Natura &Co Holding SA (NTCO) 2015 Q1 法說會逐字稿

(interpreted) Good morning, ladies and gentlemen. Thank you for waiting. At this time we would like to welcome everyone to Natura's 2015 first-quarter conference call.

Today with us, we have Mr. Roberto Lima, the CEO, Mr. Roberto Pedote, the CFO and Mr. Fabio Cefaly, the Investor Relations Manager.

This eventis 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. And at that time, further instructions will be given.

We have simultaneous translation into English and questions may be asked normally by participants connected from abroad.

(Operator Instructions)

We have simultaneous webcasts that may be accessed through Natura's IR Web site at www.natura.net/investor.

The slide presentation may be downloaded from this Web site and there will be a replay facility for this call on the Web site after the end of the event.

Before proceeding, we would like to clarify that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. And 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 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 over to the conference to Mr. Roberto Lima, the CEO. Mr. Lima, you may begin the conference.

(interpreted) Thank you. Good morning, everyone. I would like everyone here to our earnings conference call for 1Q '15.

Today I'd like to say that we are also joined by Mr. Jose Roberto Lettiere who was elected yesterday by the Board of Directors, as our new vice president of finance and for Natura as our CFO. And today, he will be listening in to our call. And Roberto Pedote has already decided to leave the Company two months ago. And he -- today is his last day and I'd like to thank him for his cooperation in the Company and wish him all the success in his new challenges.

In relation to our earnings, our total sales increased 5.5% year over year. And profit remained stabled. So we had very positive results in free cashflow. In Brazil, as planned, we advanced in designing and implementing the initiative to boost our direct sales model and recent sales growth.

On March 13th, we launched a new communications campaign in several medias called Chame Natura, Chame que vem, which brings Natura closer to the end customers with a more direct message. We implemented the first phase of the new credit collection and [ales] policy, customizing the credit analysis for consultants so they have now different levels based on how they work.

We launched the Emeis product line for pre-teens. And this is an area where Natura had no presence earlier. We continue our nationwide expansion of Radio Natura which already has 32,000 consultants and it has been showing promising results.

During the next few months, we'll increase our means of payment for our consumers through technology and we'll offer other tools to our consultants such as to send an app for smartphones.

As mentioned in our previous call, one of our priorities to make Natura a more agile and efficient company. So we implemented a new organization structure in March which simplified our structured and reduced two hierarchical levels and increased the number of direct reports to each manager.

These initiatives will together bring us closer to our consultants and providing not only quality products to be offered in (technical difficulty) as we had been doing, but also new enablers that can increase their efficacy and their results.

In this quarter, the international operations were also affected by the real devaluation and accounted for one-fourth of Natura's net revenues, including Aesop and increased over 30% in local currency, which restates our conviction that we have a robust business platform with growing results outside of Brazil.

As we have mentioned in other opportunities, we've intensified our focus on cost, budget management and improving working capital and investments. For the past month, we have strengthen some of our teams in procurement, business intelligence and credit. We've improved our process and obtained positive [terms] on the current cost and cashflow structure for which Pedote will provide further details.

Yesterday, as informed to the market Mr. Pedro Passos is now the chairman of Natura's Board of Directors, a position that was taken by Mr. Plinio Musetti in the past year, who stays as a member of the board. During this period, he substitutes the CEO of the Company and some of the board members. So therefore, he met all his objectives.

These are the points that I wanted to highlight. And I also would like to restate my conviction that we are preparing ourselves for a tough competitive scenario this year. In addition to very challenge macro environment, as everybody knows. I will now pass the floor to Pedote, so he can go through the highlights of our results.

Pedote?

(interpreted) Thank you, Roberto and good morning, everyone. Our consolidated net revenue grew 5-1/2% in 1Q 2015. In Brazil, our main market revenue retracted 2.2 with a 1.8% growth of the channel and a drop of 3.6 in our consultant productivity. This -- in this quarter, the international office and operations represented 24% of total revenue continue to grow at a fast pace.

In LatAm, the growth was 27.7% local currency and Aesop continues booming, ending the quarter with 104 stores in 14 countries and has better -- results are better than planned and much better than last year.

In relation to profitability, we closed this quarter with an expansion of .8% on the consolidated EBITDA. In Brazil, we expanded the EBITDA margin by 0.4 percentage points due to the balance between the higher marketing expenses offset by gains in overhead expenses and also a low impact of the real devaluation of our growth margin.

I wanted to take this opportunity to stress that the search for efficacy and gains in productivity is one of our very important priorities of the Company.

In international operations, we had a 0.4% retraction due to greater marking investments in some operations and negative effects of the exchange rate between real and the Argentinean peso which impacted the corporate expenses of our group in Buenos Aires.

Consolidated net income increased 2.1%, compared to 1Q-14. If we exclude the non-cash and temporary mark-to-market impact and the adjustment in the provision of the acquisition of the remaining 28.66% stake in Aesop, which is negative, the net income would have increased 5% a quarter.

Additionally, the profit was also positively impacted by the devaluation of the real and the imports to pay balance between international operations in Brazil. And I also mention, working capital is one of our chief priorities for this year. Our goal is to free BRL200 million, chiefly reducing inventory levels in Brazil and to our national operation.

For this quarter, we have invested BRL90 million in working capital, compared to BRL237 million invested 1Q '14 and we are aligned to the goals I've just mentioned.

In regards to CapEx, we have invested BRL50 million this quarter. And it's important to remember that for 2015, our CapEx budget is BRL385 million, focusing on the boosting of the Brazilian business model and then expanding information technology in international operation.

And free cashflow has shown significant improvement, compared to 1Q-14, basically just a result of working capital in CapEx. We generated BRL46 million this quarter again the cash burn of BRL200 million in 1Q-14.

Lastly, we end this quarter with a net debt of BRL100 million, equivalent to 1.03 times EBITDA, keeping a baseline similar to the one seen in the previous quarter, then reducing our position, compared to the end of last year.

I would like to take this opportunity to welcome Lettiere and wish him success in his new endeavor.

These were the main issues I would like to address, and now I would like to open for Q&A.

(interpreted) Ladies and gentlemen, now we will begin the Q&A session.

(Operator Instructions).

Our first question comes from Mr. Tobias Stingelin from Credit Suisse.

(interpreted) Good morning, everyone.

Pedote, I'd like to understand that -- well, you clearly mentioned that the currency impact hasn't been felt in the margin throughout the first quarter, so I'd like to understand that better.

What are you trying to indicate with that? So you increase prices, margin and constant. But I feel that if we understood that it's still not reflected, because the currency effect hasn't been affected yet.

And the second question is, how are you dealing with the increase of the [IPI, Avon] has reported the earnings saying that there's going to be a negative result as well, and they're already quantifying that in their earnings. So I'd like to know if you have any updates about that.

And lastly, from Roberto, I'd like to know about the structure, organization changes that were made. So what does he effectively expect to achieve with these changes, and where are you at now after six months after he's taken on the Company?

So where is he at in matching what has to do and rolling out what has to be done. But based on the road map that you created, I'd like to know where you are currently at.

Thank you.

(interpreted) Good morning, Tobias.

Well, I'm going to talk about IPI and currency together.

So the first quarter, we didn't have an impact of the IPI [pack]. That will be after May.

So the currency went to 3.3 at a certain period. And part of our costs are pegged by the currency, so that effect, it has to go to inventories. It still hasn't reached us there.

And a great product or negotiations. What we were doing, there're still ongoing. So I think that larger period of the currency issues, we may be able to mitigate that well through some actions by our procurement department.

So from now on, we've already defined that given the IPI packs and the impact to some specific categories at Natura, we will have a price adjustment in some categories. So in June, we will have a price adjustment that will be mainly focused on some of those categories, because of the IPI packs, and that will also mitigate the currency impact, the exchange rate impact sorry.

So the gross margin is being pressured, but we're also taking that together with our purchase and procurement area and with the second price increase that we will have during the month of June to mitigate the main effects.

So I do believe that we have some positive and negative effects that are taking place in these quarters. But we are pressured.

(interpreted) I'm sorry to interrupt you. So let's say that at the end of June, you're going to have some increases and the IPI packs will increase in May, so you're going to have kind of like a mismatch between these two months, you know. Did you consider that?

(interpreted) I'd say one month, because it's beginning of June where we have the price increase. But based on the entire concept when we talk about some categories, it's among -- considering the contest, I think we have some things that are in favor and against but to try balance that for the second quarter.

I'm going to pass to Roberto for the second question.

(interpreted) Okay. In relation to the road map that we're trying to develop, the initial is on efficiency, something that we already do, which is improving what already exists. And we do know that Natura has a very successful history, very integrated from production to the final delivery to our end users.

So we had a lot of opportunities to do better and a lot of efforts to regain efficiency in the channel, because in the past year, it has been affected or threatened by retailers, other competitors that are coming in.

So on one hand, that's very bad, but on the other hand, our channel is still very efficient and well-managed.

To do that, many actions were developed and some, already implemented in communication and in an attempt to try to get closer to consumers and creating the better effect, there was an individualized credit -- or a customized credit policy for our consultants and also enables to see the results. It gives us more agility in collection processes and also agreement processes so we don't lose consultants because of credit issues.

But mainly, a few that we're not only to reduce risk but also using that [Credit Suisse].

There's the implementation of different type of payment methods for our consumers, like using debit and credit cards, so that process -- we believe that we can get some benefits with that this year already and also developing support platforms for our consultants, knowing that 98% of our orders and received through the Internet, so we can see that over 16% of these orders are coming through smartphones.

So developing those platforms for smartphone checkout and helping that so that all the relationship managers can have their CRF.

So these developments are ongoing, and we expect them to better results.

The second element is completely reading the portfolio and checking where we can improve our supply, be it through price or developing new lines. We have some very interesting launches like we just had in the Ekos line, and we've had exceptional results with that.

And in addition to that, a major challenge that we have is developing new channels, developing new channels. So that that is not a threat that would cannibalize our main channel but is something that we are betting on and we have many improvements to be done.

There was a launch in December, and in this quarter, we doubled the number of consultants involved, so that they just have grown at very high rates on a monthly basis. So we believe that with these new operations, we'll have our good results.

There's also the learning curve to go into taking advantage of points of sales that are already existent that were developed by consultants. So in this area, brick and mortar, we can take advantage of that and turn them into stores.

We've done that, and we've had exceptional results in that area. So today, we have many projects so that we can learn how to do the retail and work with the brick-and-mortar store so that can become a very relevant channel for Natura. And we're developing that more and more, but we are still in the beginning phase of that.

So that is our road map, and in parallel to that is managing our day to day with as much efficiency as possible, as Pedote mentioned, working with the minimum cost we can and value each reel that we have and the investments that we have to make. And we know that the major ones have been done in the past five years, which enable us a better capacity to deliver and Natura and delivery quality products.

(interpreted) Just to follow up, you had four kiosks that you were testing out. There's also a pilot project that's transforming the consultants that fail more and provide more support to them so that they can turn into stores or something like that.

Are you going to continue with the kiosks project in parallel to that? Because as I see that, having four kiosks for a company the size of Natura doesn't seem enough to me.

Or have you decided that Kiosk is not what we're going to do. Let's have hundreds of brick-and-mortar stores and work with the larger consultants. So is that the path you're going to follow?

And the last question is about the changes in the organizational structure. How do you gain with that? Are you closer to consumers? Did you reduce the number of people? How have you changed how you relate to your consultants?

(interpreted) In relation to the kiosks, they are -- test their pilot projects. You're completely developed and organized to have a relationship with the relation managers and the consultants at the end of the line.

So when we set up the kiosks, we have to work with the people that are going to service our customers, the products and also to charge directly consumers.

So we're testing that, and the four kiosks are not the future of Natura. That is a test, a test and a test.

So what type of products is more accepted by retail consumers? What's going to sell? What's not? What gives us the flow? What gives us margin? So that's the type of stuff we're doing in the kiosk.

And in the channel, we're trying to -- existing stores, we want to create this -- what Natura should look like and how we're going to present our products. So if we can help these small entrepreneurs to be successful, and that result would be very good. So that's not the only line that's developed.

So there's owned stores. Yes. We have to learn how all of that works first and/or a franchise, if we're going to go into that model. All of that is being studied right now. We're not going to consider that it's just for kiosks.

But we have the right to do something wrong. We want to start small, so then we can escalate, and that's what's being done now in an incubation stage. That's what's going on right now.

In relation to the organizational structure, we have the new hierarchical structures until we reach the sales force. And in some areas, we believed it was too small, so we believe that some managers could have more direct reports, and that's why we gained in agility in some processes in the organization.

And the numerical results of that were assigned 10% of management's level. But we reduced two hierarchical levels in the organization where we believe we can get more agility in relation -- in addition to lower costs.

In relations of the consultants, what we've been trying to do is bringing in more technology so that we can work a group of consultants in a more identical, specified area and this digital area we can understand their behavior, what they buy, when they buy and what their purchasing habits are, so we can have more customers offers for each of them.

(interpreted) Great. Thank you once again. Good morning

(interpreted) Our next question is from Mr. Guilherme Assis from Brasil Plural.

(interpreted) Good morning, Roberto. Good morning, Pedote.

I have -- I'd like to go back to price that you mentioned already, that you should have a price increase to improve the makeup of the IPI pack and the exchange rate effect. But I'd like to know if you already know what that will be, the increase will be, given that there was already a price increase if I'm not mistaken, 3.4% on average.

So I'd like to understand what you're thinking about the macro view and that price increase, if that's going to have a negative impact, given that in our vision, consumers are very sensitive to price right now.

So I'd like to understand those dynamics, and what you expect to do to have that price increase without affecting your competitiveness.

And, also, in relation to [DBB], your flex -- the point of sales, sorry, that you're making the credit policies more flexible to the consultants, so, in the last quarter, you mentioned in your release that the cost that you're having of your Web site, so, but you didn't mention that now.

So I'd like to know how that's working and how you see the new credit policy, and [EOS] from now on.

Thanks.

(interpreted) Well, thank you for your question. First, in regards to price and cost, we have to absorb costs from IPE taxes, exchange rates, because of the reality valuation, and also we buy imported raw material.

Our effort is first to try to absorb that, and reduce other costs, and a great negotiation effort to lower and absorb what has to be absorbed.

Second, price, we -- what we're going to do from now on is to be really selective in categories that we consider that we're not going to lose our competitiveness. So we know that for us as important as revenue is to have a high sales volume, because we get our consumers using our brand and our products. So we're being very careful so we don't lose that price [days] and have a negative of revenue.

The second part of your question is about the point of sales. It's true that maybe we need more sophistication. In this presentation, you can notice our concern with credit, not only looking at risk, but also the credit bringing new business in that we're very happy with the results of what we have done so far.

Our presence has stabilized and we believe in this markup and a drop in everything we're doing. We're going to acquire new technology or we're going to have internal consultants, so I can say that it was Pedote's field of action, and it went very well.

But we have to use smart actions, and we're going to improve month by month.

(interpreted) Roberto, just going back about price, I don't know, there was a headline in Bloomberg I think yesterday that pointed out an increase of 2.5%. Is that more or less the increase that you want to have in general?

Is this number correct? Could we assume this number as..

(interpreted) Guilherme in general, it would be 2.5%, but it's concentrated in categories related to IPI. But with a lot of caution looking at the market, to very specific things that we have to look at the spaces that open to the markets.

So it would be an impact in this order, but talking about IPI taxes it begins in May, but obviously we have discussed in this call, but we're assuming that it will start in May, and that's the scenario we're looking at. But it's something to just show and for the [simpler political] still being discussed.

(interpreted) But when it's at 2.5% increase, do you believe that that's enough to offset the impact of IPI and costs? Or we can expect growth margins to pay at the levels of today? I think it was 78% or 70% for Brazil?

(interpreted) Well, yes, that follows with the continued efforts to reduce costs. We talked about fixed costs. We talked about our organizational restructuring. And we're going to continue with this effort to keep the margin, not just through price, and that won't be enough to keep the margin.

Guilherme we did increase the 3.7% increase in February, and now we're adding another 2.5%. So this is two increases and reduction of costs is the balance we're looking for.

(interpreted) Okay. Thank you very much.

(interpreted) Now, our next question is from Mrs. Andrea Teixeira from JP Morgan.

(interpreted) Good morning. Thank you. My question is I would [second force] that explanation about prices very useful. I would like to know about productivity with the great improvement of [DMA], so I want to explore how much of this space that you have a little bit of margin now for the next quarter.

I would like to understand the timing of IPI and how price increase. From what I understood, it will be more in June, so you will have this more space to improve, and your comment about commodities and the raw materials, if we could have an impact that isn't that bad in the second quarter?

And, also, because it's an easy comp in the top line.

Thank you very much.

(interpreted) It's very hard to answer, saying that all of the -- talk about all the impacts for next quarter, what we are doing today is to be more effective in costs. We restructured our areas so that we can keep the investments better applied, reducing several things that we delete that we're seeking permanent results from.

And that has certain impact, there is a process that is implemented. And the trend is to reach sufficiency but I think we can't say exactly what the results will be for the next quarter. We know that we are having a very challenging moment in Brazil, and when IPI and the devaluation of exchange rate impacts us, we want to reinforce all that our costs. And we have to see what will continue to change. And we have to be able to adjust.

But how each measure will impact in our second quarter is very hard to answer. It's not something that we can answer.

Well, this trend is very positive in the cost reductions. Things we did this quarter will have effect in the following order, but I think that, as Roberto said, the idea is not to give a forecast quarter by quarter, but, say it this way, we have a very competitive market that we have continue invest in innovation and develop the management tools in the channel and new initiatives. And, on the other hand, the Company has been gaining and has been - is gaining efficiency in all its area.

So with this balance, we will keep margins appealing for Natura. But I really can't say what will happen next quarter. I think that won't be very accurate.

(interpreted) Thank you.

It's very difficult to understand Roberto speaking. It's a bit far. And so, these price increase, what was the amount? It should be in June and what is the number? The actual figures? I didn't understand, but the quality of the sound is a bit difficult to understand, for everyone.

(interpreted) The increase will be about 2.5 Andrea Teixeira total, but focused basically on the categories that were affected by IPI.

(interpreted) And so this 2.5%, with the impact, will be enough to pass this impact on, or will there still be investment in price or markets?

Is it effective enough, it will not pass on this impact, right?

(interpreted) Well, we don't have one single measure that will solve the problem. We have a very difficult scenario ahead of us. What affects us isn't just one issue, like IPI. We have exchange devaluation, competition, salary adjustments.

So each one of these things has to be analyzed. And we have to try to keep the margins and the projections. That doesn't mean that there is a direct impact of one thing or another.

Price adjustment will not -- we can't say that price adjustment alone will impact that loss with IPE. We have to reduce cost, and we have to go to the market to see if it's possible to increase price without losing our client base. So we can't analyze them separately.

But we do have negative impact because of things that are out of our control, like taxes and exchange rates, and we take that into account in our projections perfect.

(interpreted) And salary increases, can you share a bit of if the impact will be greater in the second quarter?

(interpreted) No, on the contrary, Andrea. What we have on our payroll -- when we simplified our organization structure that Roberto mentioned with the leaving of several managers, we have to pay compensation and other fees.

So looking forward, our payroll looks very efficient. So what we have in looking forward, based on the measures we took, are very positive in relation to the cost of our payroll.

Andrea Teixeira: Perfect. And the compensations are the BRL8 million that are in other expenses?

(interpreted) No. We're not disclosing that number, but there was an amount that was taken out but the expenses will get better. And we already did all that change in the first quarter.

(interpreted) Okay. Thank you, Roberto.

(interpreted) Our next question comes from Mr. [Gustavo Oliveira from UBS].

(interpreted) Good morning. I would like to understand the top line of prices in Brazil. You did a large adjustment on the consultant base for this quarter. I would also like to understand if the digital consultants that you have, 32,000 in this quarter, are already part of this consultant base or not; if it's something separate? That's my first question.

(interpreted) These 32,000 are a part of our total consultant base. I can say that of the 32,000, 50% are consultants that have already been with a traditional direct sales of Natura's are not new. So these consultants come from different social segments and habits. So that's very essential to us.

(interpreted) And are -- they're part of the 179?

(interpreted) No, they're not. But later on, i think we can include them. But 15,000 in BRL1.5 million is a small number. It's a good point. We have to start to include them. Half of them already are included. So the adjustment that happened in the first quarter, it was a bit larger than in the past.

(interpreted) You have been doing some adjustments in the fourth quarter of the past two or three years. What do you think is happening? Will you continue to do that -- those adjustments in the second and third quarter, like a drop in the number of consultants or everything that had to be done was done now in the first quarter?

(interpreted) No. I think we're doing the contrary. We're getting positive numbers on the consultant base. What we have to do is to emphasize our changes and to increase the sales per consultant. What we've been seeing now is an increase in the number of consultants.

(interpreted) The second question is about the number of products sold, of units sold, of units sold. You said 93 million. You disclosed 93 million. 93 million units goes back to the levels of 2011 that showed these numbers. So it seems like there's an additional adjustment besides [Solo]. Is that number correct, because the mix of prices changes, I understand, about Solo. The price increased has -- seemed to be greater than the sales -- because the sales per unit is dropping.

(interpreted) Gustavo specifically about the first quarter, what we had year over year, we also had the launching of [Sotogia] the first quarter of last year, which are products that have a lower unit price. So this first quarter of 2015, we had more fragrances and toiletries usually have a lower price. So we had volume of the total sum of unit. So we did see that drop.

But adding to what Roberto said, obviously, it's essential for us to rebalance, looking forward, to have growth in this volume based on the measures, we are taking the first quarter is exaggerated if that drops, because of what we already mentioned. We're comparing to the first quarter of last year. But this is all part of our view to look for more efficiency and more volume looking forward.

(interpreted) In Brazil, I understand that your sales year over year a little bit better. It dropped less than the fourth quarter. And the campaign [show me because] they already had some insights.

It took over March and it can have a positive effect. I would like to understand if the month of March was much better than February and if this campaign is already having a positive effect in April who can reverse the sales growth in the next quarter?

(interpreted) Yes March was better than the beginning. On March 13 that's when the campaign was. But we can't guarantee that the campaign will offset the problems in the economy plus you can see that in other industries as well -- outlook for that. But we do know that the campaigns had a very positive effect.

(interpreted) OK, one last question about the Mexico and [Carmel] operations, which was of development. You had a very high drop in tickets, 34%. So what is that resulting from?

(interpreted) Gustavo, I'm going to ask Fabio to answer that. And he'll contact you later, after the call, answer that for you, okay?

(interpreted) OK, that's good. Thank you.

(interpreted) Our next question is from Mr. Joao Mamede from Santander.

(interpreted) Good morning, everyone. I have two questions. The first one is that I missed a discussion about Radio Natura in the release. Usually, you did that in the past. But I'd like to know about the project, how it -- and its advances. Are you -- did you find any difficulties? That's why you didn't -- you don't want to discuss them openly? So I'd like an update about rating Natura. That would be excellent. I understand that you have a number of other projects. I know that you're not solely focused on that. But it one of the major ones. So I just noticed that you didn't really address that in the release. So I'd like to understand why?

And the second question is that I'd like to go back to a point that was already mentioned a lot, which is price -- again, the price increase. So I'd like to hear more granularity between these [efficiencies] between all the categories. I know that the price increase is different, according to the SKU. But in a more encompassing manner, can we know if it's stronger in cosmetics or toiletries?

Because when we look at the market and your market share, up to 2012, you had more difficulties in growing in cosmetics. And correct me if I'm wrong, but in 2013, things changed. So toiletries started to suffer a bit more by losing to market share. So just so that I can understand if the impact is going to be higher in one or other category? I don't know if you can disclose that to us. Thank you.

(interpreted) In relation to Radio Natura, the growth figures are interesting. We have been informing that offline, so that we can speed that up. The end of the campaign, it's -- the campaigns are working, but they're not specific campaigns. They're working well with consumers. So now we're trying these segmentation models, which we can do in digital and indirect sales in companies.

We've always been completely tied to what's in the magazine in the ad campaign. And it raise in Natura we can be much more flexible in having offers and promotions every day, every time. So we're learning how to do that we're working on that, so that we can learn through this channel and in the future have more volume. We believe that we can increase the figure. And you could probably imagine that in direct sales and if -- when you're not going to -- through consumers, consultants are -- we're delivering straight to the consumers. So it's -- the freight cost is different, logistics are different, packaging is different. So eventually, we're going to have a different working capital.

We don't want to make mistakes. There are many campaigns that were well launched and are highly successful. But we still don't have margin. And we don't want to do that. We want to have -- we're taking all the necessary care in the beginning, so that we can get the margins, so we can know how -- learn how to deliver, so that freight doesn't affect our results. And for now, I believe that we've been able to do that. It's been efficient. And in the future, it will give us the volume.

And then the second question was about the price increase in the categories. As we mentioned, initially, they're focused on the categories that were affected by the IPI's tax increase. So mainly cosmetics and not personal products.

(interpreted) Excellent. Thank you, Roberto. Thank you, Pedote. Thank you.

(interpreted) Our next question is from Mr. Marcel Moraes from Deutsche Bank.

(interpreted) Good morning, everyone. My first question is about the marketing campaign and the promotions that you've been holding. So do you see a need, based on the economic change and see a need to change how you disseminate the campaign, focusing more on products and not institutional? Because -- or if that's already happening. And I'd also like to hear from you about that. So how are you adapting the promotional campaign to that -- to the new reality? Thank you.

(interpreted) I think you're answering through your own question. We have to -- I don't think we need to do exclusive institutional campaigns to strengthen the Natura brand. It's the most -- one of the most well-known brands here in Brazil and abroad. We're very well-known, very strong. And it's very strong, as any other multi-brand company.

So, what we want to do is use the strength of our brand and create attractiveness by demonstrating our products in a visual, beautiful way, so that that will encourage people to want these products. We've been doing that. It's working. And what I believe that we have to do more now is having more complement between online and off-line.

So bringing consumers into the digital world where they can have much more exposure to contents and to products, starting from the origin. And then we have very rich stories to tell, especially when we're talking about the products that come from Brazilian biodiversity. We just launched another line, and very successful since the beginning.

So I think that's how we can improve our marketing and create a more direct relationship and individual relationship with our consultants, which will create the create the effect that we want, where our consumers are ordering -- are asking our products -- for our products to the consultants.

(interpreted) And the other question is about innovation. You've been making changes in the Company's corporate governance. So how does that affect the innovation process? You've been making many launches in fragrances, but that still doesn't support the growth of the whole because they're profitable products, much more than the average in the portfolio, but it doesn't support the growth of the whole.

So what has been -- is being done in that sense, and in innovation in the process?

(interpreted) Yes, that's true. We do have intense innovation processes, and we'd have to separate in two types, the ones that are improvements to existing portfolios and products, and the ones that are (inaudible). So, as I mentioned, [cooba] is a new ingredient. It's a new raw material that has different effects. And we believe that that's an innovation that will provide the results that we want.

And the other one -- new category -- so we have to do deep work to be more efficient. So then we have to reduce our time to market. We have to be faster, based on the original idea, and then getting it into the market. And we need to count on our other partners and all. So, we need to verify what is essential in launching a new product, and also what is not that important and wouldn't be appreciated by our end-users.

So, those are the things that we're working on today. And we have all the tools and innovation so that we can develop that. This year, we have very interesting launches and we believe that it's going to be a complete success about how people should protect themselves, hydrate themselves, and their facial skin, for instance.

So there's many interesting things. And you -- and you brought both things together -- innovation and communication. So it's not enough just to innovate. We need to communicate, and in that communication, we need more added services. It's not just a product. We want to add services, deliver services that done by consultants, that can also be done by digital, by showing and teaching them so they can use our products well and take the utmost advantage out of all our products.

(interpreted) Thank you.

(interpreted) Our next question is from Mr. Franco Abelardo from Morgan Stanley.

(interpreted) Hello. Good morning. This is Franco Abelardo from Morgan Stanley.

The question is mainly related to the market. We know that the Natura market has been growing in double-digits for many times. But this year, there's some macroeconomic challenges and tax increase challenges. So I'd like to know from you, and also compared to the competition, which is very touch, how much do you think that the Natura market can grow this year?

And now, more specifically looking at Natura, and considering the base of comparison that is the second quarter less challenging for Natura? So can we see any [factory] sales for the Company in the second quarter? How about the kits created for Mother's Day? So, what do you -- how do you think that sales will develop in the short term for Natura?

(interpreted) Well, well avoid to give guidances for the future, but -- and at this moment, it will be even more difficult. We know that Brazil has a completely different scenario than we had a year ago. I think that several sectors are still having impact in their activities. So, Natura is not different.

So, our -- we want people to continue to consume; our consultants to have greater earnings. We want to encourage people to continue buying products. And we know that this scenario is a recession. So, we're not going to have to have that much more earnings. So if we have to increase our sales force, that will bring additional revenue in. On the other hand, we can also have people who will restrict their consumption, and if they don't stop altogether, they will reduce the number of products they buy.

So we're experiencing that every day. If it was already hard to do that in the past, today in Brazil it's even harder.

And just to add, last year, the market grew about 11%. We had a first semester that was stronger, a second semester that was a little bit weaker. But we imagine that the market will continue to grow, but it's very hard to guess at what rate at this moment.

(interpreted) Okay. What about this short-term monitoring that you do? Do you see an improvement or a worsening? According to what you saw in the first quarter, when you saw an increase, especially in March, after you started the campaign [Hage Nakuda] and launching new brands. How do you see this behavior?

(interpreted) Again, I don't think we should offer any guidances. In Latin America, there's a clear trend for growth. The countries have a higher growth rate and, no, we think that we're going to continue with the performance we're having to this time. And -- but in Brazil, this scenario makes us very cautious for the future.

So, we noted that we'd rather not say those numbers.

(interpreted) One more question. You mentioned that there has been an effort to look at the Natura stores that already exist and try to make them official. Do you have any figure -- any idea of how many stores in that format that you can have in the short- and in the mid-term? And similarly online, do you -- what effort has been made to interfere in Natura's consultants through that channel? Thank you.

(interpreted) In regards to the brick-and-mortar stores, this year we think that that number is going to increase. So maybe in our next call, in our next quarter, we can bring some information about that. But we see this very positively. The results are good. And there's a cost to makes these stores [normal], so that will have impact.

I don't know if I understood your second question about the marketplace. If you can clarify that, I may be able to answer.

(interpreted) Well, today you access e-commerce websites that offer sales from third-party companies, and you see Natura consultants selling these products in that direct channel without using Hage Nakuda. How do you look at this channel? Is there any way to improve or interact with that channel to make the process go back to Hage Nakuda?

(interpreted) Well, that's an interesting question. We have additional development department, and we're looking at what is happening, especially for apps and Smart Phones e-commerce. And we're looking for not necessarily have an action in what already exists online, but we want to maybe create our own Hage Nakuda platform that was developed for the traditional e-commerce.

But we also want to go towards the e-commerce in which we already have an interest in participation. And our first goal is to make the consultants themselves to generate flow online. And we can see that 70% of our consultants already have Smart Phones, so they're able to do that. They can place their orders on this Smart Phone platform.

So, we're going after that channel. And we want to have alternative channels to the ones that already exist.

(interpreted) Thank you very much.

(interpreted) The question is from Mr. Alexander Robarts from Citigroup.

(interpreted) Hello. Good morning. I have two questions. The first is about the international operations. And the second is about free cash flow. Thinking about the free cash flow, it has a 40% impact on the earnings and it impacts the margins. I also see in the press release that there is the [SAT] project, that investment.

How would you think about the contribution of these businesses outside of Brazil and what is the return on investment expected by the group? And how much are you considering, for example, for this year what will be the contribution? Will it be positive for the return metrics?

Maybe there are still investments that have to be made this year that might stop that increase of the margin. Could you comment a bit about those issues?

Thank you very much.

(interpreted) Good morning, Alex. Our international business, we have the opportunity, first to continue to grow at the rate that you have been seeing. I always like to refer to local currency, and we were able to grow more than 30% when we get a look at the [ASOP], it's 30, 40%.

If we put that into realis, we're going to have better and worse results according to the exchange rate, but it still is very powerful.

What we have also been seeing is an opportunity to improve products and profitability. It's very important for us to dilute our fixed cost structure. So we see that development adding to the Company's ROI. And since our international operations have a lower profitability than the Brazilian operations, the more it grows, the better is the added profitability.

On the other hand, the increase of profitability, we expect in international operations more than offsets the effect of having an international operation with a lower profitability than Brazil. So we expect a positive effect at the end of the day.

It's a less profitable area of Natura, but it is getting better and will continue to get better.

So those two factors end up at a positive result in the midterm for the numbers.

(interpreted) Okay.

The second question is about the free cash flow for the group in the -- we saw a great increase on the positive side on that item. And it's very clear that you're reaching 25% of the [KPAC], reaching those 370 (inaudible). Is there space in here inventory, accounts payable? Do you have any idea if you could comment about working capital?

(interpreted) Alex, we do have space for that. In our working capital budget we have the goals to have a positive cache of working capital of BRL200 million, and that's a point and a counterpoint.

The position in December we wanted to gain BRL200 million, but the structural actions that we took are focused made greatly in an improvement of the inventory process of the Company, both in Brazil and we have a great opportunity in the international business. So that will have a positive impact in costs, so we can reduce inventory.

We just improved in the first quarter, peak dates for payment that allow us to increase the means, time to pay our accounts, our bills, and our accounts payable are very stable and we can recover some taxes, especially in the state of Sao Paulo, that are [stopped], and we are working on that.

So we have some priorities that are mainly working capital. And we are looking for those BRL200 million this year, and the BRL90 million investment that we did in the first quarter is very aligned towards that goal of finishing with a positive of BRL200 million at the end of the year.

(interpreted) I would like to add that there's a clear difference in the measurement of Brazil and international business. We need to keep our inventory a bit higher in those places, but we have a concentration in Argentina, which is a country that has a very strong regulation on the import processes and to release payments.

So this quarter we have already seen a drop of the inventories in Brazil, at least. We started imports on a specific inventory control method, and it was implemented -- we will implement it in September this year. And that will make us gain even more.

Our goal is very strong. We want to free BRL200 million of working capital by the end of the year. And we did have a cash burn, but at the end we had a positive cash flow and we expect this to continue and get even better until the end of the year.

In our forecast for KPAC this year is about 20%, almost 25% lower than the one we had last year. So, working capital is one of our greatest focuses this year.

(interpreted) Okay. Thank you very much.

(interpreted) Our next question comes from [Hassan Toza] from [Border Access].

Yes, hi. Good morning.

I have two questions. One is, given that both your production of your product and with the use of your products depends on the availability of water, I wanted to ask you two questions in light of the drought in Brazil, in most parts of Brazil.

The first question is, are you seeing any reduction in usage from your customers, for example, taking less or even shorter showers to conserve water? Can you please comment on the usage trend you saw in the first quarter, specifically if you saw any usage reduction due to the conservation and scarcity of water? That's my first question.

(interpreted) So, this reduction was not seen, at least not in the first quarter. Our line of products is very big. Maybe they might behave differently because of -- they might use more fragrances, for example. So my answer is at first, no, we didn't see that happening because the drought is more critical in some regions than other regions, we're not facing that type of problem.

Okay. My second question is in regards to your water supply situation, specifically, you know, in terms of the availability of water in your manufacturing facilities.

So can you give a little bit of color is if the drought worsens and there is water rationing or a more scarce availability of water, how are you going to produce your products? And what is the source of supply for your manufacturing facilities?

I would appreciate your thoughts on that topic.

(interpreted) Well, first, the use of water in our products is not that large as it may seem.

Secondly, both in our plants in Sao Paulo that are located in [Cachemar], we are self-sufficient in water. In addition to external supply, we have our own artisan wells, and we have a reuse of the water used in our facilities of almost 100%, with a retreatment.

So the Company in the past invested everything that had to be invested to be self-sufficient. If we didn't have -- of course, not that we forecasted drought, but it's part of our sustainability policy, which is to be very efficient in water use in all our facilities.

So we don't see any risk in our plants at the [pedigree] we have a water supply that is constant. It's in one of the most irrigated regions of the country. So water is not an issue that concerns us at the moment.

(interpreted) Our next question comes from Alan Cardoso from Safra Bank.

(interpreted) Good morning, Pedote, (inaudible).

First, if you could give us more details about your credit -- your customized credit policy. How is the credit scoring being done, if you're doing it yourself, if you have any consultant helping you?

And what about default? Do you think that there are some consultants that can work with a greater credit limit, that they don't do now, that could help with sales?

And within that same topic, if this credit part, this customized credit policy could be an embryo of something bigger, like some retails that have financial services that are important for EBITDA, and maybe in the mid and long term could be implemented in Natura?

(interpreted) In regards to our credit policy, it was developed by an internal team with an external consultant. We brought specialists very experienced in this market that have been CFOs for large bank institutions for this customized credit. Then we checked the individual limit of credit of each consultant, not just to manage risk, but also to allocate sales.

And it was not implemented for the beginners. And the impact can be felt both in generating additional revenue, and also reducing default. And that makes us give more credit for those who can absorb more credit and less credit for those who can absorb less credit. And with that, we did increase the credit risk for the Company.

And we do have lower default rates. And our warehouses are very popular with information about behavior. And we're doing this more and more, especially for credit that depends on marketing efforts.

(interpreted) And then your second part of the question is about financial services. And this is a project that is being studied at the Company for some time. And probably, we will do that with the support of third parties. But I do think it's not something that the Company will do to offer credit that is outside of our operations. But to have financial services and correlated services might be explored at a further opportunity.

Our consultants represent a target of 1.5 million people.

Okay, great. And the second question is to comment a bit about the new line of products for the pre-teens.

This line, that can be relevant for the Company -- and if you can tell us the size of the target market, if there will be new products to be launched inside this line, competition in this segment. Just an overview for us to understand the potential and the size of this operation.

Well, it's a first line of products that combine fragrances with makeup. It's a very interesting line of products. Unfortunately, we're not going to be able to give you the volume of the targets. But Natura wants to get closer to a younger consumer in an innovative way. And maybe this is the greatest goal, to launch this line, regardless of its contribution to the earnings, which is positive. But it's a very important step that we want to take to start penetrating the segment, and to have this brand recognized also for the pre-teens that have different consumer habits, but will probably be our great (inaudible) our clients in the future.

(interpreted) Okay, great. Thank you very much.

Now we will end our question and answer session.

I would like to pass the floor to Mr. Roberto Lima for his final comments.

(interpreted) Well, first, thank you very much for participating. Thank you for your questions. I would like to finish restating our confidence that even being in the very challenging context of Brazil, we are deeply focused in recovering our sales, seeking a more agile and more effective company, more open in its proposals -- a proposal with a lot of innovation, not only in products.

But also in channels, and getting closer to our consumers. And even in the moment -- at the moment, it is the most favorable. It's up to the Company to take this image step we will continue to, in fact, and continue to believe. And at the same time, we will provide total support for our consultants and for our international operations.

I think that today, this is a very important moment for us. Roberto Pedote is leaving us exactly today after having made -- had an exceptional work done as the CFO of this company. So all the employees and the board would like thank his professionalism and his effort in his position. And I would like to thank him from his -- for his support during this initial phase of my position as the CEO.

And also I would like to welcome Mr. [Bicchieri], which has huge experience in all the companies he went through. And it will add to our effort so we can overcome the challenges that we are going to be facing, and so we can have another 45 years of success as the previous 45 were.

I would like to wish you all a great holiday.

(interpreted) This conference call is -- is closed. I would like to thank you for your participation, and have a nice day.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The itnerpreter was provided by the Company sponsoring this Event