Natura &Co Holding SA (NTCO) 2015 Q2 法說會逐字稿

Good morning ladies and gentlemen, thank you for waiting. At this time I would like to welcome everyone to Natura's 2015 second quarter conference call. Today, we have with us Mr. Roberto Lima, the CEO; Jose Roberto Lettiere, CFO; and Fabio Cefaly, Investor Relations Manager.

This event is being recorded and all participants will be in listen-only mode during the Company's presentation. After Natura's remarks are completed, there will be a question-and-answer session. At that time further instructions will be given.

We have simultaneous translation to English and questions maybe asked normally by participants connected from abroad. (Operator Instructions).

We have simultaneous webcasts that maybe accessed through Natura's IR website www.natura.net/investor. This slide presentation may be downloaded from this website and there will be a replay facility for this call on the website after the end of the event.

Before proceeding let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of Natura management and on information currently available to the Company.

They involve risks, uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Natura and could cause results to differ materially from those expressed in such forward-looking statements.

Now I will turn the conference over to Mr. Roberto Lima, the CEO. Mr. Lima, you may begin the conference.

Good morning everyone, I would like to thank you and welcome you to our 2015 second quarter conference call results. In this period, our total sales increased 7%, EBITDA increased 1.4% year over year, and free cash generation was BRL281 million which represents an increase of 91% year over year.

On the other hand net income retracted 33% mainly resulting from the reassessment of the remaining balance of practically 29% based on the acquisition of the Aesop Capital and Mr. Robeto Lettiere will give more information about that reassessment, but on any hand Aesop currently counts on 112 stores in 16 countries and results are above our expectations. For the first time, will be representing their results separately and on the consolidation so you can check the specific amounts.

In Brazil we had a very challenging business environment in this first half of 2015, we had an increase of tax burden and an FX devaluation and a contracted market compared to the same period in the previous year last year. In Brazil, our net revenue dropped 4.6% year over year and the 2 percentage points are resulting from the tax burden increase and an impact in some of the imported goods.

Our focus is still on implementing initiatives to revitalize and provide more robustness to our commercial model and the sales are a bit lower but we have seen some improvement in the frequency of purchase of our consultants. In parallel to that the idea was to maintain the expenses in control, so we had 6.3% drop compared to year over year, which is lower than inflation.

We have also implemented a new customized credit policy for our consultants and there was very -- initial results were very favorable especially in the activation in the new ones and in parallel to that although we increased the consigned credit, we have noticed that there was a decrease of delinquency because of the policies.

We are continuing to have the national expansion of the ready Natura, which counts on all 48,000 consultants and has presented promising results with the conversion rates that are similar to the e-commerce actions in the consumption area. Since November 2014, our site was certified as a diamond store in the E-bit.

In innovation, we have some relevant launches and one must be highlighted which is the moisturizer without fragrance from SOU Kaiak Expedicao in fragrances which now has a wood note to this line. And in May, Natura Ekos ucuuba that uses a seed that's from a light buttery source with the high moisturizing power and repairing power with high moisturizing and a light texture and quick absorption.

The activation of this launch of ucuuba had incredible results, much higher than our expectations. In parallel to that, we have still a lot of priorities since this week. We launched the possibility that all our consultants could have a Natura chip for their smartphones in the negotiations between Natura and one of the telecom carriers where the consultants can have access to the voice and data sources and the apps that we have available to make their orders from cell phones and tablets. And they also have a possibility of contracting the card terminal to receive payments in debit and credit cards.

We should remember that over 60% of our consultants already have a smartphone. These initiatives together could bring us closer and support even more our consultants giving them not only quality products to be offered to end users but also to new things that can increase their efficiencies and results.

Now looking into the international operations, they represented 27% of Natura's total sales keeping a fast growth rate and profitability increase. In LATAM, we closed the quarter with 460,000 consultants compared to 396,000 year over year. As we mentioned in the previous quarter, we have intensified cost and expenses management and working capital and investment projects.

In Brazil, administrative expenses increased 1.9% but in the quarter they dropped 5.3%. We have reduced expenses in Latin America and also Aesop because of the growth rate and we have to implement systems, the deployment of ready Natura in Latin American countries and we also had the impact of these expenses in Brazilian real.

In addition to the implementation in marketing expenses, we are [deferring] all efforts to do the same things that we did in Brazil, which is causing a G&A drop outside of the Brazilian operations. At the same time we will continue to do what we have already done, which is improving inventory and working capital that in Brazil was BRL69 million in the past year, although we have increased credit to consultants so they can leverage their sales. Investments in CapEx are according to plan, lower than last year, enabling a free cash generation of BRL330 million without losses to our infrastructure and innovation. That's what I would like to highlight.

Now I will pass the floor to Lettiere and he will continue with the earnings presentation. Lettiere?

Thank you Roberto. Good morning. This is my first conference call for results for Natura. It is pleasure to be here with you. So it will be my pleasure to share information for the second quarter of 2015.

Before we go into the results, I would like to say that in this quarter we changed the way that we report the different segments of business so that we can get more visibility to our international operations in LATAM and Aesop. As from now we will report separately the results for Aesop, the joining of our operations in LATAM and Brazil.

Now going to the results, as Roberto commented, our consolidated net revenue grew 7% in 2Q 2015. In Brazil, we had a 4.6% retraction in net sales and 1.8% of growth in the channel and a 3.6% retraction in the productivity of our consultants. It's worth to mention that about 2% of this retraction was originated in the change of the product in taxes.

We are going to challenge in the legal departments for all our chain and the distributors and we have to record this impact in our liabilities through a provision even if we don't have any type of disimbursement. To the moment we have a favorable decision, however it's not final. In LATAM, our sales grew 29.4% in local currency and 59.3% in Brazilian reais impacted positively by the evaluation of the Brazilian reais compared to the mixed currency Latin America. Aesop grew 64.7% in Brazilian reais ending the quarter with 112 stores in 16 countries, much better than was expected.

We closed this quarter with an expansion of 1.4% in the consolidated EBITDA but a 1% reduction in the margin. In Brazil, we had 0.8% of retraction in the EBITDA margin. The negative impact of the increase of tax burden, drop in sales and the devaluation of the Brazilian real were partially mitigated by a more rigorous management of expenses and reduction of delinquency.

It's interesting to say that our indicators of delinquency and collection stayed very healthy. When we (inaudible) the increase of tax burden and exchange rate, consolidated EBITDA was approximately BRL411 million with a margin of 21%.

I would like to remember that the exchange rate has a negative impact in production costs and COGS in Brazil and because it puts our link to the exchange rate and since we have a devaluation of the Brazilian real in comparison to currencies in Latin America we had this drop. But the liquid -- the net value was negative bringing an impact in the quarter of BRL22.5 million.

In international operations, we had an expansion of 3.6 percentage points with a greater dilution of fixed costs in the EBITDA margin, accelerated growth in sales and an increase in volume.

The net consolidated profit decreased 33.7% and when we exclude the non-cash impact and temporary and mark-to-market and the adjustment of provisions to acquire the remaining 28.66% of Aesop, the profits are decreased 13.6% and that was due to greater cash of the Selic rate on our debt that stayed stable with 2 times our EBITDA.

So overall, the business' financial heath is stable. We are very confident that this will stay that way. So, we also had important evolution in the management of working capital. It was very strong in our management. By covering inventory, we have stayed very healthy both in Brazil, LATAM and Aesop and our cash flow and our cash conversion cycle also showed a reduction, meaning that we are monetizing quicker our working capital.

In regards to CapEx, it's in line with our plan. We invested BRL90.8 million this quarter. It's important to remember that for 2015 our budget is BRL385 million focused on developing the business model in Brazil, innovation and international operations with investments in information technology and logistics infrastructure.

As a result of better management of working capital in the investment project, free cash generation grew 91% year over year and added total BRL330 million in the half year compared to BRL47 million of cash consumption -- cash burn in the first quarter -- first semester last year.

We concluded the quarter with a debt -- net indebtedness of BRL1.827 billion equivalent to 1.17 times EBITDA, which is a very comfortable situation for future investments in the Company.

I would love to also highlight before I pass the word back to Roberto that our policies and practices of paying our shareholders continues to be very robust and we paid 100% of the net income reported. Roberto?

Thank you, Lettiere. Well, those were the main points that we wanted to highlight. I believe that we had a performance in term of expense management and cash, and this first half year was what we expected. Our main challenge is still to grow our sales. We need a machine that works for the customer and we can produce more per consultant although we expect -- we had some increases and we are changing our recruiting programs so we can have a better segmentation in this channel in classes A and B. Although this scenario for consumer goods is impacting this year, but we believe that if we focus we can provide results in the future.

On the other hand what we have need -- have an organization that's more agile, more efficient and we still have things to do in that sense in Latin America for growth and anticipate some things that we are doing in Brazil such as launching Rede Natura in Chile, those are some of the initiatives that we are taking and we believe that we are on the right path in relation to our growth.

Now, I would like to open for Q&A. And I am at your disposal if you have any questions.

(Operator Instructions). Gustavo Oliveira, UBS.

I have two questions. The first one is in relation to the growth of the consultant base was very strong when you compare quarter to quarter. I would like to know what the drivers are for that situation since it's going faster, maybe it was even unexpected based on the trend that we have seen in the past quarters.

And the second question is the margin expansion in Brazil, why was it so strong, was it a price increase, was it a change in the consumption mix or even how you accounted the [IPI] tax?

In relation to the channel growth, one of the strong reasons is that we have -- we can lose consultants on a monthly basis and then we have to recover them and add more. We lose that because of credit and collection. They have difficulties in handling that so we handle that type of problem and the worse thing about that is losing the consultant. We need a more adequate credit and collection policy and with that we were able to decrease the number of consultants that we lose.

On the other hand we have new recruiting initiatives not just to the consultants themselves and but also we are able to use call centers and marketing e-mails and reach segments that we weren't reaching before and now the first results are starting to show.

In relation to the margins, we have had some increases per category and we have some internal productivity and financial reductions in Brazil. And therefore that cost a margin increase in a very difficult moment where we had some corrections due to foreign exchange.

With that margin correction, are you considering price increases in the second half of the year or isn't it necessary?

We are considering that. Pricing is something we look into every day, and we may do something on one or another product to reposition that. We are going to have to consider that but I can't say exactly what we will do in the second half. Thank you.

Guilherme Assis, Brasil Plural.

Thank you for taking my question. Roberto, I would like to understand your growth, the market growth dynamics and the large Natura market share. I understand that the base that we used to see in the releases, we don't have that information any longer that there is any problems at the base, but I would like to know that if internally, you have any information about the market growth in Brazil and the direct income in this market to know if it's improving or not after having losing some market share in the past year.

And how Natura fits into that and within your strategy if you are assessing that you can revert the trends that you had in CFT. And try to neutralize that or try to gain more market share. So I would like to know if you have any idea about what's going on in the market now because we don't have access to that information any more. That's one question.

And the second question, Roberto, would be I would like to know about the brand and channel architecture strategy. I believe that you have an innovation pipeline that was already implemented in the second quarter. In the second half of the year, there is some more things. But I would like to know if there is any movement in relation to any transformational changes in relation to the brand, so you can try to recover the market share in that channel as well.

And in relation to the channel, how are the tests going that you had with the kiosks. And I would like to know if you somehow evolved in an analysis or in a plan for the channels. Those were my questions. Thank you.

Thank you, Guilherme. I'm going to try to answer your questions. First of all, the market share data presentation, we've had some difficulties in getting the data within a reasonable short timeframe for the first quarter of the year. We are working a lot with (inaudible) that are very proactive in that sense in trying to get the data for us faster.

And some of the companies in the industry don't inform, don't provide the data or are late, but we are resolving that. In relation to direct sales channel, performance in Brazil depends on Natura's performance because we are the major player in direct sales. Therefore, we have that responsibility to show that that channel is still and will continue to be one of the strongest channels.

And it could be even stronger than it was in the future when we consider the growth rate, when you think of the local [commerce] that has been taking its place in the world nowadays. And that's what we are working on. And the important thing for Natura is the relationship's network and few people have such a huge network 1.3 million.

So that is our major challenge to show that this channel is strong and we hope that in the near future we can recover our sales figures. And after that recover the market share that was lost in the past year. Even knowing that we have more competition in the market today, there are companies that are also doing a good job. So then our challenge is even higher, but we are very confident about our position.

Roberto, can we quantify that because knowing that the market in the past when we had more access to the database from (inaudible) monitors, the market was growing 12% back in 2013. Last year, the growth dropped, it was between 8% and 10%. What is your expectation for market growth given the macro scenario that we have right now?

Is it within the 8% and 10% or is the market growing less now because of the macroeconomic scenario. So based on the first quarter results, do you have any idea about market growth right now?

Guilherme, I can't give you the precise data because I would have to have that support. I don't want to get the figures wrong, I can't say right now, but for the first quarter the growth rate could be lower than two digit figure. I don't -- most likely will not be higher than 10%, but that's data from the beginning of the year.

And the consumption scenario did worsen, but I can't say that if it's going to be an even lower growth. I would like to have more vision, we are just getting the data now so I can give you more clarity and that information with reliable data. Thank you.

In regards about the brand, undoubtedly that's one of the topics that we discuss the most. We intend to invest on that. Today, we are working together with a consulting firm so that we can position issues like brand, channel, product categories. And what I can say is that not only will the Natura brand or Natura brands like Ekos, Cromos, Tododia, they alone individually are worth a company we are planning so that we can make the most of what was built.

Now we have to do more than just work on communication. The brand has to deliver and our quality, our services are getting better and better, our times are reduced so I think that will position the brand and delivers that we can make to the consumers will improve overall. We have a very active innovations department and we are continually more focused on what we can launch to the market, some innovations had huge success.

We have a very interesting mix, so we are going to focus on what was successful. The dual consultancy to the final consultant and that will make our brand recover so that we can improve our market share.

In regards to the tests that we are conducting in retail with the kiosks, especially the geographic data, where we will be at and the segments that we want to place ourselves in the commercial structures in which we want to be in like the kiosks have a very good performance. So today, we are learning with all that and we are seeing a great acceptance of the Natura brand.

On the other hand, we have to remember that our main focus is direct sales and we think that in addition to generating revenue it's also a chance to get closer to the end consumer so that we have the possibility of experimenting and then afterwards we will go to the other channel. So direct sales, electronic sales. So that is our plan.

The tests are very positive and we will be physically more closer to the consumers and we do not believe that this lessening will maybe such that we won't be able to recover. We will be the greatest players in this segment in Brazil.

Okay, thank you. Thank you very much, Roberto.

[Bernardo Cavachi], Goldman Sachs.

My question first is in regards to the gross margin. The Company sold products from last year, got rid of inventory and today the inflation is 10% and the exchange rate is BRL3.20. So looking at the growth margin for the half year that was 69% in Brazil and taking to account the readjustments of -- that was applied last month, what's the impact of the cost pressure that you see in the domestic inflation on the Brazil gross margin in the second quarter, compared to the first one?

Your question is excellent, I think that it's part of the management to try to minimize these impacts and we do that reinforcing the structures and provisioning, which is what we did. We have to, if we increase the price of our raw material, we have to have a tradeoff with buying CapEx and we have been having good results until now.

We know that we can have impacts of inflation and also the exchange rate variation and we are trying to manage, the best way possible getting closer to our suppliers and establishing partnerships, so that we can continue to gain wins together. So procurement is separated into areas, one that buys the inputs and one that buys CapEx and that way we can absorb all the impacts of this increase in prices that can come but I hope we can manage them well.

Thank you Roberto. And a follow up in regards to the average price, for the past four quarters ever since Natura started to focus on the perfumery mix we have seen a very positive impact in 8% of the average price and also a 9% price increase on those amounts. So looking forward, do you still expect the positive impact of the mix in the average price or is that over for the past 12 months and now we just have to wait for the average adjustments of price?

As I said, we're working, looking at each product, each category, each brand, and not only looking at the costs that was observed in each one but also our position in the market. We just talked about our market share but we can't just look inside when we're pricing but also look at our prices in the market, how we can be more competitive and try to create an elasticity impact, so we can sell more since we have an installed production capacity that is fully being used and that's what we're trying to do now.

So we might have some price increase but I don't think it will be anything across the board. We're going to do that in the categories where we have room for that and maybe one product or the another.

Thank you Roberto, I would just like one more question, the consultant's increase, do you think it's from the micro initiatives of how you capture the consultants or do you think it's because of the crisis in the market, in the job market, people are looking for additional income or is it because of [Hedge] Natura that is bringing more people, what would you say about that?

Well, the dimensions are different. Hedge Natura is about 50,000 consultants, which is low if we compare to the 1,300 in Brazil. I think that the other channels are bringing good results. We have new recruiting processes and also with the new credit policy, and we have a lower deactivation of the consultants as -- than we did before but we weren't able to measure the effects in the increase of unemployment but we do know and that's why we have a diverse recruiting method, so that we can do what we've always done.

We are a great alternative for people who want to increase their income or find a new professional activity that will ensure that they can improve their quality of life and personal income in this scenario that we think will continue for some time. We didn't measure it, so I can't say how much each channel is growing, because we didn't measure that yet. Thank you very much and good morning.

Andrea Teixeira, JP Morgan.

Roberto I have two questions that are related. The first is that you have been very smart with your promotions, so when we look at the average price, per product sold and the evolution on the net revenue, you have an average of 15% increase and when we look at the price increase, it was about 6% in two stages, and then basically you're talking about an actual price increase in about 5%. I would like to check if that is true and why did you use this strategy?

And the second question is about the net margin -- the gross margin. You said that the gross margin expanded. Looking at the gross margin over gross revenue, we see a drop and also a drop in the EBITDA of about 6%.

I think that Lettiere mentioned the effect on the EBITDA, of the absolute EBITDA, removing the product in taxes. Did that happen because you couldn't repass this altered price despite of the average price increase in 15%? And related to that, if you can explain a bit about the volume share. I understand that Guilherme's question was trying to look at this volume share. It seems that the volume share, the market share volume should have dropped, even with the direct sales.

Andrea, I'm not sure if I understood your first question, I think it has to do with price promotion, is that what you were talking about?

Yes, exactly.

Could you clarify, could you ask again, please?

Yes, of course Roberto, thank you. When we calculate the average growth price per unit sold that you published the unit sold in Brazil, we calculate that year over year it increased 15%. Of course, there's the price increase effect and in this case specifically, there's not the -- you don't have the IPI tax effect because in a certain way there is an effect but it can't be the entire 15%.

So I'd like to know the gap, is it fixed percent price increase to inflation compared to the 15% and how can the volume have dropped?

I think that the main reason for the different rates is the mix. We're thinking of fragrances that has a higher average ticket that's part of the explanation that's the main reason actually.

Okay, it's not promotion.

You asked promotional as before?

No, adjusted per mix doesn't have a lower promotion effect?

No, no, we've maintained our promotion, so we have the effectiveness of these promotions compared to other marketing options and not just focus on price or even improving the margin for consultants so that they can have value without affecting our prices, but the main reduction or the main reason for that is the mix.

The second question was about the volume share, right? So we don't have enough data to compare today, but as soon as we have that we can do that and that varies a lot, according to the cycle and according to the products that are priority during that cycle. So we have a lot of growth in makeup and compared to other months, so we have to take a look at that, focused on category to see how we are behaving as the competition is also doing it's actions according to the channel.

And your third question was gross margin? I think it was the impact on the gross margin per -- because of the effect of the foreign exchange and the tax burden, is that it?

Hello? She's probably on mute, hello? Hello? Did we lose her? I think we are disconnected to her.

Ms. Andrea, she has reconnected. You may continue.

Thank you so much. Okay, so Roberto I heard, and so you mentioned the mix and after that I got disconnected, I didn't hear -- the second part was about the gross margin and the effect on the EBITDA.

I will let Lettiere talk about gross margin.

There are two impacts, two negative impacts on the EBITDA. So first, in the quarter the tax burden increase brought on a negative impact to the EBITDA of 0.7 pps and the ForEx change, that's the ForEx change. And the foreign exchange is in favor of international operations because of a positive foreign exchange variation and negatively affecting because of the cost of products sold and of the currency.

So 0.3 percentage points reduction of the EBITDA, 1.7 coming from the tax burden and 0.7 from the foreign exchange. In the year to date since the first quarter, the two impacts were even lower because of the tax burden and because of the foreign exchange rates the impact was lower, it was 1.6 percentage points on the EBITDA year-to-date margin.

So that's consolidated Lettiere, that's not Brazil?

Yes, correct.

Yes, but we had an average foreign exchange of the raw material that was still lower, so if we look back to the third quarter and fourth quarter, it is very likely that you have an even higher impact of the costs from the imported raw material?

Yes, your analysis is correct. The inventory turn will have a more negative impact because of the foreign exchange rate from now on. However, we have many initiatives that will also offset that and one of them is productivity and in our day to day we are working strongly on productivity and eventually those specific price changes that Roberto already mentioned, so we are very focused on the impact to the margin so we can deal with all these impacts because they impact a lot in margin management.

Okay. Is it correct to assume based on what Roberto said about selling more fragrances, is it correct to say that you probably did not lose share in terms of amounts in direct sales but in volume you probably did. So the question is, this balance between price and volume or volume and mix, are you comfortable with that type of behavior? So if the mix improves regardless of losing share even in direct sale for products that don't add that much value how should we think of that in the long term?

Andrea, the only thing that we are not is comfortable, we are in a recovery process to recover our sales rates and we are talking to an external consultant to see our strategy for the next period and the concentration that we should have in categories and brands. And that's where we will have our next actions.

But this type of management, we are gaining one thing at a time so we have new situations every single day not only based on our competitiveness but also focusing on our costs to have more competitive prices but also we have to consider what the competition is doing. So it is very hard to say something or talk about a strategy that would be implemented, this is the path that we are building every single day given the Company's size, it's geographical dimension, and also the number of SKUs that the Company puts into the market.

We are focusing on business intelligence systems to have a faster management, which is more accurate, based on the data warehouse that we have with millions and millions of information to establish our scenarios and be more competitive. And those decisions will be based more and more on information.

Thank you. I have another question but I can ask offline about financial expenses, I can follow up with that with Fabio. Thank you Roberto, thank you.

Robert Ford, Merrill Lynch

Can you talk about what you are doing about credit? What has changed from the previous models?

Robert, actually we had a process that was across the board, the same credit policy for each Natura segment especially for the first timers, and we had a very conservative process for them. And with the leverage of sales what we did was exchange information from our database and other operators that know about consumption habits. And then we did a customized credit policy, so if I have a consultant or two consultants that received each one, BRL500 of credit, due to the level of likelihood of delinquency of one them I can lower it to BRL300 and I can increase the other to BRL700.

With the same level of credit risk exposed I can have a much better productivity than we had before, we implemented that between March and April and the first results proved that what we imagined was that increasing credit we were able to achieve better sales with the starting consultants without having to increase delinquency rates.

On the other hand we are also reducing the delinquency rate. Now we are going to the second wave about credit that is more in collection and negotiation trying to not having any consultant leave us because of delinquencies.

Congratulations. And you also have a store at (inaudible). Can we talk about this store and the plans that you have for that specific segment?

It is a test that we are doing, I am going there this weekend to see how things are going but we have several goals, the first one is a learning curve being closer to the consumers and check their consumption habits and also we have an idea of the portfolio we have to have in a Natura store, since we have more than 250 SKUs and we will also be able to develop specific products for this type of activity.

We are learning and maybe in 2016 we will be able to implement these stores, I don't want to get ahead of myself and present plans that will not be implemented, as soon as we have a plan in hand I will have great pleasure in presenting it to you.

Thank you very much.

Franco Abelardo, Morgan Stanley

I just would like a follow-up about this store test and the possible roll out in 2016 would be more in regards to having Natura stores operating throughout the country or in this test you are also trying to identify the possibility of selling Natura products or some Natura brands in retail stores? That's my first question.

The second question is about indebtedness, even with an improve in the working capital and CapEx the net indebtedness continues to grow sequentially it was 2.3 in the first quarter to 3.3 in the second quarter. How does that concern you and you have a very favorable decision in regards to the taxes, but will you have to pay those taxes, you didn't have that disimbursement so looking at the second quarter of 2015 is the risk of indebtedness be more under control and even drop to the levels that they were before that the EBITDA is better?

Well, in regards to your first question about the store test. We are one of the most innovative companies in the Brazil if not the most innovative and we learn a lot in several channels. We do several tests with kiosks, stores, consultants, so I can't really say what will be the plan for the future, first, because the strategy is very important to us and has to be kept confidential and it's not something that will take our focus away from direct sales.

So, we will increment these movements little by little. We might go to a retail strategy and we might have some other stores. We have several alternatives but we don't want to get ahead of ourselves. We are going to wait for the right moment to say what we really will do.

In regards to the indebtedness, we took some -- we made some decisions in the first half year with the Board of Directors to anticipate some payments that we would have to do in 2016, because we were concerned with a probable -- a downgrade of Brazil in the credit rating agencies and an increase of the interest rates. So we did accumulate a little bit more of debt, of course that debt will decrease as the year goes on. There is no reason for them to duplicate and in the first quarter we had an impact on the dividends that were paid on the results of 2014 and were declared in 2015 and in 2014 our cash flow generation was not the same that we presented in the first half year this year. We were able to do something in the first six months.

We are very healthy in terms of using our resources and you can see by the numbers, what was the free cash flow generation in the first half year, so that we can administer and manage our debt in 1.2% of the Company's EBITDA.

Thank you so much if I could ask one more question. You opened some data, I would like to know if the gross margin level that you had in 2014 is sustainable in the long term or when you open new stores will you have a reduction in that margin and if you can give us some indication about your expectations of expanding stores and investments in inventory for next year?

You can see that in terms of opening stores we had a very good improvement in foreign countries, their fiscal year is a little bit different than ours. They showed a very good increase in the first quarter and the margins are very good despite -- of the speed of opening new stores and we know that the margin doesn't show up immediately.

So we are very happy with the performance of Aesop. We are very close to them. Our strategy is the same in international and in Brazil for Natura and we have a very healthy partnership and I would like to invite you all to go to our store at Oscar Freire which is open to all of you.

Alex Robarts, Citi Bank.

I would like to ask two questions. One about the product mentality in Brazil and the other one is about free cash flow. If you do have any intention of increasing productivity in Brazil for the future?

About the SIM chip with the consultant is that an initiative that we think that will help them in their daily activities for the consultants if you can comment about the growth of implementing this Natura chip, it will be more or less 50% of the consultants? What's the impact that you expect with this initiative?

In regards to the Natura chip some data, 60% of our consultants already have a smartphone so we believe that depending on the efforts that we make to sell this idea to them this, a base can be very high. And the other data I can provide is that 80% of our orders come through the Internet. So, they are already used to placing their orders in a digital manner. So with the chip they will have, as long as they have access to a voice and a data plan will enable them to do things that they wouldn't be able to if they had to pay for it themselves. So it's a differentiated channel.

So 80% of our orders come through the Internet. So we believe that if the orders come through mobile instruments -- now we have about 13% and we expect to grow as they learn how to use this instrument in front of their clients.

The most important data is that during the use of this mobile app and card applied to a device that will enable them to charge using creditor debit card we believe that we will be able to improve performance in the main means of payment, so that they don't have to use their own working capital for that.

So, the operations can be done in real time and also we will have lower delinquency. So this entire process is to make their life, the consultants' life easier.

Okay, that's very clear. About free cash flow, in the second quarter we've seen a 90% growth year over year. You mentioned a lot of gain in capital and we can see a CapEx reduction this year. Thinking of 2016, do you think you can have the means to have more growth in free cash flow or have you identified any new points to reduce working capital or there is room to have a lower level in CapEx or should we believe that CapEx is reaching a stable level and that the free cash flow the growth of it for next year will be focused on initiatives with working capital?

Alex, I'm going to give you some information, Natura had an extremely high investment in increasing it's production capacity and distribution capacity up to 2014. Right now, we have to reap the benefits of the investments that we had, a new plants in (inaudible) and a hub in Itupeva other distribution centers in Sao Paulo and in down south in Brazil. So today the infrastructure is well supported and we have major investments in that.

In Latin America we have had higher growth rates, we are investing in local production in some areas and CapEx, we are trying to do that with partners so that we don't have to invest our self. And thinking, that's the information that I can give you in relation to infrastructure and CapEX.

In relation to the continuity of other investments you can say that digital is one of the areas where we will continue to invest given the dimension of our business and digital to carry out transaction so that we can capture orders or receive payments. And the second level would be so that we can have more and more elaborate data so that we can monitor our business and make decisions based on correct information. And the third one is to make our business intelligence systems even more sophisticated so we can manage each consultant and each consumer so we can have individualized or customized proposals for each of them. That is the type of investments that we are planning on to.

I am giving you more information then -- an indication that if the CapEx will remain stable or not because many people don't want to give guidance but I believe that these indications enable us to conclude that what we want to be is either more efficient, so for each Brazilian real that we invest in the future and most of the investments that were made in the past were in infrastructure and today our investments will mainly be focused on activating our consultants network.

Okay, it's very clear. Thank you.

Tobias Stingelin, Credit Suisse.

I am in doubt about the impacts on the EBITDA because of the tax. Could you clarify that? You said that 2% of the revenue was negatively impacted because of the tax increase. You are provisioning that so there was a reduction of the total points that you would have dropped 2.6 and not 4.6 because of that, just so you don't have to do the math and think that that was wrong. So if you gained a 2%, how much of your additional EBITDA, so if you win the ruling, if you are awarded the ruling, you would also have the positive impact, just to clarify that, I mean I have been in doubt about that.

In relation to the IPI tax and the provision, we provisioned that while this is being judged and we would have no cash disbursement, in the case that we are awarded the positive decision then we can credit that to the result and that will not impact the cash flows. If it is a negative result, the result is provisioned and then that will leave the cash flow.

Yes, but in the second quarter how much was the amount for the second quarter specifically?

I can give you that figure later on, the exact figure I don't have it with me right now but I can give you that detail.

Okay, I will get it with you later, thank you. Another question, in relation to G&A specifically in Brazil, in the first quarter it dropped 12% year over year and the second one it increased 2%, so in the year you are still dropping 5% which is a very good figure. But it is still dropping at 3%, 4%, so I would like to know if there is an opportunity to reduce that in a more aggressive manner, the Company's G&A or even more aggressive in the expenses with sales or marketing. So was anything implemented that we haven't seen an incomplete impact to the bottom-line yet and will we see that in the second half of the year?

I can't say you that there is just one reason that is going to make it drop drastically, there are other things that enable us to decrease the G&A especially in Brazil where we have some difficulties and have high growth rates.

As already mentioned that we have been restructuring the purchasing provisioning provision and becoming more efficient so reducing prices and or cost without affecting quality in doing that in a more efficient manner. In terms of the productivity, what we can do is that in March we had a reduction of approximately 100 people in management position, so dropping two layers of the pyramid. We absorbed the severance costs in the first quarter, we are having some adjustments in some other areas. So this work that we carry out every day we do have -- we do plan to be more productive in having over cost but we are not in a process to decrease the size of the Company, we are trying to gain efficiencies.

Thank you. And as a reference, the 5% in the first half, is that a good figure because -- what stood out to me is the volatility was 2 and then 4 and of course there is the severance costs that we can't really quantify. So in terms of direction in the first six months of the year is the average okay?

Well, Tobias, if we look at the phase in of the business, the second half the activity is higher historically so with that assumption obviously we should have a higher dilution but the issue is that what Roberto explained in detail, our initiatives are greatly focused in improving constantly our processes by using information intelligence, improvement of processes and that way we will be able to increase our levels in competitiveness, in costs and expenses.

We already restructured, that has already happened and obviously the benefit of this restructuring is taking place and will be more concentrated in the second half, which will have a larger number of months with these benefits. So I think that your way of thinking is correct.

Okay, thank you. Thank you very much.

Thiago Macruz, Itau Bank.

I would like to understand if you have an estimate of how much more productive the consultant Natura is compared to the rest of your base? And if you could share if there is a internal goal of increasing the base of consultants?

In regards to the Rede Natura, for the past six months we have been doing ongoing evaluations and we have the results of this increase of consultants from here to Christmas. I can't give you the details of our expectations but it is growing in Brazil overall and especially in the CFT segment is increasing and we can see that for this year we are increasing in all the segments.

So for the first seven months we have been having great results, we are learning a lot, our conversion rates are increasing we have to increase the number of visits, so we need the right recruiting of the consultants, not all of them will be converted but what we have been seeing is that it is almost half to half. We have digital consultants that are not necessarily the consultants from our base, they have a very good commerce skill, they are used to this type of operation, so it is one of the things that we learned that are also coming from our external consultant. So the size of this channel in the future I think we are going to learn every month to see how far this can reach.

Okay, thank you for your answer.

Alan Cardoso, J Safra Bank.

I have a couple of questions. The first one, I think you didn't mention much the LATAM focus. You did consolidate the results for the segment. If you look at country per country how was your performance, the competition, what are you doing, you mentioned that you imported information. So how was this information technology, so how are you competing within the countries in Latin America?

What I can say about all the countries in Latin America is that our growth rates are growing. We are increasing market share in all the countries and our brand is being preferred in these countries, some of them like Colombia for example we are considered the best Company to work in that country. So we have been growing very healthy.

LATAM is very important to us and we have high inflation, the imports process is very difficult. So we are producing locally there and we have a very good team and a consultant team that's very active. So we are very happy with all these countries and obviously it's a daily management, they are experiencing what we experienced years ago in Brazil for an inflation of 20%, 30%. Chile is also very interesting country.

We are very strong in the second channel which is e-commerce so we are implementing Rede Natura to increase our presence in that market and we are following the growth of the country, it's one of the countries with the best performance in Latin America in terms of income, distribution. And in Peru because of the size of the Company we had to do some adjustments and look for better productivity but we are very happy.

Colombia is an operation that is excellent. The growth rates are beyond our expectations. The Company management is within what we expected, so there we continue to grow. And Mexico is a harder market but is also growing in market share, the brand is growing, we have a great management team. And in Mexico we have a system that is not the same that we use in Brazil, there we have a very important learning curve, it's a great challenge to operate in that country because of the competition, but we have been experiencing growth rates above two digits.

I think I mentioned all of them. And I am not sure if I forgot something; let me ask my colleagues here.

About Latin America we are looking for local production, which is interesting and is something that we do regularly not only a concern to be efficient but also to produce less impact in carbon emissions transporting goods from Brazil to other countries and also we want to be more efficient in terms of profitability.

And it's also important to say that as we learn in Brazil either positive or negative aspects, we can transfer these learnings the fastest way possible to our operations in Latin America.

My next question is with the worsening of the economic scenario we have been seeing changes in consumption. For example, the appliances sector has been seeing a lot of decrease, I see a change in the behavior of the consumer. When we look at your sales, do you think that the consumers are more sensitive to price and looking for products that are cheaper or any relevant change between categories because of -- sometimes they used products from one category and they switch because of price issues. How is the behavior of the average Natura consumer?

It's true. The scenario in Brazil is very challenging and we have our own internal challenges. We are in the new cycle of Natura after 45 years and for the past years we have been seeing a lot of difficulties growing. We now have to do these changes in a much more adverse environment and we have to think hard, the consumers think better before they purchase.

So, our greatest challenge is to understand this change in behavior and that is why we are very concerned of getting more information both internally and externally so we can have in these offers more customized to the consumers and we also have to value our channel both of appealing to new consumers in Brazil in those regions and the growth of the channel will determine the growth in sales. And if we grow these channels we might have a greater impact and also implement Rede Natura in other regions. So we have to find the opportunities to improve our business in this challenging environment.

The appeal for the products that we manufacture is huge. We hope that people who dream of buying some products that are highly priced might feel comfortable buying our products, which is also a source to improve people's beauty and that's very important in this time.

Excellent, my next question, I know you don't like to give us quantitative figures, so when you look at the performance of the Company in the second quarter and also the second half was nominally flat. When you look at the planning in fact is that something that you noticed and seek, do you look at the consolidated numbers of the Company to coincide with the goals because we are seeing a flat EBITDA.

And here in Brazil I would like to understand the dynamics for budgeting. I know that the scenario is very challenging, but what you expect to do in the future? What are you focusing on when we think about figures and what you are comfortable in saying?

What I can say is that the EBITDA -- well when we discuss the goal for the EBITDA it's extremely important that we always have that reference because if revenues aren't doing good we have to work on the other side. So you need to work with a goal, but obviously we have growth goals. However, if we were to assess what currently concerns us the most is actually recovering our sales growth. We are going to start focusing on productivity, continue to focus on productivity by reducing costs but we cannot allow our consumers to go away or losing our market share. We are focusing on our top line. And that's where we want to see results.

Excellent, thank you Roberto.

Thank you.

This concludes today's question and answer session. I would like to invite Mr. Lima to proceed with his closing statements.

Once again I would like to thank everyone for having participated in our conference call for the second quarter of 2015. We are very satisfied with the results that we had and we know that we have the processes to translate the sales and results that are very under control. We have more efficiency in controlling things that are more essential such as working capital, inventory, credit and relationship with consumers.

We are focusing on productivity in our plants. And we have been trying to become more and more assertive in our innovation activities so that we don't do everything at the same time, but do everything with a lot of focus and focusing our resources so we can have the results that we expect in our top line, in our sales. And in parallel to all of that, our main concern is to value what we have, which is most precious, which is our consultants network spread out through all of Brazil consolidated 1.3 million points of sale and few people have that.

We believe that's that where we can get our solutions and we can guide that so we can have through systems to find efficiency and becoming closer so that we can make them more and more efficient and that is part of our value proposition, not just the results but also so that they can have better results in their own activities and personally and professionally progress.

We have a lot to be done. We have a full agenda. We have projects in our day to day, but without a doubt we are starting off with a very solid foundation, which the Company was built on and we were able to create one of the most respectable brands in the world. It's not a easy path, a lot of work is being done, but we are extremely confident in what's going on right now and we hope that we were able to convey that to all of you here today during this conference call. Thank you very much. And I hope to hear from you again at the end of the third quarter conference call.

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

Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.