Natura &Co Holding SA (NTCO) 2015 Q3 法說會逐字稿

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

The presentation that will be used is available at the Company's investor relations website.

Today with us, we have Mr. Roberto Lima, 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. (Operator Instructions)

We have simultaneous webcast that may be accessed through Natura's IR website, at www.natura.net/investor. The slide presentation may be downloaded from this website, and there will be a replay facility for this call on the website after 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 the assumptions of Natura management and on information currently available to the Company. They involve risks, uncertainties, and assumptions because they relate to the 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, CEO. Mr. Lima, you may begin the conference.

(interpreted) Good morning, everyone. I would like to thank everyone for listening in and welcome you to the Natura earnings conference call for 3Q15.

Our total gross revenues increased 10% in the quarter and [12%] September year to date, with a strong contrast between the results in Brazil and international operations. In Brazil, in face of a very challenging economic environment, a drop in consumption, FX devaluation, and a substantial increase in the tax burden, we've intensified our efforts to boost our sales, simplify our structure, and increase our operating efficiency.

Our consultants channel increased 2.6% year over year or, in absolute figures, approximately [34,000] new consultants joined Natura.

The continuous efforts to reduce cost and expenses and a significant improvement in our working capital management and the increase of EBITDA in international operations positively contributed to generate BRL319 million of free cash flow, compared to BRL14 million year over year.

In the September year to date, free cash flow generation was BRL648 million, compared to the cash burn of BRL33 million last year.

This improvement enables us to make the investments necessary, maintaining the financial health of the business and the leverage within expected levels -- 1.1 of net debt over EBITDA.

Next, Lettiere will give you more information about the figures and some non-cash effects that impacted the net income in this period.

Now, I'd like to highlight some of the initiatives recently implemented that together will bring us closer to our consultants and our customers, giving everyone more ways to increase efficiency and results. The new credit policy launched in March has already shown a productivity improvement for the new consultants, the ones that have been with us for less than three months.

Through a partnership with PagSeguro and Claro, we've launched the Voce Conecta program, with promising results since its launch - over 80,000 SIM cards; approximately 100,000 downloads of the app to make the orders; and approximately 40,000 credit and debit card readers were implemented during this period.

In the Natura Network, which was launched in the country in December of last year, sales continue to grow, and we've closed the month of September with 54,000 digital Natura consultants, compared to 48,000 in June.

In terms of innovation, in addition to the launch of Natura Homem, Kaiak, #Urbano, and Tododia, we've launched a new facial care line with positive results so far and should increase our competitiveness in this product category.

In September, we began a pilot project to sell the personal hygiene and body care products from the SOU line with 30 stores in the Raia Drogasil drugstore chain in the cities of Campinas, [Menudo], with very positive results.

Now, looking into international operations, together they became relevant in the consolidated figures, representing 32% of sales and 17% of EBITDA.

In LatAm, we've maintained the accelerated growth, closing the quarter with almost 500,000 consultants, 21% more items saled, and gross revenue 31% higher than last year when measured in local currency.

Aesop has maintained strong increase of sales -- 67% in Australian dollars -- closing the quarter with 120 stores in 18 countries, representing an increase of 26 stores year over year.

Those were the points that I wanted to highlight. Now, I'd like to ask Lettiere to please comment on the main figures for the quarter and the year. And afterwards, we will be available for Q&A.

(interpreted) Good morning, everyone.

Now, I'm going to talk about the financial indicators. I would like to focus these comments on some specific blocks. For the first part, I'm going to talk about the top line, the consolidated net revenues. I'm going to talk about the net revenues in Latin America, in Aesop. And afterwards, I'm going to talk about the EBITDA margin and EBITDA, net income, and the necessary investments which were made during the quarter. And lastly, I'll make some comments about operating cash generation and also the net financial position.

So, as you can see this, on slide number 3, which is the first slide on consolidated net revenues, here we have -- in red, we have Brazil; in orange, LatAm; and then, a highlight to the Aesop operations. The growth in the quarter was 6.9%, with a strong share of the international operations where the highlight goes to 32% of the net revenues were actually generated by our international operations.

Now, moving on to slide number 4, we have a highlight for our Brazilian operations. So, you can see that in the quarter, based on a more challenging market, we had a drop in our net revenues in 9.6%.

And highlighting some indicators, showing that the number of consultants, in thousands, we had an increase of 2.6 year over year. But with the drop in the average ticket, we had a reduction in those net revenues, mainly resulting from the main element of reducing our net revenues in the Brazilian operation.

Now, on slide 5, still highlighting here now LatAm, with a 53.4% (sic - see slide 5, "73.4%") growth for the quarter, which was boosted by the exchange rate which favored this growth. But in local currency, you can see that there is a 31% growth in local currency in all countries. All countries of Latin America still have a strong growth in local currency, showing our strength in selling directly in each one of these countries.

In slide number 6, it's Aesop operation, with strong growth in the quarter, an operation that has been selling well in retail in all the countries. And today, we operate in 18 countries and we have 120 stores in retail in those countries.

Now, going on to slide number 7, our focus now is on EBITDA. We had an EBITDA of BRL400 million consolidated, and the EBITDA between Brazil, LatAm, and Aesop.

It's essential to talk about the impact of the exchange rate and also the tax burden. With the reduction of these impacts, if we do take out these two elements from our results, our EBITDA would be in about BRL440 million. With a margin of 20%, it would adjusted to 23.9%.

Now, going on to slide 8, about our net income. There was an important reduction in this quarter, but it's worth mentioning about two important elements. The first one is in regards to Aesop operations that, as we know, we have 71% shares of Aesop. And the 29% that remain have to be registered as financial liabilities. And so, because of the resolution of the business, that impacts the cash right now. Of course, we have the windows that we have to be executed in this period if this goes on, if we have to do something different.

The through-put have to go through the earnings, and this result will be impacted strongly by the impact of the assets that were valued. It's a very good asset. It's an operation that was acquired with excellent results. So, if on the one hand it increases the Company's asset in the consolidated manner.

So, this impact is the liquid -- the net margin of 6.6% and 3.2%.

Now, going to slide number 8 (sic - see slide 9, "9") about CapEx and the necessary investments, this has also been focus of our deep analysis. And after many years of strongly investing in CapEx, we are going through a phase of only the necessary investments, especially to leverage growth and to seek productivity.

So, we can see that CapEx in the [3Q14] is in line year over year and our expectation is of BRL315 million (sic - see slide 9, "BRL385 million"). The main investments have been in technology of information, business intelligence, and investment in the channel that is our main source of revenue for the business.

Now, going to slide number 10 about free cash flow, I would like to highlight what Roberto mentioned at the beginning in his remarks, in which cash flow generation has been our main financial indicator, which is an indicator that will enable us to focus and become comfortable in the investment and initiatives for the Company to grow.

The great focus on working capital has been strongly illustrated both domestically and internationally with great concentration of working capital. And despite the market being very challenging, especially in Brazil, with strong demand for the international markets we have been able to use this cash flow, and that is the main element to generate cash.

I would also like to talk about our net debt that has stayed very stable in very comfortable levels, also meeting our needs for investments and carrying out our strategic initiatives. Since free cash flow is an indicator for the quarter, it also gives us comfort in a moment of an economic crisis and low demand in Brazil, and it still is our main vector in financial management.

Now, on slide 18 (sic - see slide 11, "11"), I would like to end our indicators with the sustainability indicator. It's very important for the Company. I would highlight the management of water in liters produced, especially with this crisis in Brazil in water offer. We have been able to keep our consumption low. And also in eco-efficient packaging, we have been showing a strong growth in this indicator.

So, our commitment with sustainability and also our investments in the Amazon region, which also is an evolution indicator in our mission on 2020, on the left side here of the chart you can see the evolution of our indicators for sustainability.

And I would like to leave more time for the questions. So, I would like to pass the floor back to Roberto so that you can ask questions. So, we're here to answer them -- Fabio Cefaly, myself, and Roberto. We also have our Director of Sustainability and Marcio Bologna, our Controller, to share with you the answers to any questions that you may have.

(interpreted) So, now, we are open for questions.

(interpreted) (Operator Instructions) Guilherme Assis, Brasil Plural.

(interpreted) Actually, I have a couple of questions that I'd like to understand. I think that the first one is about the operations in Brazil. We've noticed that there is an impact to the figures in the quarter in relation to the tax increase, the FX variation, and that affected the gross margin.

So, in the first quarter or, actually, first half-year, you had some price increases, in partly to offset that I believe. I'd like to know, from now on what is your strategy? Will the Company have a strategy to make up that gross margin with a new price increase?

And also, based on that strategy, I'd like to know about what your opinion is about the complicated macro environment? We see that the retail and consumer data isn't doing so well. And how does that fit with your strategy to make up your gross margin? So, should we expect any improvements? And how will that be in relation to price? How will it affect price?

That's the first question.

I'd also like to ask my second question, which is also related to the operations in Brazil, where the strategy to cut costs. I know that you made some major efforts in the first half and you've eliminated the entire manager level, not just to cut costs but also to transform the Company and making it faster in decision making.

So, I'd like to know -- based on the figures that we saw for the third quarter in SG&A, I can see that there's already a dilution of that. Is there any non-recurring effects in contract termination? So, should we expect even more improvement from now on in G&A? So that we know what to expect in terms of EBITDA margin in Brazil.

Those are my two questions.

(interpreted) The first question about the gross margin. So, you really [radated] the fact about price. I'm going to answer about price.

I'd like to say that we've been making major efforts in cost and expenses -- I'm talking about costs of raw material and services that are connected to the industrial side -- and we've been talking to our suppliers. We're trying to be as efficient as possible in using all the inputs that we buy, trying to replace raw material that could have the same efficiency and same commitment to quality for our products, but could be more affordable in terms of price. So, we do that every single day.

You mentioned the recent changes in the managers and improving our planning processes, and we also still have paths to follow. And I can say that we've hired the FALCONI consulting firm, because we think we can go beyond the efficiencies that we already have. So, we've hired them to help us on three fronts: to find sales efficiencies -- and we call that the Sales Excellence Project; to review our G&A; and also to pursue operating efficiencies, and that has to do with the production processes and distribution.

So, the idea is not looking into reducing costs or expenses in the short term. But instead of that, we want to improve all our planning and execution processes, not only for Brazil but also for the international operations, and prepare ourselves in a moment where we believe that the economy should grow again in the future and we're going to use the assets that the Company has purchased in the last years in a very efficient manner.

So we're very excited about that, and we believe we're on the right path.

So, in relation to price, in our marketing strategy it's very important. I can't give you too many details because you could probably imagine that this information is confidential. But I can say that among the actions that we can take in marketing in the Company is price promotion.

So, we're going to look into that with a lot of care. Because we can't move prices up and down, we have to consider promotions for our products in certain categories in some products that could have lower prices, and that could enable us to improve the net margin that we ended up losing because of the foreign exchange and the tax burden as you mentioned.

I think I answered your questions.

(interpreted) Yes, I think so, Roberto. Just trying to understand a bit more in terms of price. I do understand that it's sensitive information because of the competition, but you already had a price increase this year and you mentioned that the way to deal with this now in this next quarter and the end of the year would be promotions. So, would you discard any price increases as you had in the first half of the year? Or, do you think that you may have something?

(interpreted) Guilherme, I'm sorry. I can't say much more than I already said. But our planning cycle is very long. We're already considering next year. So, we won't discard any measures that we would have to take for the health of our business. But I can't say what we will do, what type of increase or category or period.

Like I said, this is something that's always -- we're always looking into that and we will take decisions at the right time. I can't say more than that.

(interpreted) That's great. Thank you. And one last quick question. The [BRL36 million] of sale of assets. Could you explain what that is? You sold equipment to [SOU Farma]? Is that it? Did it fall into this quarter? What is in that? And is there anything we should expect -- anything new that we should expect from now on?

(interpreted) Actually, we were looking at Company assets that weren't operational and weren't in our project. So, we had a good opportunity to sell that before the actual prices in Brazil. So, we had some reasonable amounts for it based on what we had, and we thought it was a good time to realize our cash.

Do my colleagues have anything to add?

(interpreted) It was land that wasn't being used. It's about streamlining and generating cash and reducing capital employed.

(interpreted) Okay. Great. Thank you.

(interpreted) Thiago Macruz, Itau BBA.

(interpreted) We saw a significant gain of working capital this quarter, especially in suppliers. Could you give us a little bit more detail of what has been done [objectively] to improve working capital? And also can we assume that this is a new level of conversion and this will --?

If I could ask a second question, have you focused efforts in strengthening the productivity of your consultants? Have you been discussing, because of the macro environment, to increase recruitment maybe to offset the drop in sales? How do you see this balance?

Those are the two questions I have.

(interpreted) Well, in regards to productivity of our consultants, what we have to admit clearly is that today we share them with other companies and we have to achieve the preference of the consumers more than we have been to recover what we have lost in this period.

So, a lot of things are being done. You mentioned recruitment. Yes. But we're also working on other recruitment channels with a previous identification of the profits that we want to have with the consultants, the qualifications and minimal sales. And we're structuring to have a qualified recruitment.

And we have a large project and a new proposal of value for the consultants. Some modules of this program have been implemented already. And as I mentioned in the beginning of my remarks, we have an app so that they can place orders through their phones and also receive payment through credit and debit cards with devices that are placed on their smartphones.

We also bought a package to access voice and data packages with some phone carriers at low cost for the consultants.

So, we are already employing little by little each one of these measures of a greater project that we want to put in place with the consultants. In this way, we expect to improve their productivity, but what we actually want is that they can have their clients to prefer Natura.

In regards to working capital, it is our priority. We have several projects for the future to be able to meet our clients with more channels, especially more service-rendering channels. And we also want to focus strongly on the Company's financial health management; so, our relationship with suppliers.

We have the necessary inventory to have good quality to render services and also an effective credit management, so that we can build a future and at the same time have a Company that is financially healthy.

I would like to pass the floor to Lettiere. He might be able to give you more details about this improvement of the working capital.

(interpreted) The process of working capital management has been going through several reviews and improvements of processes. These processes, I would highlight, for example, in inventory management, it's essential to have a full programming of the demand, and this has been made by using SAP. We just implemented in Mexico last month, and it was the last country that we implemented SAP. We call it [Wave One] from Natura.

So, with the investment and the management software and more transparency in our controls and this planning of demand, we have been able to improve the management of our inventory.

In purchases and procurement, we have also been coordinating in a central manner and been working in management in Brazil and obviously with the synergy with the operations in Latin America -- so, the strategic partnerships with our suppliers -- and we have been getting great results.

And in accounts receivable, we are focusing our management in credit so that our days outstanding have been staying at very reasonable levels, especially in those moments with high volatility that we are going through.

So, strong credit management, more intelligence and information, and levels of control of accounts receivable in a segmented way for our Company, we have been able to manage these indicators very well.

Your question about the future, I think that our goal is to continue productivity in working capital, which is the main source of operating cash flow, together with sales. We have a size of working capital that is compatible with our cash flow generation, and the processes are better, are developing, and we have space for improvement. But also, when we get Brazil in a better moment and go back to growing, I think we will be in an even better position to manage this working capital.

So, it's a process that is day by day, continuous improvement, especially using better analysis and information with the softwares like the implementation of SAP in the region.

(interpreted) Thank you very much. If I can just ask something to Roberto, you mentioned that Natura works to recover the preference of the channel. Do you have any internal data that shows that it's the channel that has been losing preference for Natura, not the end consumer?

(interpreted) We have all the internal data of consultants, consumers. They are well known. In general, we still have a very strong penetration in several categories. In some segments in certain socio-economic classes and geographic regions, we might have some difficulties. So, today, those are the regions and segments in which we have priority to act. And in overall channels and communications and proximity with the clients, especially the management of our relationship with the consultant.

Obviously, we have all the data and they are used for the management. We have been focusing a lot on that, and we have to speed up the implementation of the measures that we already mentioned. And what the Company decides, we have to be able to move the processes in a different way in some of those sets.

(interpreted) Thank you very much.

(interpreted) Franco Abelardo, Morgan Stanley.

(interpreted) My first question is about improvement in cash flow generation. You had a great improvement in working capital with the suppliers, but you also had an increase of taxes to be paid. I want to know if this higher tax burden is already provisioned? Has it been actually paid? Or, if there is any expectation of gain in the judicial process with the government? That's my first question.

The second question is about your credit portfolio. We saw an increase in the delay, but it did improve from the previous quarter. I want to know if you see any signs of worsening of credit, and that's why you have been implementing these policies? And if this is a concern, are you thinking about doing something about that?

And I didn't understand in your presentation when you mentioned the adjusted EBITDA margin, if it's adjusted to the increase of taxes? Or, what was it for? I couldn't understand in your presentation.

(interpreted) First, about the tax on [industrialized] products, we have an injunction. So, we are provisioned. We're not [disembursing] these payments. We have a very strong case. So, it's a legal issue, and we are doing the follow up. So, we are provisioning the results, and the results that we are disclosing have that provision in regards to the taxes.

You asked about the credit. What we have been applying is a private policy towards the segments that we have established for the consultants. So, we have a differentiation for each group of consultants. And this has been very important not only when we grant credit and leverage sales, but also when we collect, because a good credit policy with more indicators and more information and more details in monitoring means you have better collection.

What has been happening in the market in general is that the market is harder. The money in the pocket of the consumers is scare. So, in our case specifically, we have been noticing that our portfolio aging when you compare to September 2015 reduced 7%. So, our aging in general reduced. One is because of the volume of the business, and the other part is because of this new credit policy and collection policy.

What we have been noticing is that those that have matured in 30 days also had reduced. In the very short term, we have been reducing the aging.

Our greatest focus has been in 60 and 90 days [maturement]. Those consultants that are just beginning, that have a base of 30%, with the credit policy we've been able to bring in more consultants. And so, in a very conservative manner we are provisioning an additional part of these [conjentures] that are going into the base.

But overall, when we look at losses, our losses and default when compared to January 2015 reduced 0.7 pp. In compared year over year, we reduced two percentage points.

So, if we put that into the earnings, we were able to with this new credit policy increase our gross revenue in this period BRL140 million, [provisioningly] BRL19 million, and a net result in our EBITDA of BRL20 million.

So, we are focusing strongly on these new dynamics that the market has been showing. It's a recessive market with less credit conditions. So, we're doing more analysis and using more criteria. We don't see that as a problem yet, but obviously we are very attentive to that.

So, in general, that's about credit.

You also asked about what I mentioned in the beginning about the adjusted EBITDA. So, what I meant was that in a consolidated manner is that the tax burden with the foreign exchange effect had very important impacts to our EBITDA margin; so, our EBITDA margin that we've disclosed -- a margin of 20% in the consolidated manner.

And when I take out the net effect of the foreign exchange rate and the tax burden, compared year over year our EBITDA margin would be 23.9%. So, that's the dimension of the impact that we had with the exchange rate and the tax burden.

(interpreted) And without the impact, are you also taking into account the price increases to offset it? Is that a net effect of the price increase? Only what you effectively absorbed in the margin?

(interpreted) Yes, it's pure. It's the pure effect of the exchange rate and the tax burden. Almost four percentage points.

(interpreted) Fabio Monteiro, BTG Pactual.

(interpreted) I'd like to learn more about the new channels. So, you mentioned the pilot project in the Raia Drogasil drugstores in Campinas. So, I know it's just a little while, but I'd like to hear your first impressions about that channel?

And also, I'd like you to talk about the store projects. So, what has advanced? What are you thinking about that in kiosks and other channels, as well? If you can give me an overview about the new channels, except the web because it's already more advanced, so to speak?

(interpreted) In relation to our SOU product line and the drugstores in Campinas, Valinhos, and Vinhedo, that was already something that we wanted for a while now, having these products in the retail channel.

And the first results are very promising. It shows you the strength of our brand and the quality of our products. But I think it's too early to have final conclusions, but the first figures are very encouraging.

After this experience, we're able to identify in our portfolio that these -- other products that could go through the same experience, be it in the pharma channel or any other customized channel. So, we're going to have an experimentation strategy instead of having a large project that would take a long time to be implemented. So, that's the first experience.

In relation to developing owned stores, we are becoming more and more convinced that that channel could cause synergies with our direct sales. Our consultants believe that one of the demands that consumers have is having an opportunity to try our products in a place where she can actually see the products and choose her perfume, her moisturizer, and her products and she can have regular purchases through the consulting channel, be it digital or be it in person.

So, we're working on this project very closely with our consultants so that it wouldn't channel the main channel.

And we also have the Natura Network launched in December last year. It's going through constant improvements by identifying things in the platform and the consumer's experience. And today, we see that we have conversion levels that are very high rates, above the market average. And we have to generate flow, and generating flow will also require a communication strategy and a closer presence to our end users.

We've grown in our digital consultants. And in parallel to the Natura Network, we believe that we can develop new alternatives by using cell phones mainly in mobile and smartphones (inaudible).

So, that's what we're looking into the future, but we're very excited with the projects that we have. And once again, all of them are seen in a very integrated manner, and we believe that it has a lot of synergy with the current channels.

(interpreted) Okay. Just a follow-up question on that, especially about the stores. You mentioned that the idea would not be -- you don't want to cannibalize the current channel. So, I'd like to understand if you're going to have an equation with the consultant so that she can have some gain with the owned stores? Or, if the gain would be the fact that that store is actually a showroom, so to speak, or a place where they can try the products and then consumers would see the benefits, but they would buy from the consultants, either via web or catalog?

So, my question is, is there a financial equation for the consultant, as Natura Network has, where she gets the commission? It's a bit lower, but there is the commission on the online, as well.

(interpreted) First of all, the store project is not a showroom. They will be stores and they have to work, economically speaking. And the synergy with the consultants is providing services. We want these services to be tried in the stores. And the consumer can feel free to go back to the store and buy, or they can recommend a consultant where they can order, be it an online consultant or a real consultant.

So, we believe that there could be a lot of synergy there, as long as we want that.

And the points or the compensation, we believe we can identify each consumer individually, map them, and monitor the relationship he has with the Company, be it whatever point of contact that he has. We're going to have all that information, but we don't necessarily foresee compensation for the consultant.

There could be incentives for the consumer to continue to buy from the consultants as they've bought until now.

But I'd like to remind you that Brazil is huge. We are practically 1,600 municipalities. We have --. The performance is different in direct sales depending on city configuration. We know that in the countryside our performance is different.

So, we will do things very carefully to fill in blanks and to respond to any problems that we may have today with our consumers.

(interpreted) Great. And just to conclude -- I'm sorry to ask again, but -- do you have any goals of potential number of stores, even though it could be in the long term?

(interpreted) Yes. Obviously, we do have that, but we are not informing that, not disclosing that figure yet. We're going to go through a testing phase, as we already are testing some products in drugstore chains.

So, we're going to try to get the concepts right and decide exactly what type of experience we want the consumer to have in the store. And our system to identify our consumers has to be ready, as well.

But obviously, we do have a horizon about where we want to get and the geography to see where we have opportunities to be successful with this type of service for our customers.

(interpreted) Thank you.

(interpreted) Albert, Citibank.

(interpreted) I would like to understand a little bit more about the international business, especially the 2.7% margin; if I'm understanding it properly, the strongest margin in this quarter. So, much better than we forecast. And I understand that there's a matter of the exchange rate and Aesop. I would like you to comment a little bit more about the structural business in LatAm since the channel is growing 20%.

So, can we think that the margin of the international business can be much closer than the Brazilian margin now? If you can help us to understand the trend for the next quarters and what are the structural highlights that we can expect -- scale, more investment?

That's my first question.

(interpreted) In regards to the margin, especially in LatAm, you can notice that we had a very important increase, especially the EBITDA margin, for LatAm in the group. This is aligned to the Company's strategy for the international business.

So, the direct sales channel has been growing. Our activity in all the countries has been growing. The Natura brand is becoming more and more consumed in all the countries. And we are getting our return on investment that we made.

And when we look at the scale, we will obviously have this margin gain, and that's exactly what we are doing right now. We are breaking through. The fixed costs of growth have already been paid. So, from now on, we go into a phase of margin gain. So, obviously, this margin gain has to come together with the top line growth, which has been our main driver.

And also, as you mentioned, we have several corporate projects of synergies in all the areas -- in activation, in supply chain, in finance, human resources. All these processes are being integrated, and we work together. So, that is generating the synergy for growth and improvement of margin in Latin America. So, it's a strategic movement that has been planned for some time now.

(interpreted) Can we think then that we are reaching a level that it's a double-digit EBITDA margin in the international part of the business? And it's something that we can expect for the next quarters, a double digit? Or, if we can think about something else?

(interpreted) Today, looking individually and country by country and individually, but we have already reached double digit in several countries that we operate. The point is is that for the management in Latin America we have to consider many costs and expenses that are related to that. And from now, as we're [losing unit scale], we'll see a stabilization of margins. That's a regular process.

(interpreted) The second question, going back to Brazil, I know that it's a bit difficult now to measure your market share and personal hygiene, cosmetics, and so on, but can you talk about behavior, Natura's behavior in terms of market share for these three segments? So, if you could, could you comment on the trends of your market share in Brazil?

(interpreted) Alex, I'm not sure if I understood your question. But if you mean our market share per category or per major group of products, actually we have a very high market share, different than other countries in direct sales. The direct sales still have an important role in the CF&T market, and we have to improve the efficiency of the products.

We have the quality of our products and the efficiency, and our concern of being effective is every day. But we still have to admit that it's a very concentrated market. Other players are making major investments, as well.

So, our challenge is to maintain and recover part of the market that we may have lost, but that's not something that's easily done. It will require a lot of efficiency in all areas of the Company, from product to marketing strategy and innovation. But we are extremely confident that the strength of the Natura brand -- which was built exactly on the pillars of the efficiency of distribution, correct prices, and quality of product -- we believe that we can recover that in some categories.

(interpreted) Okay. Understood.

(interpreted) Irma Sgarz, Norman Sachs.

(interpreted) I have a question about Natura Network and the traditional channel. In the consultant space in Brazil, in total increased 20,000 year over year and 8,000 since the end of 2014, and you launched Natura Network in December. And now, you have 54,000 digital consultants.

Based on the figures that I see, it seems to me like that all the growth that you're recurring in the consultants channel came from the digital channel and the traditional channel may have shrunk. I'd like to confirm that information. Is that correct?

And what do you feel is happening in the traditional channel, if in fact -- in relation to the productivity of the active consultants?

And another thing is if I'm a traditional consultant and then I can enroll as a digital consultant, would that be two separate consultants? Or, do you check that with their taxpayer number to avoid a double-counting, for instance?

(interpreted) Actually, your first question is about the growth of the channel. And then, a question that if the growth is coming from the digital consultant.

No, it's from both -- the traditional consultants and the digital. But I'd like to remind you that for the digital consultant that is 54,000, 50% of them are also the in-person consultants.

And to answer your last question, they're counted in both bases. They are separately counted. They're counted in both.

In terms of productivity, I'm not sure that I understood, but I think we've already talked about that in the prior periods, that we have a very efficient process in getting their preference, not only in the motivation events and acknowledgment events, but also giving them tools that could give them more efficiency in their operations.

We've already mentioned the apps for smartphones and the possibility of using the debit and credit card machines, mobile telephony plans where with BRL15 per month they can have access to that type of app.

And so, there are many initiatives involved so that we can increase the strength of this connection with our consultants. And in that way, they can also improve their income.

(interpreted) Thank you.

(interpreted) Gustavo Oliveira, UBS.

(interpreted) I'd like to go back to the gross margin and try to understand the effect that you believe is actually coming from the foreign exchange devaluation. So, you used a lot about the inventory that you had. So, inventory levels are lower than in the past.

When you rebuy new inventory, I believe that the inventory cost will be higher than what was sold now. So, I believe that the gross margin pressure should increase in the fourth quarter and the first half of the year. And so, you have a regular price increase that you always have in the first quarter.

So, could you explain that dynamic better in the inventory replenishing that and the gross margin for the next quarters?

(interpreted) The impact of the gross margin -- let's break that up. So, the first part is about costs. I think it's important to include the cost component.

The cost pressure with inflation and the dollar devaluation in the second quarter, that has a time to turn to then impact our third quarter. We had an exchange rate variation of 38% that impacted the third quarter.

So, in foreign exchange, we have a strategic sourcing area that works in partnerships with our suppliers that has raw material that's in US dollar or indexated to the dollar. And we've have excellent negotiations with our suppliers, given this long-term partnership and the potential that the Company has.

So, we highly mitigated the US dollar impact. That's why we didn't see such a strong impact as it would have been if we just [took on that]. So, there's huge efforts in negotiation and productivity.

So, the exchange rate that impacts raw material and packaging, in that case in our internal calculations we had a decrease of approximately 50% of the exchange rate impact to the margin. And our cost of goods sold is 60% impacted by the exchange rate.

So, in volume, we've mentioned that with the lower demand in Brazil we have a drop in units. So, it impacts 20% of the cost of goods sold. So, there is a base of the fixed costs that's stabilized, and that also mitigated the impact of margin, of the productivity, and fixed costs.

And then, there's the tax burden which directly affected our gross margin. So, the increase in the tax burden of 3.4 pp year over year, that directly impacted our gross margin in 1.6 percentage points.

There was a price increase in 12 months back. We captured that; that was approximately 6%. And that also helped to offset the impact that we saw.

The market is demanding more promotions. So, that has also affected things, especially compared to last year, which also reduces our margin.

And all of that, generally speaking, tells us the story about our gross margin in Brazil in the third quarter.

Looking forward, we could expect the same dynamics. However, with more efficiency that we're looking into as Roberto had already mentioned in promotional efforts, in addition to the pressure on costs and controlling costs and negotiating with suppliers and the productivity of the fixed costs. So, we also have a challenge to streamline the promotional effects.

(interpreted) Okay. Let me see if I understood, Lettiere. When you reduce --. So, that 2.7% reduction you had to the gross margin in the third quarter, 1.6% is approximately what you estimate as the tax burden and the rest would be all the fixed costs and --? Is that it? Is that what you mean? So, at least 1.6% in the fourth quarter, because the tax burden there's nothing you can do about that. But the rest you can manage it better? Is that it?

(interpreted) That is our objective. That's our goal. That's what we're doing.

And there's the mix effect. That can also improve our margin.

I'd like to remember you that this is high season now, fourth quarter. Our mix is richer; our product mix is richer. So, we expect an improvement of that, as well, because of the product mix.

So, those are the main variables that impact the gross margin.

(interpreted) Okay. It's very clear. Last question, about the pilot test in the Campinas store in the Raia Drogasil. Do you have anything that you could talk about now?

(interpreted) It's still early for us to give you information on that. As I mentioned in the opening remarks, the initial results are very positive, not only in customer acceptance, turnover, prices, and the quality which is present in all Natura products.

So, we can see that this is working, but it's still early to see any indications of the next steps. But as a test, it's going well.

(interpreted) Okay. Thank you.

(interpreted) Javier Escalante, Consumer Edge Research.

I would like to go back to Brazil, because I was surprised to see that the recruitment of consultants is not accelerating with the sharp increase in unemployment in Brazil in the past months. Shouldn't Natura benefit from higher unemployment in Brazil, as you excel in essentially sales jobs as much as it sells products?

And basically if you're trying to benefit -- the second part of the question is whether if you're trying to benefit from higher unemployment, you need to change the earnings opportunity for the reps? Or, is it that your investments already to diversify into online retail stores and even distributing [into drugstores] is already undermining the attractiveness of being a Natura consultant?

(interpreted) In relation to the unemployment increase, we believe that -- it's still recent. We believe it could have an increase in the availability, and we're very aware of that.

And in relation to the growth in the channel, we've been doing this in a very scientific manner in identifying the regions where we have a need of more consultants and reducing the number of consultants in regions where we believe that there's too many consultants in that area. And we want to avoid cannibalism and avoid their low productivity and, therefore, if they have low productivity, they have a low income.

And we're trying to recruit in addition to the main channel with our own consultants and the consultants that manage them and try to service channels in areas that we weren't accessing and trying to get some better specialists in certain product categories.

So, today, yes, we are concerned in growing the channel, but it's not the same concern and guidance that we had when the market was growing at extremely high rates, where any additional consultant enabled us to service a growing demand. Today, we have to be more selective. We have to be more focused. We're using more business intelligence tools to see where we should grow, not only geographically but also with the segments.

Thank you.

(interpreted) Luis Cesta, Votorantim.

(interpreted) Well, I'd like to go back to the long-term growth topic. Your initiatives are very clear on resuming growth in the country. But I'd like you to talk about the opportunities, the potential that you have in international growth, and not exactly in the locations where you're already present, in the countries where you are already present.

I don't know how you structure that internally, but do you think that there's an opportunity to structure an entry into new countries where Natura is not present? Not considering Aesop; I'm talking about the actual Natura brand.

And what's the likelihood of seeing Natura entering new countries in the short term, short/medium term, in the next year, two years? Is that an area for growth where you believe can be a reality? Or, wouldn't that be a focus for the Company in the short and middle term?

(inaudible) It is. Our Company is focused -- we have several fronts today -- in strengthening our direct sales channel to keep our high growth rates in Latin America.

It's also a strong international position, be it in direct sales or in other channels. If you consider short term in one or two years, the likelihood is very high of seeing Natura going into other countries or in countries that we already have with different proposals.

We just launched our online operations in Chile. It's a test still. Let's see how that works. And probably in other places also we will have the Natura brand present.

We have been seeing that the products have enough quality to reach this international market. The brand has a very acknowledged value proposal. It's known internationally by its commitment with sustainability issues in general. We just were granted an award by the United Nations in their environmental program.

So, those are values that we have in Natura, and we have to make them a reality. There's no reason not to have the ambition to be a very international, large Brazilian company in the consumer market.

(interpreted) Thank you very much.

(interpreted) [Giovanoli Veda], Credit Suisse Bank.

(interpreted) My question is about the CapEx for the year. At the beginning of your call, you mentioned that you still have the guidance of [BRL135 million] of CapEx for 2015. And to the moment, you have [BRL163 million]. So, you would have to invest about BRL130 million in this fourth quarter. Is this guidance still realistic? And what are you waiting to employ this CapEx by the end of the year?

(interpreted) Our guidance of [BRL235 million] must be reached. The number that you referred to is investments in 2015 that can be compared to BRL385 million. What we did do until September is BRL240 million. So, we have BRL145 million to reach our goal. We have projects for that, but we're not going to do it just because it's planned; we're going to do it because it's something competitive and has to be done for the Company.

(interpreted) Thank you very much.

(interpreted) Robert Ford, Merrill Lynch.

(interpreted) How do you explain the swaps? The notional cost and the settlement, please?

(interpreted) If I understood your question well, it's about the swap operations. Is that it?

(interpreted) And protection, the cost rollover, et cetera. I want to model the swap operations.

(interpreted) In terms of policy, I'm going to pass the floor to Lettiere afterwards to give you more details. But we covered all our financial liabilities in foreign currencies through swap operations to be able to convert them in Brazilian reais, especially the debt instruments.

In regards to the specific operations, each one of them in analyzed due to maturing dates and if we can anticipate the payment. So, I will pass the floor to Lettiere and he can talk about these swap operations better.

It's what Roberto already said. We have a policy for investments in financing in which our entire position for debt is in a strong currency, which is hedged. So, we have a coverage for this debt.

And in terms of average cost of the debt, we have the CDI as a reference. And we have a mix between what is debt in a local currency and strong currency. But as an indicator, we have an average debt cost in regards to CDI in 98%. So, that's basically the indicator that we use for cost of our debt.

(interpreted) Thank you very much. And you generated [BRL180 million] as cash for the suppliers. But I didn't understand in your answer how did you do that? And how sustainable is it?

(interpreted) In regards to what? Sorry. I didn't understand the question.

(interpreted) The cash flow generation for the suppliers, specifically. [BRL280 million] that was generated in the third quarter, how did you do that in a sustainable manner?

(interpreted) It's very sustainable, because we have several suppliers that are very informed -- obviously, all of them are informed. But we have a portfolio of suppliers that is very broad. And with the representivity of Natura, we have been able to negotiate the long term with partnerships to get the economic sustainability for our suppliers and also for Natura, so that both cash flows -- ours and the suppliers' -- benefit from that.

We also have instruments that we use to help to capture the working capital for our partners. So, we have a negotiation process with our supply chain and commercial partners to use this working capital. So, we do a lot of working capital through trade finance.

(interpreted) Okay. Thank you very much.

(interpreted) We close our Q&A session. Now, I would like to pass the floor to Mr. Roberto Lima for his final remarks.

(interpreted) Thank you all for your presence in our call. We are very aware of the work we have to do from now on, and we strongly believe on the power of Natura, our structure, and our capacity of our team.

We know that we have a very challenging moment, and we want an operation that's more agile and be able to significantly improve our free cash flow management. So, that will make us more competitive and take up the spaces that we have in the Brazilian market and also in those markets in Latin America and other countries where we might go into in a near future.

I trust strongly that the initiatives that are being implemented will help to improve our performance in direct sales, and at the same time the new alternatives for growth in other channels are being created and tested, aiming at more productivity. And what we want to do now in a quicker manner is to be faster in them.

In international operations, we are very confident in the growth in the EBITDA, as you saw in this presentation, and this inspires us to look at other opportunities outside of Brazil and outside those countries that we already are.

It's clear -- and I think I said this today -- that our priority is to develop as quick as possible the projects that will take us in a stronger action in the markets in which we already are, with the main goal of getting a better presence and better service and better satisfaction to our consumers and to our consultants.

At the same time, we're focusing in the increased growth of our operations, and we have been able to improve cash generation through our actions. Also, we are hiring FALCONI consultants so that we can improve efficiency continuously in our organization, so that while we develop the processes and projects to grow we can also have a Company that is financially healthy with a strong cash flow generation.

Again, I would like to thank the presence of all of you, and I hope to see you again in February in the call for the fourth quarter of 2015. If we don't talk before that, I would like to wish you all happy holidays and a better end of the year for Brazil and a good afternoon to all.

Thank you very much.

(interpreted) This conference call is closed. We would like to thank you for listening. And have a nice day.

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