Natura &Co Holding SA (NTCO) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the 2016 Third Quarter Conference Call.

Today with us, we have Mr. Pedro Passos, Chairman of the Board, Mr. Roberto Lima, CEO who is leading the Company now; Joao Paulo Ferreira, the new CEO; Jose Roberto Lettiere, CFO; Andrea Alvares, Chief of Marketing and Innovation; Erasmo Toledo, Chief Executive for Latin America, Marcel Goya, CFO and IRO and Marcel Goya, Controller.

This event is being recorded and all participants will be connected in listen-only mode during the Company's presentation. After that, we'll start a Q&A session, when further instructions will be provided.

This conference call will be simultaneously translated into English and questions may be asked normally at the end from participants connecting from abroad. (Operator Instructions) This event is also being simultaneously broadcast over the Internet and may be accessed at www.natura.net/investor. A slide presentation can also be found at the same URL and it will be available after the event is over as well.

Before moving on it, I'd like to mention that forward-looking statements made during this call concerning the Company's business outlook, forecasts and upgrading the financial targets are based on the Company's assumptions and also on information currently available. Forward-looking statements are no guarantee of performance, they involve risks, uncertainties, since they refer to future events, which depend on circumstances that might -- or may or may not materialize. Investors should have in mind that general economic conditions, industry conditions and other operating factors might affect the future of the performance of the Company and lead to results, which will differ materially from those expressed in these forward-looking statements.

I'd now like to turn the conference over to Mr. Pedro Passos, Chairman of the Board who will begin the conference. Mr. Passos, you have the floor.

Good morning, everyone. I'd like to thank you all for participating, especially the investors. We are going to put an important transition moment here at the Company. And for this reason, I am here today. The Idea is to provide any clarifications that you may need.

I'd like to start by thanking the huge contribution given by Roberta Lima throughout this last two years as the Company's CEO. I'd like also to add that throughout this period under Roberta Lima's leadership, we were able to establish a very solid strategic plan and several accomplishments were possible because of his work. We managed, as you already know, we managed to expand our operations through new sales channels. We started our project relative to own stores in retail, but also we started our drugstore project, we started distributing our products through drugstore chains. And on top of that multi-channel mechanism, we also moved forward significantly in terms of digitalizing our business. All of that was driven by Roberto's previous experience. And we also managed to reposition our brand in the market.

When Roberto arrived, he replaced Alessandro Carlucci, we knew at that time that we were going through a transition period. In other words, that he would have this business agenda to complete. But the most important task he had in his hand, the most challenging one was to regroup the executive committee. And that in my opinion personally, that was his most important accomplishment in these two years. I'll get back to that later, but I'd like to start by to really thank Roberto for his contribution in this past two years. And given the current executive group that we have and that Roberto helped us put together, I'd like to mention that we are also very glad to be able to count on a very young, talented and committed team.

This team has a big challenge to deliver the year's results and this has been a difficult year, as you know, and you'll see that when we comment on the results shortly. This team has a challenge of delivering a better year next year in 2017 so they have to focus on the short term. But as I said, they are young, they are talented and they are well-equipped to think about the Company's development cycle for the coming 10 years.

And it is within this atmosphere of a collective work conducted by a young talented team that we have elected to be their coordinator and to be the new CEO, Mr. Joao Paulo Ferreira. Mr. Ferreira has been with us for many years, seven years to be exact and he has performed really, really well in several different areas of the Company. He was the Vice President of Operations, Vice President of Logistics, he was also responsible for the Company's international operations. He was responsible for the Company's sustainability area, wherein he had a chance to create a vision for the coming 50 years, which is something very important for us, as a type of guideline.

And Joao Paulo has also been responsible for the Company's major commercial changes. And you all know the type of challenges we have in terms of renewing direct sales and Natura does that very well, on top of the multi-channel move that I mentioned before. So I'd like also to welcome Joao Paulo to this new challenge he's taken on. And once again, we can count on a team, which today has a mix of experienced and fresh talent.

People with new views being part of the Company, I'd like to mention the members of the Executive Committee now, who today help Natura move forward. First of all, Andrea Alvares, our Marketing Vice President, she has been in the Company for a year.

Erasmo Toledo, who is responsible for the Company's Latin American operation. You know his performance and you know the results he's managed to deliver. He has been with Natura for 26 years.

Also Lettiere, our CFO, has been in the Company for 1.5 year. Robert, who has been with the Company for four years, give or take.

Jose, Vice President of Operations and Logistics, has been in the Company for six years. Agenor also, who is responsible for this process of digitalization, as I mentioned. He has been with the Company for five years.

And now in the human resources area, (inaudible), who has been with us for 16 years. I'd like also to thank and welcome Marcel and his new role as Investor Relations Officer. He has been with the Company for 16 years. So as I said, it's young team, but challenged, experienced, a team that knows the Company. And we also have people who are just joining the Company with a new view, with a fresh look at the business. The reason for this transition, as I mentioned, and why to carry that out right now, it's because we've got to the conclusion that we have a team which was ready to take on the short-term challenge the Company has, and also a challenge that we'll be facing for the next 10 years. And we could have perhaps waited to conduct this transition, but we thought it's better to call the team to take on that challenge right now. That's why we're doing this at this moment.

So I'd like once again then to convey the confidence that we have in the talent and the commitment that this team has as they face these new challenges and as they try to speed up the implementation of this strategy, which was put together for the past two years. There is no change in strategy, some of it's -- the development drivers will be emphasized, be it the renewal of direct sales to growth in Latin America. This multi-channel mechanism, we are implementing as well. And that's the spirit that guides us in our everyday activity. We're going through this period where we're going to reenergize this new cycle and we hope to have short-term results, at the same time that we are committed to the Company for the next 10 years. So once again, thank you Roberto Lima for your huge contribution in putting this team together and formulating this strategy. And I'd like to count on the Roberto Lima's wise advice for the coming years, as well. Thank you, everyone.

Now I give the floor over to Roberto for his remarks.

Thank you, Pedro. Actually I'm here mainly to thank you all, for all the support I have received for the past two years. The questions you asked, the reports you put together, the discussions we had which were always exciting and allowed us to always do our best. My time with this team throughout this two years was daily, it was also always a positive experience. We saw many things materialize throughout those two years and something which may not be that visible, but which was the most important thing in my term as CEO, which was putting together a highly skilled team, able to face the challenges for the next 10 years. I believe that we'll be the main legacy of this transaction that will allow Natura to remain a committed company, a company that goes beyond financial results, a company which is also always trying to make the world a better place. Throughout this two years, several internal talents were identified across the company and we were happy to see many people being promoted, people who became officers who took on supervision roles in international areas, in the controllership division. I'm sure we are talking about very highly skilled people, people who are committed with the Company. So that's what I believe will remain as our legacy.

Brazil right now does not offer the best ideal conditions for us to grow. We have a market which is very competitive, but that also encourages us to always do better. So as I say step away now, I will be observing, I will now be at your disposal, if I may be useful, I'll be at your --. Well, but it's time to leave, we had agreed on these two-year transition term. So I conclude by thanking all Natura's employees. Some of them had to leave the Company, I hope that they may someday be rehired.

I'd like to thank the Executive Committee, which I had the honor to preside over for the past two years. They have become friends of mine and in particular we see (inaudible) and Pedro Passos, thank you for the confidence and for the chance to have led this Company, this world-class Company. So once again, thank you all for this experience for all the calls we had, all the meetings we conducted and also thank you all to those of you who sent me messages in private. I hope to see you again in other opportunity. Thank you and have a nice call, everyone and I hope the coming quarters turn out to be even better. Thank you.

Over to Mr. Jose Roberto Lettiere, CFO, who is going to introduce himself and give us presentation.

Good morning. Before I begin, I would like to thank Mr. Pedro Passos for being here and for taking part and also Roberto Lima. Roberto Lima will not be with us during this call. So they are leaving right now and we will start in a few seconds. Thank you, Pedro and Roberto.

Good morning. I'd like to thank and welcome to the third quarter earnings results conference call, 2016. First of all, I would like to reinforce that our plans are still focused on revitalizing direct sales in Brazil, developing innovative proposals for products in rationalizing our portfolio, reviewing our position and brand, developing alternative channels that are synergistic to direct sales and accelerated growth outside Brazil and in designing a quicker organization, and also one that it's financially healthy. This quarter, international operations continue to grow significantly in local currency revenue and already represent 33% of total revenue. They also represent 27% of EBITDA generation.

On the other hand, we were deeply impacted by the Brazilian economic environment. Consumers have lost their confidence and there is a high increase in taxation. The most elastic categories to revenue, toiletries are suffering more than the average in the market, especially because of trade downs and lower purchase frequency. In this context, net revenue in Brazil has dropped by 6.2% in the third quarter.

Based on the scenario, we're already adjusting our promotions and our products to access more of our consumers and to encourage the placement of orders by consultants. We've launched important product lines in our portfolio, Ekos, Tododia, Chronos and Humor with relevant marketing investments.

At the same time, we're investing in other channels. The first results we are getting have been positive. In pharmacies and drug stores, the personal care line saw -- it's already at more than 1,300 points of sale, we already have four shopping mall stores in the city of Sao Paulo. In Rede Natura, we are still growing by two digits and we already have more than 1.2 million consumers enrolled.

I'm going to continue presenting financial results and I will start with our consolidated net revenue. Net revenue decreased by 4.7% in the third quarter with international operations accounting for 33.5% of revenue as compared to 31.8% in the third quarter of 2015.

Speaking about the net revenue in Brazil, we already see a decline of 7.1%. The third quarter is still facing a challenging scenario in which consumers intensified their search for products with lower prices, what we call trade down. And there was also a reduction in the number of consultants of 3.4%, vis a vis 2015, given a decline in buying frequency. I also have to highlight that the net revenue was impacted by taxation, which is now 1.3% higher than last year. So this net revenue -- this accounted for one fourth of the decrease in net revenue and results.

Discussing the net revenue in Latin America. Latin America continues to have robust growth, which is very consistent, 30% in local currency, especially due to the expansion in the number of consultants and then quantity of units sold. So we continue to grow -- our growth has been sustained in Latin America. In Brazilian reals, net revenue fell, especially the Argentinean peso in comparison to the Brazilian real, which represents a 40% in total depreciation. But Latin America continues in a very virtuous cycle with high growth.

Speaking about Aesop, we've had another quarter of growth of around 20%. Aesop grew in Brazilian reals and also in local currency. The Australian dollar accounted for 6.9% of consolidated net revenue. We've expanded the number of stores and also the number of countries in which we're operating.

Speaking now about the consolidated EBITDA. In the third quarter of 2016, there was a contraction of 20% in the EBITDA, vis a vis last year. In Brazil, the drop of 34% resulted from the decrease in net revenue, as I said before of 7.1%, also from the higher effective tax rate, which reached 31.6% in 2016 in comparison to 30.2% in the third quarter of 2015. And also expenses, which were performing below inflation and asset divestments in the prior period. But this is a non-recurring effect. In Latin America, EBITDA grew by approximately 80% in local currency and we also had a robust growth of EBITDA with Aesop.

Net income, there was a contraction of about 45%, especially due to the reduction of EBITDA, as I previously said. And there was also an important factor, which was a smaller financial expense due to good cash management, changes in our cash balance and also debt management.

We're now going to talk about the CapEx. In 2016, up until the third quarter, we had a good CapEx guidance. Obviously this helped us due to the currency variations. So due to operations in foreign currencies, though suffered an impact, which helped us in saving in Brazilian reals. But with the new guidance and with greater efficiency of our investment operations, we are now adjusting our CapEx guidance from BRL350 million to BRL300 million, which of course will also help in managing cash generation.

Speaking about cash generation, we're going to talk about free cash flow. So in this quarter, free cash flow generation represented BRL138 million in the third quarter of 2016. And this was the consequence of the retraction of net revenue and also an investment in working capital. We are having a greater investment in working capital this year, which has been impacted by reducing demand, especially in Brazil.

As we've seen in the third quarter, there was already a reduction in working capital in comparison to what we had in the first half of 2016. So we were able to revert this trend and now we are on the right path in managing working capital and cash generation, which is an important metric for the Company.

Indebtedness. So this quarter closed with a higher level of indebtedness than the previous 1.47% to 1.11% last year. This resulted from the lower EBITDA and weaker free cash flow generation during this quarter. So it's a sequence, a reduction in revenue, weaker EBITDA and has of course impacted cash generation.

So to conclude our comments on our performance, I will refer to sustainability. Here we have our missions for 2020. And our triple bottom line, we are highlighting these metrics that we are constantly monitoring. A reduction of post consumption, recycling material. Ekos was relaunched and it incorporates recycled plastics to our packaging material. We also had a higher percentage of product recyclability, this was an another very important indicator. Carbon emissions, we did not do so well on and also water consumption due to the reduction in volume. So our batches have not been adapted to this mission. But overall, we continue moving towards this goal and our ambition is for sustainability in the environment as well as in social aspects.

I will now move on to the Q&A session from our analysts and investors. So we are all here open to your questions. And following that we will be back with our closing statements with Joao Paulo. Thank you very much. And we are here, ready to answer your questions. Thank you.

(Operator Instructions) Guilherme Assis, Brasil Plural.

Good morning. Thank you for taking my question. I'd like to ask about a few things. First, the new structure after Roberto left his position, which is Joao Paulo taking over as CEO. How will this work, as Joao Paulo had a pivotal role in the execution strategy in channels. Now as a CEO, I imagine that he is going to have a lot more on his plate to do. And as Pedro said and as Roberto said, the Company thinks that the Company had an important role for Joao Paulo (inaudible) but in the channel structure, how well the execution be made since Joao Paulo is taking over a greater role? That's my first question.

The second question is about the strategical side of managing consultants. Can you explain us a bit -- can you update us on the initiatives you have taken to re-animate this channel and how should we see this in the future? In the second quarter, we saw a slight improvement in productivity, but this was not sustained over this quarter. I understand that we are facing difficult macroeconomic conditions, but something specific, which was the increase in prices that we saw in the first half of the year is not being well received by consultants or by consumers. We saw a huge decrease in volumes. So will we see any changes in these initiatives or in the pricing strategy in order to try to revert this trend and improve our consultant performance? That's it. Thank you.

Good morning, Guilherme, this is Joao Paulo speaking. Thank you for your question. Of course, I won't be able to continue to do what I used to do, it might be his role of course and I cannot, at this time, tell you how we will adjust all those different functions, but what I can tell is that the Executive Committee has already started to work around re-distributing those tasks. So very soon we will be able to clarify that a little better.

I also like to reassure you that as Roberto and Pedro said, below me, there was this process of keen formation. So we have developed other talents, we have other important colleagues who are in charge of both the channel front and of this renewal of our strategy. So in the short front, I don't see any major impact arising from this structural change.

Your second question about consultants and about the programs, which are in place towards direct sales. Basically, we have already mentioned that the individualization of offers, the digitization process which is also ongoing and the special training for consultants also that is all going to continue. Every consultant, if they were active throughout this period, they cap a larger basket, if you will, than they had in the previous year. As you said, the balance between pricing and promotional activities and the different brands and different items which make up the basket. All of that has not been adjusted to this change in consumer behavior in the third quarter. So those adjustments, they weren't -- or they were not enough to adjust to this new buying frequency that we now see.

That's why you see in the numbers, you see a drop in activity. Even though each interaction, we can tell of that consultants' baskets too when compared to the previous year. We will continue to be speed up this marketing mix adjustment, we have started that in the first half. We continue to that to be able to overcome that trade down that we see in the market. We haven't done enough to recover in the third quarter, but you'll see change in the short run concerning that and also throughout 2017.

Joao Paulo, if I could follow-up on that answer concerning strategy and looking forward. You mentioned that this strategy is now being implemented, given the different market conditions. So in terms of what we could expect, when we look at the quarter's results, it is clear to me that you have increased prices to make up for the lost margins, there was an increase in taxes, there was a currency pressure back then. But that was not that well received in the market. At the same time, you also held-off in terms of launching new products and in terms of increasing campaign expenditures. So looking forward, from what I hear from you, we could then expect a slightly more aggressive attitude in terms of pricing and still maintaining market expenditures so that gross margin, which was somewhat robust, you might perhaps waive that margin to make up for that? Am I right in my interpretation?

I'd say for the most part, you are right, Guilherme. Just a few comments, one of them is that, again our strategy remains intact. We want to speed up, so we cannot leave growing aside. That of course imply resuming the penetration of our products in households and that remains a priority for us. We do believe that to become more attractive, we arise from better choices within our portfolio. We won't need necessarily to sacrifice an item or two. We will need to provide better support to several items in our portfolio. So we are going after growth, making more precise, if you will, choices.

That's why I would not try and anticipate major changes and our -- and the allocations of our investments. I wouldn't divide it between gross margin and marketing, as you put it in your question but what I'd like to say is that we are making choices which are even more precise in that items in our portfolio, which seem to be more competitive, they received more support.

Thiago Macruz, Itau BBA.

Good morning, everyone. I have two questions, the first question has to do with the consultant's base which dropped after some time. Well, is that actively promoted, you did that intentionally or was it the result of a natural turnover?

And the second question has to do with the expansion of the drug store channel. Do you have an internal estimate or some kind of cannibalization taking on or taking place rather, do you have any data to support that? Those are my two questions. Thank you.

Thank you for your question. This is Joao again. While the drop in the channel was stimulated, it was not to stimulate, it was not intentional as you put it. It is all a result of low commercial activity.

On top of that, we had a better management of our collection activity, so we kept default levels under control. So consultants which had less capacity to finance themselves could not carry on and because of that several of them are no longer active. That happened at a faster pace than we expected. But at the same time, we managed to qualify the channel.

As for the drug store channel and cannibalization aspect that you asked, throughout our phase, our testing phase, the evidence was that there is no meaningful cannibalization going on with the current offerings that we have through that channel.

Okay. If I could have a follow-up comment still on sales expenditures, we see that sales expenses, we saw that several launches of new products in the third quarter, it grew in nominal terms and we conclude that was one-off thing that only happen in this quarter? That was my last question. Thank you.

Good morning. And this is Andrea speaking. Yes, this is a one-off effect and it is also a result of investment and the launch of iconic brands, such as the Ekos, the Tododia brand. We relaunched those brands and those investments happened in the third quarter and we expect to see an incremental revenue coming from those brands going forward. We already have evidence of that and have evidence of where we're going through the right path right now. Thank you, everyone.

Joseph Giordano, JPMorgan.

Good morning, everyone. Welcome, Joao Paulo to the team. I'd like to have some more color on the launches of products. We see that have low historical levels for that kind of action. So what kind of demand can we expect?

Much of the innovation for the previous quarters was focused on higher margin products or higher ticket products, fragrances in particular. I'd like to understand what kind of reception those new products are having?

And a second question would be, as for the channel diversification initiative. And a short one, I know you expect more products being sold through drug stores, we have competitors working with specific corners inside drug stores, something we're not doing now, I mean that I thought we're not doing. So do you plan on increasing your exposure? Are you going to invest on that and on the retail front, what are your plans for the coming years? Imagine there is a good opportunity in terms of real estate boom going forward or is it still too early to make an estimate on that front? That's what I had to ask. Thank you.

Hello, this is Andrea once again to answer your questions on innovation. Surely, innovation is a key indicator for us and it is a growth engine for the Company. We intend -- I know you want it to remain so. As I mentioned, we were expecting good results coming from Ekos, Tododia, Chronos, toiletries and other iconic brands. Those are receiving the adequate investments. And we expect those revenues to consolidate in the coming quarters.

As for the absolute innovation index, of course it is also part of a more difficult macroeconomic scenario where we see a slowdown in economic activity. So margins, of course, will be lower than we had in previous years of the same initiatives to recover activity.

That channel in households investments and the consultants and in households, I believe all those investments will bring good results to our innovation index. As for the pricing strategy, we had planned for a reduction in volume and what happened was that that drop in volume came through a mix, which was slightly different from what we had expected and at a speed which was also different. Those changes have already been factored in in the first half, both within portfolios and also within promotional activities, trying to or tackle that trade down movement. I was talking about lower prices overall. Specifically for the facial area, where we had an important pricing operations, which was tied to products and a concept. In this particular case, we see not only a very positive reception to that initiative, but we also see a good reception to the higher prices. So there is no single answer for that, so we see a different performance for that portfolio. So that same behavior, when we have a higher acceptance, the part of consultants. When those higher prices are associated to distinguishing innovative factors, we tend to continue along those lines.

And for our drug store portfolio -- about our share in drugstores. Well, our entry into the drug store channel was well planned and the portfolio we selected for this channel was also very well planned. The fact that we selected SOU and now we are testing the [K] brand has to do with the profile that these brands have for consumers and for the channel.

So in principle, we have no intentions of expanding our portfolio for this channel, beyond these two brands. And we are assessing others, but they should have some synergy with our activities in direct sales. And we do not want our brands to be cannibalized.

I think your last question mentioned the own store channel. The opportunities that are there, what I need to highlight is that we're very happy with the performance of our first stores. We're going to open our fifth store next month. And the performance has been above the business plan. Our intention is to grow rapidly in this channel as well. Thank you.

Gustavo Oliveira, UBS.

Good morning. Joao Paulo, congratulations on the new role you will now play in the Company. My question is about relaunching brands. Just to understand a bit about what Andrea said, you started a very important iconic brand and sales instead of being accelerated or stabilized actually dropped and became more negative. What happened? What is happening -- or sales above the average that we had before, are we having a better performance, or was this just an unfortunate coincidence of market deceleration, excessive trade down and these brands being positioned the bit above the market? I'd just like to understand what is happening on the short-term.

Hi, this is Andrea again. We are seeing performance above Natura in all brands we have. But for the rest of the portfolio, in this quarter, the scenario is offsetting the positive gains we had.

And do we have any launches for lower value brands on the short-term or are we only going to use promotions to stabilize revenue? Would this be possible for the fourth quarter?

I think we're doing both. Relaunching the Humor brand, one of our toiletries brand is already at a price point that is not prestigious. So we are already answering to the trend we see, where most of the trade down happened in toiletries. So we are relaunching and reactivating a brand in an intermediate price point and also adjusting our promotional investments as well. So both are happening.

Okay. My last question is, you mentioned that one of the goals for this year was to gain market share or at least to stabilize it. How are you seeing these results now in the context of this market? Do you think that the share in the market has been maintained or wasn't that impossible?

I think that growing in market shares still a goal for us. On a very short term, we are not seeing any objective effects of that, but this growth something we're still pursuing and this of course will result from several initiatives that we are adopting right now. So this should happen in a context that is of course a bit more challenging than we imagined, especially in some categories in which we have -- we had an expressive share like toiletries, but we are still adamant about meeting these goals. [Ro] mentioned having a greater penetration in stores. So we would like to have a greater share in Brazilian households.

Franco Abelardo, Morgan Stanley.

Good morning. Congratulations Joao Paulo on your promotion. This discussion on the operational side has been interesting and we'd just like to mention the financial side of things. We saw an increase in indebtedness in this quarter, 1.5 times net debt per EBITDA. Has this been a concern? What has been done to control this? I understand that the EBITDA is dropping and that was one of the reasons, but of course working capital is also a factor there. So I'd just like to understand what is happening to the working capital? What can be done to improve it and if the CapEx reduction for this year has to do with that, do you have any estimates of CapEx for next year?

Good morning, Franco. Of course, the impact in cash generation is basically due to the reduction of our demand, a reduction in the demand for our products. With this reduction, cash generation naturally is decreased as well as the EBITDA. So as a consequence, our stock level has been above the expectations. However, since this context has already been identified and with the actions we are undertaking, of course, we have started a process to redirect working capital and that's why in the third quarter we had a positive cash generation although working capital was decreased. It was negative in the first half, so that already made a reverse sort of the trends for the third quarter.

Of course there is a concern about be indebtedness level. This is a Company that has a [vocation] for cash generation, for operating in lower cash generation cycles. Last year, we were also in a recession, we had a cash generation high above the industry's (inaudible) in this context, of course our strategy was surprised and we had a bit more working capital.

About the CapEx reduction, of course that is completely related to the cash generation and reduction of indebtedness strategy. So yes, we are focused in productivity and efficiency in cash generation. We have all of the tools for that in order to really be able to go back to the levels we had last year.

Okay. Just a follow-up. Specifically on working capital, there was a reduction that was significant in the suppliers' accounts. I would like to understand what this was and what was the effect there.

In terms of CapEx, I understand (inaudible) for this year, but should it continue for next year? Do you have any expectations or will we see another reduction in investments?

Also on the cash generation strategy, can we consider a reduction of the dividends payout this year because of it? Thank you.

Franco, the relationship between the average payment dates with cash generation, this is a result of a reduction in inventory. Since we have leveraged to change in working capital, when we reduced the inventory, of course you need to reduce the amount you're purchasing. And when you control your expenditures, you're also reducing the amount of accounts payables. So that effect overall is due to a reduction in the inventory and a low activity in controlling expenditures. And this will be controlled -- and this will have a positive and a negative effect. So of course it takes some time to analyze this cycle of cash equalization.

Now in terms of cash generation, we've been seeing for some time that the Company's investment levels in the last four years to five years have been very strong in infrastructure, manufacturing, distribution centers and this cycle has basically changed. Right now, we have a different investment profile. Our investments are now much more connected to the go-to-market strategy, the growth strategy in alternative channels, Rede Natura retail. And also something that's changing about our CapEx is that we are seeing a greater and more important share of international operations. Today, a greater share of our CapEx is supporting our international operations. And in terms of Aesop, this is basically retail. And in Latin America, some of it is in infrastructure, but also some of it is into digitalization and investments in tools extend our growth. Does that answer your question, Franco?

Again, we'll have an assembly in 2017 to make our new budget for 2017 official. Of course, we won't go back to the levels we saw in 2013, 2012. We're in a new CapEx level and we are allocating our CapEx differently. It's much more directed to growth and strategical expansion of our channels.

Just to see if I understand, there should not be great changes in dividend payouts as well, right?

Dividends, there was a change in the payout of dividends this year, officially in 2015 actually. So we reduced from 100% to 70% and we did not pay out dividends in advance in the first half. So if we look at our revenue and cash generated due to the strategy, of course this is something that is under discussion with the administrator council.

Alex Robarts, Citi Bank.

Good morning. I have two questions from my side. The first question is about the new channels in Brazil. In the beginning, Pedro mentioned two things, accelerating initiatives and also being multi-channel. If we put these two points together, can you tell us a bit about how you are viewing this for the future? How these new channels will be shared with the percentage of the revenue in Brazil this year? That is, will it have more or less than 10%? I think that there is a debate in the market, if there really is a way of accelerating these initiatives in new channels or if this should be slower. So please, can you tell us about what is your preference between these three new channels? Which one is more relevant for our business? So this is my first question.

The second question is, well, I would like to ask about the market. Do you see a -- well, we saw a reduction of 7.1%, so what happened to the CFT market in Brazil? Was that close to the average? I know that fragrances was probably the weakest. So can you tell us about your performance in comparison to the market as a whole in the third quarter? It would be interesting to hear that. Thank you.

I'll start by answering the last question. During the market in the third quarter. We did not have the final data for third quarter. We have numbers from the second quarter where you continue to see a drop in market value and a slight recovery in volume, but also a strong impact coming from the trade down. We don't see major changes in that scenario right now. There's a slight recovery of the economic activity, especially in personal care, but nothing radically different.

We do believe that we see a recovery in the coming quarters. There are nothing much different from that. And what concerns the channels, I'd like to reinforce that the multi-channel strategy is at the core of our work, as we're also trying to modernize or revamp direct sales. Here in Brazil and in Latin America, we have such high volumes of direct sales that this channel will remain as the dominant one for the coming years. We are very excited about the transformation of the channel, we're revamping as I said, this channel. There is a lot of a value to be added as we revamp this channel. Having said that, we've imagined that in about five years, the new channels might represent maybe 10%, maybe more percent, 10% or more of our revenues in Brazil. That's the breakdown, I would imagine.

Tobias Stingelin, Credit Suisse.

Good morning. Congratulations, Joao Paulo. I have one question, what are your priorities now? Roberto said that he put together a team and he kicked off important projects. You (inaudible) have been in the Company for some time. I'd like to have an idea of where we are in this transformation phase? What are your priorities? Company is trying to get things right, what changes now going forward or nothing changes?

Good morning, Tobias. Well, basically what does not change, the strategy does not change. The strategy about revamping direct sales, multi-channeling, brand reinforcement, relevant innovation, portfolio adjustment and accelerated growth in Latin America and in other geographies, all of that does not change.

What should we see going forward? A more dedicated allocation of resources [while those] long-term target and we also spend more time and dedicate more attention to the short run, 2016, 2017 as Pedro mentioned and then the objective would clearly be to stabilize the Company and resume growth in Brazil. All those changes, renovation and everything, they do play a role, but in 2017, it's about using the assets we already have, the portfolio we have, the channels we have, the investment mode that we have, the plans that we already have, we're going to (inaudible) that to extract even more value from the local Brazilian market. So we are talking about a very pragmatic approach towards stabilizing operations in Brazil as we free up energy for all those other strategic initiatives. And I'll be glad to be able to tell you about that during our Natura Day on November 17.

Just one more question. Theoretically, that will also reflect on Roberto's works, stabilizing the market share and trying to work on that mix between long and short-term. Now the question remains, the dropping volumes given the increasing prices, that seems to have gone the opposite way when compared to the market. So will you focus on price, I know the mix needs to change, but we see a very high magnitude in those numbers. So I'd like to see any evidence of change, what can we expect in the next eight months to nine months? When can we see signs of recovery going forward?

No, Tobias, stop. All the energy will be placed towards, conducting short-term adjustments. We know there are limitations as with any other short-term adjustments, but with the tools that we have, pricing, promotions, multi-channeling, communications, sampling and so on, using all of our portfolio divided by region, by segments. There we have a very detailed mapping of our consumption trends by region, by consumers. So we have people in the team who are totally focused on [getting] the results or delivering results as soon as possible. Time will tell what kind of success we'll have in the short-term.

Okay. So once again, looking forward, when can we see a recovery in volume? When can we see unit prices going down? Can we see that happen in the fourth quarter or this is for next year?

Just as a clarification, not as a guidance, here we only see that after the end of the fourth quarter. We have been working towards recovering volumes in a very short run.

Irma Sgarz, Goldman Sachs.

Thank you. Good morning. Most of my questions have been answered. Going back to something that Franco mentioned, something which is not clear yet for me is a question for Lettiere. In the past, you saw a leverage level of around 1.5 times or coming down closer to 1 times, but not more than that. So I'd like to understand, Lettiere, how do you see the leverage of the Company? Where do you see a comfortable level for that leveraging? First you mentioned the CapEx, and you mentioned dividend payout, but still I'd like to hear from you what kind of leveraging can we expect going forward? I'm talking about net debt over EBITDA, where would be a comfortable zone to be?

Good morning, Irma. The leveraging level of the Company in the third quarter suffered an impact, especially by the low level of activity. And when we have that on top of a lower EBITDA, automatically even if you do not increase your debt, you have a higher net over EBITDA ratio. When we look at cash generation and we look at that, and that has been a priority for us. We're also focusing on reinvesting cash in order to support our strategy to accelerate our business and that has also been a priority. And proof of that is that we have reduced dividend payouts to be able to reinvest in the operation.

And we also have the working capital component. So we have all the necessary tools to operate or to work with the working capital at a very reasonable level. The thing is that, we're doing really well. Last year, we closed a year in a very positive light, but the economic scenario really caught us by surprise, vis-a-vis, our (inaudible) planning. So we had to change the portfolio and that increased our inventory. So some adjustments have been made, free cash generation in the third quarter already turned out to be more positive when compared to the first half, so this indebtedness level, which now stays at 1.5 times net debt over EBITDA ratio. That's the level we need to get used to for some time until we are able to speed up all those strategies to resume growth. Once we resume growth and once we adjust our capital level, vis-a-vis, our revenues, all of that should lead to a more normal situation and then we will once again have lower Indebtedness levels. So in summary, yes, one of our strategic goals is to have lower indebtedness and strong cash generation.

Thank you. Just a follow up about the receivables portfolio. We noticed that those which were over 90 days overdue continue to grow. Do you have any mechanism in place to bring those numbers down, to try and work around those payment terms or are you now focused on working with a higher level of the default to try and retain consultants, so you need to be a little more (inaudible) on that respect to try and retain those consultants and work with the higher default levels? Or are you thinking about removing the risk in the portfolio, even though it will lead to a loss of consultants for that channel?

One of the strategic actions we have developed in the past 12 months was focused on credit management. That's something we are doing with the sales force. We have tools in place that allows us to asses credit tools, which behavior score on the scorecards, so today we have more and better information. So we are at a different level. That has helped us put together new credit proposals to leverage sales. But one thing is for sure, consumers and consultants are going through a more difficult in macroeconomic situation, that of course reflect on the result.

As for the coming months, a better approach of this credit cycle, a better approach of those tools and with all those new tools that we have available, if you will, customize those actions and make them geared to different groups of consultants. So at the current default level, which is at the moment still quite comfortable when we compare to the activity we're also generating. And once again, we are working also strongly with microcredit initiative, so overall I think we have good tools in place, we have very good credit control in order to leverage sales.

We now close the Q&A session. I'd like to turn the floor back over to Mr. Joao Paulo Ferreira for his final remarks.

I'd like to thank you all for participating in our call and also to thank you for the quality of your questions and also for all the analysis and the assessments that you are continuously doing and which sparks very interesting and important discussions internally here in the group.

I'd like to reinforce confidence and the excitement that not only I personally feel, but the whole executive group shares, which has to do with our strategy with -- accelerating our strategy and also -- and going through this more complicated time in Brazil. We do believe we're going to get through this period in a very fast manner, we'll be able to preserve our cash and we'll be able to be increase our competitiveness. As we have built at this new (inaudible) multi-channel, international expansion and the strengthening of our brands.

Once again, thank you all and I hope to be able to be with you during Natura Day on November 17 and I hope to see you and hear from you in our next call in February when we will discuss the year 2016. Thank you and have a nice day.

Natura's audio conference is over. We'd like to thank you all for participating. Have a nice 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.