Natura &Co Holding SA (NTCO) 2017 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. At this time, we would like to welcome everyone to Natura Cosmetico's second quarter 2017 conference call. Today with us we have Mr. Joao Paulo Ferreira, CEO; Mr. Jose Roberto Lettiere, CFO; Mr. Robert Chatwin, Vice President of Internationalization; Mr. Erasmo Toledo, Vice President of Direct Selling, Brazil; Mr. Marcio Bologna, Financial Controller; Mr. Marcel Goya and Mr. Luiz Palhares, Investor Relations executives. This event is being recorded. (Operator Instructions) This webcast is being simultaneously translated into English, and questions may be asked normally be participants connected from abroad. (Operator Instructions) This event is also being simultaneously webcast at Natura's URL: www.natura.net/investor. The respective slide deck can also be found at this URL, and we remain available after the event is over. Before proceeding, please have in mind that possible forward-looking statements made during this call relative to the company's business outlook, operating and financial targets and forecasts are based on the company's beliefs and assumptions and also on information currently available. Forward-looking statements are no guarantee of performance because they involve risks and uncertainties as they refer to future events which depend on circumstances that may or may not materialize. Investors should have in mind that general economic conditions, industry conditions and other operating factors could affect the company's future performance and lead to results that will differ materially from those expressed in these forward-looking statements. Now, I'd like to turn the conference over to Mr. Joao Paulo Ferreira, CEO, who will begin the conference. Please, Mr. Ferreira, you have the floor.

Good morning, everyone, and welcome to our conference call to discuss second quarter results. I am very optimistic today for this call after having witnessed in the second quarter important advances in several fronts of our strategy. And I'm talking about not only our international [pathways] but also to the transformation of the business in Brazil and our strong robust growth in Latin America. Starting by the internationalization of the company, I'd like to devote a few minutes to the Body Shop. Last Tuesday we received a favorable decision from CADE in Brazil, the consumer protection agency, which will be confirmed in the next 2 weeks, and we are still waiting for the approval from the antitrust agency in the US. Thinking about a favorable and fast outcome, we estimate that the closing might occur by mid-October. Among the preparatory activities, I'd like to highlight 2 parts. First, from the standpoint of funding, we are totally prepared to complete this transaction. Number two, since the signing of the contract we have had a team dedicated to preparing a smooth, seamless transition starting on day one. Besides the transition, this team has also been working on fine tuning the details for our business plan for this specific business. Should all authorizations be granted and should the business be completed in a successful manner, we plan to have joint sessions with you, investors and analysts, to share more details of these plans right after the closing of the deal in the coming weeks. For now, that's all we can anticipate in terms of the Body Shop, and I hope you understand our reservations at this point. Going back to second quarter results, the net income, the working capital management and the generation of free cash were, without a doubt, the main highlights among the financial indicators. Net income reached BRL 163.5 million, up 75.8% when compared to the same period of last year, and the generation of cash free, which was quite strong, reached BRL 225.5 million, as opposed BRL 96.3 million last year. This number was driven mainly by a more efficient management of inventory, receivables and accounts payable. It's also important to highlight that as we have managed to generate significant cash we have been able to maintain our investments in marketing and in sales in Brazil, which are important investments for our strategy for the country. We saw in this period promising signs of an increase of preference for the brand in Brazil and also trends of recovery in terms of market share. Moving on with the financial indicators, the consolidated EBITDA in the quarter was BRL 298.6 million, down 13% when compared to the second quarter of last year. However, this result suffered an impact of costs of BRL 35.6 million, which referred to the acquisition of the Body Shop. Without those costs, the consolidated EBITDA would sit at BRL 334 million; in other words, 3% below the numbers recorded in the same period of last year. The consolidated gross revenue dropped by 0.5% in the second quarter, mainly driven by a drop of 2% in sales in Brazil and by the foreign exchange conversion of our international results. Speaking of Brazil, the drop in revenue was influenced by some external factors, such as a slowdown in consumption, a high (inaudible) levels and the respective impacts on the activity of our consultants and the lower number of working days in the month of April. But it was also affected by internal factors, notably the change in our commercial calendar, which anticipated by 1 whole week our campaign for Mother's Day in the first quarter, and also by an adjustment in the sizing of our channel which came from the launch of our new model based on relationship sales. The launch of this new model in relationship selling in the month of May showed initial results which are quite promising. We saw for the third quarter in a row a growth in productivity on the part of our consultants, besides a good performance in key categories, which are strong, positive indicators of this renewal that the channel is going through and which is in line with our plans. As for products, we continue to invest in strengthening the perfume line with our corporal and (inaudible) body and gifts category, which have been providing returns in line with our expectations. Year-to-date, our gross revenue remains flat when compared with previous year. Still about Brazil, a very positive highlight was the result of our online business, the Rede Natura, which recorded a very sound growth of 3 digits above 150% in the quarter. Lastly, we continue to experience our retail experience, where we already have 17 owned stores in the states of Rio and Sao Paulo and where we reached more than 3,100 [brick] stores with the SOU line. The makeup line, Faces, targeted at urban, young consumers, was also successfully introduced into the pharma channel and is available in 53 stores. Moving on to our international operations, those are showing a very strong performance, as well. Natura's operations in Latin America have capped a healthy level of growth in terms of gross revenue, hitting at about 50% in local currency. Another piece of good news is that we have reached a (inaudible) position in direct sales in Argentina. Now Aesop, in turn, also reported strong growth of 30.6% in terms of Australian dollars, boosted mainly by the inauguration of 33 exclusive stores and a growth of 12% in productivity under the same-store concept. The consolidated revenue of international operations, taking into account the foreign exchange conversion, increased by 5.7% in reais in the second quarter of this year, when compared to the same period of last year, reaching the level of BRL 857.9 million. Lastly, from the social and environmental standpoint, we had great news in the year, which is the fact that we were recertified as a [B Corp]. In this space, we are including our operations in Latin America and Aesop. We are now the largest industrial company in the world to be part of that movement, which gathers companies which prioritize actions which have a positive environmental and social impact on top of financial results. In June, we were also awarded the [UEBG], the ethical buyer commerce unit, for all our agro communities with which Natura has some type of relationship that ensures that this supply chain is duly certified in terms of sustainability and ethical trade. We are going through a turnaround of the Brazilian operation and creating now a global group, and we have a very connected, strong team generating cash in a sustainable way and filled with enthusiasm. Those were the few points I'd like to emphasize. Now I give the floor over to Mr. Lettiere, our CFO, who will be talking about our numbers in more detail. Please, Lettiere, you can carry on.

Thank you, Joao. Good morning, everyone. Moving on, I'll make a brief summary of our financial statements, talking in detail about our main result indicators. Starting with net revenue, which is in line with our financial statements following the IFRS, our consolidated net revenue in the first quarter in reais was stable, with a slight drop in reais for Brazil of 2.3%, which was partially offset by the growth in international operations, a growth of 4.9%, with an appreciation of the real vis-a-vis the currencies used in those operations. I'll be talking about that in a little more detail. But before, about Brazil's net revenue, in the quarter we saw a slowdown -- or a drop, rather -- of 2.3%, and as Joao has already mentioned, this was driven by both external and internal factors. Externally, we haven't seen yet a recovery of consumption levels because of the unfavorable macroeconomic scenario. In the month of April, which was a very intense month in terms of activity and business volumes, we also had a smaller number of working days, a fewer number of working days. Internally, our commercial calendar delayed the beginning of the Mother's Day campaign in the first quarter. And we also went through a readjustment in the size of our channel because of the start of our new model of relationship sales. But on the other hand we continued to record productivity in terms of for our consultants, which increased 4.2% when compared to the previous year. This is the third quarter in a row where we see an increase in productivity on the part of our consultants. In the year-to-date for this first half, Brazil's revenues remain flat when compared to the same period of last year. In Latin America, net revenue for this quarter in local currency grew by 13.4% vis-a-vis the same period last year. We continued to expand our channel and also to improve our productivity. Peru, after unfortunate environmental impacts, reduced its estimated GDP for the country, and it is also suffering with corruption scandals. In all other countries we are having very good performance and consistent growth. Aesop had a 30.6% growth this quarter; in Brazilian reais this was 20.3%. A strong expansion of the top line came from opening 33 stores and also selling concept in the same stores, around 12% a year, which is high for retail, especially when we talk about mature markets. Today we have 188 exclusive locations besides 93 department stores in 20 countries. Our consolidated EBITDA was impacted by the costs of the acquisition of the Body Shop. Discounting that effect, EBITDA would be BRL 334.3 million, down 3%. In LatAm, this expansion of the EBITDA even with the appreciation of Brazilian real shows that our operation is growing with operational leverage, and we also saw efficient management in expenses. In Brazil we had more investments in marketing and sales to support our key categories and also to revitalize relationship selling. About administrative expenses, they are down 1.1% this quarter, which demonstrates that we are continuing to rigorously manage our budget. We had good expense control, over all. And within our base-zero budget process, which we have been running for some time, we are considering saving some expenses to reinvest strategically in marketing and actions to activate sales. And Aesop is not different. We are going through a very robust cost-cut activity. EBITDA was reduced by 25% this quarter due to the introduction of a long-term incentive plan for our key executives. At the end of last year this new plan was implemented, and it will take place for 3 years. Now let's speak about net income, which was a highlight for this quarter. It was BRL 164 million, versus BRL 91 million in this quarter 2016. It was a significant increase, especially due to higher management efficiency in our financial investments and also in controlling debt. And it also suffered a positive impact from our contingency hedge which we contracted to protect the amount to be paid in acquiring the Body Shop. That was BRL 73 million. Now let's speak about CapEx. Year-to-date we have invested BRL 95 million, which maintain a strong control on selecting and managing projects. This is in line with our growth strategy. We are supporting our innovations, digitalizing our business and also diversifying our distribution channels. Moving on to free cash generation, which was another important highlight for this quarter, again a great advance in comparison to the same quarter last year. We generated BRL 225.5 million in cash, while last year this was BRL 96.3 million. This is a result of our efficient working capital management reducing our cash conversion cycle. So we are monetizing our working capital faster and in a more efficient way. We are reducing our inventory coverage levels in all regions in most countries, higher turnaround of our receivables, and we're also managing our accounts payable due dates better. We always highlight the importance of generating cash in our management, and we will continue focusing and giving priority to this process which is extremely important. Cash generation in this half was also very positive. We generated BRL 242 million in the first half, versus a cash consumption of BRL 71 million in 2016. That is, we generated BRL 313.3 million more than last year, which confirms our focus and our drive to generate cash. Continuing with our company's net debt, another piece of good news. We reduced once again our indebtedness, closing this quarter with 1.2x EBITDA. In the second quarter of 2016, this was 1.43x. So to conclude, it's also important to mention our bottom line management. I'm going to talk about our sustainability indicators. There was an important increase in the percentage of material recycled after consumption, up from 4.3% in 2016 to [4.8%] in 2017. Using eco-efficient packaging materials was stable [in 2017] in comparison to 2016. And it's worth highlighting our investments in the Pan-Amazonic region which have already overcome our goal for 2020 and are maintaining the same water consumption levels as 2016, even with a reduction in our production volume. So that wraps up my section on our triple bottom line performance, and I'll be here available for questions in a few moments. Thank you.

(Operator Instructions) The first question is from Ruben Couto, Itau BBA.

I have 2 questions, actually. First, can you talk a bit more about the changes in Brazil with the new commercial management? There was a reduction of 7% quarter-to-quarter. I'd just like to know how much of this was driven by this new structure and how much of this was our natural churn of consultants, the way you were trying to implement the new strategy? And what should we expect? Should this be flat? Or will revenues go up this quarter? I just want to understand what this expectation is. Another topic. You mentioned in the release that relaunching and repositioning Faces has brought positive results and now it is being sold over the pharma channel. Just to understand this process better, was this a relaunch that was worked on for a couple of years? Or were there any changes in the internal process to make it change faster? Are there any learning experiences from that that you will use at other categories this year and next year?

This is Erasmo, in charge of direct selling in Brazil. So that 7% reduction in the channel, what I can tell you is that this is in line with what we had foreseen based on our pilot tests. This was the quarter in which we implemented this from cycle 8 to cycle 11, which is what we're seeing this quarter. So it's not abnormal. In fact, we are seeing some good signs from productivity, which is what we expected, and our future trend will be to continue with a slight reduction in channel but with offsets from other indicators, activity and productivity. This is all planned. So we are in line with what we have established before.

Ruben, this is Joao Paulo. I'll answer your second question about Faces. Actually, it's interesting that you mentioned our development methodology, because in fact we did use to develop this line, to relaunch it, a very different methodology than what we did before. The concept was agile development. So it was much faster, it was more encompassing in our organization, and it really shortened our time-to-market period. We have been inspired by it, and there were many lessons learned. And we decided to adopt this methodology as a way of working in an innovation process. So yes, in fact, there are other initiatives underway that will use the same range and the same speed that we used with Faces.

The next question comes from Guilherme Assis, from Brasil Plural.

I'd like to hear a bit more about the changes that were made in consultant incentives. I'd also like to understand a bit more about productivity. I know that this is all recent. The figures for the second quarter don't include all of these changes. There was an impact from Mother's Day. But can you tell us a bit more about the productivity increase that you have already seen with the changes in the remuneration compensation scheme for consultants? I think that would be important for the future so we can understand the impact that it may have. I'm not sure how much we can see in your brackets. So can you tell us a bit more about your progressive compensation system? I think that would really help. Another point is we would like to know the impact of credit with consultants. We know that some competitors, such as AVON, have had credit issues in the past, and I think that this affected their consultants, which overlap somewhat with yours. So can you tell us a bit about the impact that this credit issue had in Natura sales? Does that impact our results or does it (inaudible)? Finally, can you tell us about market share? How is Natura gaining its market share back? I think Joao Paulo mentioned that Natura is getting some of its market share back. So maybe you could tell us a bit about how the market is growing and how Natura is doing in regards to this new market?

This is Erasmo. So I'll tell you a bit more about what these changes are. We are making 3 big changes in our model. Channel management. We had a seniority model, and now we're using a leader. I'll tell you a bit more about that. Our growth plan, which is giving our consultants some growth prospectives. By increasing their productivity, they start getting different benefits. We believe that this can have an important impact on productivity and loyalty. And finally, our new value proposal. We're offering a full package for the product which we use with our consultants. So when we talk about our management model, with our new model we were able to create a mix that compensates leaders -- this is the role that replaces seniors -- in a better way, in a more attractive way. So by managing them we have levers that can contribute to growing the channel and also expanding their productivity. So these are the levers that we believe will create good results in the future, and in our pilot tests they were very effective. The growth plan. Well, when you are creating better loyalty and giving them growth prospectives this is one of the factors that helps retain them and grow with more quality, with more appropriate speed. And it also gives productivity gains, which is driven by their wish to get benefits from the next status. And lastly, the value proposition. We're very consistent in our value proposition in the way we work, in what we have to offer as benefits. And that will of course impact, or cause a significant impact, on this new product that will of course distinguish us in the market. So that's our belief. We are already seeing the results. What we see today are the first signs, which are enough to give us confidence that what we saw in the pilot program will consolidate as we move along. So we're growing productivity. We are growing the frequency of consultants' work. And at the end we'll have a consistent growth of the channel adequate to the original market. As for credit, that's a focus of attention, just as we manage that as well. Of course the credit situation in Brazil is quite challenging. It has becoming worse for the past few months. But that has not been an issue for us so far. We have a model to manage credit which allows us to leverage the activity of the channels, to leverage consultants' business, but all done in a responsible manner to avoid risking our capital. So that's what I had to say in terms of credit.

Erasmo, sorry to interrupt. Just 1 follow-up. In terms of credit, and specifically with an issue that AVON had at the consultant base, did you identify any issue affecting Natura consultants? Because there's an overlap in the base as we know.

Actually, what happened is that you find it more difficult to go back to the cycle, but nothing to really be concerned about because it has been moving very positively towards the new model. Of course it doesn't help, of course. If we had better credit conditions in Brazil, at least more stable conditions, that would help, no doubt.

Guilherme, this is Joao Paulo speaking. I cannot really give you the numbers for our market share, but I'd like to emphasize that we conduct monthly measurements of market share, just as we measure Natura's participation in the business portfolio of the consultants. Our share for the consultants and what we have been witnessing is a very positive reaction, a recoup in some categories where we are investing. Of course, more difficulty in categories where we have daily-use products, but those were not our main choice of investment. So the short-term trends are very promising, as I said.

Okay, Joao Paulo. And would you be able to share your expectations in terms of market growth for this year?

No. No. Our original estimates have been very volatile, have been fluctuating significantly. So I'd rather not share a number. It would be very uncertain at this point. But should there be any growth, it will be minor. That's what I can say.

Next question comes from Robert Ford, from Bank of America Merrill Lynch.

I'd like to have some more details about the incentive program for Aesop executives: the number of participants, CPIs, and what kind of impact would that have on expenses, and also if you anticipate something similar in the other business lines?

This is Robert speaking, as well. Your question is about long-term incentives for Aesop. You will remember that back in 2013 when we did the acquisition we acquired the business -- we only acquired part of the business. This was a partial acquisition, and the key executives and the founders remained as shareholders. And then at the end of 2016 we bought a 100% stake in the company. And then we extended to some key executives which were holding equity in the company, we offered them the possibility of enjoying this long-term incentive -- the 3-year incentive, as Lettiere mentioned -- based on the company's appreciation. So I have no more data to share with you in terms of amounts, but what I do know, what I can share with you, is that operationally speaking it has been growing 30% a year in the top line, and also operating EBITDA has also been growing. We saw an improvement from last year, as well. So all of that makes us confident that a long-term incentive is the right tool to be used at this moment. You did mention other business lines. Other lines are different, and they go through a different dynamics. So this 3-year incentive is specific for that business line.

Perhaps you could explain a little more of the concept? And as my last question, what kind of an impact would that have on the company's expense line?

Well, we have background information, historical information, where you could see a similar effect in the bottom line where we would correct for minority shareholders. So that effect now appears as compensation, and it's very much reduced when compared to previous figures. So in terms of concept, or conceptually, it follows or tags along the company's appreciation in the same levels as we did before, and the effect is quite reduced, as I said.

Next question comes from Joseph Giordano, from JP Morgan.

I'd like to have some more detail in terms of more expenses in marketing in Brazil. What kind of trend can we expect for the rest of the year? If this new higher level will be a recurrent characteristic for the rest of the year? And what kind of media are you using, mostly? We see other companies making cuts in marketing and investing in channels where you can address your final consumer more directly, through social media, et cetera. That's my first question. And the second question has to do with the physical retail and ecommerce. You talked about improvements in the direct-sales channel. I'd like to understand what kind of performance we see now for the new stores. You are opening several new stores. What kind of reception are they having? And I'd like also to understand the online arm. Are you gaining the market share you were expecting to?

This is Joao Paulo speaking. From the standpoint of investments in marketing and sales, part of those investments had to do with the transition. There was a high investment linked to a transition in the model. Those are non-recurrent. From the overall marketing standpoint -- and when I talk about marketing, I'm not talking only about media. Our investment in marketing encompasses the magazine for the consultants, all the way to broadcast TV and other training components and others. And we decided to invest what we believe to be a healthy level to be able to recover that market share. So we are investing, as I said, in a very responsible manner, monitoring returns. And I can tell you we have a very realistic expectation in terms of returns. As they materialize, we'll be able to dilute those marketing investments more efficiently. In any event, we have important innovations, important launches, for the second half, and we don't want them to go unnoticed in consumers' minds. So we cannot leave them aside. We have to communicate all those incredible launches that we have, going forward. As for the media mix and, of course, the major investments in media, specifically, I can tell you that we are investing in all media. But online or digital and social media and other types of advertising, those are areas where we have a higher level of investment. We have more than doubled investments in the digital area year-on-year, and no doubt that direct marketing is buzzword today and we are following that trend. Our online business is growing significantly, triple-digit growth -- I like to say that, triple-digit growth -- and above our expectations. And more than that, it is a profitable line of business. People talk about ecommerce as that burn cash or that have negative EBITDA. Not our case. We are past breakeven point. It is a profitable business and we are tagging along a triple-digit pathway and we are keeping that. Our stores have been well received by the consumers. It's a learning curve. We are making fine adjustments in terms of assortment. And we also want to carry on with this development. We have Caroline, our retail director, and she has been working to fine tune our development so that we can speed up our growth even more.

Next question comes from Alex Robarts, from Citibank.

I'd like to go back, if I may, to 3 points that you have already mentioned but that I need to understand a little bit better. Number one, going back to administrative expenses at Aesop, I understand that the assumption is that the level of margin for Aesop has changed and will change until June 2019. So I'd like to understand in the long run what will happen and with this step-up what will happen to those administrative expenses for Aesop? Number two, I'd like also to understand a little bit more the expenses with Body Shop, those BRL 36 million. Is it a one-time expense? Or can we expect to see that emerging again next quarter? In other words, will this be a recurrent item? And number three, about the Natura network, the Rede Natura, could you please elaborate on the order of magnitude of revenues for Brazil? Is it 5%, more than 5%, less than 5% of revenues in Brazil? Net revenues, I'm talking about.

This is Robert. I'm going to answer 2 of your questions, and then I'll let J.P. answer the last one. So regarding Aesop, I'm sorry if this seems repetitive, but the incentives there are completely linked to generating value as measured by EBITDA. So we have absolute EBITDA, and we have all of the indications that it will go up. Now the difference from net income from EBITDA means that the EBITDA margins for 3 years will, yes, be reduced. What I haven't mentioned is that obviously this cost is also deductible, which is something that it wasn't before with net income. So, yes, for 3 years this margin will be reduced. Margins without these costs will improve year-by-year. So I hope that answers your first question on current expectations. Now the second question about expenses in the Body Shop, I think this is the major part of the expense. These are not recurring expenses; these are one-off expenses for acquisition. So I think that answers your question. I'll let J.P. tell us a bit more -- excuse me. So we will have a few more expenses as the transaction is concluded in mid-October, but these will be smaller than what you are seeing now during this quarter. I'll let J.P. continue.

About Rede Natura, so the numbers are available. You can do the math on our revenue percentage. It doesn't go up to 5% yet. Continuing the growth trends, I'm sure that in the next year we'll see something like that, but so far it's around 2% to 3%.

Okay. And the question I have for you is that this is -- are you having more consultants -- can you tell us a bit more about your growth or what your drivers are?

Yes. Yes, I can. It comes from all sides. On one side, we are getting more traffic. So we are making more visits, reaching more consumers. We're having better digital media. And also our consultants are more efficient in acquiring new buyers. So, secondly, conversion is also going up. Once again, we are producing better-directed ads with products that are more relevant and they're more recurrent. So our average ticket is also going up, which is due to our mix, specifically perfumes. So this is working very well, especially integrating with our offline consultants. So this is advancing very quickly. The way our consultants are doing business is now designed to include a digital solution more and more. So we have a lot of growth drivers there to explore, and we are very optimistic about the online growth.

Excuse me. You're telling me the average ticket is going up. Is it -- how comparable is it to direct sales?

Well, first, this is the end consumer's average ticket. So I can't tell you that it's very similar to what we see in our owned stores. And it's similar to what we expect are the average tickets for our consultants with their end consumers. So it might be even a bit better.

The next question comes from Irma Sgarz, Goldman Sachs.

I have 2 questions. The first is about productivity. I understand that when channels are down they are losing or having an impact from less productive consultants which are not as involved with the brand and so have lower sales. So the productivity of the consultants that remain obviously goes up. So there's a certain mathematical effect there. But at the same time I'd say that what's very useful for the markets to understand productivity steps is to really see this turnaround as a new commercial model. So to have productivity with the same consultants, only looking at the consultants who are in our base now and who were in the base 1 year ago. So see year-on-year how these consultants' productivity advances. I'd like to hear from you about this. I understand that we are advancing, but it's difficult for us to understand because the productivity of these consultants is going up and we're not sure if this is coming from volumes or from their average ticket, due to pricing. I'd like to understand that in more detail. My other question is about working capital. Can you tell us a bit more about the improvements that you've delivered this quarter and how sustainable they will be in the future?

This is Erasmo. So I'm going to tell you a bit more about productivity. Obviously we have been following several indicators in detail based on profile, based on seniority, and so on. We have clear indications now in the tests we ran that it is, in fact, growing. That's the biggest intention of our incentive plan. So this is driving productivity up for the same consultants year after year. At the same time, we do see an impact from what you mentioned. Mathematically, as consultants leave productivity goes up, but it needs to be more than proportional. So you need to cover all of the loss in channel with higher productivity. We're seeing that we have higher productivity comparing consultants year after year, and I think we still have some pleasant surprises ahead of us. So the signals we're seeing are very positive. It doesn't capture everything, but again it's complex. We have been working on this for a number of years in trying to expand our productivity, to expand how consultants are -- how much they are earning, to expand their loyalty and to make our channels proportionally more productive; so going from growing the channel to growing productivity. All signs are positive that we are heading in that direction. We should continue to see positive signals in the next months and years.

I still dream about this being disclosed, this indicator being disclosed. I think it would be great for us to follow.

This is Lettiere. Your question about working capital. There are several initiatives that have been implemented and executed to try to optimize this factor. Receivables, this was a question asked by another market analyst. We're very stable in our due dates. We have been managing this very well. We've been very robust in what we call our credit cycle; so from the moment credit is given until how it is monitored, followed up and received. So this is very stable. This has been very strong in our working capital management. Inventory coverage. That's another important moment. We have been very strong with demand planning, and this is very aligned to the demand. So our sales force is closely aligned with our supply chain, and this has really favored supply planning, which is one of the most complex and more difficult things to do in retail. We are more efficient now and we have a smaller inventory. On the other hand, with our partnerships with our suppliers we're also going through a very good time, a good partnership, that is advantageous to both sides, generating value and supporting our demands. So this also helps on working capital. For consumption goods, in a company that is becoming more international it is normal to have a higher inventory. So I think we've been doing a good job. We captured good value generation, and I think our plan for the future is to at least maintain this level.

The next question comes from Maria Paula Cantusio, BB Investment Bank.

I have 3 questions, actually. During the last call, you mentioned that sold volumes were down. Can you tell us a bit more about what happened during this quarter? I'd just like to understand where this volume reduction came from. So can you tell us how much of it was from increased sales of kits and how much of it was a reduction in volume and in what categories have you seen a higher drop? And also if you can tell us about gross margins? What came from improving the mix and what is related to the price strategy that resulted in this higher gross margin in Brazil? And also can you update us on how stores are being refurbished for consultants, for beauty specialists?

This is Joao Paulo. So this reduction in volume has been impacted by daily-use categories, the ones that have recovered some of the market in which we didn't perform very well because they were not our main choices. So this reflects in overall volume. Although there is that effect of the kits that you mentioned, and that's the opposite: a good performance of kits leads to a reduction in volume. So there are 2 effects, and this is much more impacted by daily-use products which were not a priority. In terms of the gross margin the mix is a bit richer because of the market share that perfumes have taken. Finally, refurbishing consultant stores. Contracts have been formatted and defined. We have a long queue of consultants to sign contracts, and we are changing furniture and so on. So this will be sped up until the end of the year for these consultant stores.

Going back to gross margins, you mentioned there was an increase on the perfume category. What about pricing, as you mention in the release? Most of it comes from the category mix then, is that right?

Yes. We are ensuring that we are priced competitively in the market. At this moment this didn't imply in generalized price increases. There are limits for categories. There is an optimization of our cost base which is, in turn, reflected in the results we see. But price increases are not desirable or possible right now in the general sense.

We now conclude the Q&A session. I'd like to invite Mr. Ferreira to proceed with his closing remarks. Please go ahead, sir.

Well, everyone, once again thank you all for your interest in the company's evolution, in the company's progress. Thank you for the questions, questions that lead us to think about our business from different perspectives. And I'd like also to reemphasize this feeling of optimism. We're going through a turning point. I'm sure we are now midway through a turnaround of the business in Brazil. And as I said, we have very good, very positive promising signs, as we mentioned today. And we are also creating a global company which of course presents challenges but also new opportunities. So this moment we're going through has been very galvanizing for the whole team and has boosted us ahead, making sure we are standing on solid ground. As you can see, we remain very robust in terms of managing expenses, managing SG&A, managing working capital, managing free cash to make sure the necessary resources for us to complete this journey are available. Okay. With that, we close. Thank you all once again. Have a nice day.

Natura's audio conference is now over. Thank you all for participating. Have a nice day.