Natura &Co Holding SA (NTCO) 2017 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for waiting. At this time, we would like to welcome everyone to Natura Group Conference Call on the Third Quarter Results. Today with us, we have, Mr. Roberto Marques, Executive Chairman of the Board of Directors; Mr. João Paulo Ferreira, Natura's CEO; Mr. Jose Roberto Lettiere, CFO; Mr. Robert Chatwin, VP International and CPO, Chief Transformation Officer; Mr. Marcel Goya, Director of Finance and Investor Relations; and Mr. Luiz Palhares, Investor Relations.

Mr. Roberto Marques is connected from abroad, and will be part of the presentation but not the Q&A session. Mr. João Paulo Ferreira, Jose Lettiere and Robert Chatwin will take your questions.

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

We have simultaneous translation into Portuguese, and questions may be asked normally by participants connected from abroad, either in Portuguese or English. (Operator Instructions) We have simultaneous webcast that may be accessed through Natura's IR website, www.natura.net/investors. The slide presentation may be downloaded from this website. There will be a replay facility for this call on the website after the end of this event.

Before proceeding, please be informed that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of Natura management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events, and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Natura and could cause results to differ materially from those expressed in such forward-looking statements.

Now I will turn the conference over to Mr. Roberto Marques, Natura Group's Executive Chairman of the Board. Mr. Marques, the floor is yours.

Thank you, Paula, and good morning, or good afternoon to those of you joining us from Europe. And thank you for joining us on this call to present the third quarter results of the Natura Group.

This quarter is a special one for us because we are presenting the results in a different way. For the first time, we are consolidating the results of the Body Shop, or to be precise, 1 month of the Body Shop results, following the closing of our acquisition back in September.

With this step, we are opening new chapter in Natura history. With the Body Shop, we are [excited to step] towards constituting a global multibrand, multi-channel group that brings together 3 distinctive companies that share a common purpose, vision and commitment to sustainable and ethical business practices.

Our strong underlying performance this quarter underscores the strength of the group we are creating. I will not going to go into details or number, as we'll do that shortly, but I would just emphasize 3 main financial highlights. First, we posted robust sales growth in the third quarter with each one of our 3 businesses contributing to it. Second, we recorded a significant improvement in profitability after excluding some nonrecurring items that will be explained to you very shortly. And thirdly, the Natura Group generated strong cash flow in the quarter, and in the first 9 months of this year. As a result, our net debt-to-EBITDA ratio at the end of the year is ahead of our full-year guidance.

So with the successful integration of the Body Shop underway, the Natura Group is starting off on a positive note with strong results.

I would also like to emphasize that this past quarter also saw continued advances in sustainability. This led us to be included for the first time in the FTSE4Good stock market index, which complements our inclusion for the fourth consecutive year in the Dow Jones Sustainability Index.

Let's now move to Slide 4. With the creation of the new group, we are also putting in place a new governance and management structure. We actually presented this to you in September when we closed the Body Shop transaction, but I thought it would be useful to revisit that briefly today as a way also of introducing the line-up for today's call. As announced in September, I'm now occupying the position of Executive Chairman of the Board. This position is charged with supporting the Board of Directors and implementing Natura's Group global vision and strategy and supervising each one of the 3 brands and businesses.

Each of the 3 businesses has its own CEO and executive committee, ensuring full accountability and autonomy. In that regard, João Paulo Ferreira remains the CEO of the Natura business, and Michael O'Keeffe continues as the CEO of Aesop. As you know, we also announced the appointment of David Boynton as CEO of the Body Shop effective December 4. David has extensive experience in the cosmetics and retail industry, having served in various leadership roles at L'Occitane, and most recently, he was CEO of Charles Tyrwhitt, a U.K. apparel company.

When this full team, A Team, by the way, is in place, they will be presenting the performance of their respective businesses on future calls.

We have also created the Group Operating Committee to oversee the Group's overall strategy and to drive the synergies and opportunities across each individual business. The GOC, as we call it now, brings together the 3 CEOs, key-supporting functions within the Group and the newly created position of Chief Transformation Officer, which is held by Robert Chatwin, who has been overseeing the integration of the Body Shop. Robert is with us today, and will present the Body Shop and Aesop results.

Also on this call with me today are, João Paulo Ferreira who will comment on Natura's performance and our Chief Financial Officer, José Roberto Lettiere.

I will now hand over to them to talk about the Natura Group's third quarter and 9-month performance starting with Lettiere who will present the consolidated financials.

So back to you, Lettiere.

Thank you very much, Roberto. I will begin on Slide 6 with our consolidated net revenue. Overall, we posted strong double-digit growth in the quarter with our safe up 24.3% to BRL 2.4 billion. This growth was driven by a positive contribution from all of our business with double-digit growth at both Natura and Aesop, as you will see shortly. Please note that these figures include 1 month of the Body Shop, which we started to consolidate in quarter 3.

On a comparable basis at constant scope, we still recorded strong double-digit growth of 11.4% in quarter 3, demonstrated the strength of our underlying business. Over 9 months, our sales grow 8.9% to BRL 6.1 billion.

Turning to profitability on Slide 7. You see that we post a robust increase in consolidated EBITDA of 40.8% in the quarter, reaching BRL 450.4 million. This figure includes expense from the Body Shop acquisition for BRL 29.1 million, but also a positive contribution of BRL 11.6 million in EBITDA by the Body Shop in September and favorable nonrecurring FX for BRL 59.3 million.

This are the results of, on the one hand, a positive effect of BRL 133.6 million from the reversal of the provision on IPI tax following favorable jurisprudence. On the other hand, the provision of BRL 38.4 million for possible contingencies related to the ICMS tax in Brazil, and nonrecurring expenses of BRL 35.36 million, approximately in Brazil linked to nonoperational asset write-downs and other provisions. Excluding these nonrecurring effects and the contribution of the Body Shop, comparable pro forma EBITDA stood at BRL 408.6 million, up 31.3%. EBITDA margin in quarter 3 reached 19%, again, up 220 basis points. Excluding the one-off effect I mentioned and the Body Shop's contribution, EBITDA margin was up by 290 basis points.

Over 9 months, EBITDA was up by 26.3% to over BRL 1.1 billion, with margin rising by 250 basis points to 18.2%.

Moving down our P&L. Slide 8 looks at our consolidated net income, which was also affected by nonrecurring effects. On a reported basis, net income was BRL 61 million. This figure reflects the costs related to the acquisition of the Body Shop for about BRL 200 million and adjustments and provisions. If you strip away these one-offs and the contribution of the Body Shop, comparable net income was actually up by 139.5% (sic) [136.8%] to BRL 166.7 million.

Over 9 months, reported net income increased 4x to BRL 413.4 million from about BRL 95 million in the same period last year. This reflects our strong performance this year as well as some tax provision reversals and an easier comparable base.

Turning to Slide 9. You see that we posted strong cash flow generation. Over 9 months, our free cash flow stood at BRL 440.6 million, more than 6x above the inflow of roughly BRL 67 million in the same period last year. This strong growth is a result of our improved performance and discipline in working capital requirements.

In quarter 3, free cash flow was BRL 79.1 million compared to BRL 138.3 million in the year-ago quarter. This includes expenses linked to the acquisition of the Body Shop. If you exclude those expenses related to the Body Shop, free cash flow would have been up to BRL 144.4 million in the quarter.

Our net debt-to-EBITDA ratio rose in the period to 3.5x from 1.5x in the year-ago period. This rise is, of course, linked to the acquisition of the Body Shop, which, as you know, was entirely financed by debt.

Let me highlight that this ratio is better than the 3.6x target we had set for the full year, reflecting our strong cash generation. And as a reminder, we expect to return to a pre-transaction leverage ratio to 1.4x in 2022 through an improvement in EBITDA and cash flow as a result of the growing contribution over time of the 3 businesses.

Let me now hand over to JP to look at Natura's performance. JP?

Thank you, Lettiere. I'm very, very happy to be with you in this quarter when Natura posted sales of nearly BRL 2 billion, up by 10.6%, driven by double-digit growth both in Brazil and Latin America as you see on Slide 11.

In Brazil, sales rose by 10.4% to close to BRL 1.4 billion. We are already seeing the initial benefits of the new relationship model we have put in place earlier this year, which has increased the productivity of consultants by 15% in the quarter as you see in the box on the slide.

We are also seeing positive results from our efforts in key strategic product categories supported by continued improvement in our innovation index, which was the highest in 8 quarters. Sales benefited in the quarter from the reversal of a provision of the IPI tax. But even without that effect, sales were up by a robust 5.2%, the highest figure in 14 quarters.

Natura is also becoming increasingly omnichannel. Our online sales are also continuing their strong growth with gains in average tickets, number of transactions and in the number of registered users. Our sales force is also very quickly becoming digital, and our mobile app is already used by several hundred thousand consultants.

Finally, our retail presence is growing as well with 18 stores in shopping malls and a presence in 3,300 drugstores.

Elsewhere in Latin America, Natura continues its steady growth with sales up by 18.9% in local currency or 11.5% in real. We continue our expansion in Latin America with a gain of 7.1% in the number of consultants and more importantly, 4.7% gains in consultants productivity.

Over 9 months, Natura sales are up 3.6% to BRL 5.4 billion, with growth in both Brazil and Latin America of 3.7% and 3.8%, respectively.

Moving to Slide 12. Natura's EBITDA rose sharply this quarter by 53% to BRL 452 million with EBITDA margin up strongly by 640 basis points to 23.1%. This reflects growth both in Brazil and in Latin America.

In Brazil, EBITDA rose 62.5% to almost BRL 355 million, boosted by the reversal in the IPI tax provision, I have already mentioned earlier. Excluding nonrecurring effects, EBITDA was up by a very strong 35.4% and EBITDA margin reached 25.4%.

In Latin America, EBITDA grew by 29% in reals and by an even stronger 42.5% in local currencies. And EBITDA margin gained 250 basis points to reach 18.5%. In 9 months, Natura's EBITDA stands at over BRL 1.1 billion with a healthy margin of 20.8%.

Moving to Slide 13, I could not finish without remarking that the Natura Group is purpose-driven with a triple bottom-line approach and strong commitment to ethical and sustainable business practices. We are pleased to announce we have just been recognized as The Company Of The Year by the most prestigious Brazilian sustainability index, Guia EXAME de Sustentabilidade. We are very pleased to be the first company ever to be distinguished twice.

Other highlights worth mentioning include our inclusion in the FTSE4GOOD and Dow Jones Sustainability Index as previously mentioned by Roberto, our initiative to fight climate change through carbon emission offsets program and a record number of registrations in our consultants education program that offers higher and technical education to our consultants and their families.

So let me now hand over to Robert Chatwin to present the Body Shop's and Aesop's numbers.

Many thanks, JP. Let's turn to Slide 15. The Body Shop has already made a positive initial contribution to the Natura Group. Our Q3 numbers include 1 month of the Body Shop results as we consolidated the company in our accounts as of September 1st. The Body Shop's revenues in September reached BRL 245.5 million. On a pro forma basis, the Body Shop's Q3 sales in Pound Sterling were up 1.3%.

Also in September alone, the Body Shop's contribution to Natura Group's EBITDA was BRL 11.6 million. On a pro forma basis, the Body Shop's Q3 EBITDA was up 15.3% versus Q3 2016. So whether one looks at the 1 month that we included in our numbers or the entire quarter on a pro forma basis, the Body Shop has delivered sales and profitability growth, which all bodes well for the future.

On the following slide, we take a more detailed look what has already been accomplished in the 10 weeks since the Body Shop became part of the Natura Group. We're actually on day 70 of our 100-day plan, and I'm pleased to say that the combination is proceeding smoothly. In a short space of time, we have managed to meet the vast majority of global teams and most of the head franchisees and business partners. These meetings have strengthened our conviction that there's a great opportunity in the Body Shop. As we said in September, our overarching priority was delivering a solid Christmas, and the seasonal preparations are already well underway throughout the Body Shop's organization. We're in the second week of the 8-week high season and the results to date are encouraging.

We are hard at work building a growth platform, leveraging Group's scale and competencies. As an example, teams from the Body Shop and Natura are already under the same roof in the U.S., and Mexico and Chile are soon to follow. These exchanges are laying the groundwork for future synergies.

As Roberto said in his introduction, David Boynton will be joining the Body Shop in just under 3 weeks as CEO, bringing his past retail and cosmetics experience and inspirational leadership. At the same time, management transitions in key positions are well underway, and the teams are fully mobilized and energized.

All Body Shop countries, whether those that are already performing well or those that need to improve their performance, have plans in place already being executed. So overall, as you see, we're off to a strong start and fully confident that the Body Shop will contribute strongly to Natura Group's growth going forward.

On Slide 18, we turn to Aesop's performance. In the quarter, we recorded sales growth of 21.9% in reals. Over 9 months, sales reached BRL 456 million, up BRL 17.8 million and by a stronger 27.1% in Australian dollars. Aesop's growth was driven by a combination of organic growth with some same-store sales up 12% and expansion, thanks to 27 store openings in the past 12 months, bringing the total number of signature stores to 196 at the end of December with a further presence in 97 department stores, 14 more than in the comparable period last year.

Slide 19 looks at Aesop's profitability in greater detail. As you see on this slide, reported EBITDA was down in the quarter to BRL 15.4 million from BRL 24.1 million. However, this difference is actually mainly due to one-off inventory adjustment in Q3 2016 that boosted Aesop's EBITDA in that quarter by BRL 8.7 million. If you exclude that effect, Aesop's EBITDA in the quarter was stable year-on-year.

EBITDA margin was down in the quarter to 9.6%. This drop is largely explained both by the adjustment that I just mentioned and the impact of a new long-term incentive plan that was put in place for key executives with effects until 2019. If you exclude these 2 effects, EBITDA in the quarter would have been up in line with growth in sales.

Let me now hand over to Roberto for some concluding remarks.

Thank you, Robert. Before I conclude, I just want to also take this opportunity to thank everyone of our associates, both in Natura, Aesop and the Body Shop for this very, very strong performance within this last quarter and especially as we start really forming and creating this new group of Natura with a very, very bright future ahead of us.

Let me conclude by saying a few words about our short-term priorities business-by-business.

We'll further strengthen the Natura brand in Brazil by continuing to revitalize direct selling and making further advances in our multi-channel expansion. Aesop will continue its expansion, building on its strong track record in the past years.

And, of course, the Body Shop, focused on ensuring a successful Christmas season and completing its seamless integration into the Natura Group after a very encouraging start. All this will be backed by strong financial discipline as we pursue our (inaudible) of bringing the net debt-to-EBITDA ratio back down to 1.4x by 2022.

We will continue to exercise strict control on our working capital requirement, while generating strong cash flow and focusing on improving our profitability. With this, thank you so very much for your attention.

And now, João Paulo Ferreira, José Roberto Lettiere and Robert Chatwin will take your questions. So let me turn back to Paula.

(Operator Instructions) Our first question comes from Ruben Couto, Itaú BBA.

I would like to hear more from the nonrecurring items in the quarter. Just to make it more clear, if we look only to the IPI tax, this BRL 66 million provision reversal in the deductions line, is there a part of this that is recurring? And why you have this IPI tax effect in deductions, but also in other -- valuing in other expenses line? What are the differences here? Can you guys give a little bit more color on that?

Hi, Ruben, this is Lettiere speaking. This nonrecurring item related to the IPI tax, It's a situation where our status improved moving from a remote to a very probable gain. So under this circumstance, in our accounting principles, and in agreement with our auditors, we conducted this reversal over the provision. Part of the reversal is going to impact our ongoing business in our top line, as you can see, as we demonstrated the quarter 3. The impacts regarding previous years, we posted it or we booked it in other income, okay? So part is related to previous years and from now onwards, will be a recurrent item.

So this BRL 66 million is actually a recurring? You would expect something around this level in the fourth quarter as well?

Yes. Approximately that level.

First 9 months.

Yes, 9 months BRL 66 million. So as -- you are right, when you do it on average, if you divide it by 9, you get an average amount.

Okay. So in the fourth quarter, it should be around 1/3 of that? Around BRL 20 million or something?

Yes. Yes.

The next question comes from Guilherme Assis Brasil Plural.

Actually, it's Andres here. I want to know if there's any nonrecurring impact with the 15% productivity increase on the Natura sales rep. If yes, what would be the normalized growth from now on? And what we should expect? And I want to know if Natura is keeping with the plan of eliminating the duplicity in the sales rep [CTS] as the base is falling a little.

JP speaking. So this productivity gain, there's no recurring effect. It reflects though a reduction in the absolute number of consultants, as you've pointed out. It's not only due to duplicity in consultants. It's also an effect that we had already predicted in pilot tests that we ran, while developing the new relationship model. So we would -- we expect that number to reduce. It should stabilize sometime in the near future. Is that fine?

Yes. But any sense just on [your sensibility] when you expect to end the duplicity program?

Again, I would like to say it again, it is not only duplicity. It's also to do with the qualification of our network, which caused that reductions. So it should stabilize sometime in the next month, but I cannot give you any precise answer to your question.

The next question comes from Tobias Stingelin, Crédit Suisse.

I'm sorry to go back to this nonrecurring item, but we're getting so much questions. And I think it might be helpful if you can explain it. Lettiere, just to understand, when you have like your breakdown of EBITDA for Brazil specifically in the third quarter, you have like a chart where you go from BRL 280 million in the third quarter of last year to BRL 295 million in the third quarter of this year. And basically, you treat this as kind of comparable EBITDA. So this would be kind of the organic comparable EBITDA growth. That's fine. But when you look at your other items, basically what you call (foreign language) just to make sure we are on the same page, if (foreign language) is of 95.2 million, is that a combination of plus BRL 133.6 million minus the BRL 38 million that you booked as an expense, so this gives you the BRL 95 million, right? And then you have another minus BRL 36 million, which is basically nonrecurring? Does it make sense?

Yes, you're totally right in your analysis. It's exactly the calculation you have made.

Okay. Perfect. So let me just ask you something which I'm puzzled now. If you go to your EBITDA growth, you will see that it was basically driven -- you had recovering sales, which is good. But basically, we had also BRL 76 million gain in (foreign language). How do I reconcile this BRL 76 million? Because if we just discuss that BRL 133 million, it's out of debt. What is BRL 76 million improvement in your (foreign language), which basically explains all of the EBITDA growth.

Tobias, the explanation is as follows: You have the IPI for this current year as I mentioned before, is the reverse of the BRL 66 million. Then we have another approximately BRL 10 million related to the reduction of (foreign language) ICMS, we reduced it -- in the São Paulo state this year, earlier this year, okay? So we have a combination of reduction in our MVA and the benefits of IPI. The combination of the 2 elements gives you this BRL 76 million.

But then you just go also back to the first question from Ruben. So technically speaking, you have like per month if you are adjusting the BRL 76 million 9 months. Basically, you have to exclude [6x7], right? So I have to exclude like BRL 44 million from the BRL 76 million, which is basically related to the first 9 months -- to the first 6 months of the year. And then the remaining between BRL 66 million and BRL 44 million, the other BRL 20 million, they would be related just to this quarter and they are kind of recurring going forward, right?

Yes. Yes. It's an ongoing benefit. So we should consider in your modeling those benefits from now onwards.

The next question comes from Olivia Petronilho, Banco JP Morgan.

I'd like to stay on this point of the tax benefits and of the margin. When we exclude the BRL 66 million from the top line, and looking in your EBITDA margin in Brazil, we see some pressure this year basically coming from both COGS as well as SG&A, right? So your G&A expenses continue to grow. And when you look at your gross profit, excluding the BRL 66 million, it's also down. So we would like to understand here what is the kind of investments that you guys are doing? Of course, there's growth to volumes, but if we should expect further investments and these trends going forward? And where do you believe that we should expect this margin to stabilize?

Okay, Olivia. Just to highlight that, excluding the elements of the IPI, our net revenue grew by 5.2%, okay? It's the starting point. So the [quality] earnings of our EBITDA in Brazil is coming from a volume growth, better margin due to cost of goods sold improvement and also...

Okay. If we exclude the BRL 66 million from your gross profit as well, your gross profit grew only 3.7%. So here, we have a little bit of pressure in COGS too, again. And when we look at your G&A, it also grew a lot more than the revenues. So this is just where we're trying to understand what is the pressure in this expenses (inaudible).

You need to consider that IPI methodology. We have the credit then we have the debt, okay? In that part, you are -- when you do the provision reversal, you need to remove the credit apart. So this is penalizing the margin. So if you exclude that, you're going to see that our margins improved marginally, okay? And looking forward, these impacts will be impacting on an ongoing basis. So this is the calculation. From the BRL 66 million, you need to deduct that about BRL 9 million, which is part -- which impacted our cost.

Okay. So just to be more specific, when we look at your SG&A expenses in Brazil that grew 27% year-over-year in this quarter, should this be recurring? Are there any type of nonrecurring expenses here? Or where should we expect this to grow going forward?

As you know, we have implemented a 0-base budget, about some months ago, more than 1 year, actually. So the control of our expenses has been very, very strong. We can see sometime difference between one quarter and another quarter, but our cost and expenses is our -- is one of our key strategies to continue investing in our brands in our channels. So I would not highlight any major difference in our SG&A at this moment and looking forward for the same.

The next question comes from Franco Abelardo, Morgan Stanley.

Sorry to go back, but on the question about IPI impact on the results. How much was the negative impact to COGS, to the cost of goods? Just for us to have an idea what was the neutral margin improvement or decline in the quarter. That's the first question. Related to margins as well in Brazil, the administrative expenses, they grew 27% year-over-year and total SG&A grew 6.3% in the country, so both above the sales growth and above the 5% growth of SG&A in the second quarter. So I'd like you to have more color on what's driving these increase in G&A specifically. Is there anything punctual for the quarter? Or something that we should expect for the next quarter? And my final question is about the top line growth in Brazil. You have a tougher comparison based on the fourth quarter. So despite that, do you expect to keep accelerating growth in Brazil now in the fourth quarter? Those are the questions.

I take the first part of your question, then later -- and JP will take the remaining point. So you have the BRL 9 million impacting our costs, okay, due to the IPI reversal, which impacts our margin, which is growing marginally when you do compare quarter with quarter...

Is this BRL 9 million for the 9 months or just for the third quarter? Just to make sure I understand.

For the third quarter, okay. Regarding the expenses, you see a difference on G&A is basically due to the timing expenses. So it's a timing issue. As I mentioned, all the elements of our expenses are well controlled. And you should not expect that they will grow in the coming months. So it's well controlled according to our 0 base -- 0-budget base, okay?

Okay. So what means that -- this means that you are going to have a decline in G&A in the fourth quarter -- it was just anticipated, is that right?

It's under control in line with our year-to-date figures. You can see that in the coming year -- 2 years and the last 12 months, specifically, we are reducing the SG&A in comparison to our net revenue growth. So we are getting some leverage due to the control and the reduction in our SG&A. So it's a -- the figure -- the year-to-date figure is a good figure to demonstrate how we are controlling the SG&A.

But the year-to-date, specifically on the G&A, the administrative, P&D (sic) [R&D] and IT, you grew 11.7 percentage to date versus revenue growth of 2%. So that's my question. Should we continue to see SG&A growing so much faster than the sales?

No. It's not the case, Franco. This should be diluted, of course, and there's another element that you should consider. When you add the total SG&A, you have to consider that we had some write-offs on that package as well, which is impacting that figure. So you should not expect SG&A going up.

Okay. And then related to the last question, the top line growth?

Franco, JP speaking. Well, we are very confident on our Christmas activities. And despite any tougher comparison from last year, I think, well, let's see. Let's see how it goes, but so far, we are confident on the activities we have built throughout the last year in strengthening the brands, in strengthening our relationship with our consultants, in our innovation yet to come and the way we're managing [gifts]. So all the elements are well established for us to run a very competitive quarter, but, well, we can only talk about that next year.

The next question comes from Gustavo Oliveira, UBS.

Still 1 question on the margin. One thing that's a bit counterintuitive for me is that your selling expenses actually did not increase in the quarter year-on-year. It was actually -- that number was increasing if you take it in the first half of the year. It was -- that number was growing quite ahead of sales. And that's understandable because of all the changes that you are making in your new sales model and also investments in your new channels. Should we see an increase in selling expenses in the fourth quarter and in the following quarters, at least in the short term, while you are still completing the transition to the new sales model? And you're also rolling out new stores, you're adding new channels and drugstores. I would expect that line to go up. Or if not, I mean, obviously, because it may be because you didn't do that in this quarter, you've seen an acceleration -- or a large decline in your consultant base, 9%, actually in line with what you're heading to have in the rest of the year. But you continue to see a sharp decline in your consultant base. How should we think about these 2 lines going forward? The selling expenses, the consultant base, the [stabilizations] and all the channels that you are investing in and rolling out in the next few quarters?

Gustavo, JP. As I mentioned before, we had already predicted a reduction in the absolute number of consultants in Brazil as a consequence of the changes we made. It is a sharp reduction, as you point out, but it should stabilize sometime in the near future, okay? So you shouldn't expect huge drops in a couple of years from now, not to give you any detailed guidance, okay? So we should start seeing a lower rate of reduction until it stabilizes, okay? And as regards to the cost of sales, there was, indeed, an initial investment, especially in Q2, right? But this should not increase in the months to come, in the quarters to come.

So you think you're going to maintain selling expenses flat? Or it should grow more in line with sales?

Well, I cannot give you that guidance at all, but -- I cannot go any further than I already did, to tell you that I don't expect that line to increase structurally.

And what I can add to that, Gustavo, is that our sell expenses is also part of our 0-budget base, so it's also a part of our strategy.

Okay. So the other question I have is with respect to your productivity calculation for consultants. You're actually dividing your total revenues -- total gross revenues by your average number of consultants. But your revenues -- part of your revenues now is no longer driven by the consultants, right? You have sales through drugstores. You have sales online without the consultants. You have sales to -- in your own stores. What would be the productivity of your consultant, excluding the sales of all these other channels where the consultant does not participate? I imagine it still going up, but I would just like to understand by how much [it is going up]?

It's still going up and it's double digits from what I can tell you now.

Next question comes from Melissa Byun, Bank of America, Merrill Lynch.

First, I apologize. I want to go back to the IPI credits. Given that the benefit is noncash as you've been provisioning but not paying the tax, will this change your behavior? I mean do you expect to retain this benefit? Or do you anticipate reinvesting part of it or all of it? And then on the Body Shop, Robert, can you provide some more color on trends by channel and region, and specifically, in markets that you've identified as trouble.

This is Rob Chatwin speaking. So the question you asked was a little bit more about geographic coverage and channel coverage, is that correct?

Yes.

Okay. So we've only had consolidated results for 1 month, and that's not a very good benchmark to be able to give you information on where our channels are performing better or not. But across the board, we have a number of channels, 1 our company-owned market. So the teams there are people who are employed by the Body Shop and have own stores, and there are number of market that have some franchisees. The other one is the head franchisees who, on average, have a tenure of 20 to 30 years with the company. And then, the very much, the new channel, which is digital. So we see positive performances across all channels and geographically, right? There are some places around the world that have had difficult macroeconomic conditions like in the Middle East with the collapse of oil prices, and so on. So that also reflects the results in those countries. So independent of the business model, it's more geographic, but we do have plans in place like I mentioned, which vary in nature, depending on the mix of the channels for each of the countries. So early signs for Christmas in the markets where Christmas is more relevant, we have a very good start and a good feel. And with David coming on board in early December, we will carry on executing the country plans. So I can't go into more detail at this point, but hopefully, that helps you with your question.

Melissa, coming back to your tax doubts with IPI, this is, of course, bring us more competitiveness regarding the way we are going to manage our P&L. And of course, we take the decision regarding if we are going to do the reinvestment for the totality of the benefits we are getting now, or if you are going to slow -- make it the flow to the bottom line. But you're right, this is an opportunity. Sure.

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And to follow up, do you have a sense of whether your main competitors are also recognizing this benefit now? Of if they've changed their accounting? Or do you on the likelihood of your...

Melissa, I cannot comment on our competitors. And so -- also because looking at -- considering the Brazilian competitors, they are not a public company. So I cannot comment on that, for both reasons.

I understand. I was just trying to understand if you think that this will bring you more in line with competition in terms of your competitiveness? Or if this is an advantage?

Yes, as I mentioned, it is really an improvement in our competitiveness, sure.

This concludes today's question-and-answer session. I would like to invite João Paulo Ferreira to proceed with his closing statement. Please go ahead, sir.

Well, once again, I'd like to thank you, for your attention, your questions, which always push us to improve our business and our communication, and would like to reinforce our happiness with the underlying quality of the business and with its results and our confidence on our plans going forward. Thank you very much for joining us today. Bye-bye.

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