International Conference Call Natura 1 st Quarter 2015 Earnings Results April 30 th, 2015

Transcription

1 International Conference Call Natura 1 st Quarter 2015 Earnings Results April 30 th, 2015 Operator: Good morning ladies and gentlemen, thank you for waiting. At this time we would like to welcome everyone to Natura s 2015 First quarter conference call. Today with us we have: Roberto Lima, the CEO, Roberto Pedote, the CFO, and Fabio Cefaly, the Investor Relations manager. This event is being recorded and all participants will be in listen-only mode during the Company s presentation. After Natura s remarks are completed, there will be a question and answer session. At that time, further instructions will be given. We have simultaneous translation to English and questions may be asked normally by participants connect from abroad. Should any participant need assistance during this call, please press *0 to reach the operator. We have simultaneous webcast that may be accessed through Natura s IR website: 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 the event. Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities litigation reform act of Forward-looking statements are based on the beliefs and assumptions of Natura management, and on information currently available to the Company. They involve risks, uncertainties and assumptions because they relate to future events and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Natura and could cause results to differ materially from those expressed in such forward-looking statements. Now, I will turn the conference over to Mr. Roberto Lima, the CEO. Mr. Lima, you may begin the conference. Mr. Lima: Thank you. Good morning everyone. I would like to everyone here to our earnings conference call for 1Q15. 1

2 Today I d like to say that we are also joined by Mr. José Roberto Lettiere, who was elected yesterday by the Board of Directors as our new Vice-President of Finance for Natura, as our CFO, and today he will be listening into our call, and Roberto Pedote has already decided to leave the company two months ago and today's his last day, and I'd like to thank him for his cooperation in the company and wish him all the success in his new challenges. In relation to our earnings, our total sales increased 5.5 year-over-year and business profit remained stable, so we had very positive results in free cash flow. In Brazil, as planned, we advanced in defining and implementing the initiatives to boost our direct sales model and resume sales growth. On March 13 th we launched a new communication campaign in several medias called Chame Natura, Chame que Vem, which brings Natura closer to the end-customer with a more direct message. We implemented the first phase of a new credit collection and deals policy customizing the credit analysis for consultants so they have now different levels based on how they work. We launched the A Miss product line for preteens and this is an area where Natura had no presence earlier. We continue our nationwide expansion of Rede Natura, which already has 32,000 consultants and has been showing promising results. During the next few months we ll increased our means of statement for our consumers through technology and we will offer other tools for our consultants, such as: Systems and ads through smartphones. As mentioned in our previous call, one of our priorities is to make Natura a more agile and efficient company so we implemented a new organizational structure in March, which simplified our structure and reduced two hierarchical levels and increased the number of direct reports to each manager. These initiatives will together bring us closer to our consultants and providing not only quality products to be offered in (0:05:13 to 16 inaudible noise on the line)... we had been doing, but also new enables that can increase their efficacy and their results. In this quarter the international operations were also affected by the Real devaluation and accounted for ¼ of Natura's net revenues including Aesop and increased over 30% in local currency, which restates our conviction that we have a robust business platform with growing results outside of Brazil. As we have mentioned in other opportunities, we've intensified our focus on cost, budget management and improving working capital and investments. So 2

3 the past months we have been strengthened some of our teams in procurement, business intelligence and credit. We ve improved our process and obtained positive funds on the current costs and cash flow structure for which Pedote will provide further details. Yesterday, as informed to the market, Mr. Pedro is now the chairman of Natura's board of director, the position that was taken by Mr. Plinio Musetti in the past two years, who stays as a member of the board. During this period he substituted the CEO of the company and some of the board members, so therefore he met all his objectives. These were the points that I wanted to highlight and I also would like to restate my conviction that we are preparing ourselves for a tough competitive scenario this year in addition to a very challenging macro environment, as everybody knows. I will now pass the floor to Pedote so he can go through the highlights of our results. Mr. Roberto Pedote: Thank you Roberto and good morning everyone. Our consolidated net revenue grew 5.5% in 1Q2015. In Brazil our main market revenue retracted 2.2 as a 1.8% growth of the channel and a drop of 3.6 in our consultants productivity. In this quarter the international operations represented 24% of total revenue, continuing to grow at a fast pace. In LATAM the growth was 27.7% local currency. Aesop continues booming and in the quarter with 104 stores in 14 countries and the results are better than planned and much better than last year. In relation to profitability we closed this quarter with an expansion of 0.8% on the consolidated Ebitda. In Brazil, we expended the Ebitda margin by 0.4% to the balance between the higher marketing expenses offset by gains in overhead expenses, and also a low impact of the Real devaluation of our gross margin. I wanted to take this opportunity to stress that the search for efficacy and gains in productivity is one of our very important priorities at the company. In international operations we had a 0.4% retraction due to greater marketing investments in some operations and negative effect of the exchange rate between Real and the Argentinian Peso, which impacted the corporate expenses in our group in Buenos Aires. Consolidated net income increased 2.1% compared to 1Q14. If we exclude the non-cash temporary market to market impact then the adjustment in the 3

4 provision for the acquisition of the remaining 28.66% stake in Aesop, which is negative, the net income would have increased 5% in the quarter. Additionally, the profit was also positively impacted by the devaluation of Real and the imports to pay balance between international operations in Brazil. As Roberto mentioned, the working capital is one of our chief priorities for this year, our goal is to free 200 million chiefly reducing inventory levels in Brazil and international operations. For this quarter we have invested 90 million in working capital compared to 237 million in 1Q14 and we are aligned to the goals I just mentioned. In regards to Capex, as planned, we have invested 50 million this quarter and it's important to remember that for 2015 our Capex budget is R$385 million focusing on boosting of the Brazilian business model and on expanding information technology and logistics in international operations. Free cash flow has showed significant improvement compared to 1Q14 basically due to results of working capital and Capex. We generated 46 million this quarter against the cash burn up 200 million in 1Q14. Lastly, we end this quarter with net debt of R$1 million equivalent to 1.03 times Ebitda keeping a baseline similar to the one seen in the previous quarters and reducing our position compared to the end of last year. I would like to take this opportunity to welcome Lettiere and wish him success in his new endeavor. These were the main issues I would like to address. Now I would like to open for Q&A. Q&A Session Operator: Thank you. Ladies and gentlemen we will now begin the Q&A session. If you have a question please press the star key followed by the one (*1) key on your touchtone phone. If at any time you would like to remove yourself from the questioning queue, press star two (*2). Our first question comes from Mr. Tobias Stingelin, from Credit Suisse. Mr. Stingelin: Good morning everyone. Pedote, I would like to understand; well, you clearly mentioned that the currency impact hasn't been felt in the margin throughout the first quarter. So I would like to understand that better. 4

5 What you're trying to indicate with that? So you increased prices, margins constant, but I feel that we understood that it is still not reflected because of the currency effect hasn't been reflected yet. And the second question is: How are you dealing with the increase of the IPI? Avon has reported their earnings saying that there is going to be a negative result as well and they are already quantifying that in their earnings. So I'd like to know if you have any updates about that. And lastly, from Roberto, I would like to know about the structure organization changes that were made. So what does he effectively expect to achieve with these changes and where are you at now after six months after he's taken on the company? So where is he at in mapping what had to be done and rolling out what had to be done? So I'd like to like, based on the roadmap that you created I'd like to know where you are currently at. Thank you. Mr. Lima: Good morning Tobias. Well, I'm going to talk about IPI and currency together. In the 1Q we didn't have any impact of the IPI tax; that will be after May. So the current went to 3.3 at a certain period and part of our costs are tagged by the currency so that effect has to go to inventories, but still hasn't us there. And a great part of our negotiations what we're doing they are still ongoing, so I think that larger period of the currency issues we may be able to mitigate that well through some actions by our procurement department. So from now on we've already defined that given the IPI tax and the impact to some specific categories at Natura we will have a price adjustment in some categories. So in June we will have some a price adjustment that will be mainly focused on some of those categories because of the IPI tax and that will also mitigate the exchange rate impact. So the gross margin is being pressured, but we are also taking actions together with our purchasing or procurement area and with second price increase we will have during the month of June to mitigate those main effects. So I do believe that we have some positive and negative effects that are taking place in these quarters, but we are pressure. 5

6 Mr. Stingelin: I'm sorry to interrupt you, but let's say that at the end of June you are going to have some increases and the IPI taxa will increase in May so you are going to have kind of mismatch between these two months. Did you consider that? Mr. Pedote: I'd say one month. One month because it's the beginning of June where we had the price increase, but based on the entire concept when we talk about some categories, considering the context I think we have something in favor and against, but to try to balance that for the second quarter. I'm going to pastor Roberto for your second question. Mr. Lima: Okay, in relation to the roadmap that we are trying to develop the initial focus is on efficiency; something that we already do, which is improving what already exists and we do know that Natura has a very successful history, very integrated from production till the final delivery to our end-users. So we had a lot of opportunities to do better and a lot of efforts to regain efficiency in the channel because in the past year has been affected or threatened by retailers or other competitors that are coming in. So on one hand that's very bad, but on the other hand our channel is still very efficient and well-managed. To do that many actions were developed and some already implemented in communications and in an attempt to try to get closer to consumers and creating a better effect there was an individualized credit policy or customized credit policy for our consultants and also enables us to see the results and gives us more agility in collection processes and also agreement processes, so we don't lose consultants because of credit issues, but mainly do that not to reduce risk, but also using that credit to assist us. There is the implementation of different type of payment methods for our consumers, like using debit and credit cards so that process we believe that we can get some benefits with that this year already and also developing support platforms for our consultants, knowing that 98% of our orders are received through the Internet so we can see that over 16% of these orders are coming through smartphones. So developing those platforms for smartphone and checkouts is helping so that all the relationship managers can have their CRMs. So these developments are ongoing and we expect them to have better results. And the second element is completely within the portfolio and checking where we can improve our supply, being through price or developing new lines. We 6

7 have some very interesting launches, like we just had in the Ekos line and we ve had exceptional results with that. And in addition to that, a major challenge that we have is developing new channels, developing new channels so that that is not a threat that would cannibalize our main channels, but is something that we are betting on and we have many improvements to be done. There was a launch in December and in this quarter we doubled the number of consultants involved so the figures have grown at very high rates on a monthly basis. So we believe that with these new operations we will have our good results. There is also the learning curve to go into taking advantage of points of sales that are already existent that were developed by consultants, so in this area brick-and-mortar we can take advantage of that and turn them into stores; we've done that and we ve had exceptional results in that area. So today we have many projects so that we can learn how to do the retail and work with the brick-and-mortar stores so that can become a very relevant channel for Natura. And we are developing that more and more, but we are still in the beginning phase of that. So that is our roadmap and in parallel to that is managing our day-to-day with as much efficiency as possible, as Pedote mentioned, working with minimum costs we can and value each Real that we have in the investments that we have to make, and we know that the major ones have been done in the past five years, which enable us a better capacity to deliver and the success of Natura in delivering a quality product. Mr. Stingelin: Just a follow-up. You had 4 kiosks that you were testing out, there is also pilot project of transforming the consultants that sell more and provide more support to them so that they can turn into stores, or something like that. Are you going to continue with the kiosks project in parallel to that? Because, as they see, having 4 kiosks for a company the size of Natura doesn't seem enough to me, or have you decided that "oh, kiosk is not what we are going to do; let's have hundreds of brick-and-mortar stores and work with a larger consultant? So is that the path you are going to follow? 7

8 And the last question is about the changes in the organization structure: How do you gain with that? Are you closer to consumer that you reduce the number of people, how have you changed how you relate to your consultants? Mr. Lima: In relation to the kiosks, there are tests; they are pilot projects. We are completely developed and organized to have a relationship with the relationship managers and the consultants at the end of the line, so when we set up the kiosks we have to work with the people that are going to service our costs, that are going to serve our customers, the products and also to charge directly consumers. So we are testing that and the four kiosks are not the future of Natura; that is the test, test and a test: So what type of product is more accepted by retail consumer? What's going to sell, what it's not? What gives us the flow, what gives us margin? So that's the type of test that we are doing in the kiosks. And in the channels, existing stores we want to create what Natura should look like and how we are going to present our products. So if we can help these small entrepreneurs to be successful than that result would be very good. So that's not the only line that's developed. So there is the own stores, yes, we have to learn how all of that works first or a franchise if we are going to go into that model; all of that is being studied right now. We are not going to consider that it is just 4 kiosks, but we have the right to do something wrong, we want to start small so that we can escalate, and that's what's being done right now and in incubation phase. That's what's going on right now. In relation to the organizational structure, we had the new hierarchical structure until we reach the sale force and in some areas we believe it was too small, so we believe that some managers could have more direct reports and that's why we gained agility in some processes in the organization. And then the miracle results of that were 97% percent of the management level, but we reduced two hierarchical levels in the organizational where we believe we can get more agility in relation and in addition to lower costs. In relation to the consultants, what we've been trying to do is bringing in more technology so that we can work a group of consultants in a more intensified area and this digital area we can understand their behavior, what they buy, when they buy and what their purchasing habits are, so we can have more customized offers for each one of them. 8

9 Mr. Stingelin: Great, thanks once again. Good morning. Operator: Our next question is from Mr. Guilherme Assis, from Brasil Plural. Mr. Assis: Good morning Roberto, good morning Pedote. I'd like to go back to price that you mentioned already that you should have a price increase to improve the makeup of the IPI tax and the exchange rate effects. So I d like to know if you already know what that would be, the increase that will be given? There was already a price increase, if I'm not mistaken, 3.47% on average. So I would like to understand what you're thinking about the macro view and that price increase, if that's going to have a negative impact (given that in our vision consumers are very sensitive to price right now)? So I would like to understand those dynamics and what you expect to do to have that price increase without affecting your competitiveness. And also in relation to the point of sale that you were making the credit policies more flexible to consultants, so in the last quarter you mentioned in your release and the calls that you are having a POS, but you didn't mention that now. So I would like to know how that's working and how you see the new credit policy and the POS from now on. Thank you. Mr. Lima: Well, thank you for your question. First in regards to price and costs, we have to absorb costs from IPI taxes, exchange rates because of the Real devaluation and also we buy imported raw material. Our effort is, first, to try to absorb that and reduce other costs, and a great negotiations effort to lower and absorb what has to be absorbed. Second, price: What we are going to do from now on is to be extremely selective in categories that we consider that we are not going to lose our competitiveness. So we know that for us as important as revenue is to have high sales volumes because we can keep our consumers using our brand and our products, so we are being very careful so we don't lose that client base and have a negative revenue. The second part of your question is about the point of sale. It is true that maybe we need more communication and in this presentation you can notice our concern with credit, not only looking at risk, but also bringing new businesses and we are very happy with the results of what we have done so far. Our presence is stabilized and we believe in this markup and a drop in everything we're doing. We are going to acquired new technology, we are going 9

10 to have internal consultants, so I can say that it was Pedote s field of action and it went very well. But we have to use smart actions and we are going to improve month by month. Mr. Assis: Roberto, just going back about price, I don't know, there was a headline in Bloomberg I think yesterday that points out an increase of 2.5%. Is that more or less the increase that you want to have in general? Is this number correct? Can we assume this number as being correct? Mr. Pedote: Guilherme, in general it would be 2.5, but it's concentrated in categories related to IPI, but with a lot of caution looking at the market, competition, very specific things and we have to look at these spaces that opened in the market. So it would be an impact in this order. But talking about IPI taxes it begins in May, but obviously we have discussions and talks, but we are assuming that it will start in May and that is the scenario we are looking at. But it's something judicial and political still being discussed. Mr. Assis: And that 2.5% increase you believe that that's enough to offset the impact of IP and costs? We are going to expect growth margins to stay at the levels of today? I think it was 78 for 70% for Brazil. Mr. Lima: Well, yes, that followed with the continued effort to reduce costs. We talked about fixed costs, we talked about our organizational restructuring and we are going to continue with this effort to keep the margins, not just through price; that won t be enough to keep the margins. Mr. Pedote: Guilherme, we did increase at 3.7 in February and now we are adding another 2.5%, so these two increases and reduction of costs is the balance we are looking for. Mr. Assis: Okay, thank you very much. Operator: Our next question is from Mrs. Andrea Teixeira, from JP Morgan. Ms. Teixeira: Good morning, thank you. My question is thank you for the explanation about price, it's very useful. I would like to know about productivity. It was a great improvement of G&A, so I want to explore how much of the space that you have a little bit of margin now for the next quarter. 10

11 I would like to understand the timing of IPI and how price increase, from what I understood, will be more in June so you would have even more space to improve, and your comment about commodities and the raw materials if we could have an impact that isn t that bad in the second quarter and also because it's been easy comp in the top line. Thank you very much. Mr. Lima: It's very hard to answer talking about all the impacts for next quarter. What we are doing today is to be more effective in cost, we restructured our areas so that we can keep the investments very applied reducing several things and we believe that we are seeking permanent results. And that has a certain impact, there is a process that is implemented and the trend is to reach efficiency, but I think we can't say exactly what the result will be for the next quarter. We know that we are having a very challenging moment in Brazil and with IPI and devaluation of exchange rate impact us. We want to reinforce all that and we have to see what will continue to change and we have to be able to adjust, but how each measure well impact in our next quarter it's very hard to answer. It is not something that we can answer. Mr. Pedote: Well, the trend is very positive in cost reduction, things we did this quarter will effect in the following quarters, but I think that, as Roberto said, the idea is not to give a forecast quarter by quarter, but see the trend. We have a very competitive market and we have to continue to invest in innovation and develop the management tools in the channel and new initiatives, and on the other hand, the company has been gaining and is gaining efficiency and all its areas. So with this balance we will keep margins appealing for Natura, but I really can't say what will happen next quarter. I think that won t be very accurate. Ms. Teixeira: Thank you. It's very difficult to understand Roberto speaking, it's a bit far. So the price increase; what was the amount? It should be in June and what is the number, the actual figures? I didn't understand, but the quality of the sound is a bit difficult to understand for everyone. Mr. Pedote: The increase will be about 2.5 total, but focused basically on the categories that were affected by IPI increase. Ms. Teixeira: And these 2.5%, with the impacts, will be enough to pass this impact on or will there still be investments in price or margin? 11

12 Is it effective enough so it will not pass on this impact, right? Mr. Lima: Well, we don't have one single measure that will solve the problem. We have a very difficult scenario ahead of us. What affects us isn't just one issue like IPI; we have exchange devaluation, competition, salary adjustments. So each one of these things has to be analyzed and we have to try to keep the margins and the projections. That doesn't mean that there is a direct impact of one thing or another. Price adjustment will not we can t say that price adjustment will not impact that loss with IPI, we have to reduce costs and we have to go to the market to see if it's possible to increase price without losing our client base. So we can t analyze them separately, but we do have negative impacts because of things that are out of our control, like taxes and exchange rates and we take that into account in our projections. Ms. Teixeira: Perfect. And salary increases, can you share a bit if the impact will be greater in the 2Q? Mr. Pedote: No, on the contrary Andrea. What we have on our payroll is; when we simplified our organization structured, that Roberto mentioned, with the leaving of several managers we had to pay compensation and other fees, so looking forward our payroll looks very efficient. So what we have been looking forward based on the measures we took are very positive in relation to the cost of our payroll. Ms. Teixeira: Perfect. And the compensations are the 8 million that are in Other Expenses? Mr. Pedote: No, we are not disclosing that number, but there was an amount that was paid now, but the expenses will get better since we already did all that change in the first quarter. Ms. Teixeira: Okay, thank you Roberto. Operator: Our next question comes from Mr. Gustavo Oliveira, from UBS. Mr. Oliveira: Good morning. I would like to understand the top line prices in Brazil. You did a large adjustment on the consultant base for this quarter. 12

13 I would also like to understand if these digital consultants that you have, 32,000, in this quarter are already part of this consultant base or not, if it's something separate? That's my first question. Mr. Lima: These 32,000 are part of our total consultant base. I can say that of the 32,000 50% are consultants that have already been with the traditional direct sales of Natura, they are not new. So these consultants come from different social segments and habits, so that's very essential to us. Mr. Oliveira: And are they part of the 1279? Mr. Pedote: No, they are not. But later on I think we can include them, but 15,000 in 1.5 million is a small number. It is a good point; we need to start including them. Half of them already are included. Mr. Oliveira: So the adjustment that happened in the first quarter it was a bit larger than in the past. You have been doing some adjustments in the first quarter of the past two or three years. What you think is happening? Will you continue to do those adjustments in the second and third quarter like a drop in the number for consultants, or everything that have to be done was done now in the first quarter? Mr. Lima: No, I think we are doing the contrary; we are getting positive numbers on the consultant base. What we have to do is to emphasize our changes and to increase the sales for consultants. What we've been seeing now is an increase in the number of consultants. Mr. Oliveira: The second question is about the number of products sold, of units sold. You said 93 million, you disclose to 93 million. 93 million units goes back to the levels of 2011 that showed these numbers, so it seems like there is an additional adjustment besides Sou. Is that number correct? Because the mix of prices changes. I understand about Sou, but the price increase seems to be greater than the sales per because the sales per unit are dropping. Mr. Pedote: Gustavo, specifically about the first quarter, what we had year over year we also had the launching of Todo-Dia on the first quarter of last year, which are products that have a lower unit price. 13

14 So this first quarter of 2015 we had more fragrances, and toiletries usually have a lower price. So we had a volume of the total sum of unit, so we did see that drop, but adding to what Roberto said, obviously it's essential for us to rebalance looking forward to have growth in this volume based on the measures we are taking. The first quarter is exaggerated that drop because of what we already mentioned; we are comparing to the first quarter of last year, but this is all part of our view to look for more efficiency and more volume looking forward. Mr. Oliveira: In Brazil I understand that your sales year-over-year are a little bit better; it dropped to less than in the first quarter and the campaign Chame que Vem already had some effect. It took over March and he can have a positive effect. I would like to understand if the month of March was much better than February and if this company is already having a positive effect in April so you can reverse the sales growth in the next quarter? Mr. Lima: Yes, March was better than (0:41:21 to 29 - silence) on March 13 th that was when the campaign was (0:41:33 to 37 silence) so we can't guarantee that the campaign will offset the problems in the economy (0:41:47 to 51 silence) but you can see that in other industries as well, but we do know that the campaign had a very positive effect. Mr. Oliveira: Okay, one last question about the Mexican and Colombian operations in terms of development. You had a very high drop in tickets; 34%. So what is that resulting from? Mr. Pedote: Gustavo, I'm going to ask Fabio to answer that, he will contact you later after the call and answer that for you, okay? Mr. Oliveira: Okay, that's okay. Thank you. Operator: Our next question is from Mr. João Mamede, from Santander. Mr. Mamede: Good morning everyone. I have two questions. The first one is that I missed discussion about Rede Natura in the release. Usually you did that in the past. So I'd like to know about the project and its advances. Did you find any difficulties and that's why you don't want to discuss them openly? So would like an update about Rede Natura. That would be excellent. 14

15 I understand that you have a number of other projects; I know that you are not fully focused on that, but it is one of the major ones. So I just noticed that you didn't really address that in the release, so what like to understand why. And the second question is that I'd like to go back to a point that was already mentioned a lot, which is price again, the price increase. So I would like to get more granularity between the divisions in all the categories. I know that the price increase is different according to the SKUs, but in a more encompassing manner can we know if it's a stronger in cosmetics or toiletries? Because when we look at the market and your market share up to 2012 you had more difficulties in growing in cosmetics, and correct me if I'm wrong, but in 2013 things changed so toiletries started to suffer a more by losing some market share. So just so that I can understand if the impact is going to be higher in one or the other category, I don t know if you can disclose that to us. Thank you. Mr. Lima: In relation to Rede Natura the growth figures are interesting; we haven't been informing that offline so that we can speed that up. The end of the campaign the campaigns are working, but they are not specific campaigns; they are working well with consumers. So now we are trying these segmentation models, which we can do in digital and in direct sales in companies. We've always been completely tied to what's in the magazine and that campaign, and with Rede Natura we can be much more flexible and having offers and promotions every day, every time. So we are learning how to do that and we are working on that so that we can learn through this channel and in the future have more volume. We believe that we can increase this figure, and you could probably imagine that in direct sales (and if we are not going through consumers) consultants are delivering straight to the consumers. So the freight cost is different, logistics are different, packaging is different, so eventually we are going to have a different working capital. We don't want to make mistakes. There were many campaigns that were well launched and they are highly successful, but we still don't have margin and we don't want to do that. We want to have we are taking all the necessary care in the beginning so that we can get the margins so we can learn how to deliver so that freight doesn't affect our results, and for now I believe that we've been able to do that; it's been efficient and in the future it will give us the volume. 15

16 Mr. Pedote: And the second question was about the price increase in the categories. As we mentioned, initially they are focused on the categories that were affected by the IPI tax increase, so mainly cosmetics and not personal products. Mr. Mamede: Excellent, thank you Roberto and thank you Pedote. Mr. Pedote: Thank you. Operator: Our next question is from Mr. Marcel Moraes, from Deutsche Bank. Mr. Moraes: Good morning everyone. My first question is about the marketing campaign and the promotions that you ve been holding. So do you see a need, based on the economic change, and see a need to change how you disseminate the campaigns focusing more on products and not institutional, or is that already happening? And I'd also like to hear from you about how are you adapting the promotional campaigns to that, to the new reality? Thank you. Mr. Lima: I think you are answering through your own question. We have to I don't think we need to do exclusive institutional campaigns to strengthen the Natura brand; it's one of the most well-known brands here in Brazil and abroad, we are very well known, very strong and it's very strong as any other multi brand company. So what we want to do is use the strength of our brand and create attractiveness by demonstrating other products in a visual beautiful way so that that will encourage people to want these products. We've been doing that, it's been working and what I believe that we have to do more now is having more complementarity between online and offline, so bringing consumers into the digital world where they can have much more exposure to content and the products starting from the origin, and then we have very rich stories to tell, especially when we are talking about the products that come from Brazilian biodiversity. We just launched another line and it's very successful since the beginning, so I think that's how we can improve our marketing and create a more direct relationship and individual relationship with our consultants, which will create the effect that we want, where our consumers are ordering, are asking for our products to consultants. 16

17 Mr. Moraes: And the other question is about innovation. You've been making changes in the company's corporate governance. So how does that affect the innovation process? You ve been making many launches in fragrances, but that still doesn't support the growth of the whole because they are profitable products, much more than the average in the portfolio, but it doesn't support the growth of the whole. So what has been done in that sense and in the process of innovation? Mr. Lima: Yes, that's true. We do have intense innovation processes and we d have to separate into two types: The ones that are improvements to existing portfolios and products, and the ones that are disrupt. So as I mentioned, Ucuuba is a new ingredient, it's a new raw material that has different effects and we believe that that is an innovation that will provide the results that we want. And the other one new categories so we have to do a deep work to be more efficient so then we will have to reduce our time to market, we have to be faster based on the original idea and then getting it to the market and we need to count on our other partners, and also we need to verify what's essential in launching a new product and also what is not that important and would be appreciated by our end-users. So those are the things that we are working on today, and we have all the tools in innovation so that we can develop that. This year we have very interesting launches and we believe that it s going to be a complete success about how people should protect themselves, hydrate themselves and their facial skin, for instance. So there are many interesting things, and you brought both things together: Innovation and communication. So it's not enough just to innovate; we need to communicate and in that communication we need more added-services. It's not just a product; we want to add services, deliver services that stand by consultants that can also be done by digital by showing and teaching them so they can use our products well and take the utmost advantage out of our products. Mr. Moraes: Thank you. Operator: Our next question is from Mr. Franco Abelardo, from Morgan Stanley. 17

18 Mr. Abelardo: Hello, good morning. This is Franco Abelardo from Morgan Stanley. The first question is mainly related to the market. We know that the Natura market has been growing at double digits for many times, but this year there is some macroeconomic challenges and tax and fees challenge, so I would like to know from you and also compared to the competition, which is very tough, how much do you think that the Natura market can grow this year? And now more specifically, looking at Natura and considering the base of comparison that is the second quarter less challenging from Natura, so can we see any faster sale for the company in the second quarter? How about the kits created for Mother's Day? So how do you think that sales will develop in the short-term for Natura? Mr. Lima: Well, we avoid giving guidances for the future, but at this moment it will be even more difficult. We know that Brazil has a completely different scenario than we had a year ago. I think that several sectors are still having impact in their activities, so Natura is not different. So we want people to continue to consume, our consultants to have greater earnings, we want to encourage people to continue buying products and we know that this scenario is a recession. So we're not going to have that much more earnings. So if we have to increase our sales force that will bring additional revenue and on the other hand we can also have people who will restrict their consumption and, if they don't stop altogether, they will reduce the number of products they buy. So we are experiencing that every day. If it was already hard to do that in the past today in Brazil it's even harder. Mr. Pedote: Franco just to add, last year the market grew about 11%, we had our first semester that was stronger, a second semester that was a little bit weaker, but we imagine that the market will continue to grow, but it's very hard to guess at what rate at this moment. Mr. Abelardo: Okay. What about the short-term monitoring that you do? Do you see an improvement or a worsening? According to what you saw in the first quarter when you saw an increase, especially in March after you started the campaign Chame Natura, and launching new brands, how do you see that behavior? 18

19 Mr. Lima: Again, I don't think we should offer any guidances. In the Latin America there is a clear trend for growth, all the countries have higher growth rate and we think that we are going to continue with the performance we are having till this time, but in Brazil this scenario makes us very cautious for the future. So we noticed that we rather not say those numbers. Mr. Abelardo: One more question. You mentioned that there has been an effort to look at the Natura stores that already exist and try to make them official. Do you have any figure, any idea of how many stores in that format that you can have in the short and mid-term? And similarly, online what effort has been made to interfere in Natura's consultants through that channel? Thank you. Mr. Lima: In regards to the brick-and-mortar stores, this year we think that that number is going to increase. So maybe in our next call in our next quarter we can bring some information about that. But we see this very positively, the results are good and there is a cost to make these stores formal, so that will have a certain impact. I do know if I understood your second question about the marketplace. If you can clarify that, I may be able to answer. Mr. Abelardo: Well, today you access e-commerce websites that offer sales from third-party companies and you see Natura consultants selling these products in that direct channel without using Rede Natura. How do you look at this channel? Is there any way to improve or interact with that channel to make the focus go back to Rede Natura? Mr. Lima: Well, that's an interesting question. We have a digital development department and we are looking at what is happening, especially for apps and smartphones, m-commerce and we are looking for not necessarily having actions in what already exists online, but we want to maybe create our own Rede Natura platform that was developed for the traditional e-commerce, but we also want to go towards an e-commerce in which we already have an interesting participation. And in our first goal is to make the consultants themselves to generate flow online and we can see that 70% of our consultants already have smartphones 19

20 so they are able to do that, they can place their orders on the smartphones platform. So we are going after that channel and we want to have alternative channels to the ones that already exist. Mr. Abelardo: Thank you very much. Operator: Our next question is from Mr. Alexandre Robarts, from Citigroup. Mr. Robarts: Hello, good morning. I have two questions. The first is about the international operations and the second is about free cash flow. Thinking about the free cash flow it has a 40% impact on the earnings and it impacts the margins. I also see in the press release that there is the SAP project and investments. How would you think about the contribution of these businesses outside of Brazil and what is the return on investment expected by the group, and how much are you considering, for example, for this year? What will be the contribution? Will it be positive for the return metrics? Maybe there are still investments that have to be made this year that might stop that increase of the margin. Could you comment a bit about those issues? Thank you very much. Mr. Pedote: Good morning Alex. Our international business we have the opportunity, first, to continue to grow at the rates that you have been seeing. I always like to refer to local currency and we were able to grow more than 30%, when we look at Aesop it is 34%. If we put that into Reais we are going to have better and worse results according to the exchange rate, but still it is very powerful. What we have also being seen is an opportunity to improve profitability. It's very important for us to dilute our fixed costs structure so we see that development adding to the company s ROI, and since our international operations have a lower profitability than the Brazilian operations, the more it grows the better is the added profitability. On the other hand, the increase of profitability that we expect in the international operations more than offset the effect of having an international operation with lower profitability than Brazil. 20

21 So we expect a positive effect at the end of the day. It's a less profitable area of Natura, but it is getting better and will continue to get better. So those two factors end up at a positive result in the mid-term for the company. Mr. Robarts: Okay. The second question is about the free cash flow for the group and we saw a great increase on the positive side. It's very clear that you are reaching 25% of the Capex, reaching those 385 million. Is there a space this year inventory, Accounts Payable? Do you have any idea if you can comment about working capital? Mr. Pedote: Alex, we do have space for that. In our working capital budget we have a goal to have a positive working capital of 200 million and that's a point and a counterpoint. The position in December we wanted to gain 200 million, but the structural actions that we took our focus made greatly in the improvement of the inventory process of the company both in Brazil and we have a great opportunity in the international business. So that will have the positive impact in costs, so we can reduce inventories. We just implemented in the first quarter fixed dates for payments that allow us to increase the meantime to pay our bills and our Accounts Payable are very stable and we can recover some taxes, especially in the state of São Paulo that are stoking, and we are working on that. So we have some priorities that are mainly working capital and we are looking for those 200 million this year and the 90 million investments that we did in the first quarter is very aligned towards that goal towards of finishing with a positive of 200 million at the end of the year. Mr. Lima: I would like to add that there is a clear difference in the management of Brazil and international business. We need to keep our inventory a bit higher in those places, but we have a concentration in Argentina, which is the country that has a very strong regulation on the import processes and to release payments. So this quarter we are already seeing a drop of the inventories in Brazil at least. We started imports on statistic inventory control method and we will implement it in September this year up and that will make us gain even more. Our goal is very strong, we want to free 200 million of working capital by the end of the year and we did have a cash burn, but at the end we had a positive cash flow and we expect this to continue and get even better to the end of the year. And our forecast for Capex this year is about 20%, almost 25% lower than the one we had last year. So working capital is one of our greatest focus this year. 21

22 Mr. Robarts: Okay, thank you very much. Operator: Our next question comes from Hassan Doza, from Water Asset. Mr. Doza: Hi, good morning, I have two questions. One is: Given that both your production of your products and the use of your product depends on the availability of water, I wanted to ask you two questions in light of the drought in Brazil, in most parts of Brazil. The first question is: Are you seeing any reduction in usage from your customers, for example, taking less or even shorter showers to preserve water? Can you please comment on the usage trend you saw in the first quarter? Basically if you saw any usage reduction due to the conservation and scarcity of water. That's my first question. Mr. Lima: No, this reduction was not seen, at least not in the first quarter. Our line of products is very big. Maybe they might behave differently because they might use more fragrances, for example. So my answer is: At first no, we didn't see that happening because the drought is more critical in some regions and other regions we are not facing that type of problem. Mr. Doza: Okay. My second question is in regards to your water supply situation, specifically in terms of the availability of water in your manufacturing facilities. So can you give a little bit of color if the drought worsen and there is water rationing or more scarce availability of water, how are you going to produce your products and what is the source of supply for your manufacturing facilities? I appreciate your thoughts on that topic. Mr. Lima: Well, first, the use of water in our products is not that large as it may seem. Secondly, both in our plants in São Paulo, that is located in Cajamar, are self-sufficient in water. In addition to external supply, we have our own artesian wells and we have a reuse of the water used in our facilities of almost 100% with a retreatment. So the company in the past invested everything that had to be invested to be self-sufficient; not that we forecasted this drought, but it's part of our sustainability policy, which is to be very efficient in water use in all our facilities. 22

23 So we don't see any risk in our plant at Birigui; we have a water supply that is constant, it is in one of the most irrigated regions of the country. So water is not an issue that concerns us at the moment. Operator: Our next question comes from Mr. Alan Cardoso, from Safra Bank. Mr. Cardoso: Good morning Pedote, Lettiere. First, if you could give us more details about your credit, your customized credit policy. How is the credit scoring being done, if you're doing that yourself, if you have any consultants helping you? What about the default? Do you think that there are some consultants that can work with a greater credit limit that they don't do now that could help with sales? And within that same topic, if this customized credit policy could be an embryo of something bigger, like some retails that have financial services that are important for Ebitda and maybe in the mid and long-term could be implemented in Natura? Mr. Lima: In regards to our credit policy, it was developed by an internal team with an external consultant. We brought specialists very experienced in this market that have been CFO from large bank institutions for these customized credits, then we checked the individual limits of credit of each consultant not just to manage risk, but also to allocate sales. It was not implemented for the beginners, and the impact can be felt both in generating additional revenue and also reducing default and that makes us give more credit for those who can absorb more credit, and less credit for those who can absorb less credit, and with that we did increase the credit risk for the company and we do have lower default rates. And our warehouse is very popular with information about behavior and we are doing this more and more, especially for credit that depends on marketing efforts. And then your second part of the question is about financial services, and this is a project that is being studied at the company for some time, and probably we will do that with the support of third parties. But I still think it's not something that the company will do to offer credit that is outside of our operations, but to have financial services and correlated services might be explored for other opportunity; our consultants represented a target of 1.5 million people. 23