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management
report
natura
The Brazilian cosmetics, fragrances and
toiletries market recorded another
strong performance in 2005.
According to Abihpec (the industry
association), nominal target market
growth between January and October
2005 reached 16.5% year-on-year. In
real terms, discounting period IPCA
(consumer inflation) of 6.4%, the figure
stood at 9.5%, higher than the average
for all economic sectors.
In the direct sales segment, the
numbers are even more impressive.
While registered jobs have been
exceptionally meager in recent years,
the direct sales have offered
employment and income for more
than 1.5 million people. In 2005,
according to Abevd (Brazilian
Association of Direct Sales
Companies), they turned over R$ 12.3
billion ­ 18.3% up compared to 2004
and 51.8% more than in 2003.
Performance
Main results
Natura recorded annual gross
revenues of R$ 3,243.6 million, up
27.7% over 2004, consolidating the
strong growth registered in the
previous two years and once again
exceeding the cosmetics, fragrances
and toiletries target public growth of
16.5% (between Januar y and
October).
Annual net income
climbed 32%, from R$ 300.3 million,
in 2004, to R$ 396.9 million.
The gross margin (gross profit over net
income) widened by close to 0.5
percentage point, chiefly thanks to the
reduction in costs resulting from the
appreciation of the Real. EBITDA
totaled R$ 564.4 million, 30.8% growth
over the year before, and the EBITDA
margin (cash generation over net
revenues) remained flat ­ 24.7% in
2005, versus 24.4% in 2004.
Natura closed 2005 with consolidated
gross debt of R$ 187.5 million, versus R$
134.4 million in 2004. In order to meet
storage and logistics expansion needs, as
well as those of working capital, we
received additional financing from the
BNDES (National Economic and Social
Development Bank), raising that portion
of the total debt pegged to the Long
Term Interest Rate (TJLP) from 47%, in
2004, to 76%. The remaining balance is
indexed to the Interbank Deposit
Certificate (CDI).We also have financing
from FINEP (Studies and Projects
Funding Agency), whose resources go to
the Research and Development area.
This is currently being amortized.
A listed company since May 2004,
Natura shares (NATU3) are part of the
Novo Mercado (New Market), the
highest corporate governance level of
the Bovespa (São Paulo Stock
Exchange).
In 2005,
our shares
appreciated by 38%, versus 27.7% for
the Bovespa Index. Since listing up to
December 2005, they have appreciated
by 182.1%, against 77.4% for the
Bovespa Index (Ibovespa).
Management Report
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Appreciation Natura (Natu3)
vs. Ibovespa
Base 100 (25/5/2004)
NATU3
IBOV
Gross Revenues
(R$ million)
3,500
2,500
1,500
500
0
3,000
2,000
1,000
1,411
1,910
2,540
+
27.7%
3,244
2003
2002
2004 2005
CAGR (2002 - 2005) = 32%
EBITDA Grouwth
(R$ million)
600
200
100
0
500
400
300
199
296
432
564
2003
2002
2004 2005
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Emmanelle Moquet and Marie Gilliot, Natura's costumer in Paris
Constance Von Oertzen and your doughter Emily, Natura's costumers
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In 2005, our shares were included in
the Bovespa's IBrX100, an index
comprising the 100 most liquid shares
on the spot market. They were also
included in three Morgan Stanley
Capital International (MSCI) indices
created to accompany global stock
market performance: MSCI Brazil, with
a share of 0.53%; MSCI Emerging
Markets (EM) Latin America, with a
share of 0.27%; and MSCI EM, with a
share of 0.05%.
In line with Brazilian Corporate Law,
mandatory minimum dividends were
fixed by Natura's by-laws at 30% of
adjusted annual net income. However,
the Board of Directors opted to pay
dividends equivalent to at least 45% of
adjusted net income. In 2004, we paid
out 106.5% of free cash generation1
and 72.1% of consolidated net
income. For 2005, the proposed
payout, sent to the Annual General
Meeting comprises 80.5% of annual
net income and 95.2% of free cash
generation. This is equivalent to a net
amount of R$ 3.70 per share in
dividends and interest on capital, 48%
growth year-on-year.
The year's social highlight was the
mobilization of consultants (male and
female) towards Young and Adult
Education (EJA),
a Ministry of
Education program suppor ted by
Natura. As a result, 66,600 individuals
above the age of 15 were sent back to
primary school nationwide.
Consultants were also encouraged to
persuade their clients to purchase
product refills, thus reusing the original
packaging. As a result, refill volume
increased from 15.3% of total
products, in 2004, to 17.4%, reducing
the average environmental impact of
packaging in Brazil. Another important
event was the official installation of the
Cajamar Agenda 21 Permanent Forum
following joint efforts by company
representatives, the local community
and the municipal government.
As holders of the ISO 14001
Cer tificate,
we are permanently
concerned with and constantly
channel resources into improving
environmental conditions in our
production procedures. In 2005 we
exceeded several environmental
targets. Water consumption per
product unit sold fell by 5.6% over
2004; the average water re-use index
increased from 39.5% to 55.0%; and
energy consumption per unit sold
dropped 8.5%.
The share of
incinerated to total waste fell from
5.4% to 2.8%; the ratio of waste sent
to a landfill dropped from 21.2% to
16.1%; and the recycled percentage
climbed from 73.4% to 81.1%. Total
waste generated per unit sold grew by
8.2%, due to increased use of the
Cajamar site and, especially, the
increase in scrap volume.
As a consequence of our constant
pursuit of excellence, we were also
granted the NBR ISO 9001 Certificate
in 2005.Yet another major achievement
was Natura's official recognition as a
"renowned trademark"
by INPI
(National Institute of Industrial
Property). Such trademarks are of
unquestioned marketplace authority
and prestige and have achieved
household-name status thanks to their
tradition, proven quality and the trust
they inspire. As a result, our trademark
is protected throughout every area of
economic activity, not only in the
cosmetics sector.
Natura was also considered to be the
country's 4th most valuable brand
name and first among non-financial
entities by the Instituto InterBrand and
the magazine IstoÉ Dinheiro.
International expansion
We expanded our international
presence even fur ther in 2005,
encouraged by healthy results in
Argentina, Chile and Peru, where we
closed the year with more than
36,000 consultants and recorded
annual consolidated growth of 45.4%,
year-on-year,
in weighted local
currency terms. In April, we began
operations in France, the global
cosmetics center and made our first
inroads into the strategic Mexican
market in August. The results of both
initiatives were in line with our
expectations.
We invested R$ 31.8 million in
globalization, versus R$7.5 million in
2004. The increase was justified not
only by the strong upturn in business
in the foreign markets in which Natura
was already present, but particularly
by the enormous growth potential in
Latin America and throughout the
world, given that we are now
experienced international operations
and that our business model and
values have met with great
acceptance. In 2006, we shall begin
operations in Venezuela and, in the
following year, Colombia.
Research and Development (R&D)
Annual R&D investments moved up
Total Energy Consumption
(Energy Matrix) per Unit Sold
(kjoules/unit)
1,.000
500
0
1,250
750
250
1,025.7
785.2
603.7
551.8
2003
2002
2004 2005
Water Consumption
per Unit Sold
(liters/unit)
1.25
0.75
0.25
0
1.50
1.00
0.50
1.22
0.87
0.67
0.63
2003
2002
2004 2005
1. (Net cash provided by operating activities) ­
(net cash used in investing activities).
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41.5% over 2004 to R$ 67.1 million,
equivalent to 2.9% of net revenues.
We launched 156 new products and
the innovation index, which measures
the propor tion of revenues from
products launched in the last 24
months, stood at 69.8%, versus 63.2%
in 2004.
As part of our strategy of investing in
Brazilian biodiversity as a technological
platform for developing new products,
in 2005 we launched Chronos Spilol,
the first high-tech anti-aging cream
made from an active ingredient
derived from a sustainable organic
source ­ jambu. Another highlight last
year was the conversion of our soap
ingredients to vegetable oils. Now all
our soaps are produced from palm-
fruit oil instead of animal fat.
Investments
In order to cope with increased
production in Cajamar,
which
amounted to 209 million units in
2005, up 24.5% versus 2004, we
invested heavily in infrastructure. Most
of these resources, totaling R$ 111.6
million, went to third automatic
separation line , a second vertical
warehouse, factory equipment and
information technology (IT).
In 2006, we expect to invest R$ 180
million in proper ty,
plant and
equipment, mostly in expanding and
upgrading existing separation lines,
increasing production and logistics
capacity, building a new R&D center,
and new IT projects.
Relationships
Consultants
We began 2005 with 433,000
consultants and added a fur ther
86,000 during the year, 10,000 of
which abroad, closing the year with
519,000.
Consolidated business
volume grew by 27.3% over 2004 and
productivity per consultant in Brazil
moved up 6.6% to R$ 12,300.
We invested strongly in training and
strengthening contacts. As a result of a
series of meetings, workshops and
launch events, we succeeded in
reducing consultant turnover and
increasing their permanence. The
Internet also played an important role
in forging closer relationships and at
the end of the year 100,000
consultants were registered, all with
active e-mail.
Staff
Thanks to business growth in Brazil
and abroad,
we hired 573
professionals in 2005, increasing the
workforce by 16% to 4,128 at year-
end, of which 3,575 in Brazil and 553
abroad.
We also effected certain changes in
our organizational structure,
to
prepare the company for the new
demands arising from business
expansion and the intensification of
the international expansion process.
As a result, the executive group closed
the year with 292 professionals, 25.5%
more than at the end of 2004. In order
to align these new professionals with
Natura's culture and equip everybody
with the international expansion
process challenge, we under took
365,264 hours of training, an average
of 101 hours per professional,
including trainees.
Expansion also brought with it certain
other challenges. We recorded a slight
fall in our employee approval index in
the Organizational Climate Survey
carried out by an independent
company ­ from 73%, in 2004, to 70%.
Although we are still a market
reference, this decline is a signal that
we need to improve employee
relations. Nevertheless, we maintained
our capacity to retain and attract
talent. Proof of this comes from the
stability of our turnover rate, which
dipped from 7.81%, in 2004, to 7.64%
in 2005, and the increase in the
number of applicants for our Intern
and Trainee Program, which had
44,884 subscribers, 16.9% more than
in 2004.
CAGR (2002 - 2005) = 17.4%
1. Consultoras na Argentina, Brasil, Chile e Peru.
Distribution of Wealth ­
Consultants(1) (R$ million)
CAGR (2002 - 2005) = 32.1%
Total Number of Consultants(1)
(thousands)
600
500
200
100
0
400
300
321
375
433
519
2003
2002
2004
2005
1,750
1,500
500
250
0
1,250
1,000
750
585.5
795.8
1,059.3
1,348.8
2003
2002
2004
2005
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+
27.3%
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Suppliers
As a means of strengthening our
relations with suppliers, we expanded
and improved our cer tification
process in such aspects as quality,
logistics, innovation, contracts, service
and trackability. The aim was to
recognize their efforts to improve the
quality of the products or services
they supply. In 2005, the number of
certified suppliers increased by 60%
over the year before. At the same
time,
the number of suppliers
registered to work with Natura
tripled, after obtaining sufficient points
in areas that included, in addition to
product and service quality, social and
environmental responsibility.
Among these suppliers, there is one
par ticular group with whom we
maintain a special relationship ­ the
communities who extract the Brazilian
biodiversity assets used in our
products. The company in association
with the communities themselves,
NGOs and the government, is
constructing a model that will ensure
sustainable extraction. Despite the
progress we achieved in 2005, there is
still much to do, including identifying
the needs of both sides and defining
the best way to improve relations.
One highlight was that Natura was the
first sector company in Brazil to be
granted Ministry of Environment
authorization to access the country's
genetic biodiversity heritage (the
active ingredient, breu branco resin).
Recognition
Throughout 2005, the quality of our
relations with our various
constituencies was recognized by
various sectors of society. Natura
confirmed its position as the best
company for women to work for, it
remained among the country's most
admired companies and was also
among those who contributed most
to improving good corporate
citizenship. We also received awards
for our Investor Relations area and our
Annual Report.
The company's greatest intangible
asset, the Natura brand name, is
playing a major role in our
international expansion strategy and
we are therefore giving special
attention to strengthening it. In
recognition of this effort, Natura was
elected as one of Brazil's most
admired and desired brands by
various research institutes and
communications vehicles.
Relations with
Independent Auditors
In line with CVM Instruction 381, we
hereby declare that the company's
independent auditors, Deloitte Touche
Tohmatsu, did not supply any non-
auditing services during 2005.
The company's policy of not hiring
such services from the independent
auditors prevents any conflict of
interest and loss of independence or
objectivity.
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management
report
natura
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