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Natura Cosméticos S.A.
Financial Statements for the Years Ended
December 31, 2006 and 2005 and
Independent Auditors' Report







Deloitte Touche Tohmatsu Auditores Independentes
(Convenience Translation into English from the
Original Previously Issued in Portuguese)
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(Convenience Translation into English from the Original Previously Issued in Portuguese)
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Natura Cosméticos S.A.
São Paulo - SP
1. We have audited the accompanying individual (Company) and consolidated balance sheets
of Natura Cosméticos S.A. and subsidiaries as of December 31, 2006 and 2005, and the
related statements of income, changes in shareholders' equity (Company), and changes in
financial position for the years then ended, all expressed in Brazilian reais and prepared
under the responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements.
2. Our audits were conducted in accordance with auditing standards in Brazil and comprised:
(a) planning of the work, taking into consideration the significance of the balances, volume
of transactions, and the accounting and internal control systems of the Company and its
subsidiaries, (b) checking, on a test basis, the evidence and records that support the amounts
and accounting information disclosed, and (c) evaluating the significant accounting
practices and estimates adopted by management, as well as the presentation of the financial
statements taken as a whole.
3. In our opinion, the financial statements referred to in paragraph 1 present fairly, in all
material respects, the individual (Company) and consolidated financial positions of Natura
Cosméticos S.A. and subsidiaries as of December 31, 2006 and 2005, and the results of their
operations, the changes in shareholders' equity (Company), and the changes in their
financial position for the years then ended, in conformity with Brazilian accounting
practices.
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Deloitte Touche Tohmatsu
2
4. Our audits were conducted for the purpose of forming an opinion on the basic financial
statements referred to in paragraph 1 taken as a whole. The accompanying statements of
cash flows and value added, individual (Company) and consolidated, for the years ended
December 31, 2006 and 2005, are being presented in Appendixes I and II, respectively, for
purposes of additional analysis and are not a required part of the basic financial statements
in conformity with Brazilian accounting practices. Such information has been subjected to
the auditing procedures described in paragraph 2 and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements for the years ended December
31, 2006 and 2005 taken as a whole.
5. The accompanying financial statements have been translated into English for the
convenience of readers outside Brazil.
São Paulo, February 28, 2007
DELOITTE TOUCHE TOHMATSU
Edimar Facco
Auditores Independentes
Engagement Partner
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(Convenience Translation into English from the Original Previously Issued in Portuguese)
NATURA COSMÉTICOS S.A.
BALANCE SHEETS AS OF DECEMBER 31, 2006 AND 2005
(In thousands of Brazilian reais - R$)
ASSETS
2006
2005
2006
2005
LIABILITIES AND SHAREHOLDERS' EQUITY
2006
2005
2006
2005
CURRENT ASSETS
CURRENT LIABILITIES
Cash and banks
43,176
38,882
65,293
56,198
Loans and financing (Note 14)
45,052
44,942
75,888
68,309
Cash investments (Note 5)
90,186
237,084
209,863
330,241
Domestic suppliers
48,679
38,070
208,739
148,045
Trade accounts receivable (Note 6)
356,181
302,688
374,168
316,264
Foreign suppliers
-
-
5,518
4,869
Inventories (Note 7)
28,659
835
237,091
152,307
Suppliers - related parties (Note 10)
168,927
124,241
-
-
Recoverable taxes (Note 8)
1,517
508
38,687
23,967
Salaries, profit sharing and related charges (Note 17)
34,229
30,074
88,718
72,328
Advances to employees and suppliers
9,939
3,312
12,705
5,331
Taxes payable (Note 15)
80,490
75,536
95,672
89,125
Related parties (Note 10)
7,140
4,850
-
-
Dividends (Notes 10 and 19.d.)
213,813
195,070
213,813
195,070
Deferred income and social contribution taxes (Note 9.a.)
17,860
16,404
32,236
25,757
Interest on capital (Notes 10, 19.c. and 19.d.)
-
17,699
-
17,699
Other receivables
8,462
8,160
20,535
14,799
Accrued freight
18,805
13,786
18,944
13,786
Total current assets
563,120
612,723
990,578
924,864
Sundry accruals
2,726
8,863
3,739
9,026
Other payables
17,130
12,780
18,522
13,564
NONCURRENT ASSETS
Allowance for losses on swap and forward transactions (Notes 22.b. and 22.d.)
1,993
2,703
2,185
2,703
Long-term assets:
Total current liabilities
631,844
563,764
731,738
634,524
Receivables from shareholders (Notes 10.f. and 19.b.)
20
130
20
130
Advance for future capital increase (Notes 10.d. and 10.e.)
590
1,007
-
-
NONCURRENT LIABILITIES
Recoverable taxes (Note 8)
1,990
1,432
20,981
9,574
Loans and financing (Note 14)
28
44,290
127,077
119,156
Deferred income and social contribution taxes (Note 9.a.)
20,692
17,680
35,809
29,324
Allowance for losses on subsidiaries (Note 11)
4,565
4,202
-
-
Escrow deposits (Note 16)
193
-
250
-
Reserve for tax, civil and labor contingencies (Note 16)
34,775
30,253
49,093
61,122
Advances to suppliers
1,639
-
2,715
-
Other payables
3,219
1,806
4,348
3,232
Other receivables
-
-
557
526
Total noncurrent liabilities
42,587
80,551
180,518
183,510
Cash investments (Note 5 and 16.i.)
-
-
4,336
3,968
Permanent assets
MINORITY INTEREST
-
-
4
8
Investments (Note 11)
707,422
516,929
630
8
Property, plant and equipment (Note 12)
26,190
14,415
471,901
348,911
SHAREHOLDERS' EQUITY
Intangible assets (Note 12)
3,550
3,259
25,034
22,126
Capital (Note 19.a.)
233,862
230,762
233,862
230,762
Total noncurrent assets
762,286
554,852
562,233
414,567
Capital reserves (Notes 19.b. and 19.f.)
134,867
120,678
134,861
120,678
Profit reserves (Notes 19.g. and 19.h.)
282,480
172,589
272,062
170,718
Treasury shares (Note 19.e.)
(234)
(769)
(234)
(769)
Total shareholders' equity
650,975
523,260
640,551
521,389
TOTAL ASSETS
1,325,406
1,167,575
1,552,811
1,339,431
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
1,325,406
1,167,575
1,552,811
1,339,431
The accompanying notes and Attachments are an integral part of these financial statements.
Company
Consolidated
Company
Consolidated
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(Convenience Translation into English from the Original Previously Issued in Portuguese)
NATURA COSMÉTICOS S.A.
Note
2006
2005
2006
2005
Gross sales to domestic market
3,731,862
3,127,462
3,754,968
3,149,654
Gross sales to foreign market
-
-
133,604
92,616
Other sales
1
1
1,388
1,341
GROSS OPERATING REVENUES
3,731,863
3,127,463
3,889,960
3,243,611
Taxes on sales, returns and rebates
(837,107)
(721,114)
(1,132,973)
(961,447)
NET OPERATING REVENUES
2,894,756
2,406,349
2,756,987
2,282,164
Cost of sales
(1,161,087)
(960,012)
(891,317)
(731,134)
GROSS PROFIT
1,733,669
1,446,337
1,865,670
1,551,030
OPERATING (EXPENSES) INCOME
Selling
(730,986)
(606,509)
(885,749)
(722,474)
General and administrative
(442,924)
(316,767)
(330,845)
(260,545)
Employee profit sharing (Note 17)
17
(11,866)
(11,209)
(37,353)
(28,577)
Management compensation
(8,569)
(7,467)
(12,385)
(12,289)
Equity in subsidiaries (Note 11)
11
28,229
(6,741)
-
-
Other operating expenses, net
(1,514)
(3,640)
(388)
(5,535)
INCOME FROM OPERATIONS BEFORE FINANCIAL EFFECTS
566,039
494,004
598,950
521,610
Financial income (Note 23)
23
26,707
31,470
43,391
54,714
Financial expenses (Note 23)
23
(13,239)
(11,800)
(33,453)
(43,453)
INCOME FROM OPERATIONS
579,507
513,674
608,888
532,871
Nonoperating income (expenses), net
688
(212)
909
(1,242)
INCOME BEFORE TAXES ON INCOME
580,195
513,462
609,797
531,629
Income and social contribution taxes (Note 9.b.)
9.b
(110,869)
(116,105)
(149,023)
(134,747)
NET INCOME BEFORE MINORITY INTEREST
469,326
397,357
460,774
396,882
Minority interest
-
-
(1)
(1)
NET INCOME
469,326
397,357
460,773
396,881
EARNINGS PER SHARE - R$ (*)
1.0978
0.9349
1.0778
0.9338
The accompanying notes and Attachments are an integral part of these financial statements.
Company
Consolidated
(*) Earnings per share for the year ended December 31, 2005 were calculated considering the effect of the stock split occurred on
March 29, 2006, as detailed in Note 19.a.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(In thousands of Brazilian reais - R$, except for earnings per share)
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(Convenience Translation into English from the Original Previously issued in Portuguese)
NATURA COSMÉTICOS S.A.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (COMPANY)
Treasury
Share
Investment
Retained
Note
Capital
shares
premium
grants
Legal
Retention
earnings
Total
BALANCES AS OF DECEMBER 31, 2004
230,762
(3,655)
105,673
9,998
18,650
76,024
-
437,452
Sale of treasury shares by exercise of stock options (Note 19.e.)
19.e
-
337
4,537
-
-
-
-
4,874
Payment of receivables from shareholders (Note 19.b.)
19.b
-
2,053
249
-
-
-
-
2,302
Tax incentives
-
-
-
717
-
-
-
717
Net income
-
-
-
-
-
-
397,357
397,357
Allocation of net income:
Dividends - R$0.6714 per outstanding share (Note 19.d.) (*)
19.d
-
-
-
-
-
-
(285,237)
(285,237)
Interest on capital - R$0.0801 per outstanding share (Notes 19.c. and 19.d.) (*)
19.c, 19.d
-
-
-
-
-
-
(34,205)
(34,205)
Profit retention reserve (Note 19.h.)
19.h
-
-
-
-
-
77,915
(77,915)
-
BALANCES AS OF DECEMBER 31, 2005
230,762
(1,265)
110,459
10,715
18,650
153,939
-
523,260
Sale of treasury shares by exercise of stock options (Note 19.e.)
19.e
-
541
8,039
-
-
-
-
8,580
Payment of receivables from shareholders (Note 19.b.)
19.b
-
-
2,272
-
-
-
-
2,272
Capital increase through subscription of shares (Note 19.a.)
19.a
3,100
-
-
-
-
-
-
3,100
Tax incentives
-
-
-
3,872
-
-
-
3,872
Net income
-
-
-
-
-
-
469,326
469,326
Allocation of net income:
Dividends - R$0.7630 per outstanding share (Note 19.d.)
19.d
-
-
-
-
-
-
(325,866)
(325,866)
Interest on capital - R$0.0787 per outstanding share (Notes 19.c. and 19.d.)
19.c, 19.d
-
-
-
-
-
-
(33,569)
(33,569)
Profit retention reserve (Note 19.h.)
19.h
-
-
-
-
-
109,891
(109,891)
-
BALANCES AS OF DECEMBER 31, 2006
233,862
(724)
120,770
14,587
18,650
263,830
-
650,975
The accompanying notes and Attachments are an integral part of these financial statements.
(*) The dividends and interest on capital - gross per share for the year ended December 31, 2005 are adjusted according to the stock split on March 29, 2006, to allow the comparison with the year ended December 31, 2006,
as detailed in Note 19.a.
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(In thousands of Brazilian reais - R$, except for the dividends and interest on capital per share)
Capital reserves Profit reserves
5
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(Convenience Translation into English from the Original Previously Issued in Portuguese)
NATURA COSMÉTICOS S.A.
STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(In thousands of Brazilian reais - R$)
2006
2005
2006
2005
SOURCES OF FUNDS
From operations:
Net income
469,326
397,357
460,773
396,881
Items not affecting working capital:
Depreciation and amortization (Note 12)
6,966
4,989
54,601
44,035
Monetary and exchange variations, net, except those referring to tax, civil and
labor contingencies
(506)
3,130
(73)
4,087
Reserve for tax, civil and labor contingencies, including monetary variation on those
reserves (Note 16)
8,547
14,074
12,998
31,040
Deferred income and social contribution taxes (Note 9.a.)
(3,012)
(5,056)
(6,485)
(8,023)
Equity in subsidiaries (Note 11)
(28,229)
6,741
-
-
Proceeds from sale and disposal of property, plant and equipment and intangible assets
2,141
559
3,881
3,056
Minority interest
-
-
(4)
1
455,233
421,794
525,691
471,077
From shareholders:
Capital increase through subscription of shares (Note 19.a.)
3,100
-
3,100
-
Sale of treasury shares by exercise of stock options (Note 19.e.)
8,581
4,887
8,581
4,887
Payment of receivables from shareholders (Note 19.b.)
2,272
2,288
2,272
2,288
From third parties:
Reclassification of recoverable taxes from property, plant and equipment to current and
noncurrent assets
-
-
10,536
-
Increase in noncurrent liabilities
830
25,007
31,570
119,016
Tax incentives
3,872
717
3,872
717
Total sources
473,888
454,693
585,622
597,985
USES OF FUNDS
Acquisition of property, plant and equipment and intangible assets (Note 12)
21,165
9,991
193,596
111,636
Increase in investments (Note 11)
163,423
149,425
-
-
Increase in noncurrent assets (long-term assets)
1,925
1,639
14,232
7,291
Decrease in noncurrent liabilities
1,274
-
29,119
-
Transfer from noncurrent to current liabilities
44,348
-
20,740
78,783
Dividends proposed and paid (Note 19.d.)
325,866
285,237
325,866
285,237
Interest on capital proposed and paid (Notes 19.c. and 19.d.)
33,569
34,205
33,569
34,205
Total uses
591,570
480,497
617,122
517,152
(DECREASE) INCREASE IN WORKING CAPITAL
(117,682)
(25,804)
(31,500)
80,833
REPRESENTED BY
(Decrease) increase in current assets
(49,602)
168,867
65,714
268,425
Increase in current liabilities
68,080
194,671
97,214
187,592
(DECREASE) INCREASE IN WORKING CAPITAL
(117,682)
(25,804)
(31,500)
80,833
The accompanying notes and Attachments are an integral part of these financial statements.
Company
Consolidated
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(Convenience Translation into English form the Original Previously Issued in Portuguese)
NATURA COSMÉTICOS S.A.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Amounts in thousands of Brazilian reais - R$, unless otherwise stated)
1. OPERATIONS
Natura Cosméticos S.A. (the "Company") and its subsidiaries are engaged in the
development, production, distribution and sale, substantially through direct sales by Natura
beauty consultants, of cosmetics, fragrances, hygiene and health products. The Company
also holds equity interests in other companies in Brazil and abroad.
2. PRESENTATION OF FINANCIAL STATEMENTS
The financial statements have been prepared and are presented in conformity with Brazilian
accounting practices and standards established by the Brazilian Securities Commission
(CVM). These financial statements reflect the changes introduced by the following
accounting standards: (i) Accounting Standards and Procedures - NPC No. 27 -
"Presentation and Disclosures", issued by the IBRACON - Brazilian Institute of
Independent Auditors on October 3, 2005, approved by CVM Resolution No. 488 on the
same date; and (ii) NPC No. 22 - "Provisions, Liabilities, Contingent Liabilities and
Contingent Assets", issued by IBRACON on October 3, 2005, approved by CVM
Resolution No. 489 on the same date. Certain reclassifications have been made to the
financial statements for the year ended December 31, 2005, presented for comparative
purposes, to conform them to the aforementioned Resolutions and allow comparison with
the year of 2006. The main changes resulting from applying these Resolutions are as
follows:
· Presentation of the group "Noncurrent" in assets and liabilities.
· Presentation of "Intangible Assets" in the "Noncurrent" group.
· Reclassification of escrow deposits, previously classified in assets, to liabilities as a
reduction of the account "Reserve for tax, civil and labor contingencies", where
applicable.
Certain account captions and groups in the statements of income, changes in financial
position and cash flows have been changed in relation to the prior year, for better
classification and presentation. In the statement of income, administrative expenses were
reclassified to selling expenses, although without changing total operating expenses. The
changes made include the 2005 information to allow comparability between years. These
changes did not affect the group balances or the grand totals, except for the cash flows for
the year ended December 31, 2005, in which payments of swap and forward contracts were
reclassified from operating activities to financing activities, changing the subtotals
previously disclosed, although without changing the total variation in cash and cash
equivalents.
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Natura Cosméticos S.A.
8
The information presented referring to 2005 is already adjusted to reflect the effects of the
stock split on March 29, 2006. The details are disclosed in Note 19.a.
Until December 31, 1995, the generally accepted accounting principles in Brazil established
a simplified methodology for the recording of inflation effects determined to that date. This
methodology, named monetary restatement of the balance sheet, consisted of the
restatement of permanent assets (investments, property, plant and equipment, and deferred
charges) and shareholders' equity accounts at the indexes disclosed by the Federal
Government. The net effect of the monetary restatement was accounted for in the statements
of income in a specific account under the heading "Monetary restatement of the balance
sheet". This monetary restatement was prohibited by Law No. 9,249, of December 26, 1995,
effective January 1, 1996.
3. SIGNIFICANT ACCOUNTING PRACTICES
a) Results of operations
Determined on the accrual basis of accounting.
b) Cash investments
Consists of highly liquid temporary investments, except for the long-term investments,
stated at cost plus income earned through the balance sheet dates.
c) Allowance for doubtful accounts
Recognized based on an analysis of risks on realization of receivables, in an amount
considered sufficient to cover possible losses.
d) Inventories
Stated at the average cost of acquisition or production, adjusted to market value and for
possible losses, when applicable.
e) Investments
Investments in subsidiaries are accounted for under the equity method, as shown in
Note 11.
f) Property, plant and equipment and intangible assets
Recorded at acquisition cost monetarily restated through December 31, 1995, plus
interest capitalized during the construction period, when applicable and goodwill on
acquisition of investment and business lease. Depreciation and amortization are
calculated under the straight-line method, based on the estimated economic useful lives
of the assets, at the rates shown in Note 12.
g) Deferred charges
Represented by goodwill arising from the merger of shares of Natura Empreendimentos
S.A. into Natura Participações S.A., less the provision for maintenance of dividend
payment capacity, as described in Note 13.
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Natura Cosméticos S.A.
9
h) Current and noncurrent liabilities
Stated at known or estimated amounts, plus, if applicable, interest and monetary and
exchange variations incurred through the balance sheet dates.
i) Income and social contribution taxes
The provision for income tax was recorded at the rate of 15%, plus a 10% surtax on
annual taxable income exceeding R$240. Social contribution tax was calculated at the
rate of 9% of taxable income. Deferred income and social contribution taxes recorded in
current and noncurrent assets result from expenses recorded in income, although
temporarily nondeductible for tax purposes. Additionally, deferred income and social
contribution taxes were recorded on tax loss carryforwards.
Pursuant to CVM Resolution No. 273/98 and CVM Instruction No. 371/02, deferred
taxes are recorded at their probable realizable values, as detailed in Note 9.
j) Loans and financing
Adjusted based on exchange and monetary variations and interest incurred through the
balance sheet dates, as provided for by contract and mentioned in Note 14.
k) Reserves for tax, civil and labor contingencies
Updated through the balance sheet dates based on the probable amount of loss,
according to their natures and supported by the opinion of the Company's attorneys. For
purposes of the financial statements, they are presented net of related escrow deposits.
The grounding and nature of the reserve for tax, civil and labor contingencies are
described in Note 16.
l) Swap and forward transactions
The nominal values of swap and forward transactions are not recorded in the balance
sheet. Unrealized gains or losses on these transactions are recorded on the accrual basis
of accounting, as mentioned in Notes 22.b. and 22.d.
m) Financial income and expenses
Represented by interest and monetary and exchange variations on cash investments,
escrow deposits and loans and financing and swap and forward contracts as mentioned
in Note 23.
n) Interest on capital
For corporate purposes, interest on capital is accounted for as allocation of income in
shareholders' equity. For tax purposes, interest on capital is treated as financial expense,
reducing the income and social contribution tax basis.
o) Earnings per share
Calculated based on the number of shares at the balance sheet dates, excluding treasury
shares.
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Natura Cosméticos S.A.
10
p) Supplementary information
In order to permit additional analysis, the Company presents, as supplementary
information, the individual and consolidated statements of cash flows (Attachment I)
and value added (Attachment II).
q) Use of estimates
The preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities as of the date of the financial statements, and the
reported amounts of revenues and expenses for the reporting periods. Since
management's judgment involves estimates of the probability of future events, actual
results may differ from the estimates.
4. CONSOLIDATION CRITERIA
The consolidated financial statements have been prepared in accordance with the
consolidation principles established by Brazilian accounting practices and regulatory
instructions and resolutions established by the CVM, and include the financial statements of
the Company and its direct and indirect subsidiaries, as follows:
Ownership
interest - %
2006 2005

Direct:
Indústria e Comércio de Cosméticos Natura Ltda.
99.99
99.82
Natura Cosméticos S.A. - Chile
99.99
99.96
Natura Cosméticos S.A. - Peru
99.94
99.93
Natura Cosméticos S.A. - Argentina
99.91
95.00
Natura Brasil Cosmética Ltda. - Portugal
98.00
99.99
Nova Flora Participações Ltda.
99.99 100.00
Natura Inovação e Tecnologia de Produtos Ltda.
99.99
99.99
Natura Europa SAS
100.00 100.00
Natura Cosméticos S.A. - Mexico
99.99
99.99
Natura Cosméticos C.A. - Venezuela
99.99
99.00
Natura Cosméticos Ltda. - Colombia
99.99
-
Indirect:
Natura Logística e Serviços Ltda.
99.99
99.99
Flora Medicinal J. Monteiro da Silva Ltda.
100.00 100.00
Ybios S.A. (proportional consolidation - joint control)
33.33
33.33
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Natura Cosméticos S.A.
11
The consolidated financial statements have been prepared based on the financial statements
as of the same date and consistent with the accounting practices described in Note 3.
Investments in subsidiaries were proportionally eliminated against shareholders' equity and
net income of the respective subsidiaries. Intercompany balances and transactions and
unrealized profits were also eliminated. The minority interest in the Company's subsidiaries
was shown separately. The financial statements of foreign subsidiaries were translated into
Brazilian reais at the exchange rates in effect on the date of the related financial statements.
The shareholders' equity balances as of December 31, 2006 and 2005, reported by the
Company, differ by R$10,424 and R$1,871, respectively, from those recorded in the
consolidated financial statements due to the elimination of unrealized profits in the
inventories of subsidiaries and the Company.
For the same reason net income balances
reported by the Company as of December 31, 2006 and 2005 differ by R$8,553 and R$476,
respectively, from the balances in the consolidated financial statements.
Net income
Shareholders' equity
2006 2005 2006 2005
Company
469,326 397,357 650,975 523,260
Elimination of unrealized profits of the
subsidiary Indústria e Comércio de
Cosméticos Natura Ltda. with the Company
and other subsidiaries
(8,553) (476) (10,424) (1,871)
Consolidated 460,773 396,881 640,551 521,389
The operations of the direct and indirect subsidiaries are as follows:
· Indústria e Comércio de Cosméticos Natura Ltda.: engaged principally in the production
and sale of Natura products to Natura Cosméticos S.A. - Brazil, Natura Cosméticos S.A.
- Chile, Natura Cosméticos S.A. - Peru, Natura Cosméticos S.A. - Argentina, Natura
Cosméticos S.A. - Mexico and Natura Europa SAS, whose amounts are mentioned in
Note 10.
· Natura Cosméticos S.A. - Chile, Natura Cosméticos S.A. - Peru, Natura Cosméticos S.A.
- Argentina, Natura Brasil Cosmética Ltda. - Portugal (as of December 31, 2006 this
company has no activities currently), Natura Cosméticos C.A. - Venezuela (as of
December 31, 2006 currently in the preoperating stage) and Natura Cosméticos Ltda. -
Colombia (as of December 31, 2006 currently in the preoperating stage): their activities
are an extension of the activities conducted by the parent company Natura Cosméticos
S.A. - Brazil.
· Nova Flora Participações Ltda.: holds equity interest in the subsidiary Flora Medicinal J.
Monteiro da Silva Ltda.
· Natura Inovação e Tecnologia de Produtos Ltda.: its activities consist of product and
technology development and market research.
· Natura Europa SAS: engaged in the purchase, sale, import, export and distribution of
cosmetics, fragrances in general, hygiene and health products.
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Natura Cosméticos S.A.
12
· Natura Cosméticos S.A. - Mexico: engaged in the purchase, sale, import, export,
distribution and storage of cosmetics, fragrances in general, hygiene and health products.
· Natura Logística e Serviços Ltda.: engaged in the provision of administrative and
logistics services.
· Flora Medicinal J. Monteiro da Silva Ltda.: engaged in the sale of phytotherapic and
phytocosmetic products of its own brand. Since 2005 this company has had no activities.
· Ybios S.A.: engaged in research, management and development of projects, products and
services in the biotechnology area, and may also enter into agreements and/or
partnerships with universities, foundations, companies, cooperatives, associations, and
other public and private entities, provision of services in the biotechnology area, and
holding of equity interest in other companies.
5. CASH INVESTMENTS
Company
Consolidated
2006 2005 2006 2005
Bank certificates of deposit (CDBs)
79,338 228,106 203,351 325,231
Investment funds
10,848 8,978 10,848 8,978
90,186 237,084 214,199 334,209
Noncurrent
(Note
16.i.)
-
- 4,336 3,968
Current 90,186 237,084 209,863 330,241
As of December 31, 2006, CDBs yield interest rates ranging from 100.0% to 102.0%
(100.0% to 102.5% as of December 31, 2005) of the interbank deposit rate (CDI), and the
share in the total investment portfolio is 94.9% (97.3% as of December 31, 2005).
Weighted-average yield of investment fund investments is 98.3% of the CDI (Interbank
Deposit Rate) (101.3% as of December 31, 2005).
6. TRADE ACCOUNTS RECEIVABLE
Company
Consolidated
2006 2005 2006 2005
Trade accounts receivable
379,023 322,228 399,209 337,104
Allowance for doubtful accounts
(22,842) (19,540) (25,041) (20,840)
356,181 302,688 374,168 316,264
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Natura Cosméticos S.A.
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The changes in the allowance for doubtful accounts for the year ended December 31, 2006
are as follows:
Company
2005
Additions
(*) Reversals
Write-offs
(**) 2006
Allowance for doubtful accounts (19,540)
(40,091)
1,286 35,503 (22,842)
Consolidated
2005
Additions
(*) Reversals
Write-offs
(**) 2006
Allowance for doubtful accounts (20,840)
(40,990)
1,286 35,503 (25,041)
(*) Provision
recognized
according to Note 3.c.
(**) Refers to notes more than 180 days past due, written off due to nonreceipt.

7. INVENTORIES
Company
Consolidated
2006 2005 2006 2005
Finished products
23,280
814 155,733
88,471
Raw materials and packaging
-
-
77,176
66,162
Promotional material
5,525
21
14,847
7,976
Work in process
-
-
7,300
6,037
Allowance for losses
(146)
- (17,965) (16,339)
28,659 835 237,091 152,307
The changes in the allowance for inventory losses for the year ended December 31, 2006 are
as follows:
Company
2005
Additions,
net (*)
Write-offs
(**) 2006
Total of allowance for inventory losses
- (476) 330 (146)
Consolidated
2005
Additions,
net (*)
Write-offs
(**) 2006
Total of allowance for inventory losses
(16,339)
(17,942) 16,316 (17,965)
(*) Refers mainly to the recognition of the reserve for discontinuance, expiration and
quality losses, according to actual need and the policy established by the Company and
its subsidiaries.
(**) Refers to write-offs of products discarded by the Company and its subsidiaries.
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Natura Cosméticos S.A.
14
8. RECOVERABLE TAXES
Company
Consolidated
2006 2005 2006 2005
ICMS (State VAT) on purchases of fixed assets
2,653 1,918 16,838 11,581
ICMS (State VAT) on purchases of goods
811
22 13,382
6,946
IVA - value-added tax (foreign operations)
-
-
8,089
2,914
COFINS (tax on revenue) on fixed asset acquisitions
-
- 10,858
420
PIS (tax on revenue) and COFINS on purchases of goods
35
-
325
2,185
IRPJ (income tax)
-
-
1,868
3,580
PIS/COFINS/CSLL - withheld at source
-
-
1,782
860
PIS on fixed asset acquisitions
-
-
2,357
91
IPI (Federal VAT)
-
-
895
-
CSLL (social contribution tax)
-
-
725
3,091
Recoverable INSS (social security contribution)
8
-
170
72
IRRF (withholding income tax)
-
-
-
776
Other
- - 2,379 1,025
3,507 1,940 59,668 33,541
Noncurrent 1,990 1,432
20,981
9,574
Current 1,517 508 38,687 23,967
The Company and its subsidiaries recorded in 2006 PIS and COFINS credits on fixed assets
acquisitions made between December 2002 and December 2006, previously classified in
property, plant and equipment. The net effect on consolidated property, plant and
equipment, net of depreciation, arising from the recognition of these credits, was a decrease
of R$13,825.
ICMS, PIS and COFINS credits on fixed asset acquisitions are offset at the rate of 1/48 per
month, pursuant to rules established in prevailing legislation.
9. INCOME AND SOCIAL CONTRIBUTION TAXES
a) Deferred
Deferred income (IRPJ) and social contribution (CSLL) taxes recorded in the financial
statements result from temporary differences (Company and subsidiaries) and tax loss
carryforwards (subsidiaries). These credits are recorded in current and noncurrent assets,
in view of their expected realization based on projections of taxable income, considering
the limit of 30% for annual offset of tax loss carryforwards against taxable income,
pursuant to applicable legislation. The amounts are as follows:
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Natura Cosméticos S.A.
15
Company
Consolidated
2006 2005 2006 2005
Current:
Tax loss carryforwards
-
-
-
1,089
Temporary differences:
Allowance for doubtful accounts (Note 6)
7,766
6,644
7,766
6,644
Allowance for inventory losses (Note 7)
50
-
6,108
5,555
Effects of unrealized profits in the inventories of
the Company (Note 4)
-
- 5,370
-
Allowance for losses on swap and forward
contracts (Notes 22.b. and 22.d.)
678
919
743
919
Other provisions
9,366 8,841 12,249 11,550
Deferred income and social contribution taxes
17,860 16,404 32,236 25,757
Noncurrent:
Tax loss carryforwards
-
-
-
375
Temporary differences:
Reserves for tax, civil and labor contingencies
(Note 16)
19,554 16,847 34,635 27,809
Other provisions
1,138 833 1,174 1,140
Deferred income and social contribution taxes
20,692 17,680 35,809 29,324
As required by CVM Resolution No. 273/98 and CVM Instruction No. 371/02,
management, based on projections of results, estimates that the recorded tax credits will
be fully realized within five years. The amounts recorded in noncurrent assets will be
realized as follows:
Consolidated
2006 2005
2007 - 19,850
2008 26,774
2,146
2009
6,168
5,571
2010
2,867 1,757
35,809 29,324
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Natura Cosméticos S.A.
16
b) Current expense
Reconciliation of income and social contribution taxes
Company
Consolidated
2006 2005 2006 2005
Income before taxes on income
580,195
513,462 609,797 531,629
Income and social contribution taxes at
the rate of 34%
(197,266) (174,576) (207,331) (180,753)
Reversal of provision for maintenance of
dividend payment capacity (Note 13)
49,933
49,933
49,933
49,933
Technological research and innovation
benefit - Law No. 11.196/05 (*)
15,370
-
15,370
-
Interest on capital (Notes 19.c. and 19.d.)
11,413
11,630
11,413
11,630
Tax incentives (donations)
2,564
2,147
2,957
2,268
Equity in subsidiaries and exchange
variation on translation of foreign
investments (Note 11)
9,084
(3,530)
-
-
Permanent
differences
(2,049)
(1,700) (2,843) (1,932)
Losses generated by subsidiaries
-
- (23,091) (15,952)
Other
82 (9) 4,569 59
Income and social contribution taxes - net
expenses (110,869) (116,105) (149,023) (134,747)
Income and social contribution taxes -
current
(115,337) (125,367) (161,387) (146,897)
Income and social contribution taxes -
deferred
4,468
9,262 12,364 12,150
Income and social contribution taxes - net
expenses (110,869) (116,105) (149,023) (134,747)
Effective rate - %
19.1 22.6
24.4
25.3
(*) Refers to the tax benefit established by Law No. 11,196/05, which allows for the
direct deduction in the calculation of taxable income and the social contribution tax
basis from the amount corresponding to 60% of the total expenses on technological
research and innovation, observing the rules established in said Law.
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Natura Cosméticos S.A.
17
10. RELATED PARTIES
Receivables from and payables to related parties are as follows:
Company
Consolidated
2006 2005 2006 2005
Current assets:
Related parties:
Natura Logística e Serviços Ltda. (a)
3,209
2,806
-
-
Natura Inovação e Tecnologia de Produtos
Ltda. (b)
3,098
1,211 - -
Nova Flora Participações Ltda. (c)
833 833 - -
7,140 4,850 - -
Advance for future capital increase:
Nova Flora Participações Ltda. (d)
162
1,007
-
-
Natura Cosméticos Ltda. - Colombia (e)
428
- - -
590 1,007 - -
Receivables from shareholders (f)
20 130 20 130
Current liabilities:
Suppliers:
Indústria e Comércio de Cosméticos Natura
Ltda. (g)
132,221 106,470
-
-
Natura Logística e Serviços Ltda. (h)
16,615
9,259
-
-
Natura Inovação e Tecnologia de Produtos
Ltda. (i)
20,091 8,512 - -
168,927 124,241 - -
Dividends payable-
Shareholders
213,813 195,070 213,813 195,070
Interest on capital payable-
Shareholders
- 17,699 - 17,699
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Natura Cosméticos S.A.
18
Transactions with related parties are summarized as follows:
Product sales
Product purchases
2006 2005 2006 2005
Natura Cosméticos S.A.
-
- 1,381,926 1,111,577
Indústria e Comércio de Cosméticos
Natura
Ltda.
1,435,844 1,144,178 - -
Natura Cosméticos S.A. - Argentina
-
-
22,842
13,403
Natura Cosméticos S.A. - Peru
-
-
14,523
9,623
Natura Cosméticos S.A. - Chile
-
-
9,103
6,112
Natura Cosméticos S.A. - Mexico
-
-
6,138
1,865
Natura Europa SAS
-
-
817
923
Natura Inovação e Tecnologia de Produtos
Ltda.
- - 495 675
1,435,844
1,144,178 1,435,844
1,144,178

Product sales Product
purchases
2006 2005 2006 2005
Administrative structure: (j)
Natura Logística e Serviços Ltda.
261,776 172,383
-
-
Natura Cosméticos S.A.
-
- 184,186 124.082
Indústria e Comércio de Cosméticos Natura
Ltda.
-
- 55,209 34.264
Natura Inovação e Tecnologia de Produtos Ltda.
-
- 22,381 14.037
261,776 172,383 261,776 172.383
Product and technology research and
development: (k)
Natura Inovação e Tecnologia de Produtos Ltda. 152,781 113,596
-
-
Natura Cosméticos S.A.
-
- 152,781 113.596
152,781 113,596 152,781 113.596
Lease of properties and common charges: (l)
Indústria e Comércio de Cosméticos Natura
Ltda.
5,588
8,575
-
-
Natura Logística e Serviços Ltda.
-
-
3,238
5.695
Natura Inovação e Tecnologia de Produtos Ltda.
-
-
1,301
1.831
Natura Cosméticos S.A.
-
- 1,049 1.049
5,588 8,575 5,588 8.575
Total of service sales and purchases
420,145 294,554 420,145 294.554
(a) Refers to advances granted for provision of logistics and general administrative
services.
(b) Refers to advances granted for provision of product and technology development and
market research services.
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Natura Cosméticos S.A.
19
(c) Amount receivable due to the capital reduction made on January 30, 2004, approved by
the shareholders' meeting held on the same date.
(d) Cash contributions to Nova Flora Participações Ltda. mainly for maintenance of
working capital. In August 2006, cash contributions made in prior years were
capitalized.
(e) Refers to remittances made to Natura Cosméticos Ltda. - Colombia, necessary for the
start-up of activities in Colombia in 2006.
(f) On September 29, 2000, April 30, 2002, December 30, 2002 and January 5, 2004, under
a stock purchase and sale agreement, a financing in the total amount of R$6,174 was
made to two directors of the Company, with interest rate of 3% per year and maturities
between April 30, 2009 and September 30, 2010. This financing was granted to the
directors in order for them to acquire common shares in Natura Empreendimentos S.A.
and Natura Participações S.A. In the corporate restructuring completed in March 2004,
these shares were exchanged for common shares issued by Natura Cosméticos S.A. The
financing, in the amount of R$112 as of December 31, 2006 (R$2,493 as of December
31, 2005), is amortized with dividends and interest on capital paid by the Company to
those directors, based on the shares acquired by them and which are restricted.
(g) Payables for the purchase of products. Prices and terms are within normal market
conditions.
(h) Payables for services described in item (j).
(i) Payables for services described in item (k).
(j) Logistics and general administrative services.
(k) Product and technology development and market research services.
(l) Rental of part of the industrial complex located in Cajamar and buildings located in the
municipality of Itapecerica da Serra.
The main intercompany balances as of December 31, 2006 and 2005, as well as the
intercompany transactions that affected the results for the years, refer to transactions
between the Company and its subsidiaries, which were substantially carried out under usual
market conditions for each type of transaction.
11. INVESTMENTS
Company
Consolidated
2006 2005 2006
2005
Investments in subsidiaries
707,422 516,921
-
-
Others -
8
630
8
707,422 516,929
6,490 5,761
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Natura Cosméticos S.A.
20
Investments in direct subsidiaries are as follows:
Indústria e
Comércio de
Cosméticos
Natura
Ltda.
Natura
Cosméticos
S.A. - Chile
Natura
Cosméticos
S.A. - Peru
Natura
Cosméticos
S.A. -
Argentina
Natura
Cosméticos
C.A. -
Venezuela
Nova Flora
Participações
Ltda.
Natura
Inovação e
Tecnologia
de Produtos
Ltda.
Natura
Europa
SAS
Natura
Cosméticos
S.A. - Mexico
Natura Brasil
Cosmética
Ltda. - Portugal
Natura
Cosméticos
Ltda. - Colombia
Total
Shares of subsidiaries
526,155
53,167
2,277
20,314
4,999
3,450
5,008
48,929
32,601
113
1
Number of shares (common shares)
held 526,154
53,161
2,276
20,296
4,999
3,450
5,007
48,929
32,599
111
1
Ownership interest - %
99.99%
99.99%
99.94%
99.91%
99.99%
99.99%
99.99% 100.00%
99.99%
98.00%
99.99%
Capital
526,155
53,167
2,277
20,314
4,999
3,450
5,008
48,929
32,601
113
1 697,014
Shareholders' equity of subsidiaries
635,542
2,714 1,347 8,197 1,421 (4,541)
35,855
12,676
9,683
(1)
(23)
702,870
Share in shareholders' equity
635,541
2,714
1,346
8,189
1,421
(4,541)
35,852
12,676
9,683
(1)
(23) 702,857
Net income (loss) of subsidiaries, net
of exchange variation on translation
of foreign investments
67,188
(5,205)
421 (11,884)
(3,277)
(1,376)
13,723
(17,948)
(14,245)
(25)
(24)
27,348
Book value of Company's investment:
Balances as of December 31, 2005
473,827
1,453
947
83
245
-
22,130
13,400
4,808
28
- 516,921
Equity in subsidiaries
67,188
(5,205)
421
(11,874)
(3,277)
(505)
13,722
(17,948)
(14,245)
(24)
(24) 28,229
Exchange variation and other
adjustments on translation of
foreign investments
-
(127)
(22)
(770)
(64)
-
-
316
(843)
(5)
1 (1,514)
Change in investments in
subsidiaries (nonoperating
income)
871
- - - -
(871)
-
-
-
-
-
-
Recognition of provision for
losses
-
- - - - 339 -
-
-
1
23
363
Capital increase
93,655
6,593
-
20,750
4,517
1,037
-
16,908 19,963
-
- 163,423
Balances as of December 31, 2006
635,541
2,714
1,346
8,189
1,421
- 35,852
12,676
9,683
-
- 707,422
Provision for losses:
Balances as of December 31, 2005
-
-
-
-
-
(4,202)
-
-
-
-
- (4,202)
Reversal of provision for losses
-
-
-
-
-
(339)
-
-
-
(1)
(23) (363)
Balances as of December 31, 2006
-
-
-
-
-
(4,541)
-
-
-
(1)
(23) (4,565)
Net balances as of December 31, 2006
635,541
2,714
1,346
8,189
1,421
(4,541)
35,852
12,676
9,683
(1)
(23) 702,857
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Natura Cosméticos S.A.
21
12. PROPERTY, PLANT AND EQUIPMENT
Company
Annual
2006
2005
PROPERTY, PLANT
depreciation
Accumulated Net book
Accumulated Net book
AND EQUIPMENT
rate - %
Cost depreciation value
Cost depreciation value
Vehicles 20
a
33
19,598
8,357
11,241 16,412
6,022
10,390
Leasehold improvements
12
7,874
558
7,316
900
185
715
IT equipment
20
4,810
2,792
2,018
3,832
2,353
1,479
Furniture and fixtures
10
3,087
1,633
1,454
2,403
1,453
950
Machinery and equipment
10
1,646
311
1,335
1,064
191
873
Construction in progress
-
2,371
-
2,371
8
-
8
Advances to suppliers
-
455
-
455 -
-
-
39,841
13,651
26,190 24,619 10.204
14.415
Annual
2006
2005
depreciation
Accumulated Net book
Accumulated Net book
INTANGIBLE ASSETS
rate - %
Cost amortization value
Cost amortization value
Software 20
6,702
3,152
3,550
5,179 1,920
3,259
6,702
3,152
3,550
5,179 1,920
3,259
Consolidated
Annual
2006
2005
PROPERTY, PLANT
depreciation
Accumulated Net book
Accumulated Net book
AND EQUIPMENT
rate - %
Cost depreciation value
Cost depreciation value
Machinery and equipment
10
181,046
56,563 124,483
131,81
9 41,811
90,008
Buildings 4
144,684
30,309 114,375
144,14
0
24,618 119,522
Installations 10
79,547
33,065
46,482 67,884
27,040
40,844
Lands -
33,662
-
33,662 15,910
-
15,910
IT equipment
20
38,763
19,516
19,247 28,772
15,050
13,722
Vehicles 20
a
33
30,196
11,124
19,072 24,694
8,325
16,369
Molds 33
47,868
30,637
17,231 36,521
22,428
14,093
Furniture and fixtures
10
18,876
6,313
12,563 13,789
5,009
8,780
Leasehold improvements
12
12,694
1,380
11,314
1,028
204
824
Construction in progress
-
42,652
-
42,652
8,569
-
8,569
Advances to suppliers
-
26,764
-
26,764 16,813
-
16,813
Other
10
6,463
2,407 4,056 5,364
1,907 3,457
663,215
191,314 471,901 495,303 146,392 348,911
Annual
2006
2005
amortization Accumulated
Net
book Accumulated Net
book
INTANGIBLE ASSETS
rate - % Cost amortization
value Cost amortization value
Software 20
32,735
13,561
19,174
24,885 8,571
16,314
Patents
10 a 25
941
941
-
1,056
997
59
Goodwill on acquisition of
investment - Nova Flora (a)
- 8,015
8,015
-
8,015 8,015
-
Business lease - Natura
Europa (b)
-
5,860
-
5,860
5,753
-
5,753
47,551
22,417
25,034
39,709 17,583
22,126
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Natura Cosméticos S.A.
22
(a) The goodwill on the acquisition made by the subsidiary Nova Flora Participações Ltda.
was fully amortized in 2005, due to the low expectation of profitability from 2006
onwards. Liabilities related to this subsidiary are properly reflected in the consolidated
financial statements.
(b) The business lease generated on the purchase of a commercial location where Natura
Europa SAS operates is supported by an appraisal report issued by independent
appraisers, attributable to the fact that it is an intangible, marketable asset, which does
not suffer any decrease in value over time. The balance variation between December 31,
2005 and 2006 is basically due to the effects of the exchange variation for the period.


13. DEFERRED CHARGES
On March 5, 2004, Natura Participações S.A. was merged into the Company. Natura
Participações S.A. had recorded goodwill on the investment in Natura Empreendimentos
S.A., amounting to R$1,028,041, and a corresponding provision for maintenance of future
dividend payment capacity in the same amount. This goodwill arose from the merger of the
shares of Natura Empreendimentos S.A. into Natura Participações S.A. on December 27,
2000. This merger was approved by the Extraordinary Shareholders' Meeting held on that
date, and the amounts are supported by a valuation report issued by independent experts.
The amounts are as follows
:
Company
2006 2005
Goodwill on investments
611,929 758,792
Provision for maintenance of future dividend payment capacity
(611,929) (758,792)
- -
The provision for maintenance of future dividend payment capacity, as it is in the full
amount, will result in the recognition of the goodwill amortization tax benefits for all of the
Company's shareholders. The goodwill amount is being amortized over a seven-year period.
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Natura Cosméticos S.A.
23
14. LOANS AND FINANCING
Company
Consolidated
Type 2006 2005 2006 2005 Maturity Charges Guarantees
BNDES - EXIM
-
-
53,070
- April 2008
Interest of 2.6% p.y. + TJLP (long-term
interest rate) for 80% of the financing and
interest of 10.2% p.y. + exchange variation
for 20% of the financing
Exports and guarantee of Natura
Cosméticos S.A.
BNDES - PROGEREN (Support
Program for Enhancing Employment
and Income Capacity)
37,141
69,890
37,140
69,890 June 2007
Interest of 3.5% p.y. + TJLP
Bank guarantee
NCE (Export Credit Note)
-
-
36,635
31,641 April 2008
Interest of 104.7% of CDI (*)
Promissory notes and guarantee
of Natura Cosméticos S.A.
FINEP (Financing Agency for Studies
and Projects)
-
-
21,747
32,050 December 2008
Interest of 3.0% p.y. + TJLP
Guarantee, promissory notes and
receivables of Natura Cosméticos
S.A.
BNDES (Brazilian Bank for Economic
and Social Development)
7,939 19,342 20,258 34,994
October
2007
and April 2010
Interest of 4.0% p.y. + TJLP + UMBNDES
(**) for the maturity in October 2007 and
interest of 4.5% p.y. + TJLP + UMBNDES
for the maturity in April 2010
Mortgage (***)
FINEP II
-
-
17,623
- March 2013
TJLP
Guarantee of Natura Cosméticos
S.A. and bank guarantee
BNDES - FINAME (Government
Agency for Machinery and
Equipment Financing)
-
-
12,938
12,115 October 2006 to
April 2011
Interest of 4.5% p.y. + TJLP
Chattel mortgage, guarantee of
Natura Cosméticos S.A. and
promissory notes
Banco do Brasil (Brazilian Bank) -
FAT Fomentar (Employee Shelter
Fund)
-
-
2,568
- November 2013
Interest of 4.4% p.y. + TJLP
Chattel mortgage, guarantee of
Natura Cosméticos S.A. and
promissory notes
ACE (Advances on Export Contracts)
-
-
986
- January 2007
Interest of 5.4% p.y.+ exchange variation
Exports
Loans - Argentina
-
-
-
6,775 January 2006
Interest of 9.5% p.y. + exchange variation
(Argentinean pesos)
Guarantee of Natura Cosméticos
S.A.
Total
45,080
89,232
202,965 187,465
Current 45,052
44,942
75,888
68,309
Noncurrent
28 44,290
127,077 119,156
(*)
CDI - interbank certificate of deposit.
(**)
UMBNDES - BNDES monetary unit
. Financing in local currency from the BNDES is guaranteed mainly by the Cajamar Unit.
(***) Financing in local currency from the BNDES is guaranteed mainly by the Cajamar unit.
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Natura Cosméticos S.A.
24
Maturities of noncurrent debt are as follows:
Consolidated
2006 2005
2007 -
61,895
2008 55,534
49,107
2009 53,120
6,276
2010 7,409
1,878
2011 4,824
-
2012 4,743
-
2013
1,447 -
127,077 119,156
15. TAXES PAYABLE
Company
Consolidated
2006 2005 2006 2005
ICMS (State VAT)
65,151 58,163 64,789 58,184
IRPJ (income tax)
7,374 10,438
8,916 12,229
IRRF (withholding income tax)
2,074
1,570
5,726
4,235
COFINS (tax on revenue)
517
74
3,740
2,166
CSLL (social contribution tax)
3,082
4,118
3,662
4,718
PIS/COFINS/CSLL (Law No. 10,833/03)
2,085
1,093
2,684
1,606
IVA - value-added tax (foreign operations)
-
-
1,970
1,557
ISS (tax on service)
94
-
1,162
553
PIS (tax on revenue)
113
17
1,106
826
IPI (Federal VAT)
-
-
-
2,081
Other
- 63 1,917 970
80,490 75,536 95,672 89,125
16. RESERVES FOR TAX, CIVIL AND LABOR CONTINGENCIES
The Company and its subsidiaries are parties to certain tax, labor and civil lawsuits and to
tax proceedings at the administrative level. Based on the opinion and judgments of its
internal and external attorneys, management believes that the reserves for tax, civil and
labor contingencies are sufficient to cover probable losses.
The reserves for tax, civil and labor contingencies, net of the escrow deposits, are presented
as follows:
Company Consolidated
2006 2005 2006 2005
Tax 25,046 22,247
35,969 49,944
Civil 5,130
4,077
7,316
6,060
Labor
4,599 3,929 5,808 5,118
34,775 30,253 49,093 61,122
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Natura Cosméticos S.A.
25
Tax Contingencies
The changes in the reserves for tax contingencies for the year ended December 31, 2006 are
presented as follows:
Company
2005 Additions
Reversals
Write-offs
Monetary
restatement
2006
PIS (tax on revenue) - semiannual - Decree-laws
No. 2,445/88 and No. 2,449/88 (b)
12,740 - - -
1,488
14,228
Late payment fines on Federal taxes paid in
arrears (c)
4,926 - - -
646
5,572
Deductibility of CSLL (social contribution tax)
(Law No. 9,316/96) (d)
5,901 - - -
437
6,338
Tax assessment - INSS (social security
contribution) (e)
4,944 - - -
477
5,421
Monetary restatement of Federal taxes
(IRPJ/CSLL/ILL) according to the UFIR
(fiscal reference unit) (f)
4,851
-
(12)
-
91
4,930
IPI (Federal VAT) - tax collection lawsuit (i)
3,773
-
-
-
370
4,143
Assessment notice - 1990 (corporate income tax)
(j)
2,448 - - -
235
2,683
IRPJ and CSLL tax assessment - attorneys' fees
(k)
- 1,469
-
-
-
1,469
Attorneys' fees and other
6,254
313 (421)
(62)
765
6,849
Total reserve for tax contingencies 45,837
1,782
(433)
(62)
4,509
51,633
Escrow deposits for tax contingencies
(23,590)
(939)
34
-
(2,092)
26,587
Total reserve for tax contingencies, net of
escrow deposits
22,247
843 (399)
(62) 2,417 25,046
Consolidated
2005 Additions
Reversals
Write-offs
Monetary
restatement
2006
IPI - zero rate (a)
15,814
9,497
-
-
2,603
27,914
PIS (tax on revenue) - semiannual - Decree-laws
No. 2,445/88 and No. 2,449/88 (b)
14,267
-
-
-
1,663
15,930
Late payment fines on Federal taxes paid in
arrears (c)
5,859
-
-
-
766
6,625
Deductibility of CSLL (social contribution tax)
(Law No. 9,316/96) (d)
5,901
-
-
-
437
6,338
Tax assessment - INSS (social security
contribution) (e)
4,944
-
-
-
477
5,421
Monetary restatement of Federal taxes
(IRPJ/CSLL/ILL) according to the UFIR
(fiscal reference unit) (f)
4,976
-
(14)
-
94
5,056
IPI tax assessment - attorneys' fees (g)
5,717
-
-
(1,265)
164
4,616
IPI (Federal VAT) credit on purchases of fixed
assets and consumption material (h)
4,325
-
(225)
-
337
4,437
IPI (Federal VAT) - tax collection lawsuit (i)
3,773
-
-
-
370
4,143
Assessment notice - 1990 IRPJ (corporate
income tax) (j)
2,448 - - -
235
2,683
IRPJ and CSLL tax assessment - attorneys' fees
(k)
- 1,469
-
-
-
1,469
Attorneys' fees and other
8,765
530 (618)
(205) 1,368
9,840
Total reserve for tax contingencies 76,789
11,496
(857)
(1,470)
8,514
94,472
Escrow deposits for tax contingencies
(26,845)
(28,590)
77
-
(3,145) (58,503)
Total reserve for tax contingencies, net of
escrow deposits
49,944 (17,094)
(780)
(1,470) 5,369 35,969
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Natura Cosméticos S.A.
26
(a) Refers to IPI tax credits on raw materials and packing materials purchased at a zero tax rate and with tax exemption.
The Company filed for and obtained an injunction granting entitlement to the credit. On September 25, 2006, a
sentence was rendered dismissing the injunction, judging the Company's request invalid. The Company filed an
appeal for review of the merit and reestablishment of the injunction's effects. The additions made in the year ended
December 31, 2006 refer to offset against IPI payable computed in the same period. To suspend the collectibility of
the tax debt, in October 2006, the Company made an escrow deposit in the amount of R$27,362.
(b) Refers to the offset of PIS paid as per Decree-laws No. 2,445/88 and No. 2,449/88, in the period from 1988 to 1995,
against Federal taxes due in 2003 and 2004. The appeal filed by the Company was judged favorably to it on
September 12, 2005 by the 1
st
Panel of the 2
nd
Board of Tax Appeals that, by a majority of the votes, denied the
alleged lapsing of the offset right and unanimously recognized the unconstitutionality of the Decree-laws determining
that the calculation basis should be the billing of the sixth month prior to the occurrence of the taxable event, without
monetary restatement. The decision was published and a notification was sent. The Federal Revenue Service filed a
special appeal with the Superior Board of Tax Appeals, which did not grant the appeal. The decision is pending
formalization and publication.
(c) Refers to the levy of a late payment fine on the payment of Federal taxes in arrears, whose expectation of loss,
according to the opinion of the attorneys, was changed to probable, due to a recent decision by the Superior Court of
Justice.
(d) Refers to CSLL (social contribution tax) that was addressed by a mandate that questions the constitutionality of Law
No. 9,316/96, which prohibited the deduction of CSLL from its own tax basis and the IRPJ (income tax) basis. A
portion of this reserve, in the amount of R$4,245 (R$3,787 as of December 31, 2005), is deposited in escrow.
(e) Refers to INSS (social security contribution) required by tax assessments issued by the National Institute of Social
Security as a result of an inspection. The Company, as a taxpayer having joint liability for tax payment, is required to
pay INSS on services provided by third parties. The amounts are discussed in court through a tax debt annulment
action and are deposited in escrow.
(f) Refers to the monetary restatement of federal taxes (IRPJ/CSLL/ILL) related to 1991 based on the UFIR (fiscal
reference unit), discussed in a mandate. The amount involved is deposited in escrow.
(g) Refers to attorneys' fees for the defense in the tax assessment notice issued in November 2005 by the Federal Revenue
Service, relating to the tax basis of the IPI (Federal VAT) on intercompany transactions. In June 2006, the subsidiary
was notified of the decisions rendered by the 2
nd
Panel of the Federal Revenue Service Judgment Office in Ribeirão
Preto, which cancelled, by unanimous vote, the tax requirements related to IPI on these transactions. There was a
mandatory appeal, which is pending judgment at the 4
th
Chamber of the 2
nd
Board of Tax Appeals of the Federal
District. The attorneys are of the opinion that the likelihood of loss is remote.
(h) The subsidiary Indústria e Comércio de Cosméticos Natura Ltda. is discussing through injunctions the right to the IPI
(Federal VAT) credit on purchases of fixed assets and consumption materials. In view of Federal Regional Courts'
former decisions, the attorneys believe that the risk of loss changed to probable. The reversal in 2006 refers to the
lapse of the period for review begun between July and December 2001.
(i) Refers to a tax collection lawsuit seeking to collect the IPI (Federal VAT) related to July 1989, when wholesale
establishments began to be considered equivalent to industrial establishments under Law No. 7,798/89. The lawsuit is
in the Federal Regional Court of 3
rd
Region (SP) for judgment of the appeal filed by the debtor. The amounts involved
in this tax collection lawsuit are guaranteed by a subsidiary's (Natura Inovação e Tecnologia de Produtos Ltda.) cash
investment in the updated amount of R$4,336 (R$3,968 as of December 31, 2005).
(j) Refers to a tax assessment notice issued by the Federal Revenue Service requiring the payment of income tax on profit
from incentive-based exports made in base year 1989, at the rate of 18% (Law No. 7,988, of December 29, 1989) and
not 3%, as established by article 1 of Decree-law No. 2,413/88, which supported the Company in its tax payments at
that time.
(k) Refers to attorneys' fees for defense against the tax deficiency notices issued against the Company in August 2003 and
December 2006, by the Federal Revenue Service, in which income and social contribution taxes (IRPJ and CSLL) are
demanded related to the deductibility of the yield of the debentures issued by the Company in 1999 and 2001. The
attorneys' opinion is that the likelihood of unfavorable outcome is remote.
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Natura Cosméticos S.A.
27
Civil contingencies
The changes in the reserves for civil contingencies for the year ended December 31, 2006
are presented as follows:
Company
2005 Additions Reversals Payments
Monetary
restatement 2006
Several civil lawsuits (a)
1,811
2,557
(1,152)
(478)
206
2,944
Civil lawsuits and attorney's fees - Flora
Medicinal (b)
2,266
-
(15)
-
83 2,334
Total reserve for civil lawsuits
4,077
2,557
(1,167)
(478)
289
5,278
Escrow deposits for civil contingencies
-
(148)
-
-
- (148)
Total reserve for civil contingencies, net of
escrow deposits
4,077
2,409
(1,167) (478) 289 5,130
Consolidated
2005 Additions Reversals Payments
Monetary
restatement
2006
Several civil lawsuits (a)
2,043
2,769
(1,326)
(579)
250
3,157
Civil lawsuits and attorney's fees - Flora
Medicinal (b)
6,649
-
(66)
-
421 7,004
Total reserve for civil lawsuits
8,692
2,769
(1,392)
(579)
671 10,161
Escrow deposits for civil contingencies
(2,632)
(151)
1
-
(63) (2,845)
Total reserve for civil contingencies, net of
escrow deposits
6,060
2,618
(1,391) (579) 608 7,316
(a) As of December 31, 2006, the Company and its subsidiaries are parties to 1,164 lawsuits (760 as of December 31,
2005), at the civil court, special civil court and PROCON (consumer protection agency), filed by beauty consultants,
consumers, suppliers and former employees, mostly related to indemnity claims.
(b) The Company is a party to civil lawsuits filed by a former shareholder of the indirect subsidiary Flora Medicinal,
which seek the determination of any amounts and the satisfaction of alleged liabilities due to the former shareholder's
withdrawal. With the end of the expert investigation phase in four of the five civil lawsuits, it was possible to
determine the amounts involved, although no decision, even by the lower court, has been issued.
Labor contingencies
As of December 31, 2006, the Company and its subsidiaries are parties to 414 labor lawsuits
filed by former employees and third parties (267 as of December 31, 2005), claiming the
payment of severance amounts, salary premiums, overtime and other amounts due, as a
result of joint liability.
The changes in the reserves for labor contingencies for the year ended December 31, 2006
are presented as follows:
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Natura Cosméticos S.A.
28
Company
2005 Additions Reversals Payments
Monetary
restatement 2006
Total reserve for labor contingencies
3,929
761
(705)
(43)
953 4,895
Escrow deposits for labor contingencies
-
(301)
5
-
- (296)
Total reserve for labor contingencies, net of
escrow deposits
3,929
460
(700)
(43)
953 4,599
Consolidated
2005 Additions Reversals Payments
Monetary
restatement 2006
Total reserve for labor contingencies
5,118
1,084
(1,029)
(72)
1,238 6,339
Escrow deposits for labor contingencies
-
(536)
5
-
- (531)
Total reserve for labor contingencies, net of
escrow deposits
5,118
548 (1,024)
(72) 1,238 5,808
Escrow deposits
Escrow deposits, which represent the Company's restricted assets, refer to amounts
deposited in court until litigation is resolved. The balance of escrow deposits for which there
is no recognized reserve for contingencies, as of December 31, 2006, totals R$250 -
consolidated, and is classified under the heading "Escrow deposits", in noncurrent assets.
Possible losses
The Company and its subsidiaries are parties to tax, civil and labor lawsuits, for which there
is no reserve for losses recorded, because the risk of loss is considered possible by
management and its attorneys. These lawsuits are presented as follows:
Company
Consolidated
2006 2005 2006 2005
Tax:
INSS debt annulment action (a)
5,209
4,750 5,209
4,750
Offset of 1/3 of COFINS - Law No. 9,718/98 (b)
4,223
3,902 4,223
3,902
Tax assessment - transfer pricing on loan
agreements with foreign related company (c)
1,342
1,239 1,342
1,239
Tax debt notification - GFIP (FGTS payment and social
security information form) (d)
673
-
673
-
ICMS Tax Substitution deficiency notice (e)
608
-
608
-
Request for offset of taxes of the same type - IRPJ
(income tax) and IRRF (withholding income tax) (f)
406
-
406
-
Other
1,310 459 1,500 663
13,771 10,350 13,961 10,554
Civil 4,496
1,542
15,235
9,489
Labor 15,249 2,878 20,551 5,388
33,516 14,770 49,747 25,431
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Natura Cosméticos S.A.
29
(a) Lawsuit filed by the Company seeking the annulment of the tax demanded by the INSS
(social security contribution) through a tax assessment notice issued for purposes of
collecting the social security contribution on the allowance for vehicle maintenance paid
to sales promoters.
(b) Law No. 9,718/98 increased the COFINS (tax on revenue) rate from 2% to 3%, and
allowed this 1% difference to be offset in 1999 against the social contribution tax paid
in the same year. However, in 1999 the Company and its subsidiaries filed for a
mandate and obtained authorization to suspend the payment of the tax credit (1% rate
difference) and to pay COFINS based on Supplementary Law No. 70/91, prevailing at
that time. In December 2000, considering former unfavorable court decisions, the
Company and its subsidiaries waived the lawsuit and enrolled in the tax debt
refinancing program (REFIS), for payment in installments of the debt related to the
COFINS not paid in the period. With the payment of the tax, the Company and its
subsidiaries gained the right to offset 1% of COFINS against social contribution tax,
which was made in the first half of 2001. However, the Federal Revenue Service
understands that the period for offset was restricted to base year 1999. On September
11, 2006 the Company was notified that the offsets made were not approved, and timely
filed the applicable appeal.
This lawsuit is awaiting ruling at the lower administrative
court.
(c) Refers to a tax assessment notice whereby the Federal Revenue Service is demanding
the payment of IRPJ and CSLL on the difference of interest on loan agreements with a
foreign related party. On July 12, 2004, an administrative defense was filed and is still
being judged.
(d) Demand of fine for failure to complete the GFIP (FGTS payment and social security
information form), an accessory social security obligation, for independent contractors'
social security contributions and indemnities. The Company is discussing the collection
at the administrative level.
(e) Tax deficiency notice for ICMS Tax Substitution, demanded by Goiás State, due to
supposed underpayment by the Company. The Company has presented its defense at the
administrative level and is awaiting judgment.
(f) Refers to the nonapproval of the offset of IRPJ credits related to the fourth quarter of
1999 against IRRF debts for the second quarter of 2000. The Company has presented its
defense at the administrative level, for which a partially favorable judgment has been
rendered. On July 12, 2006, an annulment action was filed, and an escrow deposit was
made, to challenge collection of the balance of offset not approved by the Federal
Revenue Service.
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Natura Cosméticos S.A.
30
Contingent Assets
The Company and its subsidiary Indústria e Comércio de Cosméticos Natura Ltda. are
challenging in court the constitutionality and legality of the increase in the tax basis for the
PIS and COFINS contributions established by Law No. 9,718/98. The amounts involved in
the lawsuits, updated as of December 31, 2006, total R$12,171. The lawsuits are awaiting
judgment. The attorneys' opinion is that the likelihood of favorable outcome is probable. As
a final and unappealable decision has not been rendered, the Company and its subsidiary
have not recorded the contingent assets, as established by CVM Resolution No. 489/05.
17. MANAGEMENT AND EMPLOYEE PROFIT SHARING
The Company and its subsidiaries pay profit sharing to its employees and managers, tied to
the achievement of operational targets and specific objectives established and approved at
the beginning of each year. As of December 31, 2006, the following amounts were recorded
as profit sharing: R$13,850 (R$13,506 as of December 31, 2005) and R$39,260 (R$35,171
as of December 31, 2005), Company and consolidated, respectively, under the heading
"Salaries, profit sharing and related charges" in current liabilities, with contra entry to
"Employee profit sharing" and "Management compensation" in the statement of income for
those years.
18. COMPENSATION OF MANAGAMENT AND EXECUTIVES
a) The total compensation of the Board of Directors and Officers of the Company and its
subsidiaries is as follows:
2006
Compensation
Stock Options Program
Fixed
Variable
(*) Total
Stock option
balance
(quantity) (**)
Average
exercise
price (***)
Board of Directors
2,572
1,049 3,621
-
-
Officers 3,070
1,878 4,948
528,326 12.81
Total 5,642
2,927 8,569
528,326

2005
Compensation
Stock Options Program
Fixed
Variable
(*) Total
Stock option
balance
(quantity) (**)
Average
exercise
price (***)
Board of Directors
3,608
- 3,608
-
-
Officers 2,592
1,267 3,859
188,940 6.28
Total 6,200
1,267 7,467
188,940
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Natura Cosméticos S.A.
31
b) The compensation of the Executives of the Company and its subsidiaries is as follows:
2006
Compensation
Stock Options Program
Fixed
Variable
(*) Total
Stock option
balance
(quantity) (**)
Average
exercise
price (***)
Executives 12,711
4,594 17,305
3,120,859 10.02

2005
Compensation
Stock Options Program
Fixed
Variable
(*) Total
Stock option
balance
(quantity) (**)
Average
exercise
price (***)
Executives 12,423
4,562 16,985
5,220,570 6.29
(*)
Refers to profit sharing.
(**) Refers to the balance of unexercised vested and unvested options as of the balance
sheet dates.
(***) Refers to the weighted-average exercise price of the option at the time of the
Stock Option Grant, updated by the inflation calculated based on the IPC-A
(extended consumer price index) through the balance sheet date. Note 20 presents
the pro forma net income as of December 31, 2006 and 2005, should Company's
management opt for recognizing the effects of the plans in the accounting records,
considering the vesting period and using the intrinsic value method (difference
between the market price obtained on December 31, 2006 and 2005 and the value
of the option updated based on the IPC-A, for the years then ended).
19. SHAREHOLDERS' EQUITY
a) Capital
On March 29, 2006, the shareholders, at the Extraordinary Shareholders' Meeting,
approved the split of common shares, without par value, issued by the Company, in the
proportion of 5 shares after the split for each existing share. The purpose of this stock
split was to adjust the Company's share price to increase individual investor access to
the securities market, diversify the shareholders' composition and increase liquidity of
the Company's shares.
Due to this stock split, the subscribed and paid-up capital represented by 85,438,611
common shares without par value as of December 31, 2005 increased to 427,193,055
common shares without par value as of March 31, 2006. Likewise, the balance of
authorized capital represented by 2,823,414 common shares as of December 31, 2005
increased to 14,117,070 common shares as of March 31, 2006.
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Natura Cosméticos S.A.
32
In May and June 2006, 477,377 common shares were subscribed; in August and
September 2006, 161,590 common shares; and in October, November and December
2006, 361,438 of the 1,702,250 common shares issued, as decided by the Board of
Directors, in a meeting held on February 21, 2006, at an average contribution price of
R$3.09, R$3.10 and R$3.11, respectively, for the exercise of options granted to the
management and employees of the Company and direct and indirect subsidiaries,
participating in the "Addendum to the Purchase or Subscription Option Plan for
Common Shares Issued by the Company for Calendar Year 2003". Accordingly, the
number of subscribed and paid-up common shares went from 427,193,055, as of March
31, 2006, to 428,193,460 common shares, as of December 31, 2006. The authorized
capital went from 14,117,070 common shares, as of March 31, 2006, to 13,116,665
common shares, as of December 31, 2006.
As of December 31, 2006, the Company's capital is R$233,862 (R$230,762 as of
December 31, 2005).
b) Receivables from shareholders
In 2004, the amount of R$3,029 was reclassified from the heading "Receivables from
shareholders" to the heading "Treasury shares" until it is paid up. Details are disclosed
in Note 10.f.
c) Interest on capital
At the Board of Directors' Meeting on July 26, 2006, the Company's management
proposed the payment of interest on capital, according to the terms of the bylaws, CVM
Resolution No. 207/96 and Law No. 9,249/95. As of December 31, 2006, the recorded
gross amount of interest on capital is R$33,569 (R$34,205 as of December 31, 2005)
and was calculated within legal limits, including as to the mandatory minimum dividend
of 30% according to article 202 of Law No. 6,404/76 and the bylaws.
Withholding income tax in the amount of R$5,065 (R$5,131 as of December 31, 2005)
was withheld and paid by the Company.
d) Dividend payment policy
The shareholders are entitled to receive every year a mandatory minimum dividend of
30% of net income, considering principally the following adjustments:
·
Increase in the amounts resulting from the reversal, in the year, of previously
recognized reserves for contingencies.
·
Decrease in the amounts intended for the recognition, in the year, of the legal reserve
and reserve for contingencies.
The bylaws allow the Company to prepare semiannual and interim balance sheets and,
based on these balance sheets, authorize the payment of dividends upon approval by the
Board of Directors.
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Natura Cosméticos S.A.
33
Dividends and interest on capital - gross, relating to income for 2005, in the amounts of
R$285,237 (R$0.6714 per share) and R$34,205 (R$0.0801 per share), respectively, were
approved by Annual Shareholders' Meeting on March 29, 2006 and corresponded to
80.5% of the 2005 consolidated net income.
On February 28, 2007, the Board of Directors' Meetings approved a proposal, to be
submitted to the Annual Shareholders' Meeting to be held on April 2, 2007, for the
payment of dividends and interest on capital - gross, relating to income for 2006, in the
total amounts of R$325,866 (R$0.7630 per share) and R$33,569 (R$0.0787 per share),
respectively, corresponding to 78.0% of the 2006 consolidated net income. Of these
amounts, the Company paid, on August 10, 2006, dividends and interest on capital -
gross in the amounts of R$112,110 and R$33,569 (R$28,534, net of withholding income
tax), respectively.
Dividends were calculated as follows:
Company
2006 2005
Net income
469,326 397,357
Profit reserve - legal (item g. of this Note)
- -
Calculation basis for minimum dividends
469,326 397,357
Mandatory minimum dividends
30%
30%
Annual minimum dividend
140,798 119,207
Proposed dividends
325,866 285,237
Interest on capital - net of withholding income tax
28,534
29,074
Withholding income tax
5,035 5,131
Total dividends and interest on capital - gross
359,435 319,442
Amount exceeding the mandatory minimum dividend
218,637 200,235
Dividends per share - R$
0.763
0.671
Interest on capital per share - net - R$
0.067 0.069
Total dividends and interest on capital, per share - net - R$
0.830 0.740
e) Treasury shares
As of December 31, 2006, common shares in treasury, which have been used in the
exercise of options in the Stock Option Programs for purchase or subscription of shares,
totaled 679,317 (2,160,075 as of December 31, 2005), at a unit average cost of
R$0.3350 (R$0.3560 as of December 31, 2005).
f) Share premium
Refers to the goodwill generated on the issuance of 3,299 common shares resulting from
the capitalization of debentures in the amount of R$100,000, occurred on March 2,
2004.
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Natura Cosméticos S.A.
34
g) Profit reserve - legal
Since the balance of the legal reserve plus capital reserves exceeded 30% of the capital,
the Company decided, in accordance with article 193 of corporate law, not to recognize
a legal reserve on net income for 2005 and 2006.
h) Reserve for profit retention
As of December 31, 2006 and December 31, 2005, the profit retention reserve was
recognized pursuant to article 196 of Law No. 6,404/76 for use in future investments, in
the amounts of R$109,891 and R$77,915, respectively. The retention referring to 2006
is based on the capital budget, which will be submitted for approval in the Annual
Shareholders' Meeting to be held on April 2, 2007.
Article 199 of Law No. 6,404/76 sets forth that the balance of profit reserves, except for
the reserve for contingencies and unrealized profit reserve, may not exceed capital.
Upon reaching this limit, the Shareholders' Meeting will decide on the use of the excess
amount in a capital contribution or increase, or in the payment of dividends.
After distribution of profits for the year ended December 31, 2006, the profit reserves
exceeded capital by R$48,618.
In light of the aforementioned, on February 28, 2007, the Board of Directors approved
the proposal to be submitted to the Annual and Extraordinary Shareholders' Meetings, to
be held on April 2, 2007, for capitalization, without issuance of shares, of the profit
reserves. The proposal consists of capitalization in the amount of R$153,939, referring
to the profit reserves recognized in the years ended December 31, 2004 and December
31, 2005, which were fully utilized for investments in property, plant and equipment and
working capital, in 2005 and 2006.
20. STOCK OPTION PROGRAM
The Board of Directors meets once a year for the purpose of, pursuant to the terms of the
Program, establishing the Plan, indicating the directors and managers who will receive the
options and the total amount to be paid.
The Plans have a four-year time span for exercising the options, and the exercise rights are
50% at the end of the third year and 50% at the end of the fourth year. The deadline for
exercising options was two years after the end of the fourth year.
The balance of options as of December 31, 2006 is 6,701,732 (8,226,050 as of December
31, 2005) and is composed by plan as follows:
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Natura Cosméticos S.A.
35
Number of
call options or
subscription
(in shares)
Amount for the
year updated according
to the IPC-A (extended
consumer price index)
through
December 31, 2006
2002 658,885
5.60
2003 2,381,422
3.14
2004 1,627,960
7.72
2005 941,485
16.57
2006 1,091,980
24.69
6,701,732
As of December 31, 2006, had the Company's management opted to record the effects of
the plans based on the intrinsic value of the options (difference between market price as of
December 31, 2006 and the value updated based on the IPC-A) recorded over their related
vesting period, the pro forma consolidated net income for the year ended December 31,
2006 would have been R$435,470 (R$364,152 as of December 31, 2005), as shown below:
Consolidated
2006 2005
Net income
460,773 396,881
Effect of programs considering vesting period
(25,303) (32,729)
Net income - considering the exercise of the options
435,470 364,152
As of December 31, 2006, the market price of the Company's shares was R$30.15 (R$20.60
as of December 31, 2005).
21. PENSION PLAN
On August 1, 2004, the Company implemented a supplementary defined contribution plan
for all employees of the Company and its subsidiaries in Brazil. According to the terms of
this plan, the cost is shared between the employer and the employees, so that the Company's
share is equivalent to 60% of the employee's contribution according to a contribution scale
based on salary ranges from 1% to 5% of the employee's compensation. The plan is
managed by Brasilprev Seguros e Previdência S.A. and the Company's contributions for the
year ended December 31, 2006 totaled R$3,397 (R$3,037 as of December 31, 2005).
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Natura Cosméticos S.A.
36
22. FINANCIAL INSTRUMENTS
a) General conditions
The Company and its subsidiaries enter into transactions involving financial
instruments, all recorded in balance sheet accounts, to meet their own needs, and reduce
exposure to market, currency and interest rate risks. These risks and the respective
financial instruments are managed through the definition of strategies, establishment of
control systems, and determination of exchange exposure limits.
Cash investments are mainly made at negotiated rates of return, since the Company
intends to hold these investments to redemption. These investments reflect market
conditions at the balance sheet dates.
Loans and financing are recorded at the contractual interest rates of each transaction.
b) Exchange risk
The Company has entered into swap and forward transactions to hedge against exchange
variation on its liabilities resulting from financing agreements and operating activities.
According to the Company's policy, swap and/or forward transactions must be
contracted for all debts that may expose the Company to exchange risks. These
transactions consist of swaps between two variable rates: foreign currency and CDI
(interbank deposit rate).
As of December 31, 2006 and 2005, the Company had swap and forward transactions
with financial institutions in the amounts of R$30,410 and R$7,242, respectively. Since
March 2006, the Company has been contracting transactions for imports of equipment,
purchase of inputs pegged to exchange variation, and investments in international
operations, resulting in a liability balance of R$2,185 and R$2,703, respectively,
recorded in current liabilities in consolidated. Foreign exchange exposure is mainly
indexed to the U.S. dollar and the euro.
The Company and its subsidiaries do not use derivative financial instruments for
speculation purposes.
c) Interest rate risk
The Company and its subsidiaries are exposed to fluctuations in the TJLP due to the
financing agreements entered into with the BNDES and FINEP.
d) Fair values
The fair values of cash and banks, temporary cash investments, and accounts receivable
and payable approximate the carrying amounts due to the short-term maturity of these
financial instruments. The fair values of loans and financing substantially approximate
the carrying amounts since these financial instruments have variable interest rates.
Regarding the swap and forward transactions the carrying and fair values are as follows:
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Natura Cosméticos S.A.
37
Consolidated
2006
2005
Carrying
value
Fair
value
Carrying
value
Fair
value
Swap and forward transactions
2,185 2,860 2,703 2,775
At the balance sheet dates the Company consults the financial market and updates the
fair value of financial instruments.
e) Credit risk
The Company's sales are made to a large number of beauty consultants. The Company
manages the credit risk through a strict credit granting process.
23. FINANCIAL INCOME, NET
Company Consolidated
2006 2005 2006 2005
Financial income:
Interest on cash investments
21,989
25,738 33,722 36,648
Gains on monetary and exchange variations
3,008
4,092
5,835 13,639
Interest earned
23
183
825
1,145
Gains on swap and forward transactions
37
-
91
-
Other financial income
1,650
1,457 2,918 3,282
26,707 31,470 43,391 54,714
Financial expenses:
Interest on financing
(7,114)
(5,910) (18,677) (14,665)
Losses on monetary and exchange variations (3,424)
(2,530)
(7,541)
(8,817)
Losses on swap and forward transactions
(1,622)
(1,230)
(4,114) (12,223)
Other financial expenses
(1,079)
(2,130) (3,121) (7,748)
(13,239) (11,800) (33,453) (43,453)
Total financial income, net
13,468 19,670 9,938 11,261
24. INSURANCE
The Company and its subsidiaries contract insurance based principally on risk concentration
and significance, at amounts considered by management to be sufficient, taking into
consideration the nature of its activities and the opinion of its insurance advisors. As of
December 31, 2006, the insurance coverage was as follows:
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Natura Cosméticos S.A.
38
Items Coverage
Insured
amount
Industrial complex/inventories Any material damages to buildings, installations
and machinery and equipment
575,152
Vehicles
Fire, theft and collision for 1,255 vehicles
48,055
Loss of profits
Nonrealization of profits arising from material
damages to installations, buildings and
production machinery and equipment
797,981
25. SUBSEQUENT EVENT
On February 28, 2007, the Board of Directors approved a proposal to be approved at the
Extraordinary Shareholders' Meeting, which will be held on April 2, 2007, for the:
a) Private placement of 1,514,750 common shares, without par value, by the Company,
within the limit of authorized capital, as set forth in article 6 of the Company's by-laws,
which will be designated for subscribing and paying up the common shares, without par
value, issued by the Company, corresponding to the shares granted to the Company's
Management and Employees, as well as to the direct or indirect subsidiaries'
Management and Employees, participants in the: "Amendments to the Stock Option
Plans of Purchase or Subscription of Common Shares Issued by the Company Related
to Calendar Years 2003, 2004 and 2005" and "Amendment to the Stock Option Plan of
Purchase or Subscription of Common Shares Issued by the Company Related to
Calendar Year 2006", excluding the preferential right to subscription by the Company's
other shareholders in view of the specific designation mentioned above, under the terms
of paragraph 3, article 171, of Law No. 6,404/76. The prices for paying up the shares
issued and to be subscribed, under the referred terms, set according to the "Amendments
to the Stock Option Plans of Purchase or Subscription of Common Shares Issued by the
Company Related to Calendar Years 2003, 2004 and 2005" and to the "Stock Option
Plan of Purchase or Subscription of Common Shares Issued by the Company Related to
Calendar Year 2006", corresponds, on February 28, 2007, to R$3.15, R$7.75, R$16.64
and R$24.80, respectively, subject to monetary adjustment based on the IPC-A,
calculated and released by the Brazilian Institute of Geography and Statistics (IBGE),
through the subscription date, and must be paid in cash, upon subscription.
b) Purchase of 1,000,000 common shares, without par value, representing the Company's
capital, to be held in treasury for subsequent sale, in order to fulfill the exercise of the
options granted to the Company's Management and Employees, as well as to the direct
or indirect subsidiries' Management and Employees, participants in the "Amendments
to the Stock Option Plans of Purchase or Subscription of Common Shares Issued by the
Company Related to Calendar Years 2003, 2004 and 2005" and "Amendment to the
Stock Option Plan of Purchase or Subscription of Common Shares Issued by the
Company Related to Calendar Year 2006.
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Natura Cosméticos S.A.
39
The purchase of 1,000,000 common shares, without par value, representing the Company's
capital, will be in effect from February 28, 2007 until May 31, 2007 and will be
intermediated by the brokerage company Pactual CVTM S.A. located at Avenida Brigadeiro
Faria Lima, 3,729, 6º andar, City of São Paulo, State of São Paulo, and the Company's
Directors are authorized to practice any acts necessary for the repurchase of the shares
approved under the aforementioned terms.
The 1,514,750 registered common shares, without par value, issued by the Company, in
accordance with item (a) above, will be subscribed and paid up only after the sale of all the
registered common shares, without par value, to be purchased by the Company and held in
treasury. This sale will result from the exercise of the options granted to the Company's
Management and Employees, as well as the direct or indirect subsidiaries' Management and
Employees, participants in the "Amendments to the Stock Option Plans of Purchase or
Subscription of Common Shares Issued by the Company Related to Calendar Years 2003,
2004 and 2005" and the "Stock Option Plan of Purchase or Subscription of Common Shares
Issued by the Company Related to Calendar Year 2006."
In compliance with CVM (Brazilian Securities Commission) Regulatory Instruction No.
358, of January 3, 2002, the Company disclosed on the CVM's site (in the Periodic and
Special Financial Statements - IPE), on February 28, 2007, a significant event notice related
to the above events.


























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ATTACHMENT I
(Convenience Translation into English from the Original Previously Issued in Portuguese)
NATURA COSMÉTICOS S.A.
STATEMENTS OF CASH FLOWS
(In thousands of Brazilian reais - R$)
2006
2005
2006
2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
469,326
397,357
460,773
396,881
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortizations (Note 12)
6,966
4,989
54,601
44,035
Monetary and exchange variations, net, except those referring to tax, civil and labor contingencies
7,339
7,800
14,529
6,312
Reserve for losses on swap and forward contracts (Notes 22.b. and 22.d.)
1,585
1,231
4,022
12,064
Reserve for tax, civil and labor contingencies, including monetary variation on those reserves (Note 16)
8,547
14,074
12,998
31,040
Allowance for inventory losses (Note 7)
146
-
1,626
1,943
Deferred income and social contribution taxes (Note 9.a.)
(4,468)
(9,262)
(12,964)
(12,150)
Proceeds from sale and disposal of property, plant and equipment and intangible assets
736
(204)
2,476
2,242
Equity in subsidiaries (Note 11)
(28,229)
6,741
-
-
Minority interest
-
-
(4)
1
461,948
422,726
538,057
482,368
(INCREASE) DECREASE IN ASSETS
Current assets:
Accounts receivable (Note 6)
(53,493)
(66,235)
(57,904)
(66,198)
Inventories (Note 7)
(27,970)
800
(86,410)
(32,289)
Other receivables
(2,528)
(7,750)
(2,317)
7,152
Noncurrent assets (long-term assets):
Escrow deposits (Note 16)
(1,467)
(888)
(29,369)
(2,688)
Recoverable taxes (Note 8)
(558)
(556)
(8,019)
(5,726)
Other receivables
(1,051)
(4,252)
(2,575)
4,111
(87,067)
(78,881)
(186,594)
(95,638)
INCREASE (DECREASE) IN LIABILITIES
Current liabilities:
Suppliers
49,116
42,399
54,736
41,849
Salaries, profit sharing and related charges, net (Note 17)
3,376
2,574
15,545
9,125
Taxes payable, net (Notes 8 and 15)
3,944
25,261
(4,366)
19,794
Other payables
4,054
12,799
6,233
9,589
Noncurrent liabilities-
Other payables
1,414
(556)
8,491
(4,380)
61,904
82,477
80,639
75,977
NET CASH PROVIDED BY OPERATING ACTIVITIES
436,785
426,322
432,102
462,707
CASH FLOW FROM INVESTING ACTIVITIES
Acquisition of property, plant and equipment and intangible assets (Note 12)
(20,898)
(9,574)
(193,596)
(111,636)
Investments (Note 11)
(163,423)
(149,425)
-
-
NET CASH USED IN INVESTING ACTIVITIES
(184,321)
(158,999)
(193,596)
(111,636)
CASH FLOW FROM FINANCING ACTIVITIES
Decrease in current loans (Note 14)
(52,207)
(12,907)
(116,005)
(75,104)
Fundings - noncurrent loans (Note 14)
-
65,342
111,322
120,366
Payments of swap and forward transactions (Notes 22.b. and 22.d.)
(2,295)
(3,072)
(4,540)
(15,499)
Payment of dividends (Note 19.c.)
(307,123)
(203,812)
(307,123)
(203,812)
Payment of interest on capital (Notes 19.c. and 19.d.)
(51,268)
(30,129)
(51,268)
(30,129)
Payment of capital (Note 19.a.)
3,100
-
3,100
-
Tax incentives
3,872
717
3,872
717
Sale of treasury shares by exercise of stock options (Note 19.e.)
8,581
4,929
8,581
4,929
Payment of receivables from shareholders (Note 19.b.)
2,272
2,288
2,272
2,288
NET CASH USED IN FINANCING ACTIVITIES
(395,068)
(176,644)
(349,789)
(196,244)
NET (DECREASE) INCREASE IN CASH AND BANKS
(142,604)
90,679
(111,283)
154,827
Cash and banks at beginning of year
275,966
185,287
386,439
231,612
Cash and banks at end of year
133,362
275,966
275,156
386,439
CHANGE IN CASH AND BANKS
(142,604)
90,679
(111,283)
154,827
SUPPLEMENTARY CASH FLOW DISCLOSURE
Income and social contribution taxes paid
112,978
103,859
143,276
111,605
Interest paid on loans and financing
4,073
2,484
9,902
6,645
* * * * *
Consolidated
Company
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
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ATTACHMENT II
NATURA COSMÉTICOS S.A.
(In thousands of Brazilian reais - R$)
2006
2005
2006
2005
REVENUES
3,686,217
3,088,611
3,842,193
3,201,561
Sales of goods, products and services
3,724,334
3,119,889
3,880,988
3,234,980
Allowance for doubtful accounts - recognition (Note 6)
(38,805)
(31,066)
(39,704)
(32,177)
Nonoperating 688
(212)
909
(1,242)
INPUTS PURCHASED FROM THIRD PARTIES
(2,321,827)
(1,860,261)
(2,132,303)
(1,731,670)
Cost of sales and services
(1,347,257)
(1,110,075)
(1,274,736)
(1,046,472)
Materials, energy, outside services and other
(974,570)
(750,186)
(857,567)
(685,198)
GROSS VALUE ADDED
1,364,390
1,228,350
1,709,890
1,469,891
RETENTIONS
(6,966)
(4,989)
(55,625)
(44,035)
Depreciation and amortization (Note 12)
(6,966)
(4,989)
(55,625)
(44,035)
VALUE ADDED GENERATED BY THE COMPANY
1,357,424
1,223,361
1,654,265
1,425,856
VALUE ADDED RECEIVED IN TRANSFER
54,936
24,729
43,391
54,714
Equity in subsidiaries (Note 11)
28,229
(6,741)
-
-
Financial income (Note 23)
26,707
31,470
43,391
54,714
TOTAL VALUE ADDED TO BE DISTRIBUTED
1,412,360
1,248,090
1,697,656
1,480,570
DISTRIBUTION OF VALUE ADDED
(1,412,360)
100% (1,248,090)
100% (1,697,656)
100% (1,480,570)
100%
Payroll and related charges
(144,832)
10%
(118,907)
10%
(379,669)
22%
(306,416)
21%
Taxes and contributions
(781,410)
56%
(714,503)
57%
(817,140)
48%
(727,181)
49%
Financial expenses and rents; includes exchange variation on
translation of foreign investments (Notes 11 and 23)
(16,792)
1%
(17,323)
1%
(40,073)
3%
(50,091)
3%
Dividends (Note 19.d.)
(325,866)
23%
(285,237)
23%
(325,866)
19%
(285,237)
19%
Interest on capital (Notes 19.c. and 19.d.)
(33,569)
2%
(34,205)
3%
(33,569)
2%
(34,205)
2%
Minority interest
-
-
-
-
(1)
-
(1)
-
Retained earnings (*)
(109,891)
8%
(77,915)
6%
(101,338)
6%
(77,439)
6%
(*) Unrealized profit from subsidiaries is eliminated.
Supplemental information to the statements of value added
RN0052-1*.*
(Convenience Translation into English from the Original Previously Issued in Portuguese)
STATEMENTS OF VALUE ADDED
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
* * * * *
Of the amounts recorded under "Taxes and contributions" in 2006 and 2005, the amounts of R$467,418 and R$412,131, respectively, refer to ICMS (State VAT)
under the taxpayers' substitution regime levied on the estimated profit margin defined by the State Finance Secretariats obtained from sales made by Natura
beauty consultants to final consumers.
In order to analyze this tax impact on the statements of value added, these amounts should be deducted from the amounts recorded under "Sales of goods,
products and services" and "Taxes and contributions", since sales revenue does not include the estimated profit attributable to Natura beauty consultants upon the
sale of products, in the amounts of R$1,583,938 and R$1,311,672 in 2006 and 2005, respectively, considering an estimated profit margin of 30%.
Consolidated
Company
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LETTER FOR THE BOARD
Our Common Future
The year 2006 brought us many happy events. Besides the excellent results
achieved by Natura, we must all celebrate a historical occurrence: throughout the
world, awareness that global warming is a risk to the life of our planet expanded.
Thus, the seed planted in the report Our Common Future, of the United Nations
World Commission on Environment and Development, whose 20th anniversary will
be celebrated in 2007, is prospering. And this increases the possibility that we can
cause changes in behavioral, production and consumption guidelines that assure
the fulfillment of our common responsibility toward future generations.
The company initiatives that promote development with economic, social and
environmental balance ceased to be seen as "idealistic" and have become
"imperative." For those of us at Natura who for many years have guided our actions
by our dedication to sustainable development, this change in perception only
reinforces our desire to advance down this path.
The results obtained in 2006 are expressive. Natura's gross revenues grew 19,9%
over gross revenues in 2005. International revenues grew 44,3%. Our EBITDA was
R$ 654.5 million. The distribution channel formed by our Consultants grew 16,2%
in Brazil, climbing to 561,000 people. In other Latin American countries, we already
surpassed 56,000 Consultants. We generated R$ 1.6 billion in direct income for this
universe of 617,000 people that is dedicated to social transformation and spreading
our values.
In four years, Natura increased its Brazilian market share from 12% to 22,8%. The
total number of items for resale jumped from 98 million in 2002, to 241 million in
2006, and in the same period the number of employees increased from 2,800 to
4,300.
This very significant growth trend fills us with pride, and at the same time demands
our redoubled attention to control the increased complexity, the pressures on the
various systems and processes, and the tensions generated in the work
environment. We are confident that the measures taken in 2006 and scheduled for
the coming years are solid and consistent, and will eliminate any obstacles to our
continued development.
With our dedication to our essence, we will continue to invest in innovative
management, science and technology. For Natura, technological development
includes the mobilization of expansive social networks that are capable of
integrating scientific knowledge with the wisdom of traditional communities, while
simultaneously promoting the sustainable use of nature's resources. In 2006, our
investments in research and development were R$ 87.8 million, a 30,8% increase
over 2005. We initiated the construction of a new Research Center in Campinas
(São Paulo), which should be inaugurated in 2008, and we opened an advanced
technology center in Paris.
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We continued to invest in the sustainable use of Brazil's biodiversity, despite
insufficiency of the legal framework that regulates access to genetic patrimony and
fair remuneration of traditional knowledge. Despite the fact that this failing is a
significant impediment to the country's development, we understand that the
continuity of our transparent practices and ample dialogue with all the social agents
involved assure us of conditions to make good use of the huge competitive
advantage represented by Brazil's rich biodiversity. In anticipation of legislative
development, in 2006 we became the first Brazilian company to sign agreements
for remuneration of widespread traditional knowledge, establishing pioneering
partnerships with the Associação das Ervateiras do Mercado do Ver-o-Peso
[Association of Herb Producers of the To-Be-Weighed Market] and the Associação
de Produtores de Boa Vista [Association of Producers of Boa Vista], of Acará, both
in Pará.
With the same innovative attitude, in Pará we also organized an undertaking
intended to widen and deepen our presence in the Amazon, and to expand our
experience with sustainability. The new soap factory in Benevides will substitute
part of the African palm oil, used as a raw material, with native palm oil provided
by agricultural and extractive cooperatives in the region. Over the long term, the
project may involve 2,500 families from 21 municipalities, involving social and
economic benefits for the communities and new challenges in learning, harmonious
living and management.
Our desire to spread the concept of Bem Estar Bem (Well Being / Being Well), and
the vision of turning Natura into a globally important brand that is identified with
the community of people who are dedicated to building a better world through a
better relationship with themselves, with others and with the nature of which they
are a part, require daring and determination on our part. It is with this spirit that
we define our strategy for strong growth.
In Brazil ­ the market that will still be responsible for the majority of the company's
results in the coming years ­ we will continue to grow, seeking efficiency and
productivity gains. In our other operations in Latin America, since acceptance of our
proposed value through the direct sales channel is already proven, the challenge is
to accelerate growth to attain critical mass, thus increasing profitability. In other
regions of the world where there are strong indicators of acceptance of our
proposal, we are evaluating and testing the best ways to handle the opportunities.
Global expansion demands a company that is increasingly cosmopolitan and
multicultural, capable of understanding and interacting with different cultures, and
able to express itself in multiple languages. It also demands growing involvement in
work done through networking, and the capacity to identify and attract leadership
that identifies with our beliefs in the various countries where we operate. Thus, it is
essential to encourage entrepreneurship and managerial autonomy to become a
decentralized company, with more robust processes and better management of
knowledge.
With the participation of everyone: employees, consultants, shareholders,
consumers, suppliers and integral partners of the Natura community ­ whom we
thank for their dedication for the achievements made in 2006 ­ we will build a
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company that is increasingly better, at the same time contributing toward our
common future so that we will realize the ideal of a more prosperous and fair
society built on solidarity.
Antonio Luiz da Cunha Seabra
Guilherme Peirão Leal
Pedro Luiz Barreiros Passos
Board of Directors Co-Presidents
Alessandro Giuseppe Carlucci
Chief Executive Officer
MANAGEMENT REPORT ­ 2006
The historical growth trend of the markets in which Natura operates continued in
2006 at rates much higher than the average of other sectors in the Brazilian
economy. The nominal growth of the cosmetics, fragrances and personal hygiene
sector was 13.4%, according to the Brazilian Association of the Personal Hygiene,
Perfume and Cosmetics Industry (Abihpec). According to the Brazilian Association
of Direct Sales Companies (ABEVD), the direct sales sector posted growth of 18%
in relation to 2005.
At Natura, we again reached the end of the 2006 fiscal year with significant growth
and profit indicators. Our consolidated gross revenues were R$ 3.9 billion, a 19.9%
increase over 2005, which, as in the previous year, exceeded the growth rate of our
target market. In Brazil, our market share climbed to 22.8%, versus 21.4% in
2005. This growth was due in part to the efforts of our Consultants, who this year
totaled 561,000, 16.2% more than in 2005. In international operations, gross
revenue increased 44.3% and the number of Consultants exceeded 56,000,
representing growth of 49.7% over the previous year.
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In 2006, our EBITDA totaled R$ 654.5 million, 16% greater than EBITDA in 2005.
The net profit of R$ 460.8 million grew 16.1% in the period. EBITDA and net profit
margins were 23.7% and 16.7%, respectively, slightly lower than the 2005
numbers of 24.7% and 17.4%. This drop is partly due to the planned increase of
investments in the Company's internationalization process, both in the
administrative structure and in the start-up of new operations, and partly because
the sales performance of the last quarter of 2006 was lower than our forecasts.
This fiscal year we made significant investments in fixed assets. The total was
R$ 193.6 million, 73.4% greater than the R$ 111.6 million of 2005. The funds were
used primarily in expanding the productive capacity of Cajamar, São Paulo, and in
the new soap factory in Benevides, Pará, in the start-up of construction of the new
research and development center, and in Information Technology.
The Cost of Goods Sold (COGS) was 32.3% of net income, slightly greater than the
32% of 2005. Administrative and sales expenses also posted an increase in 2006,
rising from 44.3% in 2005 to 45.5%.
In 2006, the liquidity of Natura's stock increased. At the Extraordinary
Shareholders' Meeting held on March 29, 2006, shareholders approved the split of
shares issued by Natura at the rate of 1:5, so that individual shareholders trading
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in smaller volumes could purchase Natura shares in a standard block with less
absolute value.
With the increased liquidity, our paper began to appear on the major indices of the
Brazilian stock market: Ibovespa, IbrX 50, IBrX 100, ISE, ITAG and IGC, in addition
to the MSCI, an index where we first appeared in 2005.
Stock valuation during 2006 was another positive factor, as shown in the following
graph:
Natura's bylaws establish an obligatory minimum dividend of 30% of adjusted net
income. The company's Board of Directors approved a dividend distribution policy
corresponding to 45% of the adjusted net income. For 2006, Natura already paid
dividends and interest on own capital in the amount of R$ 140.6 million.
The Board of Directors sent a proposal to shareholders for the Ordinary
Shareholders' Meeting to be held on April 2, 2007, for payment of an additional R$
213.8 million, bringing the net total to R$ 354.4 million. These amounts correspond
to 77% of consolidated adjusted net income in 2006.
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As one of the pillars of our company operation is the integration of environmental and
social results into the financial results, some events in 2006 deserve to be highlighted.
In the environmental arena, we made progress in several areas in 2006, as follows:
- Emission of greenhouse gases: We implemented a system to map
emissions, identify opportunities to reduce gases emissions - from the supply
chain to the final disposal - and to manage action plans, with the goal of
becoming "carbon-neutral" by 2008, thereby mitigating and offsetting the
environmental impact of all our operations.
- Water: The use of water per unit sold fell 7% and the average water reuse
index fell from 55% to 42%. This drop is explained by the increased production
volume and the learning curve of a new water purification system for our
industrial process.
- Energy: The use of energy per unit of product sold decreased by 1%.
- Waste: The total weight of waste per unit sold increased 2.2 pp and the
portion of recycled waste increased from 81.1% to 84.1%.
- Refills: The share of refills per items sold rose from 17.4% to 19.8%, which
represents a significant reduction in the environmental impact of our products,
considering that the average mass of refill packaging is 54% less than that of
regular product packaging. Also because of refills, we achieved a 7% reduction
of average environmental impact from our packaging.
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The voluntary sale of products of the Crer para Ver program totaled R$ 5.4 million
in 2006, a growth of 76.9% over 2005. These funds were earmarked to various
educational projects. The Youth and Adult Education Campaign, developed in
partnership with the Ministry of Education, reached the significant milestone of
more than 78,900 enrollments and re-enrollments nationwide.
Research and Development
2006 marked the end of our use of animal testing, an objective that Natura has
pursued for more than six years. We also continued our efforts to increase the
percentage of use of ingredients of renewable plant origin in our formulas. In 2006
we obtained six new certifications, bringing the total to 22 active certificates of
Brazilian biodiversity.
Investments in innovation and launching new products continue to be an important
differential for the company. This year we launched 225 products, versus 213 in
2005, and we maintained the strategy of investing in Brazilian biodiversity as a
technological platform for the development of new products, as in the launch of our
Diversa make-up line, which is exceptional in its use of refills, including lipstick
refills.
In the fragrance category, we returned to a more intense pace of innovation with
the launch of the Natura Humor line. Other important launches complemented the
Ekos line: Essência do Brasil Breu Branco and Essência do Brasil Priprioca.
In addition to starting construction of a research and technology center in Campinas,
São Paulo, and the inauguration of an advanced research center in Paris, France, we
installed a laboratory for the development of oils from the Amazon in Benevides, Pará,
and we signed a partnership agreement with the Centro de Biotecnologia da Amazônia
(Amazon River Region Biotechnology Center), to undertake a pilot project to develop
fixed oils.
RELATIONSHIPS
Employees
In October 2006, Natura launched its Relationship Principles, a set of rules and
standards of conduct, and an ombudsman, which at this initial juncture will apply to
our employees in Brazil and will be extended to other operations and publics with
which we have a relationship.
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The expansion of operations in Brazil and in other countries required that we hire 997
new employees. In 2005, Natura generated 573 new direct jobs. As of December 2006,
we had a total of 5,125 employees, with 4,361 in Brazil alone.
In 2006, the investment in education jumped 29% over 2005, reaching R$ 16.4 million,
which means that we vastly exceeded the goal of 40 hours of training per year per
employee.
During fiscal year, we again conducted research on the organizational climate using an
independent institute. The result was 69% favorable, versus 70% for the previous
fiscal year. Although small, this drop signals the need to continue to improve the
quality of relationships with our employees. On the other hand, we maintained our
ability to attract and retain talent. Our turnover rate in Brazil fell from 7.6% to 6.7%
this fiscal year.
In terms of diversity, 2006 stands out for the increased share of individuals with
disabilities among our employees, representing an increase of 4.2%.
Consultants
Our growth was supported by a boost in the sales force, both in quantity and
quality. Considering all operations, we ended 2006 with more than 617,000
Consultants, an increase of 18.9% over 2005. In Brazil alone, we rely on the
support of 561,000 Consultants, who maintain productivity (sales per Associate) of
R$ 12,500, slightly exceeding the previous year's strong performance, which was
R$ 12,300.
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We continue to make important investments in relationships with Consultants,
including training, meetings, offices and product launches as a way to keep them
involved and an integral part of our community. Movimento Natura, a program that
invites them to participate in social and environmental issues as mobilizing agents,
continues to have relevant results and to earn attention for us, such as, for example,
the Youth and Adult Education program and the growing sale of refills.
Suppliers and Supplier Communities
In 2006, we progressed in our certification program, Qlicar (Quality, Logistics,
Innovation, Cost, Contractual Conditions, Service and Traceability), and we
classified our suppliers into categories in order to implement specific development
plans. In 2007, Qlicar will be expanded to the communities that supply biodiverse
resources, distribution centers and service centers.
The policy of industrial outsourcing requires development of the productive skills and
capacities of suppliers, both domestic and foreign. The result of this entire process will
be to make outsourcing a competitive differential through the development of long-
standing associations. The main products currently manufactured by third parties are
our lines of bar soaps, shampoos, conditioners and liquid soaps in the Ekos line.
STRATEGIES AND CHALLENGES
The impressive financial, social and environmental results that we have obtained in
recent years, as well as the acceptance of our proposed value in Brazil and abroad,
lead us to believe that there are sufficiently favorable conditions for Natura to
continue growing. At the same time, we need to move forward in consolidating the
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investments and projects that sustain our vigorous growth of recent years. Thus,
we will continue to implement a strategy of growth and consolidation, based on
the following guidelines.
In view of the positive results in Argentina, Peru and Chile, resulting from good
acceptance of our brand and the direct sales channel, we will continue to grow and
more quickly seek the point of equilibrium in these operations, demonstrating that
we have a profitable and reproducible business model. We will continue to invest in
the Mexican operation, since the strategy has proven itself sound as evidenced by
greater-than-expected growth levels, and we will consolidate Natura's presence in
the region by starting operations in Venezuela and in Colombia, also in 2007.
At the same time, we will continue to sound out new markets and, as reported, we
began planning the launch of operations in the United States and Russia, slated for
2008. Thus, Natura's experience in France will continue to be a major source of
learning.
We will continue to grow in the Brazilian market, maintaining the innovative spirit
that defines our company. As a result of increasing competition in this market and
of our relevance in it, we will need to be even more efficient and creative in our
marketing activities, with an increased balance between short- and long-term
operations. In recent years we invested in the expansion of our administrative
structure to more autonomously and efficiently manage our operations ­ in Brazil,
which will continue to finance all our initiatives in the coming years, and
international operations, which represent the seeds of our future growth. Starting in
2007, we will keep this structure fixed. We will begin to incorporate gains of scale,
and we will also explore productivity gains that still exist in the main operating
processes.
In terms of the environment, we will continue mitigating and, where possible,
eliminating harmful impacts to the environment, with the goal of becoming
"carbon-neutral" by 2008. Keeping in mind our large-scale use of biodiverse
Brazilian resources, we will continue to dedicate funds and the energy to
sustainably use them, in strict partnership with farming and extraction communities
with which we maintain relationships. In terms of social justice, our focus will
continue to be to improve the quality of relationships and the expansion of the
distribution of resources to all the publics in our business chain.
COMPLIANCE WITH ARBITRATION BOARD
The Company, its shareholders, administrators and the members of the Financial
Board agree to resolve, by means of arbitration, any and all disputes or
controversies that may arise among them, related to or deriving from, especially,
the application, validity, efficacy, interpretation, violation and their effects, of the
provisions contained in Law No. 6404/76, in the Company's bylaws, in the
regulations published by the National Monetary Board, by the Central Bank of Brazil
and by the Securities and Exchange Commission, as well as in any other regulations
applicable to the operation of the capital markets in general, as well as those
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appearing in the New Market Listing Regulations, in the New Market Participation
Contract and in the Arbitration Regulations of the Market Arbitration Board.
RELATIONSHIP WITH INDEPENDENT AUDITORS
In accordance with CVM Instruction No. 381, we state that the Company's independent
auditors, Deloitte Touche Tohmatsu, did not provide any services not related to the
independent audit during fiscal year 2006. The Company's policy in hiring the services
of independent auditors ensures that there is no conflict of interest, or loss of
independence or objectivity.
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EARNINGS RELEASE ­ 2006
São Paulo, Brazil, February 28, 2007 ­ Natura Cosméticos S.A. (São Paulo
Stock Exchange ­ Bovespa: NATU3) announces today its results for the fourth
quarter (4Q06) and for the year 2006. The financial and operating information
included in this report, except where otherwise indicated, is presented on a
consolidated basis, according to the Brazilian Corporate Law.
> 2006 HIGHLIGHTS
· Gross Revenue of R$3,890.0 million (+19.9% compared to 2005)
· R$654.5 million EBITDA (+16.0% compared to 2005)
· Net Income of R$460.8 million (+16.1% compared to 2005)
· Opening of the first "Casa Natura" (Natura House) in Brazil ­ Campinas ­
São Paulo
· Expansion of the distribution center ­ Mathias Barbosa/MG
· Initiation of the tests phase of the direct sales model and opening of the
researches lab in Paris, France
· 18.6% growth in the consolidated number of Consultants, reaching 617.3
thousand.
· Natura Shares (NATU3)
o Splitting 1:5 in March 2006
o Entry in the IbrX50 and Ibovespa indexes, of the São Paulo Stock
Exchange
o
51.2% appreciation in 2006 (vs 32.9% of Ibovespa)
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(1) Data from Natura Empreendimentos
> FINANCIAL SUMMARY
4Q06
4Q05
Change %
2006
2005
Change %
Units sold ­ items for resale
(in millions) ­ Brazil
1
67.8
5.9%
216.0
241.0
11.6%
Gross Revenues
1,029.7
16.6%
3,243.6
3,890.0
19.9%
Net Revenues
726.0
17.5%
2,282.2
2,757.0
20.8%
Gross Profit
494.1
11.0%
1,551.0
1,865.7
20.3%
Gross Margin (%)
68.1%
-
68.0%
67.7%
-
Ebitda
2
194.9
-8.9%
564.5
654.5
16.0%
Ebitda Margin (%)
26.8%
-
24.7%
23.7%
-
Net Income
138.5
-15.7%
396.9
460.8
16.1%
Net Margin (%)
19.1%
-
17.4%
16.7%
-
EPS (R$)
0.93
1.08
15.4%
Dividends + Interest on Capital
3
per share (R$)
Total consultants
4
in Brazil
(in thousands)
482.8
16.2%
482.8
561.1
16.2%
Total consultants
4
in Latin America
5
37.6
49.7%
37.6
56.2
49.7%
>
Consolidated Financial Summary (R$ million)
(in thousands)
0.74
0.83
12.2%
-
-
71.8
1,201.0
852.8
548.2
64.3%
177.5
20.8%
116.8
13.7%
561.1
56.2
-
-
-
-
(1) Total consolidated number of Cosmetics, Fragrances and Toiletries products resold by consultants. Therefore,
units sold exclude samples, gifts, resale support material, Crer para Ver products, among others.
(2) EBITDA = income from operations before financial effects + non-operating income + depreciation and
amortization.
(3) Including the dividends and interest on own capital per share (net of withholding income tax) regarding the
results of the fiscal year 2006, "ad referendum" of the Annual General Meeting to be held on April 02, 2007.
(4) Position at the end of the period of the 17th sales cycle.
(5) Argentina, Chile, Peru and Mexico.

>
Consolidated Gross Revenues (R$ million)
429
587
688
1,016
1,168
1,411
833
806
1,910
1995
1996
1997
1998
1999
1
2000
1
2001
2002
2003
2004
2,540
+33.0%
3,244
2005
+27.7%
CAGR (1995-2006) = 22.2%
3,890
2006
+19.9%
+35.4%
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> COSMETICS, FRAGRANCE AND TOILETRIES (CF&T) SECTOR IN BRAZIL -
NATURA'S TARGET MARKET FIGURES
According to data from Sipatesp/Abhipec1, in 2006, the Cosmetics, Fragrances and
Personal Hygiene Industry posted a 13.4% growth, compared to 2005. Discounted
by the Amplified Consumer Price Index (IPCA) of 3.1% in the period, in real terms,
the industry posted a 10.0% growth. During the last bimester of 2006, the target
market annual growth was 11.8%, compared to the same period of previous year.
The table below shows the breakdown of the target market 2 in two segments:
Cosmetics and Fragrances, and Toiletries, and Natura's market share in these
segments.
Target Market (R$ million)
Natura's Market Share (%)
2005
2006
growth%
2005
2006
points
percentage
Cosmetics and Fragrances
5,203
4,455
16.8%
34.3%
36.2%
1.8
Personal Hygiene
5,638
6,240
10.7%
11.3%
11.7%
0.4
Total
11,443
10,093
13.4%
21.4%
22.8%
1.4
>
CF&T Target Market Net Revenues Breakdown and Natura's Market Share in Brazil
Source: Sipatesp/Abhipec
(1) Sipatesp/Abhipec ­ Brazilian Association of the Cosmetic, Toiletry & Fragrance Industry
(2) Target Market ­ Cosmetics and Fragrances (Skincare, Make up, Fragrances and Sun Protection) and Toiletries (Soaps, Hair care, Deodorants and
Shaving products)
Natura increased its market share in the target market by 1.4pp, from 21.4% in
2005 to 22.8% in 2006.
> CONSOLIDATED GROSS REVENUES

Gross revenue in the fiscal year 2006 was R$3,890.0 million, with a 19.9%
evolution compared to 2005. We added 1.4pp to our market share in the target
market in Brazil, which increased from 21.4% in 2005 to 22.8% in 2006. The
foreign market sales interest in the total revenue increased from 2.8% in 2005 to
3.4% in 2006.
In 4Q06, the consolidated gross revenue totaled R$1,201.0 million, a 16.6% growth
compared to 4Q05. In Brazil, the gross revenue increased 15.6% in the same
period, a rate below our expectations, due to a lower market strategy efficiency at
the end of the year, that, despite having several innovative elements, did not
reached the planned results. We have developed some actions focused on
leveraging the sales of our products that may serve as gifts, what has indeed
occurred, despite of a cannibalization of our other items, affecting our gross
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margin. The causes have already been identified and will be eliminated for the 2007
strategy.
Taking into consideration our relevant market share and the natural increase of
competition in the Brazilian market, we will increase the efficiency of our Marketing
actions, searching for a better balance between short and long term actions. In the
international market, the gross revenue posted a 51.8% growth in North-American
dollars in 2006 compared to 2005, and a 52.0% growth in 4Q06, compared to
4Q05.
In 2006, 225 new products were launched, among which two news products
deserve special attention ­ Natura Humor perfume and Natura Diversa make up
line. The innovation index, indicating the percentage of the annual revenue arising
from the products launched during the last 24 months, decreased from 69.8% in
2005 to 58.4% in 2006. This decrease basically arises from a lower effectivity of
some products launches during 2005.

> COST & EXPENSES
Cost of Goods Sold - In the fiscal year 2006, the Cost of Goods Sold as a
percentage of net revenues remained stable, from 32.0% in 2005 to 32.3% in
2006.
In 4Q06, the Cost of Goods Sold was 35.7%, compared to 31.9% in 4Q05. This
3.8pp increase was mainly due to two factors: (i) increased growth of sets and
lower growth of the baseline products sales and (ii) increase of the overhead and
production indirect costs due to the adequation of the structure, focused on the
continuity of the expansion process of the Company.
The chart below shows the breakdown of cost's main components:
Item
4Q06
4Q05
RM/PM
1
29.2
26.8
Labor
2.5
2.1
Depreciation
0.9
0.9
Others
3.1
2.1
Total
35.7
31.9
>
Composition of Cost of Good Sold (% Net revenues)
2006
2005
25.4
25.9
2.8
2.5
1.1
1.0
3.0
2.6
32.3
32.0
(1) Raw material and package material

In 2006, sales expenses showed a slight 0.4pp increase, from 31.7% in 2005 to
32.1% in 2006, as a percentage of net revenue. This growth was due to a planned
increase of investments in international expansion and in the brand construction in
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these markets, partially offset by the higher efficiency in logistic processes (call
center and freight expenses).
The sales expenses posted a 1.0pp growth in the quarter, from 31.3% of net
revenue in 4Q05 to 32.3% in 4Q06. This increment is associated to higher
investments focused on the strengthening of Natura brand in the international
operations mentioned above, concentrated in this period.
Administrative expenses rose from 12.7% in 2005 to 13.4% in 2006 in relation
to net revenue. This increase is attributed to (i) strategic decisions, especially
regarding the projects and the restructuring of the IT area; and (ii) adequation of
the administrative structure, aiming the continuity of the expansion process of the
Company in Brazil and abroad. These increases were partially offset by the
reduction of the provisions for tax risks and others in 2006.
In 4Q06, the administrative expenses represented 12.7% of net revenue, compared
to 11.4% in 4Q05. The reasons for the increase were the same of the year,
however, the impact in the quarter was higher, due to the combination of lower
sales growth with (i) expenses with administrative structure that achieved its peak
in 4Q06 and (ii) a higher circumstantial concentration of expenses from projects
also in this quarter.

> EBITDA AND NET INCOME

In 2006, EBITDA totaled R$654.5 million, with a 16.0% growth compared to 2005
(R$564.5 million). The EBITDA margin posted a reduction, from 24.7% in 2005 to
23.7% in 2006. This reduction is a direct result of (i) strategic decisions, such as
higher investments in the brand strengthening, internationalization and IT; and (ii)
re-adequacy of the administrative structure, due to the strong Company growth
during the last years.
In 4Q06, EBITDA was R$177.5 million, an 8.9% reduction compared to 4Q5
(R$194.9 million). The EBITDA margin decreased from 26.8% in 4Q05 to 20.8% in
4Q06, mainly due to the (i) sales growth below expectations in 4Q06, (ii) gross
margin reduction and (iii) intensification of administrative and sales expenses, as
previously mentioned.
In 2006, net income reached R$460.8 million (R$396.9 million in 2005). The net
income per share, excluding treasury shares, was R$1.08 in 2006 (R$0.93 in
20051), posting a 15.4% increase, in line with EBITDA.
In 4Q06, net income recorded a 15.7% reduction, from R$138.5 million in 4Q05 to
R$116.8 million. This reduction, more accentuated if compared to the EBITDA one,
was due to the lower net financial revenue in the period (R$0.1 million in 4Q06
against R$8.1 million in 4Q5). An increase in the Income Tax (IR)/Social
Contribution on Net Income (CSLL) average rate could also be observed, compared
to 4Q05, due to the higher loss interest of international operations, arising from the
opening of new subsidiaries.
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(1) For better comparison purposes, the value of net income per share in 2005 was divided by 5 to reflect the splitting
of shares occurred in March 2006.
> CAPEX (FIXED ASSETS)
2006 capital expenditures (CAPEX) totaled R$193.6 million, mainly allocated to: (i)
expansion of logistics and production capacity, (ii) land acquisition for the
construction of the new research and development center in Campinas and (iii) IT.
For 2007, the investments programmed amount to R$190 million to be allocated to:
(i) expansion of logistics and production capacity, (ii) civil works regarding the new
research and development center, and (iii) IT.

> RESULTS BY AREA OF OPERATION
>> Brazil
4Q06
4Q05
Change%
Units sold ­ items for resale
(in millions)
71.8
67.8
5.9%
Net Revenues
2
Ebitda
2
Ebitda Margin
>
Financial Highlights - Brazil (R$ million)
Gross Revenues
2
1,158.5
1,002.1
15.6%
2005
2006
Change%
241.0
216.0
11.6%
3,759.5
3,154.0
19.2%
194.4
205.8
-5.5%
697.6
597.2
16.8%
23.7%
29.2%
26.3%
27.0%
Total de Consultants
1
561.1
482.8
16.2%
561.1
482.8
16.2%
819.9
704.3
16.4%
2,656.0
2,212.8
20.0%
(1) Number of consultants by the end of cycle 17 of sales
(2) Pro-forma Revenues and EBITDA Brazil, excluding the transactions with foreign subsidiaries (gross revenue and
cost).

In Brazil, the number of consultants reached 561.1 thousand at the end of 2006,
with a 16.2% growth compared to the previous year, showing the high attraction
capacity of the Natura brand. The average productivity by active consultant was
R$12.5 thousand, a 1.9% growth compared to the previous year (2005: R$12.3
thousand).


>> Operations under consolidation - Argentina, Chile and Peru
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4Q06
4Q05
Change%
Units sold ­ items for resale
(in millions)
Net Revenues
Ebitda
Ebitda Margin
>
Financial Highlights ­ Argentina, Peru and Chile (US$ million)
Gross Revenues
2005
2006
Change%
Total de Consultants
1
4.0
2.2
83.3%
13.5
8.9
51.6%
17.6
11.6
52.0%
-3.4
-1.5
135.9%
-25.4%
-16.3%
51.2
36.2
41.7%
11.6
7.0
65.0%
42.0
27.8
51.1%
54.9
36.2
51.8%
-6.8
-4.5
51.1%
-16.3%
-16.3%
51.2
36.2
41.7%
(1) Number of consultants by the end of cycle 17 of sales
Gross revenue kept on showing a strong rhythm of growth for the operations under
consolidation, with a 51.8% growth in dollars in 2006 compared to 2005 (53.1% in
national currency). The EBITDA margin remained in the same level, representing a
16.3% loss on net revenue. The maintenance of the margin is explained by the
higher expenditures for the strengthening of Natura brand in these operations,
mainly in 4Q06.
In 4Q06, compared to 4Q05, the gross revenue growth was practically the same of
the complete year, 52% both in dollars and local currency. The total number of
consultants increased 41.7% and the growth of active consultants was even better,
reaching 43.7%. The productivity in dollars increased 5.8% compared to 4Q05.
The operating loss represented by EBITDA grew 135.9% in 4Q06 compared to
4Q05. The loss intensification in this quarter is due to higher expenditures for the
strengthening of Natura brand in these operations.
>> Operations under implementation ­ Mexico, Venezuela and France
4Q06
4Q05
Units sold ­ items for resale
(in millions)
Net Revenues
Ebitda
>
Financial Highlights ­ Mexico, Venezuela and France (US$ million)
Gross Revenues
2005
2006
Total de Consultants
1
0.23
0.05
1.7
0.6
2.0
0.7
-5.4
-3.3
5.0
1.4
0.58
0.06
4.4
1.1
5.1
1.2
-16.7
-10.0
5.0
1.4
(1) Number of consultants by the end of cycle 17 of sales
The operation in Mexico keeps on expanding and has been showing results that
meet the expectations. The operation in Venezuela was started in January 2007 and
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the operation in Colombia will probably be started at the end of the first half of
2007.
In Paris, France, the highlights were the inception of the pilot tests of the direct
sales channel and the opening of the advanced center of technology.

>> International expansion process

In 2006, investments in the international expansion process, represented by the
international operations negative results deducted from the ascertained income
from the Brazilian exports to international operations, totaled R$39.6 million. This
amount was R$4.6 million higher than the projection disclosed at the beginning of
2006, of R$35 million. This increase is totally explained by the decision of
increasing the investments in the brand in the Latin-American markets, focused on
4Q06.
For 2007, we estimate a total investment of R$48 million in this process. Such
increment is due to the increase of investments in the Mexican operation and to the
start of the operations in Venezuela and Colombia.

> CASH FLOW
2006 internal cash generation
1
reached R$515.4 million, up 16.9% over 2005. Out
of this total, R$73.1 million were used for operating working capital
3
and R$46.7
million for the other current and non-current assets and liabilities
4
.
2005
2006
Change%
Net income
460.8
396.9
16.1%
(+) Depreciation and amortization
54.6
44.0
24.0%
Internal cash generation
1
515.4
440.9
16.9%
Operating working capital
3
-73.1
-3.7
Other assets and liabilities
4
-46.7
1.5
Operating cash generation
395.5
438.7
-9.8%
Capex
-193.6
-111.6
Free cash flow
2
202.0
327.1
-38.3%
>
Consolidated cash flow ­ pro forma (R$ million)
Out of the R$73.1 million increase in operating working capital, approximately R$38
million refer to temporary events, especially the inventories balance increase due to
a sales increase below Company's expectations in 4Q06. Eliminating the excess
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resulting from temporary events, the investment in operating working capital would
represent R$35 million in 2006, in line with the Company's growth.
The increase in other assets and liabilities in 2006 was basically caused by a judicial
deposit made by the Company in the amount of R$28 million, regarding a
proceeding that questions the right to IPI tax credit in the acquisition of inputs with
zero tax rate.
As a final result, the free cash flow generation
2
in 2006 was R$202.0 million,
posting a 38.3% reduction compared to 2005 (2005: R$327.1 million).
Note 1: (Net income in the period)+ (depreciations and amortizations).
Note 2: (Internal generation of cash) +/- (variations in working capital and long term assets and liabilities) ­ (acquisitions of property, plant and
equipment).
Note 3: Assets ­ Accounts receivable, inventories and short-term recoverable taxes. Liabilities ­ suppliers, salaries, profit sharing and social charges,
tax liabilities, provisions and freights payable.
Note 4: Assets ­ Advance to employees and suppliers, short-term deferred income tax and social contribution, other credits and long-term assets.
Liabilities ­ short and long-term other accounts payable and reserves for taxes, civil and labor contingencies.
> DIVIDENDS AND INTEREST ON OWN CAPITAL
On February 28, 2007, the Board of Directors approved a proposal to be submitted
to the Annual General Meeting to be held on April 02, 2007, for the payment of
dividends and interest on own capital regarding the results earned in the fiscal year
2006, in the amounts of R$325.9 million and R$33.6 million (R$28.5 million net of
withholding income tax), respectively.
Out of the aforementioned amount, on August 10, 2006, dividends and interest on
own capital regarding the results earned during the first half of 2006, in the amount
of R$112.1 million and R$33.6 million (R$28.5 million net of withholding income
tax), respectively, were paid. The remaining balance to be paid on April 04, 2007,
after approval by the Annual General Meeting, will represent R$213.8 million
dividends.
These dividends and interest on own capital summed up, regarding the results of
the fiscal year 2006, will represent a net remuneration of R$0.83 per share (R$0.74
per share in 2005, already considered the splitting effect), corresponding to 175%
of the free cash generation
1
(96% in 2005) and 77% on net income in 2006 (79%
in 2005).
Note 1: (internal cash generation) +/- (variations in working capital and long term assets and liabilities) ­ (acquisitions
of property, plant and equipment).

> ESTRATEGY AND CHALLENGES
The significant financial, social and environmental results that we have been
obtaining during the last years, as well as the acceptance of our value proposal, in
Brazil and abroad, make us believe that there are quite favorable conditions for
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Natura's continued growth. At the same time, we need to make progress regarding
the consolidation of the investments and projects that have supported our strong
growth during the last years. Thus, we are going to implement a consolidation and
growth strategy, based on the following guidelines.
Taking into consideration the positive results obtained in Argentina, Chile and Peru,
resulting from a good acceptance of our brand and from the direct sales channel,
we will keep on growing and will be more focused on searching for the break-even
point in these operations, showing that we have a profitable and feasible business
model. We will keep on investing in the Mexican operation, since the strategy has
been showing to be adequate, with growth levels above projections. We will also
consolidate the presence of Natura in the region, through the establishment of
operations in Venezuela and Colombia still in 2007.
At the same time, we will keep on searching for new markets and, as already
announced, we have already started the planning for the establishment of
operations in the USA and Russia, in 2008. In this sense, the experience of Natura
in France will keep on being a great source of learning.
We will keep on growing in the Brazilian market, maintaining the innovative spirit
that characterizes our Company. Due to the increasingly competitiveness of this
market and to our relevance in it, we will need to be even more efficient and
creative in our marketing actions, with a greater balance between the short and
long term movements. During the last years, we have invested in the extension of
our administrative structure to manage our operations in a most efficient and
independent manner ­ the one in Brazil, which will keep on financing all the
initiatives during the next years, and the international ones, which represent the
seeds of our future growth. From 2007 on, we will maintain this structure fixed,
starting to incorporate scale gains, also exploring productivity gains already existing
in the main operating processes.
> CORPORATE RESPONSIBILITY
Employees ­ We keep on advancing in 2006 with a view to get closer and talk to
our publics. We have approved and published the Letter of Relationship Principles
and installed an Ombudsman's Office, both addressed to employees and third
parties operating in our facilities in 2006, but which will be extended, during 2007,
to the other publics in Brazil and to international operations.
Consultants ­ Our consultants take to the consumer our products and concepts
and also act as social transformation agents, with the initiatives of Movimento
Natura ("
Natura Movement"), the recruitment of students for the program
Educação de Jovens e Adultos (EJA) (
Adults and Youth Education), which, in 2006,
reached 78,936 enrollments and the efforts for the reduction of the environmental
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impact, through the sale of refills that increased from 17.4% on invoiced items in
2005 to 19.8% in 2006. Moreover, our consultants voluntarily sell products
specially created to collect resources destined to Programa Crer para Ver
("Believing is Seeing" Program), which supports public education projects. In 2006,
Crer para Ver
collected R$5,382.4 thousand, a 76.9% growth compared to 2005.
Consumers ­ In 2006, we completely eliminated the realization of tests with
animals from our practices, without renouncing to the exigent safety criteria for the
utilization of our products, i.e., from 2007 on, Natura will no longer make tests with
animals in its production chain and will no longer buy raw materials or inputs tested
in animals.
Suppliers and Supplying Communities ­ During the last quarter of the year, we
have executed a historic and inedited agreement for the sharing of benefits arising
from the access to diffuse traditional knowledge associated to the genetic
patrimony with Ver-As-Ervas Association, which represents the herb workers of the
Ver-O-Peso
popular market, in Belém (PA). Besides the benefits sharing, Natura
has established a cultural and technical agreement, in the amount of R$560
thousand, to meet the association requirements, such as professional qualification
to learn new techniques of herbs manipulation, preventing wastage and adding
value to the activities.
Environment - Biodiversity ­ In 2006, Natura reached 22 certified biodiversity
assets, or 63% from a total of 35 native or exotic species used. The assets in phase
3 of certification in 2006 were lemon grass, camomile, "buriti", coffee, "cumaru"
and "priprioca".
Emission of Gases of the Greenhouse Effect ­ With the Consolidation of the
Annual Inventory of Emission of Gases of the Greenhouse Effect in 2006, which
considers from the supply chain up to the use and final disposal of the product, we
will be able to construct a scenery of reduction alternatives starting from 2007 and
meet our challenge of making our activities "carbon free" up to 2008. Products
impact ­ Since 2003, Natura analyzes the environmental impacts of its packages
through the evaluation of their life cycle. The average environmental impact of the
products by declared weight showed a 7% reduction compared to 2005, from 89.3
mPt/kg to 83.2 mPt/kg.
Energy ­ The Energy Consumption showed a 10.5% growth compared to 2005,
explained by both production and isolated items growth. However, the relative
consumption of energy by unity sold showed a 9.9% reduction, meaning the efforts
for the optimization of the use of energy.
Water ­ The absolute consumption of water increased from 136,677m³ to
141,883m³ in 2006, 2.4% above the stipulated goal, partially due to the internal
production volume 3.2% higher when compared to the goal and partially due to the
variations in the products mix. Moreover, in that year, a more efficient system of
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water purification was installed for the plant, although much more complex, reason
why there was initially a higher consumption of water, due to the stabilization and
learning curve. On the other hand, the consumption of water by unit sold posted a
7.0% decrease.
Residues ­ The total weight of residues generated by Natura increased 14.3% in
2006, reaching 6,831 tons. Out of this total, 84% were recycled, increasing by 3p.p.
the percentage of residues addressed for recycling.
In 2006, our ISO 9001 and 14001 certifications were maintained.
This press release contains forward-looking statements. Such statements are not statements of historical
fact, and reflect the beliefs and expectations of the Natura's management. The words "anticipates",
"wishes", "expects", "estimates", "intends", "forecasts", "plans", "predicts", "projects", "targets" and
similar words are intended to identify these statements, which necessarily involve known and unknown
risks and uncertainties. Known risks and uncertainties include, but are not limited to, the impact of
competitive products and pricing, market acceptance of products, product transitions by the Company
and its competitors, regulatory approval, currency fluctuations, production and supply difficulties,
changes in product sales mix, and other risks. This press release also includes pro-forma information
prepared by the Company for information and reference purposes only, which has not been audited.
Forward-looking statements speak only as of the date they are made, and the Company does not
undertake any obligation to update them in light of new information or future developments.