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International Conference Call
Quarter 2007 Earnings Results
February 29
, 2008
Operator: Thank you. Ladies and gentlemen, we will now begin the Question and
Answer session. If you have a question, please press the star (*) key, followed by
the one (1) key on your touch-tone phone. If at any time you would like to remove
yourself from the questioning queue, press star (*) two (2). Ladies and gentlemen,
again, if you would like to pose a question, please press star (*) one (1). Excuse
me; our first question comes from Mr. Robert Ford with Merrill Lynch.
Mr. Robert Ford: Hi good morning everybody, good afternoon to those of you in
later times also. But Alessandro, you are pursuing many initiatives that seem very
compelling, right? Individually and collectively and I was wondering if you could
expand on some of the efforts to perhaps improve the relationship with the
consultants and maybe the Consultora Orientadora Program with the Casas
in Brazil.
Mr. Alessandro Carlucci: Hi Bob, good morning, how are you? Let me explain a
little bit more about the investments in the relationship with our consultants and you
already mentioned some of them. Maybe the first one, the most important one, is
the implementation of the CNO model - the Consultora Natura Orientadora - that is
going to start in the middle of 2008 and we are going to finish the implementation
all over Brazil in 2009, so in one year and a half ahead we are going to operate all
our operations in Brazil under the CNO model.
And another initiative to establish better relationship with our consultants is the
implementation of Casa Natura. We are going to implement around 30 Casas
Natura in the next three years, this year probably 6, 7, and the rest in the next two
years. Another important investment, we are going to triple the investments in
training. We are recognized as a company that invests in training and we see an
opportunity to offer better training sessions to our consultants and we are going to
do it starting this year.
And another initiative that is going to help the relationship with consultants is the
decentralization of our distribution centers looking for the ... to shrink the delivery
time, the total delivery time to our consultants. So with these four main initiatives
we believe that we are going to have more loyalty, we are going to have our
consultants more satisfied, so this is going to be an important part of the R$ 400
million investment for the next three years.
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Mr. Ford: And Alessandro, when it comes to pricing I know you took some price on
soaps, took some at additional price in sunscreens; are there other categories that
you will take price in? And if you could give us an indication of what some of the
volume responses have been in soaps, sunscreens and perhaps other categories?
And I perceive - I know whether accurate and not
that you may be able to fund
this with reductions in packaging cost simply by changing packaging not
necessarily changing the impact of the presentation, but you... I perceive there
would be cost opportunities in some of these things without impacting gross
Mr. Carlucci: Bob, just a minute please. Hi Bob, let us see if I understood your
question. We have in our portfolio in some categories we have some products that
should be used every day, as soaps, as shampoos, as deodorant and other kinds
of products. What we did in soaps and we are going to do with other categories -
and I can tell you the next one, only the next one because it is public - and the
other one for strategic reasons I am sorry I am not going, I cannot give you the
information, but the next one is shampoo, we are implementing this month.
We are decreasing the price and stopping the promotional efforts in those products
because we believe that we should have the right price instead of doing promotion
campaigns and at the end the price is almost the same, but the customers they do
not see the real price. So our decision is to avoid the promotional campaigns and
decrease the price to have the best value between ... the best relation between the
value and the price in these products. So this is part of our strategy. And we are
not going to change any package, any quality formulation, the products are going
to be the same and we do not believe that this should impact the gross margin,
because there are other movements in the richest part of our mix that can
compensate this effect.
And with the soaps we had a very good response in sales, so we believe that this
is a good decision to be implemented during the first semester of this year.
Mr. Ford: And just with respect to some specifically, Alessandro, can you give me
a sense of the magnitude? Was it a price cut of something between 20%, 25%?
Traces to what the response was in terms of volume, because I perceive that those
cts were featured a little bit more heavily maybe not promoted, but ...
traces to what the volume response was to that move?
Mr. Carlucci: Bob, unfortunately I cannot give you the precise increase in volume
because I think this is very strategic to us, but I can guarantee you that the
response of the customer was very good, it was better than we supposed to be and
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in fact we had some stock outs of soaps in the end of last year and in the
beginning of this year and we are preparing, we are prepared now with this
learning to do the same with the hair-care products. But the response was very
good, but sorry, I cannot give you the precise number. Maybe when we have
implemented all the strategy I can give you some numbers.
Mr. Ford: Ok, I understand. And then just lastly with respect to the tremendous
growth that is happening with lower income groups, it coincides with the launches,
which I think is... you are probably attempting to target that tremendous increase in
disposable income among C and D consumers. Can you talk a little bit about what
you are doing to perhaps enrich your strategy better focusing on that segment of
the population?
Mr. Carlucci: This reduction in price is a way to capture a part of these customers.
Of course that is not only the C class, the B and A too, because there are going to
buy more soaps or shampoos of Natura. But this specific action that you were
talking about is a way to capture this new customer. So this is the only specific
thing that we are doing to capture and we believe that this can help us a lot to
increase productivity and to decrease the promotional effects, because we really
believe that those products are going to be ... we are going to sell without
promotional efforts only because they are the best value proposition in the market
with a good price.
Mr. Ford: Ok great, thank you very much.
Mr. Carlucci: Thank you Bob.
Operator: Excuse me; our next question comes from Mr. Reinaldo Santana with
Deutsche Bank.
Mr. Reinaldo Santana: Yes, good morning Alessandro. If you can... two
questions, first if you can expand on the competitive environment in Brazil, as of
late? And also my second question has to do with margins. If I understood
correctly, with this program you expect a minimum Ebitda margin of 23% for the
period that you are investing; and if you are expecting higher marketing
expenditures in 2008 in what areas do you expect to generate savings and better
margins? Thank you.
Mr. Carlucci: Hi Reinaldo, is Alessandro speaking. I will start with the competitive
environment and I think that in the last years - and probably this is going to happen
in the next one - the competitive environment in Brazil is getting tougher and
tougher. We have a market that is growing, we are in a market that grows in the
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last 10 years, so I think that every company wants to have a piece of this market
and we have all the major players here in Brazil now, so the competitive
environment is getting tougher.
Nothing specific in this year, I do not believe that in this year we are going to have
something special, but it is getting tougher and tougher. This is my perception.
Even though, as I mentioned in the initial speech, we are the preferred brand in
Brazil with 42% of preference and a very high score, especially because the
second preferred brand has 18% of preference. So even though the competitive
environment is getting tougher, we keep the preferred brand with the same high
score that we had in the last years. So we think that we are prepared to be an
important player and to increase market share in the next years. Now I will pass to
David to explain to you a little bit more how we are going to finance the R$ 400
million of investments.
Mr. Josť David Uba: Reinaldo, our cost savings program is quite broad, it involves
mainly manufacturing and distribution processes. I will start giving some examples
of opportunities we have in the manufacturing process and how we are going to get
those cost savings. As you probably know, we have already decided to decrease
the number of SKUs in our portfolio and that will be one of the triggers for obtaining
higher efficiency in the manufacturing processes. We are very confident that we
will be able to get a higher efficiency in the supply chain coming from higher
purchases by SKUs combined with a more stable demand for those items. The
idea here is for Natura to share gains from this favorable change in the supply
We also have a very specific plan for higher utilization of our assets. We will
decrease the setup times in our manufacturing process through this higher volume
per SKU and also as an effect of all those moves we expect a reduction on
transformation costs.
We also are putting in place a better and more comprehensive loss prevention
process and system in the company. In this year of 2007 we had an increase in our
losses coming from products being discontinued and we expect, by a lower
turnover, with this lower turnover in the portfolio combined with a much better loss
prevention system to reduce dramatically those losses in the near future.
On the distribution side we will get much lower order taking costs through the high
utilization of Internet, we have a specific plan for the medium-term for that. We also
will have a lower transportation cost coming from the decentralization of our
distribution and a reorganization of our cycles, our timetable of our cycles in the
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country. So those are some examples of initiatives we are organizing now, we are
implementing in order to decrease our costs. Those 400 million in three years will
come from operational costs of usually variable costs that will gain a higher
productivity through a different approach and some structural changes in our
Mr. Santana: I understood great, thank you and one follow-up. Do you expect any
pressures from raw material prices?
Mr. Uba: No, we do not have any specific expectation. Maybe on plastics that
might happen if the new oil prices stabilize, although here in Brazil there is always
a kind of cushion provided by Petrobras on those prices. But we are not expecting
much pressure on raw material prices. Last year for instance, average inflation for
our raw material and packaging costs was very, very low, lower than the general
index for inflation. So it seems that the supply side of the business is very stable
and calm, we are not expecting any big change in costs.
Mr. Santana: Thank you, thank you very much.
Operator: Excuse me. Ladies and gentlemen, as a reminder, if you would like to
pose a question, please press star (*) one (1). Our next question comes from Mr.
Celso Sanches with Citigroup.
Mr. Celso Sanches: Hi, good afternoon. I just want to talk a little more about the
revenue drivers and an update on the numbers for the fourth quarter, but as a look
out the next couple of years and clearly you are assuming your margins
assumptions - which were very helpful by the way from our standpoint - how do
you see the industry growing? Alessandro was talking about the past, if I
remember correctly about industry growth in nominal terms of somewhere in the
neighborhood of 13% to 15% if I am not mistaken - nominal of course, not real - is
that something you see accelerating? We saw a little bit of a drop in the growth
rates in the second half of last year. Do you think that is temporary? And more
importantly within that, do you see direct sales participation stabilizing here or
decreasing as (inaudible 28.12) a lot of people to shop in more formal channels?
And then related to that same question, rep recruitment in the medium term if the
economy continues very strong it is going to become more difficult as there are
more work options for women and also can you just update us please on your
turnover rate? In 2007 it was not lower than the past, if that moves up dramatically
2007 or not? If you could update us on those things please? Thank you.
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Mr. Carlucci: Let me see if I understood all your points. If I miss one, please say to
me. First of all I believe that our industry should grow almost at same rates of last
year this year, between 12% and 14%. So I think that in nominal terms we are
talking about the same rates of the last two years, this is my projection for this
Talking about the channels in the cosmetic industry, in 2007 we saw a slight
increase of the participation of retail and franchise, even though the direct selling
grew the retail and the franchise grew a little bit more. But I do not see a change in
the structure of the channel organization in our industry and I believe that we are
going to be an important player; the direct selling is going to be an important player
in this industry for the next 10 years, at least. So I do not see a change in the
structure of the industry. And you asked something about the turnover, could you
repeat because I think that I did not understand well what you would like to know.
Mr. Sanches: Sure, actually before I say that could you give clarification, a little bit
more detail, when you say a slight increase in retail and franchise, if you have any
numbers that it would be helpful.
And then secondly the turnover, your consultant turnover has been trending down,
even though it has slowed that downtrend it was still trending down over the last
few years. With the success of your competitor I was wondering if there has been a
change in that trend and what is the number for 2007 if you have that? Thank you.
Mr. Carlucci: Celso, let me share with you some numbers. We do not have the
numbers of the whole 2007; we have only the numbers of the first 10 months of
2007. With these numbers we can see the retail growing 13%, 13.1%; direct selling
growing 12.9% and the franchise 20.9% and it is important to share with you that
the franchise is the small part of our industry, is less than ... is around 5% and in
the last three years franchise was in a very bad moment in Brazil, so they are
recovering their participation. So as I mentioned there is a slightly better growth for
the retail, but 0.2%, so it is almost the same of the direct selling.
And talking about the turnover we saw last year a slight increase in the turnover in
our consultants, but it is not a trend because it was really little, small the increase,
so it is not a trend, we cannot configure that it is a trend. But we saw a small
increase in the turnover.
Mr. Sanches: Do you have a number you could attach to that for us?
Mr. Carlucci: Yes, we had last year 28.8% against 26 in 2006.
Mr. Sanches: That is great, thank you very much.
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Mr. Carlucci: Thank you.
Operator: Excuse me. Ladies and gentlemen, again, if you would like to pose a
question, please press star (*) one (1). Our next question comes from Ms. Daniela
Bretthauer from Goldman Sachs.
Ms. Daniela Bretthauer: Good afternoon. A quick question on an interview that
appeared in the local press today regarding your Internet strategy. Apparently you
want to have like a global store; can you comment a little bit on that strategy
Alessandro? Thank you.
Mr. Carlucci: Yes Daniela, this is a brand strategy. We want to offer our products
for Brazilians and non-Brazilians around the world and this is not a business
strategy, we do not want to have a business under Internet at least for the next
years, so this is only a brand strategy to offer the products for people that want to
buy all over the world independent that we have or not a local operation. So this is
the main strategy.
Ms. Bretthauer: And who is going to handle that, meaning are you going to have
an agreement with an Internet company and logistically?
Mr. Carlucci: Yes, definitely, we are not going to operate this logistic process and
it is going to be based in France, because it is the best place today for us to
operate, so it is going to be a third-party that is going to operate.
Ms. Bretthauer: Ok, thank you.
Mr. Carlucci: You are welcome.
Excuse me. Ladies and gentlemen, this concludes today's que
stion and
answer session. I would like to invite Mr. Carlucci to proceed with his closing
statements. Please go ahead, sir.
Mr. Carlucci: I would like to thank you all for your time, for the questions, and
again say that we are confident that we are going to start a new growth cycle in
Brazil, that we are going to continue to grow in Latin America and prepare a very
good plan to start our operations in the United States in 2009. Have a nice
weekend and thank you for your time again.
Operator: That does conclude the Natura audio conference for today. Thank you
very much for your participation and have a good day. Thank you.
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