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Transcription of Natura's 2Q05
Earnings Presentation
July 29, 2005
Good morning ladies and gentlemen. At this time we would like to
welcome everyone to Natura's 2005 second quarter results conference
call. Today with us we have: Alessandro Carlucci, the CEO, José Davidd
Uba, the CFO and Helmut Bossert, the Investor Relations.

We would like to inform you that this event is being recorded and all
participants will be in listen-only mode during the Company's
presentation. After Natura's remarks are completed, there will be a
question and answer session. At that time, further instructions will be
given. Should any participant need assistance during this call, please
press *0 to reach the operator.

We have simultaneous webcast that may be accessed through Natura's
IR website:
. The slide presentation may be
downloaded from this website; please feel free to flip through the slides
during the conference call. There will be a replay facility for this call on
the website. We remind you that questions, which will be answered
during the Q&A session, may be posted in advance in the website.
Before proceeding, let me mention that forward-looking statements are
being made under the Safe Harbor of the Securities litigation reform act
of 1996. Forward-looking statements are based on the beliefs and
assumptions of Natura management, and on information currently
available to the Company. They involve risks, uncertainties and
assumptions because they relate to future events and therefore, depend
on circumstances that may or may not occur in the future. Investors
should understand that general economic conditions, industry conditions
and other operating factors could also affect the future results of Natura
and could cause results to differ materially from those expressed in such
forward-looking statements.

Now, I will turn the conference over to Mr. Helmut Bossert, Investor
Relations Manager. Mr. Bossert , you may begin the conference.
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Speaker ­ Helmut Bossert
Good morning everybody. First, let me welcome you all to Natura's
conference call to discuss our results for the second quarter of 2005.
I'm going to present the slides and then Alessandro, Davidd and I will be
glad to answer any questions you may have.

Now let's go directly to slide 2.

Slide 2 ­ Historical figures: CF&T Target Market and Natura's
Market Share

This slide shows the nominal compound growth for this target market
between 2000 and 2004 which grew by 17%. In real terms, this
amounts to 6.8% per annum.
The graph on the right shows that Natura's market share rose from
13.9%, in 2000 to 18.9% in 2004.

Let's now move on to slide 3, which shows market figures for the first
four months of the current year.

Slide 3 ­ CF&T Target Market Growth in Brazil ­ First four
months of 2005
The chart on the left shows the first four months of 2005 target-market
net revenue growth of 18.1%, while the one on the right indicates that
Natura's net revenues grew by 30.3% in the same period, followed by
an increase in our market share from 18.6% to 20.5%.
This substantial market growth is based on the dynamic of the industry,
strongly influenced by innovation and changes in the population's
demographic parameters, for example the growing presence of women
in the workforce and the gradual aging of the population.

In addition, there is no hard evidence at the moment that leads us to
believe that these factors, considered industry's drivers, will run out of
steam in the short and mid-term.
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The next slide deals with growth per product segment.
Slide 4 ­ CF&T target market growth in Brazil per category (First
four months of 2005)

In the cosmetics and fragrances segment, Natura recorded year-on-year
growth of 33.3%, versus 18.7% growth for the market as a whole, and
our market share climbed from 32.2%, in the first four months of 2004,
to 36.2% in the same period of 2005.

In the toiletries segment, we grew by 24.3% in the same period, versus
17.7% for the market, and our share increased from 10.0% to 10.5%.
The fact that our growth outpaced that of the market can still be
explained by strong innovation, a commercial model based on a
constantly sales channel growth and high consultant retention and
productivity rates. Also, there is our brand, which this year, was ranked
fourth as the most valuable brand in Brazil, in a recent study by
Interbrand published by Isto É Dinheiro, a well-known magazine in

Let's now move on to slide 5.

Slide 5 ­ Gross Revenues and total number of Consultants

This slide shows that Natura's gross revenues recorded a growth rate of
28.5%, in the second quarter and first half of 2005.
On the right, we can see that at the end of June, 2005, the consolidated
figure stood at 484 thousands of consultants, up 21.1% over the same
period last year.
Let's now go to slide 6, which deals with the Brazilian sales channel in
more detail.

Slide 6 ­ Sales Channel in Brazil: growth and productivity
The graph on the left shows that the number of consultants in Brazil
totaled 454 thousands consultants at the end of the first half 2005,
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20.2% more than at the end of June, 2004. It is also worth noting that
the average growth for the last two years was 15.1%.

The chart on the right shows that productivity, in the second quarter,
increased by 7.3% year-on-year, reaching R$3,085 per average active
consultant. For the first half as a whole, productivity amounted to R$
5,637 per average active consultant, a growth of 7.1%.

Slide 7 deals with our Latin American sales channel.

Slide 7 ­ Sales Channel in Latin America: growth and
Our Latin American operations have also been expanding consistently,
with a compound annual growth rate of 35.1% over the last two years.
At the end of June, 2005, there were 29,9 thousands consultants,
35.9% growth over June 2004.

In the second quarter, productivity measured in US dollars grew by
8.4% year-on-year, reaching US$693 per average active consultant.
In the first half 2005, productivity was of US$1,252, up 7.0% growth
over the first half 2004.
And now some comments on our innovation process, moving on to slide

Slide 8 ­ Continuous Innovation

Investments in innovation continue to play a strong role in the
company's growth. In the first half 2005, these investments totaled 3%
of net sales, in line with our strategy.

It is also worth noting, in the graph on the right, that we recorded a first
half total innovation index of 69.7%, versus 61.3% in the first half of

Now, with slide 9, I'd like to briefly say something about corporate
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Slide 9 ­ Social corporate Responsibility
This slide shows the sales figures for our Crer para Ver product line,
which in this first half of 2005 was of R$3.8 million, up 46.2% over the
same period of 2004.

Regarding environmental field, our first-half packaging impact index
averaged 10.2 milipoints.
Now let's move on to slide 10.
Slide 10 ­ Financial Summary ­ Quarterly figures
This slide summarizes the main quarterly indicators:

Products for resale moved up 17.0% year-on-year, accompanied by
net revenues growth of 30.1%.

Gross revenues climbed to 35.6% year-on-year, while our gross
margin increased by 2.8 percentage points, from 65.9% in the
second quarter of to 2004, to 68.7% in 2005. This was due to lower
promotional efforts in the period and better management of seasonal
products margins (such as Mothers Day and Valentines Day).

EBITDA grew by 25.9% year-on-year, while the EBITDA margin
narrowed from 23.9% in first quarter of 2004 to 23.1%. The
decrease in the EBITDA margin was essentially due to the company's
structural changes, aimed at ensuring continued business growth,
such as: our ongoing international expansion ­ this year we have
entered Mexico and France and we are preparing to enter other
markets in 2006 and 2007 ­ and the previously-mentioned upturn in
innovation investments.

Net income climbed by 11.5% year-on-year, while the net margin fell
from 18.4% in the second quarter 2004 to 15.8% in 2005, chiefly
due to:

the reduction in the EBITDA margin;

a lower financial result;
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higher net expenses abroad related to the international expansion
process, which do not reduce the taxable income base in Brazil;

the lower relative share of goodwill amortization on the income tax
and social contribution calculation base, in the second quarter of

Now let's go to slide 11, which summarizes our first-half financials.
Slide 11 ­ Financial Summary ­ First-Half figures
Net revenues increased by 30% year-on-year, the gross margin widened
by 1.2 percentage points and the EBITDA margin decreased by 1.6
In short, the benefits from improved gross-margin management and the
gains in scale from higher output partially offset the upturn in expenses
from strategic investments in the international expansion process and in

Now for slide 12.

Slide 12 ­ EBITDA and margin
Here we can see that first half 2005 EBITDA which totaled R$224
million, 21.3% higher than in the first six months of last year.

Second-quarter EBITDA stood at R$129 million, 25.9% up year-on-year.

The graph on the right shows a comparison between first-half and
second-quarter EBITDA margins for 2004 and 2005.
Now let's move on to slide 13, which deals with our Latin American

Slide 13 ­ Operations ­ Latin America (Argentina, Chile and

Net revenue growth continued to outpace growth in Brazil and totaled
US$6.6 million in the second quarter of 2005, a year-on-year growth of
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The next slide deals with our international expansion process.
Slide 14 ­ International expansion
International expansion has continued as planned and initial
achievements in Peru (which is already profitable) show the model is
vigorous, in spite of operating losses in our other operations (all of them
still in the process of consolidating their structures).
Here you can see total net expenses from our international expansion
process, which totaled R$18.6 million in the first half 2005 and refer to
operating losses from existing operations (Argentina, Chile and Peru)
plus those from new ones (Mexico and France).

For 2005 as a whole, we estimate such expenses at R$41 million net,
R$28,8 million higher than in 2004.
Now slide 15.
Slide 15 ­ CAPEX
We invested R$ 53.1 million in permanent assets in the first half of
2005, most of which went to the acquisition of new machinery, software
and molds. In April 2005, we inaugurated our new vertical warehouse
facility, doubling storage capacity in Cajamar (SP). In the third quarter,
our third automatic separation line (Picking) will begin operations.

It is worth reiterating that our 2005 annual investment program totals
R$120 million, focusing on increasing production capacity, intensifying
automation and making the logistics process more flexible.

Slide 16 compares cash generation in the first half of 2005 and 2004.

Slide 16 ­ Cash Flow

Gross cash generation in the first half of 2005 stood at R$ 184.9 million,
27.2% up year-on-year. Of this total, we invested R$40.5 million in
working capital and long-term receivables and liabilities.
Investments in permanent assets, as mentioned previously, stood at
R$53.1 million, giving free cash generation of R$91.3 million.
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Finally, slide 17 brings us to dividends.

Slide 17 ­ Dividends and interest on capital, net of taxes
The Board of Directors has approved the payment of dividends and
interest on capital related to the first half of 2005 and this proposal will
be put to the AGO in 2006. The net total comes to R$101.8 million,
equivalent to R$ 1.20 per share and representing 64.6% of first-half net
income and 111.5% of free cash generation in the same period.

That brings us to the conclusion of our presentation and we are now at
your disposal for the question and answer session. Thank you all very
Question and Answer Session
Operator: Ladies and gentleman, we will now begin the question
and answer session. If you have a question, please press the star
key followed by the one key on your touch-tone phone now. If at
any time you would like to remove yourself from the questioning
queue, please press star two. Our first question comes from
Daniela Bretthauer, from Santander. Please, go ahead with your

Ms. Daniela Bretthauer: Hi, good afternoon everyone. The first
question is if you could just give us a little bit more clarity on the
financial results, meaning how much was the effect of the market
to market on your financial results? I'm just trying to get to ... If
that was the main reason why your financial results were lower
than expected. That's the first question.
Mr. David Uba: Hi Daniela, this is David Uba speaking. Actually,
we had two effects on these financial adjustments, one for this
current quarter and another one for the same quarter of last year.
Let's start for the last year, which this explanation will help you
understand why we had such a big difference between our results
of second quarter of 2004 and the current second quarter. Last
year we had a capitalization of some convertible bonds by
BNDESPAR and that resulted in a decrease in our expenses,
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financial expenses, for that period. Actually, we had made some
provisions for an extra cost for those debentures that, when we
went public, those extra expenses didn't apply anymore, so we
canceled those provisions in that particular quarter, so that had a
net effect in that quarter of R$3 million. This year we decided to
swap 1 million term finance for another one at much better, with
much better conditions, with a lower cost and when we decided to
anticipate the liquidation of that operation, that loan, the market to
market calculation of the net payment to be done, resulted in a
financial expense of R$2 million, so those two effects together
represented a effect total difference from those two quarters of
R$5 million.
Ms. Bretthauer: OK, so this basically on the financial results,
would it be fair to say that the lower figure it is more a reflection of
your working capital needs going up, rather than the market to
market? Because it is a very small impact, I was thinking maybe
was a bigger figure, so I guess the lower financial result has to do
with the increase in working capital needs. Am I correct on that
Mr. Uba: Almost. I would say that the impacts are similar. We
estimate our excess in inventories in this first half of the year as
something around R$20 million, which we do not expect to reduce
until the end of the year, by the way, so if you take the impact of
this excess in inventory at, let's say, an average cost of 10% per
semester, would mean an impact in this semester of R$2 million or
in the quarter of 1 million, while the market to market adjustment
meant R$2 million for the semester and 2 million for the quarter
alone. So they are similar.

Ms. Bretthauer: A combination of both.

Mr. Uba:
Yes, yes.

Ms. Bretthauer: And the second question is, you provided us with
the total amount, or the total cost of your internalization, or
international expansion for 2005, which is a pretty substantial
amount, R$41 million. What can we expect for 2006 and going
forward? Similar levels, or ... I am just trying to sense when will
that figure peak and when will it start to normalize? Or that will not
happen anymore going forward? If you can give us a little color on
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what to expect for your expenses in the international expansion
going forward, that would be great.

Mr. Uba: Daniela, as you know this internationalization process is
deep rooted in our strategic planning for the coming years. We
want to create a new route of growth for the company in the
coming years and we believe that if we do not expand abroad we
might jeopardize the growth of the company, let's say from 5 to 10
years from now. So, this is ... the company is strongly committed
to this internationalization expansion, but with a limited impact in
our results. This internationalization expansion is always reflected
in our results, since they are operational losses in the startups in
other countries, so we are also committed in putting a cap on these
expenses as a percentage of our EBITDA. We are right now in the
process of making a new long-term planning including this stronger
expansion abroad and we still do not have precise figures for the
coming years, but what I can advance to you that we are very
concerned in putting a cap on the impact of this internationalization
in our results.

Ms. Bretthauer: Can you share with us what this cap, as a
percentage of the EBITDA may be at current levels?

Mr. Uba: No, not currently. We are still in the process of discussing
this with our board of directors and it is going to take a few months
before we have a better picture of what we are going to do in the
coming years, but what is important here is that we are going to
limit this impact and I would even say that at a very reasonable
level. We wouldn't let this to have a too relevant impact in our

Ms. Bretthauer: OK, thank you very much, David.

Operator: Our next question comes from Robert Ford, from Merrill
Mr. Robert Ford: Hi, good morning everybody. David, my first
question had to do with some of the expense pressures that appear
to be resulting from your domestic operations and I was wondering
if you could share with us a little bit more color in terms of what is
pressuring your logistics expenses internally in addition to just
simply fuel costs? And what may be the portion that you can
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address and the portion you can't address? And I would like to
have a better sense of some of the investments that you appear to
be making that I think will yield greater productivity in future
periods but for now maybe yielding greater costs?

Mr. Uba: OK, Bob. First of all I should start telling you that we do
not have any specific pressure from raw material costs, they are
very well balanced with the internal inflation here in Brazil. We had
some pressures from plastic packaging, but they were offset by
some gains on imported and other materials that are linked to
foreign currencies here in Natura. So we for raw materials, we are
in line with the internal inflation in Brazil. Now, the other pressures
from logistic process that we had were more linked to what we call
here the process associated with taking orders and shipping orders
to our consultants. All these processes, as we had, suffered a little
bit from the tremendous increase in volume we had in the last
three years. Actually, that infrastructure was not well designed for
this tremendous increase we had. We are redesigning all the
infrastructure for conducting those processes and we expect these
costs to decrease in the next year. This year, in the first half of this
year, this loss of productivity in these processes represented
roughly 1% of our net sales, which we expect to go on for the
remaining of the current year.
Mr. Ford: OK David, in my perception, when people make
reference to your working capital requirements means that not only
is it in distribution, but also in manufacturing it seems as if you are
carrying a little bit more finished product; you built up inventories,
not just to hedge yourself, because if you take out that R$20
million in excess inventory that you referenced, you are still up
50%, your sales are only up 30, right? So, there too, it seems like
you are bumping up against some of the capacity constraints,
because of your phenomenal growth that you have had over the
last few years. Is that correct? And if so, will you raise your CAPEX
budget even further than the R$120 million to address some of
these constraints that you appear to be bumping up against?

Mr. Uba: OK. Well, your supposition is partially correct, part of the
problems we have in servicing our consultants came from some
constraints in our manufacturing processes, some bottlenecks we
have in manufacturing processes, but also from inadequate
inventory policy we had until, say, the beginning of this year. As
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our portfolio increased in number of SKUs, all these logistics
processes increased in complexity and we had to review all the
processes. So, let me try to summarize what we are having right
now at Natura. We, in the last two years, we have been losing
some sales because of our lack of capacity of fulfilling 100% of our
consultants' demands. We want to decrease these stockouts and
the losses of sales derived from these stockouts and we believe
that we can have two positive effects from doing that: the first one
is the direct one, is the increase in sales from these lost sales by
canceling those losses from the stockouts; and the second one is
improving the quality of service to the consultants and giving them
more stimulus for increasing their sales to the final customers. And
this second factor may be even more important than the first one.
We believe that by improving service to our consultants will help
them to increase their customer base, or increase the share of
Natura in these customers' expenses with cosmetic products. So,
what we are doing now is investing in manufacturing process,
giving more flexibility to the manufacturing process and at the
same time to develop a much more intelligent, I would say,
inventory policy in order to reduce the stockouts to almost zero
and therefore to increase our sales. We are absolutely sure that
this investment has a tremendous return for the company.

Mr. Ford: I have no doubts that you've got some good
opportunities and they sound like they are very good ... very good
problems to have, I would suspect. But is it going to cause you to
raise your CAPEX? And because part of this is improving the quality
of service to the consultants, then my suspicion is also you have
been growing consultant base by so much, that we're also probably
going to see some growth in terms of your further growth already
from that first quarter base in terms of the ... that your managers,
your promoters to the consultants as well, are we going to see
further growth in terms of that level of the organization and, again,
are we going to see CAPEX in excess of R$120 million?

Mr. Uba: No, I don't expect CAPEX to go much further beyond the
levels, the level of this year, R$120. In this year no, and not even
for the coming years. It should stabilize around those levels. That's
our perception right now. We are going to eliminate some
bottlenecks we have right now and for the coming years, of course
it also will depend on the rate of growth we will have in our
volumes, but our better estimate right now is that CAPEX should
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stay around those levels, R$100 to R$120 million per year.
Mr. Ford: OK and when it comes to promoters and people and also
if you were to strip off fuel costs, because my guess is that on
some of your freight contracts there is a component that may not
to be easily negotiable, which will be their operating expenses. Are
those things that will not be easily addressed initially meaning that
you're going to have to kind of work through this period of higher
fuel costs and probably make an investment initially, I would
suspect, in building up a bigger team of promoters that, when you
bring them on first, it takes a while for them to reach levels of
productivity of your existing promoters.
Mr. Uba: Well, the new promoters we are bringing to the
company, of course they have much less productivity then the
senior ones, but at the same time, the compensation of those
promoters are in line, roughly in line, with the contribution that
they give to the company. So, actually we never saw any decrease
in productivity or increase in sales expenses as a result of bringing
new promoters to the company, because of this effect. As the
productivity is much lower, their compensation also is lower in the
first years in the company, so the net impact is, in terms of
percentage of expenses, is nothing, they do not increase neither
decrease the sales expenses as a percentage of sales. Did I
answer your question or not?
Mr. Ford: You sure did, David. The only other thing was with
respect to your freight contracts, because my perception in terms
of logistics was there was an external component as well, it was
not just picking internally and trying to fill demand or servicing the
call centers, but there was a third party freight component, that
they you're trying to work through as well. Is that correct?

Mr. Uba: The freight? Well, we might have some pressures from
freight contracts. We will try to compensate that by offering larger
volumes to our freight companies, the contractors, and see if we
can compensate some increase in costs, in petrol prices for
instance, or the fact that we are growing at higher rates at more
distant areas from our distribution centers, which might add some
costs, add some freight costs to the company. What we are trying
to do, as I said, is to improve the negotiation with these freight
companies and try to stabilize the cost around what it is today. We
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... it is too soon for projecting or estimating any effect in the long
term, but I would say that if we have a impact, a negative impact,
it wouldn't be too much; very, very small as compared to the total
expenses of the company.

Mr. Ford: Thank you very much David, that is good to hear.

Mr. Uba: OK, thank you.
Operator: Our next question comes from Julia Rizzo, from CSFB.
Ms. Julia Rizzo: Well hi, good afternoon everyone. I have two
questions regarding the product development and the direct
distribution channel. My first question is if Natura is developing new
products out of the CST segment to be distributed through the
direct channel? And the second question, following the same line, is
if the company decides to get in a new product segment, for
example vitamins or supplement tabs, what point or market
characteristic the company considers, such as market size or
penetration or returns, to add this new product to its direct
distribution channel? Is there any color on that? Hello?

Mr. Uba:
Just hold on one second, Julia.
Mr. Carlucci: Hi Julia, how are you? It's Alessandro speaking.
Talking about the developing of new products outside the cosmetic
industry, even though we are planning and studying the
opportunity to develop products outside the actual industry, we are
too far from this day to share with you some informations about.
The important for you is to know that we are studying, we are
planning, but we don't have now good informations about what we
are going to do, what is the size of the market, which products,
and what we ... how we plan to develop and launch and sell those
products, so we don't have much more information about to share
with you.
Ms. Rizzo: But could you please just provide like a figure, such as
what kind of sectors or segments could be actually possible for
Natura pick up and choose to develop and try to distribute through
this channel? Like we considered outside the CST segment this and
this, because of this and that? Can we just have a highlight on
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Mr. Carlucci: Julia, like a said, we are far from the date that we
are going to launch an outside, or a new category outside the
cosmetic industry. But I think that, as you know, there are some
new categories where direct selling companies do well, like - and
are just examples - nutritional products, some lingerie products,
products that can be sold by direct selling companies and we are
studying among those categories. Maybe, the nutritional products
are more related with our reason being, so you could think about
the nutritional products, but as I told you we don't have a plan
already done, so we are still studying.

Ms. Rizzo: OK, thank you very much.

Operator: Our next question comes from Robert Wertheimer, from
Morgan Stanley.
Mr. Robert Wertheimer: Hi. My first question is on the price per
unit and unit sales. Price per unit grew 10% year over year after a
number of quarters are being flat to slightly down and I'm
wondering how much of that planned for, did intentionally and how
much was a surprise to you and why it happened?

Mr. Uba: Robert, this is David speaking. Actually, We had a 3%
real increase in our average prices in the second quarter,
differently from the first quarter when we had a real decrease in
our average price. I would not say that that was a surprise to us,
at the same time I would add that we were not planning to change
this average price. We have, usually we have a certain degree of
volatility in the demand among our categories; that also might be
helped by our promotional efforts in a given period and by new
products being launched and that is what we saw in the second
quarter of this year. We had some very good new products being
launched with a higher unit price, higher than the average for the
company, and also some increase demand for some higher prices
products inside each category. It's a normal process in this
business and it wasn't actually a surprise for us, so with this
increase in prices in the short term it is natural that the number of
items sold decreases a little bit, since the commitment of our
customers with our products might be considered fairly constant in
the short term, so if in the short term we have an increase in
average prices, the unit sold should decrease a little bit. Of course,
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this is an effect only for the short term. In the long term, we can
have both effects. Average prices increasing as well as number of
items and we saw that, we have been seeing that in the longer-
term, if you look in the last three years, for instance. That is a
summary of what happened in the second quarter.
Mr. Wertheimer: OK and if I can just understand the reason for
the inventory build. Is that on purpose with more innovation in the
pipeline and preparing for higher sales at the back half of the year?
And you mentioned that inventories should stay high for the rest of
the year and I just wanted to understand exactly why?

Mr. Uba: No, not really. The reason for the increase in inventory
was that we were not happy with our inventory policy that
prevailed until the end of last year. We were losing a reasonable
portion of sales because of stockouts in our inventory. We decided
to review all our inventory policy in order to decrease those
stockouts and therefore to increase our sales. We ... in the first
moment, the increase in inventories was higher than it should be
because we are still developing, let's say, the details of the new
inventory policy and we expect a certain excess that we have now
to disappear by the end of this year. But the new inventory levels
will be higher than we used to have before, because we were under
invested in inventories until then. We were losing more sales than
we should and you can see our gross margin is very high. So, any
losses in sales can have a tremendous financial impact in our
results and also, as I mentioned before to Bob, if we fail to fulfill
100% of our consultants' demands, we might have a very negative
impact in our network of reps and also with an additional impact on
sales. So, what we are doing now is trying to extremely improve
the service we provide to our consultants. That's the real reason
for increasing inventory right now.

Mr. Wertheimer: Great, and just one last. Did I understand
correctly that the price increase was 3% real or about 9% nominal
year over year?

Mr. Uba: Yes, you are absolutely right, 9% nominal and 3 real.
Operator: Our next question comes from Margaret Kalver, from
Harding Loevner Management.
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Ms. Margaret Kalver: Yes, hi. Just a quick question on the
domestic competitive environment. Avon maybe becoming a little
bit more aggressive, I read and do you expect to have higher
promotional expenses or higher advertising costs in your Brazilian
market going forward?
Mr. Carlucci: Hi Margaret, is Alessandro speaking. In fact, until
now we didn't see any reasonable change in the competitive
environment here in Brazil. We have important competitors like
Avon, like Lever, like l'Oreal, like other big companies, like Nivea,
but we didn't see any change until these days that should keep us
planning more promotional investments in the next months. So we
are running our plan as we started this year, so we are not seeing
a big change in the competitive environment.
Ms. Loevner: OK, thank you.
Mr. Carlucci: You are welcome.
Operator: Our next question comes from Ms. Tânia Sztamfater,
with Unibanco.

Ms. Tânia Sztamfater: Hi, good afternoon everyone. I have two
quick questions. The first one regarding your small pilot on the bi-
level Consultant Network. I'm wondering if you have any update on
that, how were the results and if you are considering using that
type of direct distribution in a larger scale?

Mr. Uba: Hold on a second, Tânia, please.
Ms. Sztamfater: OK.
Mr. Carlucci: Hi, Tânia, is Alessandro speaking. First of all, I would
like to share with you that you have a lot of new initiatives on new
kinds of sales models. We are trying every day to develop new
kinds to reach the customer always by the direct selling system.
We have, yes, we have a pilot, a project with a two-level system,
among other projects that we have. We are trying to develop the
actual one that we are using Brazil, but we still don't have results
about this project, even though we are happy with the start of this
pilot. But we didn't reach the point to share with you what we are
going to do, if we are going to roll out, if we are happy with the
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results and when we finish this project we can share with you what
we are going to do, but nowadays we don't have the final results.

Ms. Sztamfater: OK. Do you have like a timeline for discussing
with the market this new product or this is still very premature?
Mr. Carlucci: I think that is premature. Maybe next year we could
share something about this project, because if we change
something it's an important change in our model, so we are caring
about, so before next year I don't believe that we are going to
have some better information about.

Ms. Sztamfater: OK, thanks, Alessandro. And the second and last
question is regarding your new picking line. Since picking was one
of your ... one of the most important bottlenecks in the production
by the end of the last year and beginning of this year, I was
expecting that with this new line starting to function in the third
quarter, that would affect working capital needs and ... decrease
working capital needs and might, and even might affect the costs
of goods sold. As you mentioned that you expect the level of
inventories at least to stay, at least in this level for ... still the end
of the year, I wanted to know where are the impacts of this new
picking line now functioning from the third quarter on?
Mr. Uba: Tânia, this is David speaking. We will have a small
impact of this new line in our operational costs, not in the
inventory. Inventory was increased not because we had a
bottleneck in our picking line, but because we had some
bottlenecks in our manufacturing process and also because of our
promotional process and cycles. We need to be better prepared to
face the volatility in our demand, mainly during ... for the items
being promoted. So, the picking line, as I said, will have some
impact in some sales expenses. We have more productivity in the
picking process, no impact on the cost of goods sold, neither on the
inventory level. And also we will be ready for facing new increases
in sales, because we are almost doubling our picking capacity with
this new line.

Ms. Sztamfater: OK, Thanks David.

Mr. Uba: Thank you.
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Operator: Our next question comes from Daniela Bretthauer, from
Santander. We ask you please to limit yourself to one question.

Ms. Bretthauer: Yes, I have a follow-up question, David. Can you
share with us what level of stockouts that you are right now? I
mean, you mentioned as a percentage of sales, but as a
percentage of your inventories, what was the rate? And you said
that you expect to decrease that and to what level? What level
would think is a normal stockout for your business?

Mr. Uba: We, actually we do not disclose this information, but I
can tell you that we wouldn't be happy if these stockouts were
about 1%. We intend to work with these stockouts to be below 1%
of our sales, but the level that we have today we don't share.
Although it has a direct impact on sales, we are more concerned
with the indirect impact, through the perception of our consultants
in our quality of service, the service that we provide to them.
There is where lies, probably, the best opportunity for improving
our performance in the medium-term, by improving or by reducing
the stockouts. Did I answer your question of not? Hello?
Ms. Bretthauer: ... question on the payout ratio for the first
quarter, first half, excuse me. It was around 65% of earnings and I
particularly was expecting a little bit more. I understand you
already signaled another 10 million in July, but that is only for the
second half of the year payout, which will only take place in April
next year. So, I was wondering if the market can expect a higher
payout during the second half of the year, so that for the full year
the average payout could be around 75% or higher or if we are just
expecting too much from the company on that front?

Mr. Uba: Daniela, actually we would prefer to compare our payout
to the free cash flow generation for the period or for the exercise.
We have been, we always declared that the company had no
intention to build up cash, so that we would pay 100% of our free
cash flow and we have been doing this consistently since our IPO.
As we said in the first half of this year, our payout as compared to
the net ... to the free cash flow was a little bit above 100%,
actually 110%. So what we ... I can advance to you that that's our
policy and we will proceed with it. By the end of the year, the
beginning of the next year, we should pay that complement of
dividends and income on net worth, juros sobre capital próprio, in
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order to keep with that policy, about 100% of the free cash flow
generation in the year.

Ms. Bretthauer: So, in other words, we should really focus on the
free cash flow payout rather than the net income payout? That is
your guidance, right?

Mr. Uba: Yes, that is my guidance right now, because that is our
policy, we should have our payout around 100% of free cash flow
generation. Hello?
Ms. Bretthauser: OK, thank you.
Mr. Uba: Thank you, Daniela.
Operator: Excuse me, this concludes today's question and answer
session. I would like to invite Mr. Bossert to proceed with his
closing statements. Please, sir, go ahead.
Mr. Bossert: I would like to thank everybody who took part in our
conference call and remind you that we are always at your
disposal. I hope to see you again at our forthcoming meetings, so
please check our event agenda on our investor relations site. Thank
you very much.

Operator: That does conclude the Natura audioconference for
today. Thank you very much for your participation and have a good