Natura Cosmeticos' CEO Discusses Q1 2013 Results - Earnings Call Transcript

Apr.26.13 | About: Natura Cosmeticos (NUACF)

Natura Cosmeticos SA (OTC:NUACF) Q1 2013 Earnings Call April 26, 2013 11:00 AM ET

Executives

Alessandro Giuseppe Carlucci – Chief Executive Officer

Roberto Pedote – Chief Financial Officer, Investor Relations Officer, VP-Legal & Information Technology

Analysts

Robert E. Ford – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Lore Serra – Morgan Stanley & Co. LLC

Andrea F. Teixeira – JPMorgan Securities LLC

Linda Bolton Weiser – B. Riley & Co. LLC

Javier Escalante – Consumer Edge Research

Operator

Good morning ladies and gentlemen. At this time, we would like to welcome everyone to Natura’s 2013 First Quarter Conference Call. Today with us we have Alessandro Carlucci, the CEO; Roberto Pedote, the CFO; and Fabio Cefaly, 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. (Operator Instructions) We have simultaneous webcast that may be accessed through Natura's IR website at www.natura.net/investor.

The slide presentation may be downloaded from this website. There will be a replay facility for this call on the website at the end of the event. Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 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. Alessandro Carlucci, the CEO. Mr Carlucci, you may begin the conference.

Alessandro Giuseppe Carlucci

Good morning, everyone and welcome to our conference call for Natura results in the first quarter of 2013. In Brazil, the beginning of this year was more challenging we’ve crossed sales growth of 3.7%, which fell short of our expectations. This was due to our promotional strategy, which did not prove very effective in motivating our consultants in the first half of the quarter, and to the extended summer vocation periods resulting from this year Carnival holiday falling close to January.

This quarter the growth in the consultant base in Brazil of 7.8% was in line with our planning, while consultant productivity declined due to the factors I just mentioned. The significant improvements in profitability in our international operations in Latin America levers more confidence that we are already have solid and robust business platform that will make us a tough player in the region. In the countries in consolidation, Argentina, Chile and Peru, we ended the quarter with EBITDA margin of 14%, while in the countries in implementation, Mexico and Columbia, EBITDA margin was 6.8%, with both operations showing significant progress. We remain highly dedicated and focused on the initiatives that make up our productivity program. Our logistic continue to improve. Today, 40% of orders are delivered within 48 hours.

In March, we launched the Natura Eu Gosto program, which create incentives for purchases in cross categories and cross brands based on certain customer behavioral profiles. We also are very enthusiastic about our innovation plan. And at the end of the second quarter, we will kick off a series of launches in Toiletries categories that will allow us to operate in previously unexplored market segments with new concepts and new brands and innovative packaging.

We also made significant progress on projects with impact over the medium term that will enable us to connect and strengthen our relationships. In February, we expanded the pilot Natura Network offering the project to all 6,000 consultants in the city of Campinas. And on February 28, we concluded the acquisition of the Australian company Aesop, which confirms our ambition to leverage Natura value proposition by offering new brands and eventually new categories.

I also want to share with you the market share data for 2012, recently release by Euromonitor. In Brazil, we maintained, for the eight straight year, our leadership in overall CFT markets with market share of 13.4%, 100 basis points lower than 2011. As we mentioned in the earnings conference call for the fourth last year, we’ve seen strong growth in Toiletries categories last year, mainly healthcare and deodorant, in which our market share losses were concentrate.

As I said earlier, our launches should enable us to recover already this year our competitiveness in Toiletries products.

In the Operations in Consultation, we expanded our market share by 30 basis points to 4.3% and we are already a relevant player in these countries. In the Operations in Implementation, our market share expanded by 20 basis points. In short, despite the lower start of this year, we remain very confident in our productivity program led by the innovation program, which should bring material results in the third quarter and with first signs emerging already in this next quarter. We are also very enthusiastic about the progress on our direct sales model with the Natura Network.

Those were the points I wanted to cover. So I will now ask Roberto to give us some detail on the results.

Roberto Pedote

Thank you and good morning. In the first quarter, our consolidated net revenue, excluding Aesop acquisition, grew by 5% on the year ago period. As Alessandro already mentioned, the results in Brazil fell short of our expectations. Meanwhile, the international operations grew by 30% or 18% in local terms. As already expected, we observed the mixed match between gross revenue and net revenue growth in Brazil. Due to the increase in the value-added margin of ICMS tax in the state of São Paulo since August 2012.

Note that this impact will no longer exist in the second semester of 2013. We also registered gross margin comparison of 100 basis points, due to the price/cost ratio and higher taxes raised in Brazil and as well as accounting adjustments such as elimination of profits on inventories between the manufacturer and distributor.

We expect our balancing of gross margin over the coming quarters driven by the full impact of the price increase implemented in March 2013 as well as the new price increase of 3% already managed for the second half of the year that we’ll take effect in September.

Consolidated EBITDA was R$262 million with margin of 19.4%. the international operations, which already represent a robust business platform made a positive margin contribution driven by higher operating leverage in growth margin expansion. Brazil made a negative contribution to the consolidated results maybe due to the pressure on gross margin already mentioned in the lower dilution of spending on digital technology and projects targeting the medium and long-term.

Consolidated net income in the period was $125 million rise, down at 17.7% from the first quarter of 2012. this reduction was due to the operating results as already mentioned and through the higher financially expense, which were impacted by too main factors sectors.

The first is the marking to market of financial derivative instrument in view of the fluctuations in the currency coupon, which generates merely non-cash accounting effect that will disappear by the maturity of this debt. And the second is an R$8 million loss on financial hedge operations contracted to offset the impacts from currency fluctuation between the date of the commitment to acquire Aesop and the payment settlement date. Note that this financial hedge contract was entered into comply with our FX exposure policy.

For the whole year, we do not expect net income growth to diverge significantly from EBITDA growth. Cash consumption was R$110 million, reflecting the CapEx of R$60 million and unfavorable variation in working capital of R$248 million. This variation was impacted by the comparison based in December 2012, which enjoyed a positive non-recurring impact of approximately R$80 million from calendar effect and on typical concentration suppliers as I mentioned last quarter.

The working capital position in March 2013 improved by 8% compared to March 2012 due to the better management of suppliers and inventories. Note that the behavior of working capital has been in line with our plans. The Board of Directors also approved the buyback of 2.5 million shares to meet the exercise of stock options. The buyback will start on April 29 and last for one year with the shares repurchased held in treasury.

Those were the main points I wanted to go over today. Thank you very much. Let’s go please to the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Robert Ford with Merrill Lynch.

Robert E. Ford – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Hey, thank you and good day everybody. Hey, guys, I had a question with respect to Eu Gosto. Could you expand a little bit on what you’re doing to drive more cross selling? I know it’s been a phenomenal opportunity for you for a while and I’m curious as to what you put into place and how it would be funded?

Alessandro Giuseppe Carlucci

Hi, Bob, it’s Alessandra. Would you mind to repeat your question pleases?

Robert E. Ford – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Absolutely, Alessandro. It had to do with Eu Gosto, the cross selling incentives. And I know that what it’s just like 50% of consumers only consume one or two categories, right, if I’m not mistaken. And it seems like a massive opportunity and has been for a while. So I’m curios as to what you put into place. I know that you put a lot of thought behind it and just want to know kind of what the structures generally are like and if it will require any additional funding, right?

Alessandro Giuseppe Carlucci

Hi, Bob. It’s a very good question. And as you know the cross category initiative is part of bigger group, a wider group of initiatives. But speaking specifically about this, we started, first of all, to show to our customer in our catalog a different way to see our problems. So combined with the regular way that is to sub brands, we are offering to our customer and this in a different way, a combination of different categories and different sub brands. we did a study where we understood that there are almost 20 different profile of customers and then using this segmentation, we started a month ago, to have some pages in the catalog where we offer different products to the needs of this kind of sub brands of customers. So for example, the women that do sports, the traffic man, the products for the bath, for the everyday use, so different kind of profiles where you have a page with different products from different sub brands and dedicated to this kind of customer.

And we have an intention also to start to offer promotions to this profile of customer. and, of course, when we are going to have the Natura Network implemented, we are going to able also to offer directly to the right customer, because we are going to need (inaudible) where they are and who they are individually speaking.

So in some way, it’s a way to find not offended needs of our regular customers that’s today are buying only one or two categories as you mentioned. But this is in the beginning, we are only starting the project and we believe that we are going to have a lot of opportunities to increase the frequency of purchase, adding new categories and new sub brands for the same customer.

Robert E. Ford – Merrill Lynch, Pierce, Fenner & Smith, Inc.

and, Alessandro, you made reference to, but I’m curios if today in Campinas, are you beginning to do this electronically, at least to the consultants and I’m curious as to what CRM tools are becoming -- I guess practical within the model of Campinas. It’s early days, but I expect you’re starting to gather data and then that data on the final consumer will probably build on an accelerated basis, given the introduction of credit cards?

Alessandro Giuseppe Carlucci

Yes. Totally right, Natura Network is going to allow us and as you know we are piloting the Natura Network in Campinas. It is going to allow us to do a more personalized relationship with the customer using CRM. But now our most important efforts in Campinas is to connect the consultants. And we are putting our major efforts to really help the consultants to start to learn how they can use their own sites, how they can use the mobile equipment. And so all the CRM and all this personalized relationship with the customer is going to be done ahead. So today, we have concentrated our efforts to recruit more consultants to the Natura Network and also to teach them and to learn with them how they can use this tool to increase productivity.

and in a sequence, we are going to leverage the knowledge from their customers to really increase the frequency of the purchase. But we are going to do this probably a little ahead. So now, we have concentrated our efforts to really have more consultants connected in the Natura Network.

Robert E. Ford – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Okay. And then just one follow-up and you alluded to this as well with respect to the greater frequency of purchase. As you and you have a lot (inaudible) questions on the Brazil call and the Portuguese call and with respect to SOL. But as you prepare to launch, do you anticipate any changes or modifications to fulfill that policies given the greater frequency of use of the personal care lines?

Alessandro Giuseppe Carlucci

Even though we learn during the pilots that this will increase productivity and, of course, increase the frequency of purchase of the customer. We don’t have trends of change in the minimal order yet, and of course, depending not only in SOL depending on different indicators, we can adjust the minimum order. But this is not planned because of the launch.

Robert E. Ford – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Okay, thank you very much.

Alessandro Giuseppe Carlucci

Thank you, Bob, for your question.

Operator

Our next question comes from Lore Serra with Morgan Stanely.

Lore Serra – Morgan Stanley & Co. LLC

Good morning. Thanks very much. I wanted to ask two questions. So first is, just any thoughts or color on how Mother’s Day sales are shooting up? And then in terms of cost/margins, you had a lot of growth in administrative cost in the first quarter and obviously that’s tough with the lack of sales growth. But as you think about historically, you kind of target this kind of 23% to 24% EBITDA margins. You are not off to a good start in terms of where the first quarter was. How do you think about that goal of getting to that kind of a margin and how do you sort of get there with the first quarter starting point, please?

Alessandro Giuseppe Carlucci

Hi, Lore. This is Alessandro speaking. Regarding the Mother’s Day, we are very happy with the results of Mother’s Day even though the good information to you is what I already said that the innovation program is going to bring material results in the third quarter. And we first signed the merging already in the next quarter. In other words, even though Mother’s Day is going very well, you know that in a quarter we have more than one cycle. Some times the cycle is very good and another – the second one is not so good. So in the combination, it’s important for you to follow this orientation that we’re going to see some first signs of recover in the next quarter. But the big impact of the innovation program is going to be seen in the -- from the third one.

Lore Serra – Morgan Stanley & Co. LLC

Perfect. Thank you.

Roberto Pedote

Hi, Lore. Related to the margin, this line of administrative expenses in quarter one, it included several different things. In the consolidated one, we included even the expenses due to the acquisition of Aesop. Excluding this, if you just see Brazil, Brazil grew 14% this line in quarter one. And it includes investment in projects, for example, (inaudible) Natura, all the group that’s working out the investments that we’re doing there in this line. We are investing more in IT also. It includes innovation, includes several things. What we expect is that we will be able to balance not only this line, but all the investments required for 2013, including a very strong support of the innovation in the marketing expense, and also this line that is a mixture of short and medium term investments. We believe that we can balance them in their range of what you mentioned as was the margins from previous year, but we don’t expect to see this line growing 25% that was what happened in the first quarter, because we had some extra costs there as I mentioned.

Lore Serra – Morgan Stanley & Co. LLC

Thank you.

Operator

Our next question comes from Andrea Teixeira with JPMorgan.

Andrea F. Teixeira – JPMorgan Securities LLC

Hi, good afternoon. Thank you for taking my follow-up question from the Portuguese call. I just wanted to see some additional results, if you can, kind of give us an impression on how the mix has been evolving. I mean I know it’s part of the test obviously for and trying to push the category of toiletries. Just wondering if there is any offer that we can do that on the productivity side related to a mix effect? And lastly you said that your numbers have been slightly better, and I know other analysts have tried to ask in a different way, but as some costs that you’ve seen like some of the trends in Mother’s Day already, so if you can give us an impression that the trend continues to be positive from the orders or they have received well your complaints for Mother’s Day and if the trend is positive? Thank you.

Alessandro Giuseppe Carlucci

Hi, Andrea. Well, regarding the mix on productivity and the SOL launch, what we saw in the pilot test with SOL is that this new line increase productivity not because of mix effect, but mainly because brings extra added sales. So the consultant keeps selling all our products as they used to sell plus a part of SOL.

So, at the end, mix change that is not because of the mix effect that we raised productivity, but because of the added sales, so extra sales. So this is what we expect to see when we launch SOL in Brazil.

Andrea F. Teixeira – JPMorgan Securities LLC

And should we think about the (inaudible).

Alessandro Giuseppe Carlucci

Sorry, go ahead.

Andrea F. Teixeira – JPMorgan Securities LLC

Yeah, just, this is working up in your comments, when you launched Natura life, I believe you mentioned in the beginning of next year with another product that you’re running together with the Natura Network, do you believe that you can – that’s when we think we can add – you guys are going to add the additional categories and that could be another opportunity to increase productivity or should we think in a different way?

Alessandro Giuseppe Carlucci

Well, first of all, we don’t have yet an official date to roll out Natura Network. And I believe that this is not going to happen before half of 2014, even though we don’t have yet an official date. On the other hand, you were right to say that it’s going to be much easier for us to add new categories and new value propositions for Natura and for our consultants if they are connected, because we will not have some bottlenecks that we have today like the catalog, like the cash flow of the consultant because in the Natura Network, the customer can pay with credit card. So there are a lot of advantages for us. So we have all the consultants connected. And one of them has increased efficiency and the effectiveness of offering new categories and new value proposition.

But this is not going to happen and the Natura Network is not going to be rolled out before the half of 2014. And you mentioned also just to be sure that I answer your question regarding Mother’s Day and as I mentioned to Lore, Mother’s Day is doing very well, we are very happy. But, on the other hand, we know that the major impact of the innovation program for this year is going to happen in the third quarter. And we are going to see some first signs of recovery in revenues in the second one. But the most important impact is going to happen in the third one. In other words, I’m trying to say that in the second quarter, we have Mother’s Day, but we have also other promotional cycles and the combination of those ones are going to give us first recovery in revenues, but the most important one is going to happen in the third one.

Andrea F. Teixeira – JPMorgan Securities LLC

Okay. Just to make sure that I understand and thank you for the query. The Natura Network has to be coming together with the Internet sales, right? The new - or we should think about the Natura Network as being completely different or isolated? I mean, it will be in tandem with that, but not necessarily launched at the same time.

Alessandro Giuseppe Carlucci

Okay, let me clarify. What we call Natura Network is the biosphere project. We use to call biosphere when it was an internal project and now became public and the real name is Natura Network. And the program that invites our consultants to be connected to the internet and to do their business connected and allow the customers to buy directly from the internet, paying with credit card and receiving the product in one day. This is what we call Natura Network.

And by doing this, we are going to be able to expand the value proposition of the company and to offer new categories and new brands. And this is a project that I was mentioning that is not going to be roll out before the half of 2014.

Andrea F. Teixeira – JPMorgan Securities LLC

Okay, perfect. Thank you for the clarification, Alessandro.

Alessandro Giuseppe Carlucci

Thank you, Andrea.

Operator

Our next question comes from (inaudible).

Unidentified Analyst

Good morning everybody. Well, regarding the price increase to take place in next September, as mentioned in the Portuguese conference call, I understand that you are pricing through cost. But I’m also wondering if such movement in price is also related to another possible tax increase as well as the case from last year. Well, what I’m trying to understand is, if you are or not expecting another tax increase to take place by the second half, thank you.

Roberto Pedote

[Lewis], it’s Roberto here. No, we are not expecting. we don’t have any information to direction and we are not expecting. This is what we know today.

Alessandro Giuseppe Carlucci

And the price increase is only because we saw opportunities in the competitive environment, and also because we have some cost pressure, so it’s only driven by, how can I say markets and commercial.

Roberto Pedote

Yeah.

Alessandro Giuseppe Carlucci

And not because of taxes…

Unidentified Analyst

Okay, thank you very much.

Alessandro Giuseppe Carlucci

You’re welcome.

Operator

Our next question comes from Linda Bolton Weiser with B. Riley.

Linda Bolton Weiser – B. Riley & Co. LLC

Hello, I was wondering if you could explain, if your share loss, if your market share loss in Brazil in 2012, what it is to other direct sellers like maybe Avon or if it was more to competitors in the regular retail channels in that direct selling. And also maybe you could – maybe you put data day, but for the first quarter just reported, can you tell us what the market growth was in Brazil and then also what you think if your market share was lost, again, who you think the share loss was to? Thank you very much.

Alessandro Giuseppe Carlucci

Hi, Linda, it’s Alessandro speaking, well, regarding 2012 what happened mostly is that we lost a market share basically to two toiletries category, healthcare and deodorant, and those two categories are mainly retail categories and we know that’s some of the big companies in this area invested a huge amount of money in new launches and in advertising. And because of this, the growth of those two categories hit a record of more than 20% of growth. That is something that didn’t happen in the last 10 years because those two categories are very highly penetrated in Brazil. So this was for us a specific effect of last year and mainly because of this, we lost market share. And when we see our market share in what we call core beauty that is the cosmetic area, the fragrance area and the make up area, we didn’t lose market share last year. So answering more precisely your question, we lost in hair care and deodorant and mainly to the retail companies.

Linda Bolton Weiser – B. Riley & Co. LLC

Thank you very much.

Operator

Our next question comes from Javier Escalante with Consumer Edge Research. Excuse me Mr. Javier Escalante, your line is open.

Javier Escalante – Consumer Edge Research

Hello.

Alessandro Giuseppe Carlucci

Yes, Javier. Go ahead. You can ask – what’s your question? Well, we are missing Javier. So Javier, we are going to call you after the call, so we can answer your question.

Operator

(Operator Instructions) Our next question comes from Robert Ford with Merrill Lynch.

Robert E. Ford – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Okay. Hey, thank you very much for taking the follow-up and because nobody asked a question on this one. There was a lot of focus and there is a lot of confidence with respect to [Soul]. Can you share a little bit about what you’ve experienced in your pilots? And you made a comment Alessandro, on the last call that I thought was very intriguing with respect to maybe broadening on some of the brands into other categories, right? And I interpreted that to be a specific reference to [Soul] going in to other daily-use categories and I was curious now that to the extent you can share something, what you’re thinking about doing with the brand this year?

Alessandro Giuseppe Carlucci

Hi Bob. So what we learned in the pilots and the [Soul] pilots, the first one that this line being the extra sales with very low cannibalization, helped to build the brand. So Natura brand is more admired and preferred by the people that used SOL lines. So in other words, brings innovation, brings freshness, brings a lot of good attributes for the brand. And also we learned what is the right price to position this line because we tested in three series with different prices, so now we know the best price to leverage profitability and also sales.

And to finalize, we learned that the customer like it so much, the product by itself. So, it’s very obsessed with quality and now the concept. So we’re very confident that we are going to have a good launch. And when I mentioned that SOL is going to have some other initiatives in the future, is because, we’re not going to launch all the categories under this line in the same cycle. And in the toiletries, you have different several categories. And we are going to launch gradually and not all of them in the same commercial cycle. And this is going to happen not only this year, but also next year.

Robert E. Ford – Merrill Lynch, Pierce, Fenner & Smith, Inc.

And given the vibrancy of the deodorant category that you referred to earlier, where so much of the growth last year and since the [S&T] came from shampoo and deodorants, is that a category where you feel you have a value proposition that could be relevant over the near term?

Alessandro Giuseppe Carlucci

Yes, we believe and in this specific category, we are going to have something very interesting next year. And we believe that we can play an important role because not only the preference of the brand, but because also the quality of the products and the fragrance. So we believe that we can keep doing good business.

Robert E. Ford – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Okay. and then in one of the pilots is the soap. I don’t know if it was a – I assume it was a bar soap, but I’m not certain, was so phenomenally successful that the it carefully did some cannibalization and I’m curious, if you’re able to find a price point where you could optimize the portfolio, the fact I guess, or if you’re still trying to find kind of the correct positioning?

Alessandro Giuseppe Carlucci

In the bar soap, we are going to keep piloting till we find a better marketing mix, because we weren’t happy with the results specifically the bar soap. But with the liquid soap, the results were very good. so we are going to keep testing the bar soap in the region, and try find a better balance in the marketing mix to launch also the bar soap. But until we don’t have a good result, we are not going to launch this specific item.

Robert E. Ford – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Okay. well, thank you very much and I’m very much looking forward to your launches.

Alessandro Giuseppe Carlucci

Okay. thank you, Bob.

Operator

Excuse me, this concludes today’s question-and-answer session. I would like to invite Mr. Carlucci to proceed with the closing statements. Please go ahead, sir.

Alessandro Giuseppe Carlucci

Thank you for participating in today’s conference call. I would like to emphasize our belief that in 2013, we will reap concrete results from our strategy in Brazil and in the international operations. We continued to advance projects that will enable us on the one hand to evolve and modernized the relationship with our network through the use of digital technologies and on the other hand, to expand to us value proposition through new brands and categories connected with the concept of we’re being well. Once again, thank you so much and we are going to be again together in the conference call for the second quarter of 2013. Good day everyone and have a nice weekend.

Operator

That does conclude the Natura audio conference for today. Thank you very much for your participation. Have a good day.

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