Natura Cosmeticos SA (OTC:NUACF) Q2 2016 Earnings Conference Call July 28, 2016 9:00 AM ET
Fabio Cefaly - IR
Roberto Lima - CEO
Jose Roberto Lettiere - CFO
Andrea Alvarez - VP Marketing & Innovation
Joao Paulo - VP Sales
Marcelo Alonso - Director of Sustainability
Guilherme Assis - Brasil Plural
Tobias Stingelin - Credit Suisse
Ruben Couto - Itau BBA
Irma Sgarz - Goldman Sachs
Andrea Teixeira - JPMorgan
Alex Roberts - the Citigroup
Maria Paula Cantusio - BB Investimento
Lesley Cook - Bernstein
Good morning, ladies and gentlemen. Thank you for waiting. Welcome to Natura's 2016 Second Quarter Conference Call. We have Mr. Roberto Lima, the CEO; Jose Roberto Lettiere, the CFO; and Fabio Cefaly, Investor Relations Manager. This event is being recorded, and all participants will be in listen-only mode during the Company's presentation. Then we'll start the Q&A session.
At that time, further instructions will be given. We do have simultaneous translation into English, and questions may be asked from abroad [Operator Instructions]. We have simultaneous webcast that may be accessed through Natura's IR Web site, www.natura.net/investor. The slide presentation may be downloaded from this Web site. There will be a replay facility for this call on the Web site after the end of the event.
Before proceeding, let me mention that forward-looking statements are being under the Safe Harbor of the Securities Litigation Reform Act of 1996, are based on beliefs of Natura management. They involve risks and uncertainties and assumptions. Future statements depend on circumstances that may not occur in the future. Investors should understand the 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.
We now give floor to Mr. Roberto Lima, Natura’s CEO. Mr. Lima, you may begin the conference.
Thank you. Good morning everyone. I would like to start thanking you and welcome you to the second quarter teleconference. All our plans are focused on revamping direct sales in Brazil and in developing innovative proposal products, rationalization of portfolio, we’re reviewing our positioning, our grand strategy and we are promoting new synergies with direct sales and fast growth abroad and at the same time designing more agile organizations that is financially healthy and with strong generation. Results this quarter indicate we are heading in the right direction.
Despite very challenging current scenario, low confidence on the part of consumer, higher tax burden, we have improved sales. Below our potential, still business important result indicates that we are recovering in Brazil. We have improved the pricing, process. Pricing increase have been more assertive. We have more credit concession plans. We have a new magazine with a better presentation of products. Our promotions are segmented and assertive, optimizing our portfolio. And using digital instruments, we are now itemizing our portfolio and we are now introducing a new strategy, called Viva a sua beleza Viva. At the same time, we are now promoting Mother’s Day, Valentine’s Day. We are now reintroducing the Chronos and the UNA alliance. At the same time, we’re investing in other channel and the initial results are positive.
In drug stores personal care line is already been sold in 1,270 POSs. Our first Natura store at the Morumbi shopping mall has shown results that are above our expectations. The next store will be opened in Villa Lobos mall. Rede Natura, our online operations, we’ve had two digit growth and we have more than 900 registered consumers. Abroad we’ve had robust growth with operational leverage. We have improved our profitability and we have stronger participation of international results. In this quarter, LatAm and Aesop accounted for 32% of our total revenue and 21% of our EBITDA.
I would like to point out that we are managing expenses properly. General expenses have decreased and compared to the second quarter of last year offset by inflation. Lettiere will be describing that in detail. Cash generation is yet another of our priorities. This quarter’s results have been impacted by more working capital, especially in the coverage of inventory both in Brazil and abroad. These inventory increase are corrected based on our initial plans, this is one of our priority. We are implementing corrected managed measures to correct our inventory levels by the end of 2016.
We are not implementing results for the first quarter of 2016. I would like to point out this is what I have to say, I would like to give the floor to our CFO, Lettiere, who will be presenting financial results for this quarter.
Jose Roberto Lettiere
Good morning, everyone. I would like to comment on our financial and economic performance. I would like to point out our social and environmental performance. Marcelo Alonso, our Sustainability Director is here with us.
Let me start by net review, consolidated net revenue. Our estimate was 5% growth. That indicates a different trend vis-à-vis the economic growth of Brazil. We’ve had some difficult times. This first quarter after six consecutive quarters, we have managed to revert that trend. We have a 1.2% growth in net revenue -- gross revenue. The international results are also positive. I would like to point out the results in Latin America. 33% growth and Aesop has shown 47% increase in local currency.
I would like to point out that in this case of Aesop when we compare the last 12 months we have had 45 new stores and we have three new countries in operations including Italy, Denmark and Canada.
Let me just go back to Brazil’s results. The impact of the tax burden has been strong, not only in cash management or net revenue management but also on EBITDA. We’ve had the impact when compared to the previous quarter R$50 million with incremental tax burden. Let me now talk about net revenue, or having talk about net revenue, let me talk about the EBITDA performance. We’ve had a growth when compared to the first quarter of 2016, still suffering from the tax world impact and also because of the exchange rate volatility.
As I said before, exchange rate variation for second quarter was 55 million for Brazil and 16 million for Latin America, that’s the result of the appreciation of the local currency, the reais and the appreciation of the peso in Columbia and in Argentina. Both of these currencies were devaluated when compared to the reais and also to the dollar. When you add up these two components to incremental tax burden in Brazil and exchange rate variation, the impact for the quarter was worth R$105 million incremental to the second quarter of 2015.
Let me now compare to the first semester’s results, so that you can understand a magnitude of this impact to these two components, the incremental tax burden in Brazil and the exchange rate volatility. In tax burden, R$104 million that’s incremental when compared to the first semester of 2016 and R$102 million given through the volatility or due to the volatility of exchange rate using the reais as the basis for comparison. So between these two elements we’ve had R$16 million that’s incremental when compared to the Q1 2016 and Q1 of 2015. The EBITDA impact to mitigate these two elements we have controlled expenses dramatically. This has been consistent on day-to-day operations. We’ve managed to control expenses, there was a flat growth, there was no nominal growth when compared year-over-year.
Let me now talk about net profit. We’ve had changes when compared to Q1 for this, results were below our expectations then. The main variations include loans and investments in Brazil. We had small variation and that is due to the CDI variation of the basic industry, invested cash would have better investment rates, when compared to last year.
Our debt remained relatively flat but higher interest rates, but our collection index, our contraction was below last year's numbers. Aesop's acquisition impacts our net income results in Q2 impact was smaller, but we have consolidated impact once we have reviewed the impacts in Q1 of Aesop's operations again exchange rate variations, we had also impacts on the net income indicates of international operations. There was a negative impact given the fact that the real was appreciated, especially when compared to other currencies and the Australian dollars. We have had other adjusts with our liabilities our tax liabilities and labor liabilities we have had negative impact given higher interest rates and that of course impacted our financial results.
We will now be talking about our CapEx, as well as about our cash flow. We had investment in CapEx sitting at BRL$77 million in the second quarter as compared to 90.8 in the second quarter of 2015. And we can see a few changes in the profile of our investments. First our international operation which accounted for 40% so we can see that investments are growing. According to the size by mentioned of our International operations which have been taking up increasingly more space and also those investments are primarily focused on sales expansion and growth strategy in other words we invested in stores, IT and reason if you will for us to strengthen our growth strategy.
Another way to look at the CapEx we had at decline the guidance BRL$315 million full year and year-to-date we sit at to BRL$111 million as compared to last year's BRL$141, which means the stronger focus and more consistent focus on spending on which will result in growth. In terms of free cash flow we had in the quarter an increase of BRL$219 million rise when compared to BRL$215 in the second quarter of last year, which was the slight growth but our working capital performance was not that favorable, Mr Lima has mentioned that but I'd just like to reinforce that we are carrying over inventory at a larger base than we expected specially these are the demand that we have a demand which is different from what we have planned. So for the second quarter our focus or in the second half rather we will …the second half rather, we will focus on re-directing the demand planning with a strong campaign for Father's Day and Christmas and I believe we are going to be able to minimize those impact. So we have a positive cash flow at 96 million in second quarter 2016, showing that our business model easy cash generating one. And with a few fine tuning adjustments especially in face of this difficulty in demand, if we manage two associate demand with our supply plan, we will be able to resume a strong cash generation as it has been the case in our track record.
As for the sustainability indicators, we have our 2020 plan, it's a very ambitious plan in the part of the company. And I would like to give the floor over to Marcelo, for him to briefly comment on those indicators. And then we'll be available for questions and comments you may have. Marcelo is our sustainability officer. And he will be talking about those indicators and how they impact our bottom line.
So as what Jerry mentioned, we have this ambition for 2020. And the idea is to move along. We are halfway through, and of course, our numbers are impacted by sales results of course, so some indicators such as relative ambition of carbon posted a slightly below level, when compared to last year. But we are focused of seeking alternatives within our lines that will allow us to reach those ambition levels which are forecast of 2020. That also impact the use of recycled products, also in the recyclability of our products, and in our eco-efficient packaging. The number we have consider quite positive is the growth of our products in Amazon region.
Today we set at around R876 million and our ambition is to reach R1 billion by 2020. As for water consumption because of higher need to clean equipment because of a lower product model that reach slightly worse performance but on the other hand, our clear program penetration plan has been showing very positive results, which have also contributed for Natura Institute in terms educational projects.
One of the main highlights in the quarter is that Natura is now introducing its P&L study relative to the Company's performance back in 2013. We have valued our environment impact. We are now making those numbers public. And we do believe that we will help in our affords to attract investments and just for your -- for the analyst to be aware of. We also hope to make our operation increasingly transparent for our consumers.
At this point we can move on to the Q&A session.
I would like to say that we are here with our Natura's Vice President, who is responsible for our commercial operations in Brazil, here with us today. And also here with us our Vice President of Marketing and Innovation, Andrea Alvarez. And they are both available for you. So we are now ready to start the Q&A.
Our first question comes from Guilherme Assis from Brasil Plural.
Good morning, everyone. Thank you for taking my question. Good morning, Roberto, Lettiere, everyone. I'd like to first touch on the issue of the issue of the average price. We saw an increase of 14% in Brazil in the quarter. Can you give us some more color on that? You had some increases in February and then in March. What were those increases that were implemented when that happened, and how big of hike they were? And can we -- and if I could perhaps have some understanding of a breakdown of that 14% increase.
And as a follow-up question, in the second half of the year we probably will have a more favorable exchange rate. With those price increases we've seen in the first half, can we expect an even better recovery of the gross margins? We saw a strong pressure in the first quarter, especially in Brazil. And that pressure decreased in the second quarter. Can we see, looking forward, a recovery of gross margins going forward when compared to last year combining all those effects, price increase and a better FX rate? So those are the questions I had. Thank you.
Well Guilherme, good morning. Thank you for your questions. First, concerning the price increases, it's important to understand why we have a higher inflation level which affects all our expenses. Secondly, in 2015 we had a sharp tax increase in the industry. And since then the BRL was considerably depreciated, and some of our inputs are sold in U.S. dollars. So there was no way out of increasing prices. And you referred to that as a recovery of the value of our products because of inflation, and also because of an increase in tax burden. And this will probably improve our gross margins.
But as we speak, we're trying to recover from all of those impacts. The net effect at the moment would be going the other way, I'd say. The market has been showing a down trade movement in lower average tickets, and that also may be a factor in our average price. I will give the floor over to Lettiere to complement on that.
Jose Roberto Lettiere
Speaking of the top line and then I’ll talk about the FX impact. I’d like to add a comment in terms of pricing on the price increases happened throughout the first half and additionally there was an optimization of our promotional investments. We were more, quote-unquote, intelligent in promoting our products. We were able to understand the performance of each brand better according different regions and all of that also have explained perceived price increase that you have.
If I could dive a little deeper, you did mention that the increases were made in the first quarter. So the dynamics for the second quarter had more to do with adjustments, promotions. Is that a fact? Or was there an increase or a readjustment in prices as Roberto said in the second quarter.
The last price increase was finalized at the end of March. So that's why we see the impact in the second quarter.
As concerns margin can we expect an improvement in margins dynamically speaking for the second half I am talking about growth margin?
Jose Roberto Lettiere
Guilherme, there are two different components to your question. And I'll ratify them, talking in the second quarter of 2016 we began to compare oranges with oranges, vis-a-vis last year in terms of tax burden, because of the increase in IPI. That’s something we are going to be suffering through. But the same thing happened last year as concerns FX rates in the first quarter as comparing to the country we suffered a very strong impact BRL$91 million as compared to last year. We worked within assumption of a higher U.S. dollar to the real at an average rate of 4.20. If the dollar remains at around 340, 350, nobody really knows but let's suppose that our assumption.
For the second half we will have in Brazil a foreign exchange benefit but we cannot forget that in the second half especially the fourth quarter our international operations account significantly for our final consolidated numbers. And with the appreciation of the Brazilian real and the subsequent depreciation of Latin American currencies, vis-a-vis the BRL and the U.S. dollar, we will have a negative impact as we consolidate our international operations when we talked about Brazil the FX rates should provide with some relief, in terms of gross margins. But for the consolidated numbers we feel a suffer from FX rates because of our international operation.
Okay, quite clear. Thank you, Lettiere. One final comment, as you've mentioned, you've had better productivity on the part of consultants, and you also saw a growth of gross revenues in Brazil. We do not a lot of information about the market. But in your view, have you resumed market share? What are your expectations in terms of market growth for the year, both from CSE and direct sales?
Good morning this is Andrea. One of the goals for this year is to revert the negative trend in market share we would have in recent years. This is a key indicator and our goal is to revert that decrease cycle. But for the accrued for this year, we should first stop the fall in 2016, and then go back to the positive trend next year. InQ1 we have had good numbers, but this is just for the first quarter we would rather see longer trends, and we have interest -- a positive outlook. Let me just compliment my answer. Most categories we have smaller prices for the first quarter we have haven't had consolidated data for second Q.
In a recession market, we had this relatively positive performance based on the information we have is that the market is still shrinking, it should shrink even further in this first semester. That varies from category to category. But overall you are right.
Thank you that’s very clear, thank you very much.
Next question comes from Tobias Stingelin from Credit Suisse.
Good morning. Can you elaborate on reducing discounts strategy? Price increases may be more sustainable. My question is about tax burden. Are you still provisioning taxes, but you're still fighting or battling in the judicial system for an injunction? The innovation index has collapsed. Is it relevant? Is it still have relevant? I have never seen that number get so low. What does that mean in actual fact? Thank you.
Good morning Tobias. This is Joao Paulo speaking. We have optimized our promotional investments. We had a better understanding as how promotions got to sales reps to end users. We have conducted a very indebt study last year and we changed our promotions slightly. Our goal was to have a better leverage picking brands, regions and have promotions work, that’s one end. On the other end, we have been investing and qualifying our brands introducing important product that will make us sell more with fewer promotions. So by combining these two elements have helped us increase our leverage.
Based on the 15% price increase, how much was price per se and how much is due to greater efficiency in promotional policies?
Most was list price increase, per se. But promotions were relevant nonetheless. Would you like to say something?
Let me just go back to the innovation in the CS, it is an important indicator to us. We had lost efficiency in innovations. We thought we were innovating too much so to speak. Now have fewer innovations but they are relevant. In that transition phase we may have some drops and we’re now changing the methodology to take into account incrementally, if I may. So that’s why we’re reviewing our indicators. Innovation is still a very key pillar to all of us.
Let me just add to Andrea’s answer. We’ve been working hard to reduce time to market innovation. That might reduce investments and still have the same results. It may mean more efficiency.
Let me try to understand. We must understand the curve. It may drop a little bit, and then it will go back again up. What would be the expectation there?
It's too early to provide that guidance. And it's a very important element when compared to the competition. So we're not giving you any guidance in that sense. I'm sorry. I wouldn't like to announce that number yet. Thank you. Let me just address the last point of your question as to the provision. You are right. We're now provisioning those taxes, because of that industrial tax injunction. We still believe we are right. Our legal team believes that we are right in that demand. And we are very hopeful.
Are there any expectations as to verdicts?
No, it's very difficult to predict I don’t think. We may have a decision -- we may not have a decision by year’s end.
SG&A may be flat in nominal terms for the year. What do you think?
We have to have a productivity and efficiency strategy, just like we have in productivity. That won't change. We'll keep on driving for more efficiency, more productivity, so that we can reallocate resources that we'll have in productivity, to provide growth. That's part of our strategy. That will remain the same.
Next question Ruben Couto from Itau BBA.
Good morning. Thank you. Can you please elaborate on the productivity of sales representatives this semester? There are several initiatives being implemented now. But could you pick one or two outstanding strategies? Is it segmentation, POS's, or was it Mother's Day was it that made the difference? Can we expect continuous productivity gains throughout the year? Thank you.
Good morning this is Joao Paulo. It was not due to one single activity, we have a set of activities to re-qualify the channel including segmentation, training programs, enhancement skills, programs. There is no single activity that’s worth mentioning. It was not limited to one given cycle. This is what we have been trying to do on a regular basis, less volume but more qualified team, this is something it can be repeated.
Let me ask you another question. You've been advocating for the repositioning, but it's more focused on beauty products, right, but image or facial products, Chronos. But I'm thinking about the category mix. What is your focus in the future? Is it more for makeup, facial products? What benefits can you extract in terms of margin contribution, sales? What are the white spaces you're trying to allocate or to use to enter? Is this the focus for the future, beauty, repositioning the brand? You're changing the communication, and everything that you have been doing right now; is that the future trend?
Jose Roberto Lettiere
I think I can address that question. Our focus is to bring Natura to the beauty product universe, adding to what we have in terms of equity, in terms of caring. We're not moving away from our strengths. We're adding a new component, which is beauty. Based on this strategy, we are focusing on core beauty products, including makeup, facial products, hair products; these are some categories we believe will help us build that better perception of the brand. So that's why we're focusing on these categories right now. The concept of Viva a sua beleza Viva, translates that. And that can be used in several core brands. And that of course builds the mother brand. Revitalizing Chronos helps skin care but also the top brand, just like echo, that’s the campaign we have just introduced. These are important brands that help contributes to the improvements of the mother brand, if I may.
Thank you that makes sense.
The next question comes from Irma Sgarz from Goldman Sachs.
Good afternoon, or good morning, rather. I have two questions. The number of consultants in Brazil showed a slight decrease quarter on quarter. You did comment in the release that this has to do with the level of activity on the part of consultants. What can you tell us about that level of activity? You've been mentioning training, about repositioning of that channel. I think some friction might be natural. But what concerns me is that when we see such a steep decrease in volume that means that some consultants will remain less active and eventually leave the channel? Is that a trend we should expect to see looking forward? And last, can we see growth in the future? Assuming that prices will not be going up as they have, how can we revert that drop in volume, given the fact that the channel seems to be slightly shrinking?
And the second question is, inventory days are way above last year's level. I'd like to understand the reasons why that level has changed so significantly in terms of inventory coverage. So I'd like to, as I said, see what's behind, if there's something abnormal going on in terms of inventory coverage.
I'll start talking about the channel. Yes, you're right. The slowdown in economic activity does affect the performance of our sales consultants. And that creates some pressures and brings the channel's performance down. But we find it relatively easy to recruit new sales consultants. So it balances out, right. We are now recruiting the consultants to try and offset that slowdown in activity. But at the same time, there's also an effort in qualifying and training, as I mentioned before. We also stimulate participation in core business activities, as Andrea mentioned. And for that, the consultants who choose to remain in the activity will be more prepared to explore their portfolios and increase their own sales volumes. And that's our priority. What to expect to see going forward is a modest, modest growth for the channel, with some gain in productivity, should we turn out to be successful in those efforts.
Excuse me, just a follow up. Thank you for your explanation. But that growth in productivity going forward in your understanding should be coming from volume on some pricing going forward.
It might come from pricing, but also from a more efficient use of our portfolio in terms of improving their sales basket, in other words, our consultants we probably be providing better service to their clients. So we’ll tap on the relationship that we already have with those clients and increase the efficiency of current portfolio. So, both avenues will happen.
Concerning your inventory concern, we have three important elements to be taken into account. First, we do believe we should not lose sales because of the efficiencies in inventory. So sales for us is extremely important. That’s why we have a slightly higher safety inventory. But it's slightly higher than we had contemplated before and why, because we have noted some changes in the habits of consumers, as I mentioned. So, in a fast growing market, such as this, it's difficult to anticipate items which would be in demand at a steep learning curve. But we’re doing really well and we are improving that interpretation of the market and we expect to see results in the second half.
The third element to be taken into account is the growth in international operations, which have an increasing weight in our consolidated results. And international operations usually work with a higher inventory level than in Brazil. So, I now turn the floor over to my colleagues who want to complement on that [Pablo]?
Jose Roberto Lettiere
I think we are aligned with what Paolo just said. I just like to add a fourth element, which is positive. Until the end of last year and beginning of this year, which impacted the first quarter when compared to Argentina, you will remember that we had a very complex process of products release and products which were important from Brazil. We believe government, the new administration from Macri, there was a liberation clearance of that. So, to avoid lack of products in a region of a country which grows considerably, we adopted a strategy of providing imports to those regions.
And Argentina the bulk of the production is produced locally, but we send inputs to them to overcome that barrier at the frontier. Now that administration in Argentina has cleared the way we do not expect to see any problem, that’s a very positive aspect, which will help us bring inventories down in terms of imports for that particular country.
Next question comes from Andrea Teixeira, JPMorgan.
Roberto, thank you for bringing Joao Paulo and Andrea onboard for the call. I'd like to comment on what Andrea said. I have this curiosity. I'd like to know perhaps volumes there is a strong disparity. Volumes dropped 11%. Average price went up 14-15%. Given that the marketing budget has remained flat in nominal terms of course, for Brazil, it's difficult to innovate in those circumstances. So I'd like to understand if we should expect a change on that front. I do understand that the channel works counter-cycle-wise, if you will. And you did mention recruiting.
But of course, we see productivity going down. But given the fact that prices went up, I'd like you to explain about the marketing budget. I do not see volumes improving significantly, given the price increase. Only if we had a very disruptive innovation in the coming months that would allow us to have a turning point in that volume curve. Am I right in my rationale, or can we expect that marketing budget to be back-loaded for the second half?
Okay. I'll answer part of your question. What have we done to fund a higher increase in marketing geared for the consumer? As we reduced promotional efforts, we were able to focus on sales directed to final consumer. So it may look flat. But within our investment structure, we see a change that was made in order for us to have more available investment to focus on the final consumer. That's part of what we are doing. The other part is to use the existing resources, use them in a more efficient way.
So use an ROI analysis on investment, and we are now being informed by that analysis in terms of using the available resources more efficiently. And also in negotiations with our different partners, we are using the same methodology. With all that, the available budget is slightly higher, for as I said, marketing for the final consumer. As for innovation, fortunately we have within our innovation area, we have applied research, a long-term research department. And we have strong ties with outside partners. We've been doing that for almost 10 years.
So our innovation sources are not necessarily self-funded. Because we work with outside partners in innovation. And long-term research is as the name implies, long term. So much of the innovation which we'll available will arise from years of investments. And those technologies are increasingly ready to get to market. I understand the difficulty you have in terms of anticipating marketing budget. You depend on logistics. You depend on sales. I understand that. And the forecast tends to become even more complex, because to date, we are trying to increase the synergy between marketing and what's actually happening in the channels. So the channels need to be proactive in what we do in terms of marketing.
Number two, we are also diversifying our media. We now have signed an agreement with the 8 o'clock, with the prime-time soap opera on Globo TV, which is part of our broadcast TV budget. We're also looking into different media in other areas of the country. And we have increased our use of digital media. So the mix tends to change, and the expenses will change. But it's important to emphasize, as Andrea said, that for each of those initiatives, we have a specific concern in calculating the return on investment looking to be more efficient in terms of using of our marketing budget.
It is a more recent trend drive that discipline of analyzing returns, am I right? Or has this been going on for some time. And my final question, do you see any improvement even though we do not have those figures in terms of productivity arise in some of this initiative even if we are not talking about innovations such as SOU, which was a breakthrough. Innovations in packaging, the downsizing you promoting in some products to make them more accessible, more affordable, do you see results coming from those initiatives, where these promotions down also led to negativity factor, what are you doing to improve communication and how our consultant viewing that?
I’ll be talking about the final consumer, and then as well might address the channels themselves. Initiatives where we have invested have been showing quite interesting results. Chronos is the most recent example where we have a very good reception under parts of the final consumer and also on the part of the channel. Even though, we increased the price when compare to the previous line, consumers have notice a real benefit increase to which they attribute a higher value, that was socially a very efficient campaign and as a result that this [stuff] is working in reference to those initiatives where we are investing. Our ROI study gets back to last year, but only now you are seeing the results, so it is been a methodology we have been using first on time now. But for the channels, as I said, that optimization had been going up for some even for some more time as a compliment, launches and re-launches that which shows to focus on quite where we see by the channels.
Chronos as it is mentioned and as Andrea just mentioned, but there is a large series for the second half, some of which you already know about, such as the Tododia, everyday line, which has been just re-launched, it's on TV and everywhere. So, lots of things happening in the second half. And all those launches and re-launches are being quite well accepted by the channel both for higher pricing are just in terms of new things being introduced as those will be aligned.
Our sales network our consultants see that as a distribution media as well. So, we are passing that on to our consultants in a very successful manner. But as I said, the economic activity is slow. Our toiletries market has been posting negative numbers. So, even though our new products are being well received, we have to take into account that the sales volumes will not reflect that immediately. But what I can tell you is that our re-launches are being quite successful.
Now, if I may --.
Jose Roberto Lettiere
Let me just add something to the use of products. We have been working hard to recovery one of the fundamentals of direct sales and that strength that has been perceived as something just like Joao Paulo has just described, especially in recent launches of Chronos, the importance is just undeniable, we’re closer and closer to the sales reps. So they have to be better trained to transmit that to consumers. And we’re doing outstanding job in that sense, I believe.
Let me just ask about dividends. The 60% announced was of course the timing has been postponed, right? But dividends will be paid upon the policy of 70% of profit, not cash flow?
Jose Roberto Lettiere
Yes, that is correct. We're not anticipating dividends. We're not discussing the payment, per se. Of course, the Company would rather maintain its own policies. There's no point in changing that all the time. But that's a decision to be made at year's end. And our executive directors are committed to making their proposal. And the Board will make a decision. But this decision will be made in due time. We're not anticipating the payment of dividends.
That decision will be made in Q4 for 2016, right?
Jose Roberto Lettiere
That is correct. Based on year’s results, once we finalize results on December 31st.
Thank you very much.
Next question comes from Alex Roberts from the Citigroup.
Let me address the issue of productivity, price and volume in Brazil. You've had strong performance, and there are several factors contributing to price, 14.7% increase. But I haven't heard yet, and that's why I'm asking this question. What was the impact of the SKU reduction? What was that impact? I'm under the impression that you have managed to reduce SKUs by 15%, about 1,100, right? I've seen several initiatives. But results are different based on the category. But my question is, has this reduction of SKUs helped improve sales? How much would that 15% reduction represent? Do you believe that there's room to reduce SKUs even further? So this is my question.
Thank you, Alex. Here is what I can tell you. All the income from SKUs that have been done away has migrated successfully to other portfolio items. We came up with a very detailed plan to identify other items could be benefitted to, so that we could still provide good service to consumers. We've kept track of those activations throughout our channels. But I can state that all the income, all the revenue from those SKUs have migrated, or has migrated rather. That's the tale of our portfolio. So their revenue is not proportional to the total number of SKUs that have been reduced or eliminated. This is a constant exercise. On one end, our business depends on innovation, new products; new items. In some categories that need is even more prevalent, such as makeup. Makeup is very fashionable, as you know. And of course we'll keep on innovating and introducing new SKUs. Likewise, we would like to maintain that discipline to clean the portfolio so that we can consolidate SKUs and still get good results for the business. That is a continuing trend.
Yes I understand, but is it fair to conclude that NATURAs portfolio of about 1,100 SKUs should have a larger average price than the previous portfolio, is it a fair assumptions or not?
Reducing SKUs was the not a cause for any increase of average prices. They have been replaced by items at the same price positioning. Our portfolio has been constantly updated. It has products with higher added value just like Chronos. But we do have cheaper products in our portfolio, they can help us maintain operations when we consumption standards change like we have seen. We have 189 rial products, but we have 79 rial fortunes that helps us to maintain operations, once we have this consumption parent variation. Again it was not the reduction of SKUs that have helped us increase those.
Well, that's clear. Has it helped in productivity in any way, or would you say it hasn't helped that much in productivity?
I don't think it has made a relevant contribution to increase productivity.
Thank you. Let me ask you second question. You had performance. You know to exercise that option to purchase the rest, maybe, is December the time to exercise that option? Is this something that you are actively considering or not? What's your take for the next six to 12 months timeframe?
This is a very important subject. This is public information. We have the right through the call and that team has the put rights, we may exercise right on that. That decision will be made considering whether we should purchase immediately or we would rather have a stable team, a team that has been in charge of the success of Aesop, would like them to keep on working based on these two criteria, we have the right to purchase, we are not stabilized to do so right now. And we are interested in having a system to connect our team evaluation at this time of Aesop's results, once that decision made it will be made public.
Thank you. That's very clear. And finally, the CapEx education was 350 million customers. Are you still considering that number as guidance for this year?
Yes, that's the only guidance that we clearly give. Our commitment is to maintain that 350 million [consumers] as announced at the beginning of the year.
Next question comes from Maria Paula Cantusio from BB Investimento.
Maria Paula Cantusio
Let me go back to sales channels a little bit. What was the sales numbers from Rede Natura purchases being made from end users? Are they still buying? What's the projection for growth? And let me ask about the rollout of SOU sales in the Drogasil network. Are you considering another drugstore chain? Can you elaborate on the product lines? What product lines would be included there? It would be something with smaller average ticket price, just like the SOU line, or otherwise would be included? And my final question is, what is the impact of other -- the sources of impact in the operational line? Thank you.
As to online sales, we’re now opening up for sales directly to end users on top of digital consultants also supporting that sale. It was a very successful operation, the market reaction has been positive. It now plays an important role in total sales. Most sales comes from digital consultants. It is recurring, very recurring sales, those who purchased and received good service from digital consultants remains his/her customer. It's a new customer base to us in ecommerce. We have to acquire that and this is a very fast growing customer base. And we’re very satisfied with the results so far.
As to the drugstore chain channel, just like we said before, we have now concluded the national expansion with the Drogasil network, it's starting this week. And we are preparing ourselves we’re considering partnerships with other networks. We’ll make that announcement in due time. We’re now considering the inclusion of other categories, it's still too soon to say anything about it. But as few categories may join in in that channel, my team and Andrea’s team are both considering how and when that introduction would take place. But we may have introduction of other categories in that same channel.
Jose Roberto Lettiere
Maria Paula, as your question about other expenses, the highlight when compared to last year, we sold non-operational assets this quarter. So the result of those sales helped contribute to the positive result last year. And we didn’t have that this year, we haven’t had that this year so it’s a non-recurring item of last year.
The next question comes from Lesley Cook, Bernstein.
Hi. Good morning. Thanks for taking my question. I just had two. So the first, I just wanted to ask more about the beauty market in Brazil. So what are you seeing from a competitive landscape? Are you seeing anything different from competitors like Avon? So that's my first question. And then the second question I had was so you started to focus, on just with direct [indiscernible] channel. So you've got online. You've both talked about traditional retail, so the drugstore chain networks and opening your first store recently. So I was just wondering. Is that what you believe direct sale [indiscernible] can do? And is this because of a change in the market and consumer preference? And then I guess, do you expect any kind of cannibalization to your direct selling sales? Thank you.
Let me try to address that question. Let me try to concentrate on what's relevant to answer your question. There is now evidence of cannibalization of direct sales by implementing or by including. That’s the first important piece of information I'd like to give you. Quite the opposite being in other channels gives us a visibility to raising the awareness on the part of consumers, even from repurchases those that were initiated with sales reps. So that’s the first important element that is worth mentioning. As to the competition all competitors are intensively working and that includes Avon. This has been another day at the office so to speak.
Jose Roberto Lettiere
Let me just try to complement the answer. Let me talk about the competition just like Joao said, the second quarter we have low activities still, but competitors are trying to recover, these consumers that are purchasing less, and less frequently. They are promoting new products trade-down offers and they are concentrating investments in those key categories for them -- for each one of them. Joao has touched upon that already.
Our portfolio wide both in terms of categories and prices and we can of course operate we have more flexibility. All that competition takes place in a shrinking market both last year and Q1 for this year. So it's very hard, a very peers battle to maintain our market share, and we are trying to stop that market share loss and this is something that will be on our rater. Once the economic scenario improves, which would hope will happen soon, we may go back to growing faster than the market.
That concludes the Q&A session. I would like to give Mr. Roberto Lima for his final remarks.
Once again I would like to thank all of you for taking part in this call. There were very good questions. They help us reflect upon what other things or what other actions we may take to maintain our growth in the future to benefit our consultants and our customers. We believe we are head into right direction to building faster and more efficient organization that is better prepared for the new and more positive economics. We hope it will happen soon than later. We are confident we will better manage our cash, this is something that requires all our attention at this time.
We will keep on investing where we have begun to invest that will help us make the company yet more competitive. These initiatives are getting to the market faster, we have learn to test to make pilots prototypes. Therefore we believe our time to market will be reduce even further such as our cost. Many things are going on, we have been testing several things. And what's more important these larger projects are all being focused on implementing our direct sales channel the productivity, the activities of our sales reps and we are adding whatever new technologies can help us to get return sales also to communicate to encourage and to manage the channel. The overall result is the more attentive team a very highly trends and good team that can a make difference in a very competitive market.
So it's is the one and Brazil, this is the reason why we had very good results in the second quarter.
I hope to see you in the next call in October. Have a good day.
That concludes Natura's audio conference today. Thank you very much for attending. Have a good day.
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