Natura Cosmeticos' (NUACF) CEO Joao Paulo Ferreira on Q4 2016 Results - Earnings Call Transcript

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Natura Cosmeticos SA (OTC:NUACF) Q4 2016 Earnings Conference Call February 23, 2017 8:00 AM ET

Executives

Joao Paulo Ferreira - CEO

Jose Roberto Lettiere - CFO

Andrea Alvares - VP, Marketing and Innovation

Analysts

Gustavo Oliveira - UBS

Franco Abelardo - Morgan Stanley

Tobias Stingelin - Credit Suisse

Joseph Giordano - JP Morgan

Guilherme Assis - Brasil Plural

Irma Sgarz - Goldman Sachs

Robert Ford - Bank of America Merrill Lynch

Alex Robarts - Citibank

Operator

Good morning ladies and gentlemen. Thank you for standing by. At this time, we'd like to welcome you to Natura's Fourth Quarter and Year 2016 Conference Call.

Today with us we have Mr. Joao Paulo Ferreira, CEO; Mr. Jose Roberto Lettiere, CFO; Mr. Marcel Goya, IRO; Mrs. Andrea Alvares, Marketing and Innovation VP; Mr. Marcio Bologna, Controller; and Mr. Luiz Palhares, IR Manager. This event is being recorded; and all participants will be in listen only mode during the company's remarks. After that we'll start a Q&A session when further instructions will be provided. [Operator Instructions] This event is also being simultaneously webcast over the Internet, and may be accessed at www.natura.net/investor. The respective slide deck is also available at the same URL.

Before proceeding let me mention that forward-looking statements made during this conference call concerning the Company's business perspectives operating and financial targets are based on assumptions and beliefs on the part of the Company's Management and also on information currently available. Forward-looking statements are no guarantee of performance. They involve risks and uncertainties as they refer to future events and depend on circumstances that might materialize or not. Investors should have in mind that general economic conditions, industry conditions, and other operating factors might affect Natura's future performance and lead to results that will differ materially from those expressed in these forward-looking statements.

I'd like now to turn the conference over to Mr. Joao Paulo Ferreira, CEO, who will start the presentation. Mr. Ferreira, you have the floor.

Joao Paulo Ferreira

Good morning everyone. Thank you for participating. Welcome to our conference call to discuss fourth quarter results. In this last quarter we saw a reversal of our results in Brazil when compared to the previous quarter as we moved along with robust growth in other countries in Latin America and also in Asia. As a consequence we have gained good consolidated results, there was a profit in cash. We are confident that we are going through a gradual recovery journey in Brazil driven by a series of advancements we have managed to implement with significant hard work. As we try to revitalize our direct sales, we have launched new value propositions to our consultants, new direct sales format which will allow their professional development, a revamping of their performance, and more gains. Our consumers will receive a closer service which will strengthen their experience with our products, and our consultants will receive -- or will perceive Natura as a possibility to grow and prosper based on new ways of working with the Company.

Another highlight is our use of technology, a powerful enabler to drive business for our consultants providing ways and information so that their relationship with their clients be increasingly more intense. We definitely have went over the phase of using technological innovations just as an enabler for transactions. We are now becoming a data-driven company which involves decision-making processes, productivity, and the quality of the relationship between Natura consultants and consumers. In less than a year, over 300,000 consultants are using our mobile digital platform as a way to conduct transactions, obtain content, and information from Natura. Also the Rede Natura, our online business unit more than doubled its sales when compared to 2015, closing the year at BRL107 million, over 93,000 digital consultants and 1.5 million consumers.

We have also advanced in our retail strategy with the opening of five exclusive stores and shopping malls in the city of Sao Paulo. All of those presented above -- performance which is above what we expected. We are also present in a larger number of drugstores around the country. From the standpoint of innovation, we continued to invest in our iconic brands, and throughout the year, we had important re-launches of the Ekos, Tododia, Chronos, Una and Humor line on top of the women's perfume Ekos Eaux de Toilette.

In Latin America we continued to grow in local currency with productivity gains, operating leverage, and expansion of our consultant network. The Aesop where we now have 100% of capital also showed continued growth with the addition of over 41 exclusive stores throughout the year, reaching a total of 176 units in 20 countries. Another highlight and priority has been the expense management.

In Brazil admin and general expenses in the year and in the quarter decreased when compared to the previous year, more than offsetting the pressure coming from inflation. Later in the presentation, Lettiere, our CFO, will give you more details on that front. We have also continued our effort in the rigorous and efficient management of our CapEx. We have used our investment in working capital and we also decreased our inventory coverage bringing down the conversion cash cycle.

Finally, yesterday our Board decided on dividend payout and relative to the year 2016 and approved a net payout of BRL0.25 per share which accounts for a payout of 40% of our net income. These were the main highlights I'd like to present.

I'd now give the floor over to Lettiere, our CFO, who will give you more details of our financial numbers.

Jose Roberto Lettiere

Thank you, Joao. Good morning everyone. And thank you all for participating in our conference call to discuss fourth-quarter results. I'm going to be talking about our performance, specifically our bottom line. I'll be first talking about our financial numbers, and I'll also talk about our performance indicators and also our socio-environmental indicators at the end. I'll start talking about the consolidated Natura [indiscernible] in Brazil and abroad. Our net revenue dropped by 1.6% in the fourth quarter because of a higher effective tax rate in Brazil, and also due to the lower number of units sold, and also was highly impacted by depreciation of the Brazilian real over the currencies we used in international operations. In terms of net revenue in Brazil, net revenue in the fourth quarter dropped 0.5% when compared with fourth quarter of 2015. Once again, the explanation is the same, highly impacted by the effective tax rate in the country.

The productivity of our consultants showed a growth of approximately 10% in the period, and as to the number of consultants we saw a drop of 7.4 percentage points. Net revenue in Latin America in reais saw a drop due to the depreciation of the region's currencies, but a strong growth in local currencies, in other words a growth of 26% with an important increase in the number of consultants, an increase of 8%. And we also saw higher productivity and a higher amount of units sold, which is set at around 18%. So in Latin America we had another quarter and another year where we saw strong growth with consistent advancements. Net revenue with Aesop, we also had a good quarter, a good progressed growth of around 29% in local currency, Aesop remained showing very consistent performance. We're talking about 176 exclusive units, 41 more than what we had in the fourth quarter of 2015 and we also saw a growth in same-store sales of 12% in the year in local currency. So once again a very solid performance.

Now talking about the consolidated EBITDA, in the fourth quarter of 2015 we saw a growth in our EBITDA margin when compared to the fourth quarter of 2015 up around of 19% -- which moved from 19.4% to 20.1%. We had -- we saw a growth in Brazil. Our EBITDA in Brazil grew 3.8%. We saw a growth in local currency in Latin America of 35% and we also saw a very strong growth in Aesop of 16% also in local currency.

I have the EBITDA bridge on the next slide which shows how we got to that EBITDA number in the fourth quarter 2016. Basically we focused highly on productivity, reducing expenses, new business units also represent an important point which contributed significantly to the EBITDA. I'm talking specifically about online, pharma, retail. Also international operations had an important contribution for our EBITDA in the quarter of around BRL130 million, up from the fourth quarter 2015. And on the side of extra impact we had an increase of the tax burden in Brazil of around BRL34 million and the FX effect which in the fourth quarter was quite important, especially when we converted Latin America figures into reais.

Now, moving on to the consolidated net income, we saw a good recovery in the fourth quarter 2015 when compared to the previous year, a growth of 38.8%, resulted -- which resulted from a slight improvement in the consolidated EBITDA, also an improvement in our income tax rate in Brazil now which is the result of hard work conducted by all operations in Brazil and abroad. And with that we managed to improve or recover generating BRL202 million in net income in the fourth quarter.

In terms of consolidated CapEx, as for CapEx we also had a year where we brought CapEx down and we did it by optimizing investments, investing in projects to increase our service level to consultants, the opening of new stores, innovation and also the digitalization process of our operations. Our CapEx has a different profile, as you can see I have been talking about that for the last conference calls. Brazil accounted for 62% of the CapEx used by the Company. Latin America and Aesop accounted for 38%. So the international share starts to have a higher weight when we talk about investments geared towards growth.

Free cash generation in the fourth quarter, we had good free cash flow generation which resulted from a higher net income generated in the period and also a more efficient working capital management, reducing our working capital, which was strong in the fourth quarter. That offset the performance we had in the first three quarters. This generated BRL403 million in the fourth quarter, which leaves us in a very positive situation. It shows that our business model can generate free cash and that means that we will be more comfortable in our future investments.

About indebtedness briefly; we closed the year with a net indebtedness ratio of 1.4 times. This is also a result of reducing expenses, improving CapEx, treasury efficiency in capturing and investing and in December 2016 we purchased Emeis Aesop part, so that was a disbursement of about BRL300 million. To conclude our performance session, I have the last slide which is sustainability. In the fourth quarter since 2016 we were still very focused and ran several activities in our triple bottom line management. I would highlight here our efforts in reducing our carbon emissions. Post-consumption recycled material results were reduced and our recyclability was also improved, especially in the Ekos line. The conception of Amazon inputs in comparison to our total input consumption was also reduced significantly and I'd also highlight our Crer para Ver program, which had a BRL23.7 million funded accounting for BRL38 million in Latin America. This was a record fund raised which leaves us at a very fortunate position of being able to contribute to such an important project in our society. So these were the main indictors for our triple bottom line performance.

I'm going to go back to -- I'm going to hand the floor back to Joao and we will hear questions. And all of our staff members will be here to answer your questions, Joao, Andrea, Marcio, everyone is prepared to receive your questions. So please ask. Thank you.

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Gustavo Oliveira, UBS.

Gustavo Oliveira

I have two questions. First, I would like to understand the trend for the selling expenses line. It grew over the year, as you mentioned there were remunerations, effective the training sessions for Brazil, but you still haven't implemented several of the segmentation initiatives or they would be expanded throughout the year. When you started implementing initiatives, will this line continue to show robust growth, or do you believe that it will be level from now on? And also do you think that would impact sales? That's my first question.

Joao Paulo Ferreira

Actually the new value proposals in segmenting consultants was an important growth curve for the year. However, this does not mean we will increase the base level of expenses in sales.

Gustavo Oliveira

So for Brazil, what we work around inflation levels expenses, do you think that's an appropriate level for the year?

Joao Paulo Ferreira

Well, we didn't design any structural changes.

Gustavo Oliveira

Okay. That answers my question. Now my second question is about sold volume that dropped by 15% in the quarter. And productivity per volume for consultants is also dropping. So can you please tell us what happened? I think there's a mismatch, volumes dropped, but value and productivity have not. So what happened over this quarter in comparison to previous years?

Joao Paulo Ferreira

Our volumes dropped throughout the year. So this last quarter is not an exception. We've been talking about reducing some categories, so that accounts for it. In the last quarter, there was an additional affect because it is usually affected by Christmas campaigns. So you have products listed here per their volume, but they include more than one item that come at a high average cost. So that's why there's a difference in comparison to previous quarters. But wouldn't that be comparable from year to year, last year we also had these kits, right? This year we were more efficient in selling these kits, we have more attractive kits with a higher cost.

Gustavo Oliveira

Okay. Thank you. There is a lot of toiletries, oh, toiletries in kits, okay. I see. All right, thank you.

Operator

The next question comes from Franco Abelardo from Morgan Stanley.

Franco Abelardo

I have two questions, the first is about indebtedness and free cash flow generation. We went to 1.4 times indebtedness during this year which is higher than Natura's average. Do you think that this is a concerning level or do you think it's appropriate for your strategy? Are there any expectations to reduce it over 2017? And the reduction in payouts, the 40%, was this a one-off in comparison to 2016 or is it more strategic? Is Natura reinvesting some of its cash generation to their own direct sales strategy and other channels? That's my first question.

The second question is also related to cash generation. There is a forecast that 33 million working capital will be generated. Is this comparable to the release cash which showed 144 million for 2016? And if it is comparable, why is it so smaller in 2017? Are we going to expend due dates for receivables or are there any different factors that will affect us for 2017?

Joao Paulo Ferreira

To answer your first question about the indebtedness being 1.4 times vis-a-vis the EBITDA, well, previously I mentioned that our business model is directed towards cash generation. The Company has tried over the last years to expand indebtedness due to how our business trends, we had a reduction in revenue, a reduction in the generation of the EBITDA, but on the other hand we have moved forward significantly in managing financial components, working capital, better utilization for CapEx, and also what relates to capturing credit line and cash investments. So we have become efficient in those treasury factors. 1.4 times is a level that to me is not concerning, far from it. But obviously we can have a better cash ratio and that's our expectation. We hope to continue working so we can resume our growth, resume our EBITDA expansion, and keep the same productivity and the same operational efficiency in cash generation components.

To answer your second question, you asked specifically on working capital, the generation of free cash flow. You may have noticed in our statements and in our financial results that we are reducing working capital quarter by quarter, year by year. So this is the financial direction aligned with our strategy so we have can have enough cash generation to obviously be able to reinvest in our growth plan, so revitalizing direct sales, international growth and so on. We concluded the year 2016 with a different level for working capital, it was quite used, but this is a several-year history. So obviously these estimates will be approved by the general meeting in April and therefore we expect BRL33 million in working capital which is not that much when you consider that 2016 was finished at a very optimal point. So that's why we are foreseeing this amount because it includes the presumption that 2016 has already been -- has already utilized a lot of working capital.

Franco Abelardo

About the payout, 40% do you think that that's a one-off or do you think that there will be a different strategy to reinvest more of the cash generation in the business?

Joao Paulo Ferreira

Well, the payout, this change actually started last year. The Company had been paying over 90%, but due to the need of going through this new cycle this year and reinvesting in a new strategy and also due to having a difficult year with high interest rates and with a smaller demand I think we wanted to be safe in reducing the payout to 70% and now to 40%.

As I said, we're working hard so that our business model can focus on cash generation. Obviously we're always going to prioritize investments towards the business because it is through the -- through strong returns that we will generate more dividends. So we are focusing on reinvesting to generate more cash and better results and then obviously to continue increasing dividend payouts. But this reduction was necessary according to our strategy.

Franco Abelardo

Okay. Thank you.

Operator

Our next question comes from Tobias Stingelin from Credit Suisse.

Tobias Stingelin

I'd like to ask you about productivity specifically. Do you believe that we are now riding on a trend? Can we see that going forward too? In the past we saw a lot of volatility, good quarters followed by bad quarters followed by good quarters. I know it's early, there's a series of variables that will play out. I'd like to see a little better how you understand productivity going forward and if you could also elaborate on this new value proposition offered to consultants, has been this tested in other markets?

And lastly, you brought the EBITDA numbers and we saw that new businesses contributed with 9 million if I understood correctly. At the same time online sales contributed with a 106 million. It seems to be to be a very low margin, does it have to do with the ramp-up of the business or is it being consumed by the negative EBITDA from the opening of new stores? Since you have broken those numbers down, I'd like to have some more color on that bridge slide.

Joao Paulo Ferreira

I'll start by the end. We are very proud of our new businesses. They're already showing profits after their ramp-up phase. We are seeing very, very fast ramp-up as you can see by that bridge. As it refers to the productivity of consultants, we are in fact seeking to find ways to increase their productivity. But it is key that they manage to obtain higher benefits, higher profits working with Natura. That's what we are working for.

How much can we expect to see that in the future going forward, we cannot say by now, but that's what we are working for. But that's the reflection of a conscious option. Lastly, the new format, it's a bit difficult to explain everything during an earnings call. But ensure to have already started implementing those new businesses, we're talking about value propositions that take into account the level of education, the level of talent that those consultants have.

And on the other hand, we offer benefits that will gradually increase, increase with time both in terms of financial benefits and in terms of training and those benefits will, as I said, increase as their volume of business with us increases as well. Those changes were tested for more than a year especially in the city of Porto Alegre and in the city of Belo Horizonte, and the results turned out to be very promising in terms of gains in productivity and gains in revenues. So those results make us confident that we'll recover our business in Brazil. And in fact, we already have data and information collected from those cities that makes us be very optimistic.

Tobias Stingelin

What's the status of the rollout of that system? How can we see that going forwards?

Joao Paulo Ferreira

The whole bases should be already under the umbrella of those prepositions by mid-2017. So we're going to see a progressive curve until mid-year, by then all the base, the entire base will have joined in.

Tobias Stingelin

One more question about the EBITDA. I imagine that stores are still showing negative EBITDA. You've been over a year in the pharma business, the online as well. I'd like to understand where do you need a better ramp-up to improve those numbers.

Unidentified Company Representative

Tobias, that's a bridge as you said. So those BRL9 million that you see there is a variation actually. So we have another number at the base. That's a variation. What I can tell you, I'm not going to repeat what Joao said, but we are talking about business which are going through a ramp-up phase, and they are all generating positive results, and that's within our expectations for all those businesses. And as I said, we are happy and optimistic about that. That's within -- it falls under our strategic line.

Operator

Next question form Joseph Giordano from JP Morgan.

Joseph Giordano

I have two questions actually about direct sales. Try to understand what you see happening at the beginning of the year in terms of trends. When we look at market numbers, the Company has improved a lot in the past quarters, but you are still losing share when we look at Avon, which is our best proxy for direct sales, they continued to grow slightly above Natura, so I'd like to have more color. On top of those benefits and incentives to consultants, the efforts to increase productivity and everything, I'd like to understand what you understand in terms of products. We see a better level of innovation, but still I'd like to understand a little more what do you see going forward in terms of products, client demands, how can you differentiate your line from that of your competitors?

Andrea Alvares

Hi Joseph, this is Andrea. Starting with the market share observation in the year -- the whole year, we saw some drop, but we see also a clear trend of recovery, those margins, in the first quarter of 2017.

And this is also in line with a reversal of trends in terms of acceptance and also in line with the launch of new products. So last year we re-launched Ekos, Chronos, Una. We launched Humor, [indiscernible] and all those products performed better than expected, but generated better results only starting the second half of the year. So that's when we saw numbers changing especially for toiletries. We still had a full year where there was a significant drop in the volumes, but when we look at the whole year, we saw a recovery of value, something we had not -- we did not see in the first half of the year where there was a clear loss of value, a clear trade-down in the business. So we saw a recovery of average prices in the second half. So I think we're moving in the right direction. The re-launches that we implemented last year brought the results we expected. Now we have to move forward. And I think what we have seen in the beginning of the year on top of the investments we've made, we have just re-launched our [indiscernible] make up line which is positioned for a younger consumer and which is being very well-received by our consumers in our network.

Operator

Next question comes from Guilherme Assis from Brasil Plural.

Guilherme Assis

I have a few questions. Looking at the results or the numbers, something that caught my attention was that the margin was slightly below what I expected when we compare figures of last years. I'm talking about Brazil specifically, a drop of 50 billion. When we look at that throughout last year, you saw a significant growth in the first-half and then in the second, but this growth was not followed by competitors in the first-half, and then in the second-half we saw less or fewer price increases whereas competitors hiked up their prices. So when we talk about margins, I was expecting margins to be slightly above, little more in line with what we have in the previous year. So I'd like to understand what happened. I understand the dynamics which is inherent to the mix. I understand that you have focused on toiletries, on kits, and of course that helps explain the issue of volume vis-a-vis prices, but it seems to be that you offered more promotions than I had expected. So I'd like to understand your policy on that front a little better. I've seen a few campaigns, speaking of 2017, we see campaigns where we have promotions in the line of toiletries. So my question is, are you going to be able to support that increase in productivity from consultants?

Jose Roberto Lettiere

Speaking of the margin, I understand you're talking about the gross margin, right?

Guilherme Assis

Yes, right.

Jose Roberto Lettiere

There is a very important fact which is the effect of tax rates. When we compare the fourth quarter of 2016 with the fourth quarter of 2015, we have an increase of 5% in terms of taxes. In the other lines, we saw very good level of efficiency. Even with a pressure from the FX rate, our promotional efforts or management, I mean, if you take away the tax rate effect, we see an evolution in terms of margins. We gain margins pro forma speaking. Now the second part of your question will be addressed by Joao.

Joao Paulo Ferreira

From the point of view of promotional investments, Guilherme, on average, last year we saw lower figures, we invested less in promotions last year. And we do not expect to increase those promotional investments this year because we are being more selective if you will in terms of what products and what consultants will be offered promotion. We are now increasingly using digital mechanics so we can customize offers according to our consultants. So there is an efficiency gain there. And as you noticed, toiletries are one of the year's priorities specifically for the beginning of the year. That's part of our options for the beginning of the season. We intend to gain more market share in toiletries and do that faster in the beginning or early on in the year.

Guilherme Assis

So one final question, if I may. In what concerns the difference with Avon as it was mentioned before, Avon showed a slightly higher growth than you last year. They do not provide many details, but they announced a good growth in PDB. When you look at your number that doesn't seem to be happening. That leads me to think that maybe they were perhaps more aggressive and conceding credits. They'd be too aggressive and they did say in their call that they will adjust that. I'd like to understand your perception about that. Did you see that happening in your consumer-base and should we expect a reverse on that dynamics going forward? Are you getting ready or preparing the Company to recover that market share, a market share that might be going towards Avon? So maybe with this effect you might speed up that reversal process which was mentioned earlier in the call. That's my question.

Joao Paulo Ferreira

I think it's important to highlight one thing. The training of our consultants and our relations network has improved. When you see an effect like that, obviously your base is healthier and it is less vulnerable to defaults. Of course, like any other company and any other sector in Brazil, when you are facing a recession, you have higher default level. But working with the base, everything that we have done in terms of training our network, this obviously brings us to a healthier position.

One other aspect is, as you know from some other calls, I have talked about our investments and technology and in training how we manage credit, how we manage analytics, charges, so we have a control panel both on sales as well as credit that I would say is quite acceptable. I'd just like to add that in fact recovering our presentation -- our penetration in households is one of our priorities. We intend to do it. We -- that's a part of our strategy, that's in all our choices. Of course, whenever our competitors slip up, we hope that will present itself as an additional opportunity for us.

Operator

The next question is from Irma Sgarz from Goldman Sachs.

Irma Sgarz

I have a couple of questions. The first one is related to volume growth. We saw even in the third quarter that volumes in Brazil were still dropping by about 15% in comparison to other years. So what about for 2017? What should we expect in terms of recovering productivity for consultants? Obviously something that helped in the fourth quarter was reduction in the number of consultants and the increase in price per unit.

Now, looking at 2017, are you implementing any -- well, the price increases are below inflation if I'm not mistaken. So the growth should result from volume sold. Looking at the first cycles of this quarter, what have you been seeing in terms of volume? What do you think can help to expand this volume in this year trend?

Another question is about the CapEx for the year. In previous years, we announced CapEx plans for the year. So I'd just like to understand a bit about your plan for CapEx in 2017. My final question is about the Faces brand. Do you also have plans of including that plan into the portfolio or I'd just like to know when that will happen in drugstores? Thank you.

Joao Paulo Ferreira

Hi, let me answer a part of your question. First about volume recovery. In fact, our focus this year is to recover household penetration. We had an increase in price last year to recover our margin, and on the short term this led to a not-so-good result, but we have been seeing this as positive because our price increase was not as significant this year which will give us a better access to the market. We have been seeing this as a part of our household recovery strategy and of course I'm focusing our marketing metrics in key categories such as gifts and toiletries, something that we had mentioned before. Now about Faces being launched, we have just introduced that proposal for our network, for our consultants, and this was very well-received. This is a brand that we will explore in other channels as well specifically with partnerships with higher drugstore and also some department stores specifically Renner. So we're going to start trying the product out with these channels and the makeup category. We know that the drugstore channel is good for impulse buying and trying out for the first time. So we have to -- that's how we intend to work in that channel as well. In terms of CapEx, Irma, we have included this in the menu at CVM capital for the BRL350 million and obviously this will have to be approved in the general meeting in April, but this is a level that matches our needs of accelerating recovering growth, supporting multi-channels, and also our operational expenses have demanded capital to expand growth.

Irma Sgarz

And that includes 25 new stores, right?

Joao Paulo Ferreira

Well, we're not disclosing this yet, but obviously our intention is to grow in Brazil, in Aesop, in Latin America, so this will be a new growth cycle that will require CapEx. And we have expectations of continuing generating cash, then, well, this model seems well in tune with our growth strategy.

Operator

Our next question is from Robert Ford, Bank of America Merrill Lynch.

Robert Ford

In the retail channel what is the percentage of sales and what is the comparison of sellouts?

Joao Paulo Ferreira

Robert, I'm not sure if I understood your question correctly. You asked about the percentage of our retail operations, right?

Robert Ford

Yes, that's right.

Joao Paulo Ferreira

Our performance was above expectations. So we are learning about how these operations work, consumer preference, the brands that are most attractive, how holidays will work in that channel, so we have been testing and examining these issues. But everything has been successful so far. So this boosts our confidence that we will continue to grow. We're adjusting and learning, but we feel pleased right now with our experience so far.

Robert Ford

About sell-in, sellout did you mention retail or direct sales?

Joao Paulo Ferreira

Just retail. I think in direct sales that would be difficult to measure. Well, sell-in equals sellout in retail for us right now. We don't have inventories in sell events as anywhere, so sell-in is the same as sellout.

Robert Ford

Okay. And the data you have on the press release, does that include the sales of retail?

Joao Paulo Ferreira

Yes, total volume.

Operator

Our next question comes from Alex Robarts, Citi Bank.

Alex Robarts

I also have two questions, and the first one goes back to the topic of the consultant-base in Brazil. I think that your goal is very clear having a good base of consultants that is the most efficient it can be. Looking at the figures for Brazil, 1.25 million consultants, this is our lowest in three years in absolute numbers.

This is the second drop quarter by quarter in the fourth quarter now. So I just want to understand up to which point do you think that you should try to maybe provide better incentives, or do you think that this base will drop by a bit more once you reach a certain level, or will it stop this on the short term or middle term? And what can we expect, can you tell us a bit in terms of the -- do you think that the base will reduce over the year? And finally are you thinking about changing incentives to stop this drop? What number do you think is acceptable or optimal 1.2 million, 1.3 million for direct sales to continue?

Joao Paulo Ferreira

We have invested in training our consultants network. This makes the process a bit more selective both in credit, as we mentioned, as well as training and recruiting. This is essential for our productivity to recover and to strengthen the brand through consultants. Well, that being said our intention is to have the biggest base possible to have well-trained consultants, and what we hope will happen in the short term is to have the stable number of consultants in our base. If there are variations we hope that they will be slight in terms of our existing base. We hope to be stable in the short term.

Alex Robarts

So you wouldn't accept a base below 1.1 million consultants, right?

Joao Paulo Ferreira

Well, all of the training process is for our consultants and all of the value propositions will take us to new configurations. It's still early to say what the new balance point will be. What I can say right now is that our intention is to stabilize our base on the short term.

Alex Robarts

My second question is about the international side of the operation. If we were to calculate figures adding up Latin America and Aesop, the margin has really dropped about 10 base points, and of course the gross margin in Latin America dropped and also administrative expenses in Aesop have gone up. So I know that there is a currency exchange effect there, but today if I'm not mistaken 60% or 70% of products are being exported to these countries, and that results in a currency exchange effect. Do you think that in the next years local production will go up, could it reach 50% of the business or even more, or are we always going to export two-thirds of it from Brazil? The second part of my question is will Aesop see a major growth on the administrative side in 2017? Can we expect any changes in that sense -- I just want to understand this item of administrative expenses in Aesop?

Jose Roberto Lettiere

Starting with the margin part of your question, the gross margin, I understand you're talking about the gross margin, an important component is to assess LatAm's gross margin. That can be explained basically by the foreign exchange impact we have reproduce -- we manufacture those products here in Brazil, so we saw an important foreign exchange impact on Latin America's margin, part of it coming from the US dollar and part of it coming from the subsequent appreciation of the real against the Latin American currency. As for the Aesop's gross margin, there was a growth of 1 percentage point, so we are somewhat comfortable in terms of margins.

If we look at the second issue, you mentioned about the G&A or expense management, administrative expenses, with the acquisition of 100% Aesop, there is no impact whatsoever in terms of the [indiscernible] expenses or anything like that. From the moment we bought our first stake in the company and now with the full purchase the company has remained totally independent, but of course with increasingly more synergies with Natura. But never -- and it's not in our plan -- we will have -- or we will produce a negative impact on the company's G&A. Expectation is we continue to grow with the same take on productivity, on efficiency, on growth, leverage by the operational side.

Alex Robarts

Okay. Just to be sure, the margin in 2015 for Aesop at 20.9% -- it -- 19.8% last year is that the level that you see happening in the mid-term for Aesop, or could we expect that level to go up over time as you increase number of stores, in other words is there room for that Aesop margin to grow in the future?

Joao Paulo Ferreira

Growth was extremely fast for the past few years. Of course as we have new stores open, we don't see margins growing at the same pace of course, but what we see when we look at the numbers is that we have our margins sitting at very solid levels for the segments where Aesop operates. So what I can tell you right now is that our plan is not going to be to dilute that number. Our investments will be geared towards improving our margins, but I have no doubt that we have reached a margin level for the segment -- for the market which is quite good I'd say. Of course we need to grow organically, but we are at a very comfortable level.

Alex Robarts

Thank you. Thank you.

Operator

[Operator Instructions] We now close the Q&A session. I'd like now to turn the conference back over to Mr. Ferreira for his final remarks.

Joao Paulo Ferreira

Well, once again I'd like on behalf of the executive committee to thank you all for participating in our conference call. In particular to the quality of the question we have received, which are always an incentive for us. We are quite confident in our bases, our strategic foundation, and we see a new growth cycle starting for Natura. We know that our products, our network, our brand, are the vehicles to generate positive impact on society. With that I remain available to be seeing you again in April when we come back with our first call of the year. Thank you and have a nice day.

Operator

Natura's conference call is over. Thank you for participating. Have a nice day.

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