Natura Cosmeticos SA (NUACF) CEO João Paulo Ferreira on Q1 2019 Results - Earnings Call Transcript

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About: Natura Cosmeticos SA (NUACF)
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Earning Call Audio

Natura Cosmeticos SA (OTC:NUACF) Q1 2019 Earnings Conference Call May 3, 2019 8:00 AM ET

Company Participants

Roberto Marques - Executive Chairman

José Filippo - Chief Financial Officer

João Paulo Ferreira - Chief Executive Officer

Viviane Behar - Investor Relations Director

Conference Call Participants

Tobias Stingelin - Citibank

Luiz Felipe Guanais - BTG Pactual

Thiago Macruz - Itaú

Joseph Giordano - JPMorgan

Bob Ford - Bank of America/Merrill Lynch

Helena Villares - Bradesco

Ruben Couto - Santander

Irma Sgarz - Goldman Sachs

Operator

Good morning, ladies and gentlemen. Thank you for waiting. We would like to welcome everyone to Natura &Co Conference Call on the First Quarter Results 2019. Today, we will hear from Mr. Roberto Marques, Executive Chairman of the Board of Natura & Co; Mr. José Filippo, Chief Financial Officer of Natura & Co; Mr. João Paulo Ferreira, CEO of Natura; Mrs. Viviane Behar, Investor Relations Director of Natura &Co. This event is being recorded. [Operator Instructions]

We have simultaneous translations into Portuguese and questions maybe asked normally by participants connected from abroad either in Portuguese or English. [Operator Instructions] We have a simultaneous webcast that can be accessed through Natura IR website, www.natura.net/investor. The slide presentations can be downloaded from this website. There will be a replay facility for this call on the website after the end of the event. This presentation may contain forward-looking statements. Such statements are not statements of historical fact and reflect the beliefs and expectations of Natura &Co management. This presentation also includes adjusted information prepared by the company for information and reference purposes only, which have not been audited. Forward-looking statements speak only as of the date they are made and the company does not undertake any obligation to update them in light of new information or future developments.

Now, I will turn the conference over to Mr. Roberto Marques, Executive Chairman of the Board of Natura &Co. Mr. Marques, the floor is yours.

Roberto Marques

Thank you. Hello, everyone and thank you for joining us for this call to present our first quarter 2019 earnings. As was said, I am joined today by José Filippo, CFO of Natura &Co; João Paulo, CEO of Natura; and our Investor Relations teams of Natura &Co headed by Viviane Behar. I will start with a few introductory remarks on our performance. Filippo will then detail our financials on a consolidated basis and also by business. And after my concluding remarks, we will open the floor to your questions.

Just before we get started on this presentation, I wanted to highlight that as you all know on January 1, 2019, a new accounting standard for this agreement was adopted, the IFRS 16. For the purpose of the comparison the results in analysis in this presentation excludes these effects, especially as we did not restate 2018, so we do not really have a fair comparison. The terms adjusted revenue and adjusted EBITDA also exclude other effects that are not considered recurring are not comparable between the periods under analysis. So hopefully, that will be helpful for all of you.

So let’s begin with Slide 3 with an overview of our performance. Q1 was another quarter of solid consolidated underlying performance for Natura &Co with growth in sales, EBITDA and net income confirming the continuing momentum of our multi-brand, multi-channel, purpose-driven beauty group that we are building. Our adjusted net revenue was up by a robust 7.1%. Importantly, all three of our brands and businesses posted sales growth in Brazilian reais in the quarter in spite of some challenging market conditions in some markets, notably Brazil, demonstrating the group’s resilience and benefit of its broad geographic footprint. Natura overall revenue grew 2.3%. Growth was up in double-digits in Latin America.

While the business operated in a weak CFT environment in Brazil, it’s important to highlight that we outperformed the market and gaining market share, confirming its leadership in the sector in direct sales and underscoring the business solid fundamentals. The Body Shop also continued to show progress in its transformational plan. Sales were up about more than 10% in Brazilian reais broadly stable in local currency, a very satisfactory performance given the continued optimization of its own store network with 44 net closures of stores in the past 12 months.

Our store like-for-like sales were slightly down due to a weak Asian market, but up by 2.4% in UK, which as you all know is our Body Shop’s biggest market, confirming the brands growing attractiveness. And Aesop delivered another yet impressive quarter with solid double-digit growth in sales, including FFO signature store supported by strong performance in both channels and geographies. Adjusted EBITDA was up by 3.7% versus Q1 ‘18 driven by a very strong 54% EBITDA growth at The Body Shop, really reflecting significant efficiency gains coming from the transformational plan. Finally, net income was up nearly 73% demonstrating a very strong underlying performance. From a financial standpoint, the business also consumed less cash in Q1 and we grew our leverage ratio to 2.95x at the end of the quarter, which compares to 3.32x in the year ago quarter, so a significant improvement there as well. We are further on track to achieve our guidance of returning by 2021 through a leverage ratio of 1.4x, which we talk about it, which is equivalent to the level prior to the acquisition of The Body Shop.

Finally, Natura &Co posted further sustainability achievements. Natura was included in the Corporate Knights Global 100 list of the most sustainable corporations in the world for the 10th consecutive year. The Body Shop won Marie Claire’s beauty award for its Christmas campaign, which helped protect a further 11 million square meters of natural habitat in Armenia and in the UK. And Aesop also reduced plastic consumption by 17% per unit by redesigning some of its bottles, which should consider it sustaining 124 tons of virgin plastic over a year. These achievements confirm Natura &Co’s commitment to a better way of doing business combining positive economic, social and environmental impacts.

With that, let me hand over to Filippo to go through our financials in greater detail. Turn to you, Filippo.

José Filippo

Thank you, Roberto and hello to everyone. Before going to our financials on Slide 5, I thought it would be helpful to step back for a second and remind you again of the various adjustments that continue to impact our numbers and give you some visibility on their impact. Indeed, as in past quarters, this quarter was marked by several non-operational adjustments, IFRS 15, which impacted net revenues both in Brazil and Latam and EBITDA in Brazil, hyperinflation in Argentina, non-recurring tax effects in Brazil from a reversal of an ICMS tax provision and continued transformation costs related to The Body Shop impacting EBITDA. And this quarter also was marked by the adoption as of January 1, 2019, of the IFRS 16 accounting standard, which Roberto has already mentioned.

As you see on Slide 6, IFRS impacted in various lines of P&L and balance sheet. You’ll find full details in explanatory notes 2.3 and 15 of our consolidated financial statements. But let me mention the main impact. The standard introduces one single lessee accounting model replacing the previous accounting standard of operating and financing its investments. In our balance sheet, the adoption of IFRS 16 has brought accounting changes to the fixed proportion of rental agreements now classified as leases requiring recognition of future commitments in liabilities offset against rights of use in assets. Our assets and liabilities are both impacted by approximately BRL1.9 million. And up until 2018, rental costs were reported as expenses but henceforth are recorded in both depreciation and financial expenses accounts. Overall, this changes results in a favorable impact of BRL112.2 million on EBITDA.

Let’s now look at our Q1 performance. I’ll start with a review of our P&L with our consolidated net revenue on Slide 7. As shown in the graph, the group’s net revenue rose 7.1% in the quarter in Brazil reais and 4.1% at constant currency to near BRL2.9 million. The strong increase in sales results from growth in Brazilian reais in all three business units. Natura’s net revenue was up 2.3% driven by Latin America, up 10%. In Brazil, net sales, excluding the effect of IFRS 16, were down 1% due to a weaker CFT market and the new pricing alignment policy to support a sustainable omni-channel strategy, which impacted the online channel. Sales at The Body Shop were up 10.2% in Brazilian reais and revenue stable at negative 0.2% versus Q1 2018 at constant currency. This comes despite 44 net own store closures as The Body Shop continues to optimize its network. It also reflects a high comparable base at Q1 2018 had been boosted by phasing of head franchise orders. Finally, Aesop posted double-digit growth of 34.2% in Brazilian reais and 16.3% at constant currency with strong growth across channels and geographies.

On Slide 8, we turn to consolidated EBITDA excluding IFRS 16, which grew by 5.6% to nearly BRL337 million. Adjusted EBITDA, excluding IFRS 16, rose by 3.7% in Q1 to BRL330.8 million, notably driven by the very strong growth at The Body Shop and a solid contribution from Aesop. On the same basis, margin was 11.5% a slight contraction of 37 basis points.

Turning to Slide 9, we look at Natura &Co’s net income. Excluding IFRS 16 effect, net income was up by 72.8% to BRL41.9 million largely supported by the increase in consolidated EBITDA. Underlying operating income posted a drop of 12.1% in Q1 as a result of increased expenses, mainly corporate expenses, which offset increase of BRL154.4 million in gross profit.

Let me conclude this quick summary of our key financial highlights with a look at the main aggregates of our balance sheet on the next slide. Cash flow in the quarter was an outflow of BRL339 million. This represents a reduced cash consumption of nearly BRL12 million versus the same quarter last year. This reflects low working capital requirements at Natura driven by reduced inventory and higher accounts payable to suppliers, which partially offset the higher seasonal working capital requirements at The Body Shop and Aesop. Finally, we continued de-leveraging the company in line with our expectations. Our net debt-to-EBITDA ratio stood at 2.95x at the end of Q1, down from 3.32x in Q1 2018. This puts us well on track to achieve our target of returning by 2021 to our leverage ratio prior to the acquisition of The Body Shop of 1.4x.

After looking at our consolidated numbers, let me now comment on the individual performance of our three businesses, starting on Slide 12 with the key highlights of Natura. Natura faced a tough environment in Brazil as well as we will see shortly, but the company outperformed the market, gained market share in the sector and in key categories of fragrance, body and gifts. Euromonitor recently confirmed that Natura was the leader in the Brazilian CFT market for the second consecutive year in 2018 with market share of 11.7%. This solid performance reflects the success of our relationship selling margin, which is leading to higher productivity in Brazil. Consultant productivity increased for the 10th consecutive quarter, up by 1.5%. Another highlight in Brazil was the launch in March of the Natura digital account in partnership with Banco Santander. This is an additional exclusive feature embedded in our consultant mobile platform, which will promote banking and financial inclusion of our network of consultants. In addition, this partnership will offer micro-credit to consultants also on the mobile platform to purchase Natura products.

Adoption of our digital platform by our consultants continued to increase and the range of available digital solutions and services. Over 60% of our consultants in Brazil and 30% in Latin America use our mobile platform. Latin America is also performing strongly and Euromonitor confirmed that Natura has increased its leadership in CFT direct sales in the region with market share of 5.1%. We performed well in all countries. In Argentina, despite the challenging economic environment, we were posting strong growth.

On Slide 13, we will look at the sales performance in Natura both on a consolidated basis and in its two geographic fronts. Total sales were up 2.3% to BRL1.7 billion in Q1, mainly driven by LATAM. In Brazil sales dropped 1% reflecting the weaker CFT market and also as a result of a new pricing alignment policy, which impacted the online channel to support a sustainable omnichannel strategy. Consultant loyalty remained high. However as I just mentioned before, we have gained market share demonstrating Natura’s strong fundamentals in Brazil. In Latin America, we saw very solid growth of 10% and an even stronger 19.4% at constant currency with growth in all geographies, with Argentina and Colombia as highlight. The number of consultants grew 7.4% versus Q1 2018 to more than 634,000 and volumes were up in the region by 12.7%.

I will conclude on Natura with the EBITDA on Page 14. Overall, EBITDA reached BRL247 million. In Brazil, EBITDA was down 5.2% with an EBITDA margin of 15.4%. This reflects lower sales in a soft market and higher cost of goods sold as a result of a negative effect from foreign exchange, category mix and promotional investments. This was partially offset by efficiency gains. SG&A declined by 100 basis points to 57.1% of net revenue as a result of continued rationalization efforts despite investments in innovation and technology. In Latin America, EBITDA grew double digits, up to 10.1% driven by a strong performance in Argentina and in Colombia. EBITDA margin was favorable due to higher cost of goods sold from significant negative exchange rate effects in Argentina.

Let’s now move to The Body Shop on Slide 16. Net revenue in reais increased by 10.2% in Q1, at constant foreign exchange sales were broadly flat at negative 0.2%. As mentioned earlier, this reflects the smaller own store footprint as The Body Shop continues to optimize network and has closed 44 underperforming own stores in the past 12 months. It also reflects the higher comp as Q1 of last year benefited from strong orders by head franchisees. On a like-for-like basis, sales at own stores were down 1.7% in Q1 mainly due to a weakness in the Asian market and stable sales in U.S. However, like-for-like in The Body Shop’s home market in the UK, its biggest market, was up by 2.4%, which is a very encouraging performance that demonstrates the successful effort on the brand’s rejuvenation. We also saw very strong growth at The Body Shop’s direct selling channel, at home, which were up nearly 65% and represented about 5% of total sales. This helped to offset the drop in online sales, which were impacted by The Body Shop’s effort to reduce discounts. At the end of the quarter, The Body Shop had 2,888 stores with 1,024 owned stores and 1,864 franchised ones.

In Slide 17, we see that The Body Shop’s adjusted EBITDA in the quarter, which excludes transformational costs, grew by 53.7% in reais to BRL81 million. This resulted in a margin of 9.9%, up by 280 basis points. The Body Shop’s transformation plan is advancing well with costs and benefits in line with the plan. Transformation costs of BRL6.1 million or £1.5 million incurred in the quarter are related to initiatives such as organization redesign, store footprint optimization and reduction of discounts among others. As a reminder, we expect to incur circa of £10,000 in transformation costs in 2019.

On Slide 19, we round up this look at the performance of business with Aesop which posted another quarter of strong growth. Net revenue grew in reais by 34.2% in Q1 with a very strong performance across all channels and geographies. At constant currency, growth remained very strong at 16.3%. Like-for-like growth in signature stores increased 10.6% in Q1 and with 22 openings in the past year Aesop now has 230 signature stores. EBITDA also grew double digits in reais up by 29.5% in Q1 resulting in an EBITDA margin of 13%.

Let me now hand over to Roberto from some concluding remarks.

Roberto Marques

Thank you very much Filippo. So what are the key takeaways, then we mentioned as you see on Slide 20, three of them. First of all, Natura &Co posted a solid performance in Q1. Revenue grew across the three brands, which we think very important. And net income was up by a very strong 73%. And the usage of cash was reduced as we continued to de-leverage the company. This good momentum of Natura &Co in each one of our businesses shows the strength of the global multi-brand, multi-channel beauty group that we are building. With this new quarter of solid performance, we want to reiterate that these are on track, Natura &Co is on track to deliver on its medium-term financial targets while making a positive social environmental impact and creating value for its stakeholders.

Finally, just to mention that Natura &Co decided to participate in a new venture capital vehicle called Dynamo Beauty Ventures. This new vehicle will work to identify and invest in emerging brands in the cosmetics and wellness segments particularly in Europe and the United States. This fund will work in partnership with entrepreneurs with extensive experience in the industry to acquire minority stakes in companies with strong growth potential and innovative business model. Before we go to the Q&A, let me just tell you that we are still to talk with anyone, but there is nothing new to report today and as you can appreciate we won’t be able to say anything more at this stage.

Thank you very much for your attention. And now Filippo, João Paulo and I are happy to take your questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Tobias Stingelin, Citibank.

Tobias Stingelin

Good morning to everyone. Thanks also for taking my questions. I think the first one is – I just wanted to understand a little better the underlying sales trends given the imbalance between sell-in and sell-out in Brazil, so there was strong double-digit growth in the first quarter and now top line was down, so there were clearly a lot of inventories in the channel and is the situation now normalized, can you also explain what effectively happened and give us some indication about how the situation is evolving now in regards to sales trends in April, Mother’s Day and so on, I think that’s my first question. And then I have two more, I don’t know if you [indiscernible] right now, but I just wanted also to get an update about the pricing strategy online, if it goes – if the digital strategy had also kind of impacted the first quarter, so if you can kind of elaborate on that. And then just the third question is about the corporate expenses, which were above the 1% of sales, which was kind of a soft guidance, so I just want to understand what’s the trend there as well? Thanks so much again and I hope thanks [indiscernible] see the impact.

João Paulo Ferreira

Good morning Tobias, JP speaking. Thanks for the question. So on your first question, indeed as you know our consultants they carry some sort of inventory, which help them buffering the market effects. So we do see – we did see through transfer [ph] panel that the market slowed down significantly in Q1. Nevertheless, the activities from our consultants and the preference from consumers continued to drive their sales and this is the reason why again through transfer panel we continued to gain share. So going forward, we expect those two sell-in, sell-out lines to normalize and you should see our sell-in numbers picking up. And this is already the short-term trend, okay. And we are pretty happy with what are these numbers so far. So that is on your first question. On the second question…

Tobias Stingelin

Can you just repeat, there is a little bit of echoing on the line, I can’t – couldn’t hear you very well, you said that – so to expect sell-in and sell-out should normalize and the trend in April is already better, it’s something like you just said?

João Paulo Ferreira

Yes, exactly that. So the sell-in, sell-out trends should normalize going forward and we are seeing already a positive sell-in trend. And we are really happy with our Mother’s Day campaign so far.

Tobias Stingelin

Thank you.

João Paulo Ferreira

So moving to your second question, our digital channel, if – as you are aware, we are in preparations for the full merger of our on and off beauty consulting models, which is due mid of the year. And in order for that to work properly, few enablers have to be implemented. One of them was the digital account, which we have just launched in partnership with Santander. But another key enabler was to sort of equalize our pricing and promotional strategies so that we will remove arbitrage opportunities amongst channels. So we planned for a hit in Q1 in our online channel, which just happened. And we should see the online channel performing in its historical trends and the – as of mid of the year when the two channels will be merged. Now I will hand over to Filippo.

José Filippo

Yes. Tobias, regarding corporate expenses you asked, those two expenses are related to our corporate governance structure. It’s a lean structure as you know. We target to be less than 1% of net sales. However, this particular quarter was impacted by a non-recurring cost of strategic projects expenses. This shouldn’t be a trend. That’s nonrecurring, and that tends to be in our targeted numbers.

Tobias Stingelin

Can you just repeat, sorry, the side of the nonrecurring? Again, I’m having some issues with the line. I don’t know if it’s my line only or if everybody’s having kind of this echo. But can you maybe just clarify the nonrecurring nature?

José Filippo

Look, those are related to strategic projects.

Roberto Marques

Right. Those are Tobias, just to be clear, sorry for, if you’re not hearing well, but that’s Roberto. That’s correct. Those are nonrecurring that elevate a little bit the quarter corporate expenses a little bit about 1.2%, 1.3%. Again, it’s close to our 1% target, but those are nonrecurring expenses that we budget, and we don’t anticipate that it will continue. Thank you.

Tobias Stingelin

Okay thank you.

Operator

Our next question comes from Luiz Felipe Guanais, BTG Pactual. You may proceed.

Luiz Felipe Guanais

Good morning guys. I have 2 questions here. In the case of the sales performance in Brazil, was there a category that was more impacted as a result of competition and also the gap between sell-in and sell-out? And the second question, if you could comment on The Body Shop sales trend going forward for 2019 and regards to the main market, which you we could expect the turnaround initiatives to move on in the coming quarters. Thank you.

João Paulo Ferreira

Okay, thank you. I’ll take your first question. JP speaking. So basically, fragrances was, the most impacted category in Q1 and again, not by not because of competition but mainly to market performance in the month. So, there was a, the mix was affected with fewer fragrances, units.

José Filippo

Yes. Regarding the Body Shop, the stores and that’s why we are highlighting the key market there we’re putting more energy in terms of starting the transformation and the rejuvenation of the brand in UK. So, our whole market is one that we are highlighting a good performance in terms of like for like even in Q1. So, we are we feel pretty positive about it as we’ve started to really think about the rejuvenation of the brand.

Luiz Felipe Guanais

Thank you very much.

Operator

Next question comes from Thiago Macruz, Itaú.

Thiago Macruz

Hi guys good morning. My question is regarding The Body Shop. I mean since the beginning, we’re seeing a combination of maybe much better profitability there with, to some extent, soft growth. My question here is do you guys believe you’ve reached where you want to be in terms of profitability now at that the specific operation. And if you could provide us with the main pillars for organic growth going forward, is it reasonable to assume that we’re going to move to positive in current in constant currency already in 2019? That’s my first question. And my second question is regarding your strategy in China. At your Investors Day, you gave us an indication of potentially eventually thinking about opening up a shop there, thinking about opening up a factory there eventually. Can you provide us with an update on that front? Those are my two questions. Thank you.

Roberto Marques

Thank you, Thiago. Roberto here. So, in terms of The Body Shop, we are pretty much on track with our transformation. As we presented a couple of times, as we actually plan, the initial focus on The Body Shop was really and has been to increase the margin and the profitability. And that’s been the result of the in a redesign of the footprint of our stores. As you saw, we closed net of 44 stores, our own stores in the last 12 months, especially unproductive, unprofitable stores. So that is actually performing well. Also, the redesign of the organization, reducing layers, being a little more efficient there, that’s also on track. So that’s with the first part of the transformational program. It’s on track. It’s doing very well. And in parallel, we are starting to really talk about the rejuvenation of the brand. You guys heard from David, the new purpose of the brand, which is driving again some of the new market campaigns that is coming. Some are potentially redesign of our stores with potentially a first prototype in the last quarter of the year. So, this is also on track. So, we feel pretty good about what is going is exactly what we planned, and we’re pretty happy about that. So, what was the China? Regarding China, as you saw at the Investor Day, we had our first initial, call it, stronger presence through Aesop through Tmall Global, which has been very successful for Aesop. And right now, what we are committing to do is potentially explore the same venue for The Body Shop later this year. So that’s where the team is working, and that’s probably our first step or second step, I would say, as a group, while at the same time, we are exploring other possibilities. But right now, nothing that we can communicate at this point.

Thiago Macruz

Alright that’s it, thank you very much.

Operator

Next question comes from Joseph Giordano, Banco JPMorgan.

Joseph Giordano

Hi good morning everyone thanks for taking my question. I like to understand a little bit more about the innovation trend throughout the year. You mentioned like a few launches on fragrances and also on lotions. So, I would like to understand like how the innovation index evolved into this quarter. I couldn’t find this data at this time. And secondly, you mentioned about all the digitalization process here, right? So basically, slightly over 50% of your sales reps are already digital. So how should we see that evolving towards the target of 100% of the base throughout the year? And lastly, in terms of the strategy for the small franchises of the sales reps. So, like how much are they accounting of your sales already? And what’s the plan for the next years? Thank you.

[Technical Difficulty]

Operator

Please hold. We are reconnecting the speakers. Mr. Roberto, you may proceed.

Roberto Marques

Yes, sorry guys. Can you I think it was Joseph. Could you sorry, Joseph, we got disconnected here for a second. Could you kindly repeat the question that wasn’t answered properly at this point, and again, apologies for that?

Joseph Giordano

Sure. So, like there were actually 3 questions. So, the first one was on the innovation here. So, you mentioned a few launches in the quarter on the fragrances and the lotion side. So, I would like to understand how the innovation index is evolving on this front. The second question was on the digital strategy. So we have like a slightly over half of your base with a visual website or a webpage to the network, so I would like to understand how we should see that evolving towards 100% and through the end of the year, particularly now that you have like the digital accounts, so all consultants are able to receive digital payments. And lastly, how is the contribution of those small franchises evolving inside Natura Brazil where it seems to be like a major initiative here towards the bricks-and-mortar channel. So, like also like how representative it is already in the terms of sales? And how should we be seeing that strategy going forward in terms of openings? Thank you.

João Paulo Ferreira

Joe, JP speaking. So, we are extremely confident and excited with our innovation pipeline. You saw some of the new launches, but especially the second half is packed with new products with relevant technology. We are pretty confident on that. Having said that, because it was planned to be more active as of Q2, so the innovation index would be slightly down in Q1 in comparison to the previous number, right? But this is just a phasing consequence – it’s a consequence of our phasing strategy. As it comes to the digitization of our network of consultants, well, as of June or so, when we fully merged the 2 models, the on and the offline consulting services, as of that moment on, every new consultant will also be a digital consultant, and all of them will receive their online stores. Now, those which are already part of the network will be converted progressively, I mean, as it goes, so we should close the year particularly in Brazil, with an extremely high percentage of our consultants already digitized. And finally, on the franchise stores, consultant stores, we are extremely happy with the results so far. They are extremely happy with the results. So, we’re meeting their expectations as well. There’s a significant number of new consultants enrolled on the program. So, you’re going to see a high number of openings throughout the year. But I wouldn’t like to disclose what percentage that represents of our total sales at this point.

Joseph Giordano

Right, perfect. Thank you very much.

Operator

Next question comes from Bob Ford, Bank of America/Merrill Lynch.

Bob Ford

Good morning, everybody, and thanks for taking my questions. JP, I just wanted to follow up on the Joseph’s questioning in – that is, can you talk a little bit about the economics of the franchised channel versus the direct sales channel, please?

João Paulo Ferreira

Okay. Bob, let’s see if I got this right. I was trying to think – see if I understood. You asked about a comparison between the franchised stores and the direct sales channel in general. Is that correct?

Bob Ford

Exactly. And excluding any symbiotic benefits because I understand the benefits of trial and increased share of wallet and whatnot as the two evolved, right? But just from a kind of a margin perspective, how do they compare?

João Paulo Ferreira

Alright. So, because they’re so much more productive than any single consultant, right, even though they have better discounts, the cost of serving them is much lower. Hence, they get a better margin and we get a better margin than the average direct sales channel.

Bob Ford

Okay. No, good to know. And then, Roberto, there was a huge increase in The Body Shop’s direct sales, and I was hoping you could talk a little bit about what’s behind that and perhaps any possible plans to roll out social selling tools for The Body Shop? And then how do you see direct sales evolving at The Body Shop in the UK, Australia and the possibility of expanding that to other existing markets or new ones?

Roberto Marques

Bob, thank you for the call. Yes, we are super excited about what we are seeing in UK. It is a result of some improvements already in upgrading systems that is helping the consultants in UK and direct selling. There’s been more and more now collaboration between Body Shop and Natura, understanding the tools, and I think we can even take that to the next level. We are in the process as we speak to upgrading also to the same system that UK team has right now in Australia for The Body Shop. So, we expect also to start seeing some momentum and some growth in Australia. And we are in discussions without disclosing how fast and which markets, we are in discussions about expanding Body Shop At Home in other geographies. We absolutely see that as a venue for growth within The Body Shop. And David and the team are working with JP and the team in Brazil are looking into that from an strategic point of view.

Bob Ford

And with respect to social selling in new markets, is that where TBS or The Body Shop moves or do you see at least for now a little bit too much conflict between channels?

Roberto Marques

Look, we are evaluating, Bob. You know, we don’t – we believe direct selling or social selling will be again a key potential revenue growth stream for the Body Shop. But of course, we are evaluating how that would play with our own stores and company stores or even franchised stores. We do believe – and again, there’s a lot of already conversations and change of – exchange of experience between Natura social selling tools with The Body Shop. So, we would probably see an enhancement that, that will come from that collaboration.

Bob Ford

It’s pretty helpful. Thank you very much.

Operator

Next question comes from Helena Villares, Bradesco.

Helena Villares

So, good morning, everyone, and thank you for taking my question. First, I just wanted to highlight the reconciliation between adjusted figures in IFRS 15 and IFRS 16 were pretty clear, so thank you for that. So, I know that the comment about the participation in the beauty – Dynamo Beauty Ventures and I just wanted to understand if this is a form of research and development investment? And if this is a strategy that the company should continue to pursue with other holdings in such kind of assets? If you could just give me more details regarding that investment, it would be great? Thank you.

Roberto Marques

Okay, Helena, it’s Roberto. Thanks for the question. Listen, it’s – we’re excited about that. It’s a small initiative for us initially, but it is something that we are bullish about it. And you’re right, we probably anticipate that we want to do more of those things. We believe this trend of really going after more entrepreneurial upcoming new technologies, new brands is something that we want to really foster within the group. And this is a first vehicle that it kind of match our criteria within what we believe should be our focus moving forward. So, the answer is yes. We think that we’re probably going to do more in the future and it’s a first kind of step into that direction.

Helena Villares

Okay. If – and if I could just follow up on that, do you think that you can have some kind of cost benefits in this kind of R&D investment?

Roberto Marques

Yes. Listen, it’s an investment, but this is not the reason why we’re doing. This is not – just to be clear, we are really going after the opportunity to have access, to get to know what’s happening in some of that kind of new upcoming trends and technologies and brands. This is our primary focus at this point.

Helena Villares

Okay, thank you.

Operator

Next question comes from Ruben Couto, Santander.

Ruben Couto

Good morning, everyone. You mentioned that you continue to see market share gains in Brazil, but can you share with what’s your expectation regarding total CFT market growth in 2019? What do you guys expect for this year? And you also mentioned about consultant loyalty in Brazil, which remains high. Can you give more color on how you’re actually measuring this and if we can assume that within the direct selling channel in Brazil you are gaining market share compared to the other brands? Thank you.

João Paulo Ferreira

Hi, Ruben, JP speaking. So, the CFT market is – it’s – well, initial members in the year suggested there will be – they’re going to – it’s going to grow less than we expected. You can refer to historical numbers. Normally the market grows 2 times GDP growth give or take. So, as you guys are looking at continuous decrease in GDP estimates, that also suggests what’s going to happen to our market. And yes, I can assure you that we are gaining market share in direct sales channel. We track that on a monthly basis, a lot of detail, so I can assure you that we’re gaining shares there as well.

Finally, you talked about consultant loyalty. We track that indicator, that KPI. We have been tracking those for many, many, many years. It’s a combination – it’s a continuous panel and it’s a combination about how satisfied consultants are and their willingness not only to recommend activity to others, but also to continue in the activity. So, the combination of those elements compose what we call the consultant loyalty.

Ruben Couto

Okay, that’s clear. Thank you.

Operator

Our next question comes from Irma Sgarz, Goldman Sachs.

Irma Sgarz

Yes, hi, good morning. Thanks for taking my questions. I have 2 very quick questions. Aesop continued to obviously perform very well in the overall group context, but when you look at the same-store sales that you posted for the first quarter, it did mark a slowdown that was a little bit more than I had expected and you sort of look at the run rate of 2018 and now sort of the slightly less than 11% for the first quarter. So, I was wondering, was this impacted by the daigou at all or are they shopping in different channels that don’t impact your same-store sales?

And if did impact your same-store sales, would you be able to sort of just provide maybe an underlying number excluding that impact just so that we can get a sense of how trends were excluding the daigou on the Asia effect? And then the second question is, I think you mentioned somewhere in the release that you have about 5 million customers already on your CRM, and I was curious, whether this is data that has been input by your sales reps and to what extent you feel you already sort of have progressed far in terms of your ability to capture data on your final end consumers through your digital tools, because, ultimately, it still depends on your sales reps to input the data on your – on their customer base that they have access to. So, I was curious sort of where you feel that you’re on that curve in terms of capturing data on your final customers through the CRM system?

Roberto Marques

Irma, Roberto here. I’ll start with Aesop and then JP talk a little bit about CRM. So, you’re absolutely right. I mean, we’re still pretty happy with double-digit growth like-for-like at the Body Shop and the growth overall is still pretty remarkable. But you’re right, somehow, it’s been impacted by the daigou and also, as you know, the Yellow Jacket in France and also some kind of still the impact of Brexit in UK. So. you have a little bit of headwind in some of the markets. But overall, I think the signature stores are performing well. To really address the daigous and some of the impacts, again, we’re also pretty confident with the strategy of Tmall Global, and we think that this is just starting. That’s encouraging numbers that we’re seeing and we still think there’s a huge opportunity to further drive growth into that. So, we still feel pretty bullish about the year and what we are committing in terms of Aesop performance for 2019. So, JP, you want to comment on the CRM?

João Paulo Ferreira

On the CRM?

Roberto Marques

Yes.

João Paulo Ferreira

Yes. We’re only in the beginning of that journey, Irma, as you mentioned. Consultants, as they become more digital and they offer better services to the end consumer, payment services and then the view as of now with the new Santander partnership, content through the social selling tools that we are launching. So – and as they get more acquainted with our digital platform that they have all those possibilities in their hands, I mean, we basically empower them with our CRM engine and all the analytics for them to do a better job with their own clients. So, we will see them collecting many more customers into that database. So, we’re just in the beginning of that journey. We are targeting at least 20 million customers in the database by the end of next year.

Irma Sgarz

Thank you. That was helpful. Just to understand – to get an understanding like do your reps really put in all the data for each order that they place on which product is associated to which one of their customers, because I know that was always sort of the last leg of that purchasing journey that you were losing that last piece of data? And I was just curious how disciplined you feel your reps are in already inputting that data? Thanks.

João Paulo Ferreira

No, that is not going to be the mechanism. But as you properly pointed out, I mean, the reps will help us getting the data on the customers, but not by inputting them or typing them in, but rather by offering the customer better services, and we will connect the customer to the consultant digitally and hence acquire their data. But that would require us much more time for me to describe that – all those mechanisms, but it’s not going to be typing things into the – onto their phones.

Irma Sgarz

Great.

Roberto Marques

Alright. Guys, I just want to again thank everybody for joining the call. I appreciate it. Again, we feel pretty good about the results in Q1 across the three business and also pretty confident about continue those positive trends for the remaining of the year. I want to thank everybody, wish you guys a good weekend and hope to talk soon, Thanks to everybody. Have a good day. Thank you.

Operator

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