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Edited Transcript of NATU3.SA earnings conference call or presentation 14-Nov-19 2:00pm GMT

Q3 2019 Natura Cosmeticos SA Earnings Call

SAO PAULO Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Natura Cosmeticos SA earnings conference call or presentation Thursday, November 14, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* João Paulo Brotto Gonçalves Ferreira

Natura Cosméticos S.A. - CEO

* José Antonio de Almeida Filippo

Natura Cosméticos S.A. - Chief Financial & IR Officer

* Roberto de Oliveira Marques

Natura Cosméticos S.A. - Executive Chairman of the Board

* Viviane Behar de Castro

Natura Cosméticos S.A. - IR Director

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Conference Call Participants

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* Gustavo Piras Oliveira

UBS Investment Bank, Research Division - Head of LatAm Research & Latin America Consumer Analyst

* Helena Villares

Itaú Corretora de Valores S.A., Research Division - Analyst

* Irma Sgarz

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Joseph Giordano

JP Morgan Chase & Co, Research Division - Senior LatAm Healthcare Analyst

* Robert Erick Ford Aguilar

BofA Merrill Lynch, Research Division - MD in Equity Research

* Ruben Couto

Santander Investment Securities Inc., Research Division - Research Analyst

* Tobias Stingelin

Citigroup Inc, Research Division - Director

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for waiting. At this time, we would like to welcome everyone to Natura &Co's Q3 2019 Results. Today with us, we have 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; and Mrs. Viviane Behar, Investor Relations Director of Natura &Co.

This event is being recorded. (Operator Instructions) We have a simultaneous webcast that may be accessed through Natura's IR website, https://natu.infoinvest.com.br/en. The slide presentation may 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 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 would turn the conference over to Mrs. Viviane Behar, Director of Investor Relations of Natura &Co. Mrs. Behar, the floor is yours.

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Viviane Behar de Castro, Natura Cosméticos S.A. - IR Director [2]

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Good morning or good afternoon to everyone. Thank you for joining us today for this call to present our third quarter and 9 months 2019 earnings. I am Viviane Behar, Natura &Co's Head of Investor Relations. I am joined today by Roberto Marques, Executive Chairman of Natura &Co; José Filippo, CFO of Natura &Co; and João Paulo Ferreira, CEO of Natura. Our Investor Relations team at Natura &Co is also with us. The presentation we will be referring to during this call is available on the Natura &Co Investor Relations website.

Roberto will now start with an overview of our performance. Filippo will detail our financials on a consolidated basis and by business. And after Roberto's concluding remarks, we will open the floor to your questions. Let me now hand over to Roberto. Roberto, please?

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Roberto de Oliveira Marques, Natura Cosméticos S.A. - Executive Chairman of the Board [3]

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Thank you, Viviane, and hello to everyone. Thank you for joining us. Let me begin on Slide 3 with an overview of our performance. Natura &Co posted remarkable sales performance in the third quarter with all of our business and brands again contributing to a double-digit growth at constant currency by 10.1%. This is more relevant as we continue to face a weak market in Brazil and a continuous challenges in Hong Kong, which as you know, is an important market for both the Body Shop and Aesop. Natura posted total growth of 13.2% at constant currency, with significant growth and market share gains in Brazil and continued strong sales in Latin America. The Body Shop also posted healthy sales growth of 3.8% at constant currency and launched in mid-September its new concept store in Bond Street, London, as part of its transformational plan. This flagship store features several new elements that build on its heritage, such as return on the company's pioneer refuel station in an activist corner.

Aesop continues to post double-digit sales growth of 10.2% at constant currency and to grow its store footprint with 21 new stores over the past 12 months. Our profitability in the quarter was impacted by 2 effects that are part of our efforts to build a leading multi-brand and multi-channel group. The first is planned phased increasing investments in Natura, notably in digitalization and in brand market, which is supporting current and future growth. The second is nonrecurring costs associated with the acquisition of Avon Product, which accounted to BRL 36.5 million on a net base in Q3.

We are excited by the progress we have made in recent weeks to complete the acquisition of Avon. We recently received approval without restrictions from CADE, Brazil's anti-trust authority, for the transaction. And yesterday, the shareholders of both Natura and Avon gave their greenlight to the transaction in the general assembly held in São Paulo and New York. These are very significant milestones that we have passed, and we are well on track to close this transaction as planned in Q1 2020.

We also continue to improve our leverage ratio to 2.98x at the end of the quarter compared to 3.27x in the year-ago quarter. This also puts on track to achieve our guidance of returning by 2021 to a leverage ratio of 1.4x, equivalent to the level prior to the acquisition of The Body Shop.

Beyond the numbers, this quarter was also marked by new advances in sustainability. Let me just highlight a couple of them. Natura's Carbon Neutral Program, which totally offset the company carbon emissions, received the 2019 United Nations Global Climate Action Awards, the world's most important recognition of initiatives to fight climate change. And The Body Shop joined Natura in becoming a B Corporation, satisfying the demanding criteria in terms of sustainability. So as you can see, we continue to take decisive new steps in building our multi-brand, multi-channel purpose-driven group.

Let me now hand over to Filippo to go into our financials in greater detail.

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José Antonio de Almeida Filippo, Natura Cosméticos S.A. - Chief Financial & IR Officer [4]

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Thank you, Roberto, and hello to everyone. Before going to our financials, I thought it would be helpful to step back for a second and remind you of the various adjustments that impact our numbers. Throughout this presentation, we will refer to adjusted revenue and EBITDA. And on Slide 5, we describe the principal adjustments that we applied to our reported figures to allow better understanding of our underlying performance.

Indeed, as in the past quarters, Q3 was marked by several nonoperational adjustments: IFRS 16, IFRS 15, hyperinflation in Argentina, nonrecurring tax effects in Brazil, continued transformation costs related to The Body Shop and acquisition costs related to Avon. As of Q1, we decided to present our results excluding the effects of IFRS 16, and we are doing this again this quarter as we will until the year-end.

Let's now look at our Q3 performance. I will start this overview of our P&L with our consolidated adjusted net revenue on Slide 6. Our reported sales grew by 7.2%, and in constant currency, adjusted net revenue was up 10.1%. As shown on the graph, the group's adjusted net revenue rose 6.3% in the quarter to BRL 3.5 billion. The solid increase in sales results from growth in all 3 of our businesses as we will see shortly. In the 9 months, adjusted net revenue grew by 7% and 7.4% at constant currency to reach nearly BRL 9.8 billion.

On Slide 7, we turn to consolidated adjusted EBITDA, which, as you see on the graph, stood at BRL 459.3 million in Q3. As Roberto explained, this 3.4% drop in the quarter reflects the combination of higher investments in Natura as planned, Avon acquisition-related expenses and the impact on The Body Shop's profitability of the events in the Hong Kong market.

Adjusted EBITDA margin remained solid at 13.2%, down 130 basis points. On a reported basis, Q3 EBITDA was nearly BRL 399 million, including BRL 32 million in Avon acquisition costs and BRL 6.4 million in transformation costs at The Body Shop. In the 9 months, adjusted EBITDA was BRL 1.2 billion, up 4.4% with margin down 30 basis to 12.6%, while reported EBITDA was up 2.5% to BRL 1.1 billion.

Turning to Slide 8. We look at Natura &Co's net income and underlying operating income in Q3. Net income stood at nearly BRL 69 million in the quarter, reflecting the previously mentioned effects on EBITDA and nonrecurring Avon-related expenses. The latter had a net impact after tax of BRL 36.5 million in the quarter. Excluding that impact, net income was BRL 105 million.

Underlying operating income, which excludes acquisition-related expenses, transformation costs, financial expenses and income tax decreased by 15.8% in Q3. This is mainly due to higher SG&A expenses totaling more than BRL 175 million to lay the foundations for sustainable long-term growth at Natura.

Slide 9 looks at the same aggregate in the 9-month period in which the effects I just mentioned had a significantly lower impact. Net income in the period at BRL 176.6 million was up by a healthy 6% even after Avon-related costs of BRL 103 million. Underlying operating income was down by 3.4% in the 9 months as solid growth profit of BRL 508 million helped us offset selling and G&A expenses.

Let me conclude this quick summary of the key financial highlights with a look at the main aggregates of our balance sheet on Slide 10. Cash flow in the quarter was an outflow of BRL 74.3 million in Q3. And over 9 months, the outflow was about BRL 405 million. This expected drop versus Q3 of last year reflects lower net income as well as higher CapEx due to phasing of projects, notably digitalization at Natura and The Body Shop. These effects were partially offset by improved working capital at Natura.

We continue to leverage the company in line with our expectations. Our net debt-to-EBITDA ratio stood at 2.98x at the end of Q3, down from 3.27x in the year-ago period. 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 individual performance of our 3 businesses, starting on Slide 12 with the key highlights of Natura. Total net sales were up 8.1% to BRL 2.2 billion in Q3 with growth both in Brazil and Latin America despite challenging market conditions. In the 9 months, sales were up 5.8%. In Brazil, sales rose 7.2% in Q3, and the company continued to gain market share. This is particularly strong performance given that we are operating in a weak CFT market and faced a tough comparable basis. Growth was driven by all channels supported by core categories and new disruptive product launches, including Tododia with probiotics and 100% vegan Mum and Baby. Over the 9 months, sales in Brazil were up 4.7%.

Natura's solid performance reflects the success of our relationship selling model, which is leading to higher productivity in Brazil. Consultant productivity increased for the 12th consecutive quarter, up by 6.8%. The average number of consultants was stable versus the same period of last year and it increased by 2.4% versus the previous quarter. Within the consultant base, we continue to see movement towards our top silver, gold and diamond segments, attaching to the good momentum of our margin. Adoption of our digital platform by our consultants continue to increase as the range of available digital solutions and services. The number of consultants using our digital platforms, which includes the app and the web, rose by a strong 32.3% versus the same quarter of last year to 860,000.

We are seeing good adoption of the Natura digital account in partnership with Santander Bank. This is an additional exclusive feature embedded in the consultant's mobile platform, which promotes banking and financial inclusion to our network of consultants.

Rede Natura, our online platform, which operates under a new pricing alignment policy, confirmed its recovery. We ended Q3 with approximately 600,000 virtual stores in Brazil, a 7% increase versus last year. This contribute to double-digit growth in online sales, and the quarter saw an increase in the number of visits. We also continued our multichannel expansion with 6 new stores opened in the quarter to reach 49, while the number of our consultants’ franchise stores exceeded 300.

Latin America is also performing strongly. In Latin America, Q3 adjusted net sales grew 10.2% in Brazilian real and 28.8% at constant currency. Sales in the 9 months were up 8.4% in the region. The number of consultants grew 8.3% versus Q3 2018 to nearly 690,000, and volumes were up in the region by 23.9%. Highlights included Colombia, Mexico and especially Argentina, where, despite the challenging economic environment, we have posted strong growth to local currency, outpacing inflation.

We are also pleased to say that Natura celebrated its 50th anniversary and added a new country, Malaysia and a new continent, Asia, capitalizing on The Body Shop's knowledge of the market and in partnership with The Body Shop head franchisee there. We recently began selling Natura products online in Malaysia, and we will progressively roll out a multichannel offer in the country.

I will conclude on Natura with its adjusted EBITDA on Slide 13. Overall, adjusted EBITDA was BRL 387.6 million in Q3, down 2.8% and up 0.7% in the 9 months. We saw a concentrated performance between Brazil and Latin America. In Brazil, EBITDA margin remained very resilient at 17.5% despite the investments mentioned earlier. On adjusted EBITDA, down 6.6%. Adjusted gross margin grow by strong 60 basis points, but this was offset by higher SG&A expense linked to the investments in Brazil and further digitalization, market investments such as sponsorship on the Rock in Rio Festival that connects the brand with young consumers, new innovative product launches and costs associated with the Natura's 50th anniversary.

In the 9 months, adjusted EBITDA in Brazil was broadly stable at BRL 728.7 million, with margin of 17.3%, down 80 basis points. SG&A expenses in Q3 reflected the investments and were up 340 basis points as a percentage of sales, whereas in the 9 months, SG&A was up by 50 basis points. We expect SG&A expenses to be full year in Brazil to remain broadly in line as a percentage of sales with the 9-month period.

In Latin America, adjusted EBITDA was up by a strong 13.9% in Q3. EBITDA margin was 19%, up 60 basis points with a significant drop in selling expenses, down 170 basis points. And in G&A, which was reduced by 30 basis points, attesting to strong operational average. In the 9 months, adjusted EBITDA was up 6.6%, and margin was 16%, down 20 basis points.

Let's now move to The Body Shop on Slide 15. Net revenue in reais increased on a reported basis by 1.1% in Q3. At constant foreign exchange, sales were up by a healthy 3.8%. This growth was driven by solid sales in the U.K., Asia Pacific and Latin America as well as higher sales in the at-home direct sales, online and health franchise channels. This more than offset the unfavorable effect of 35 net store closures over the past 12 months as The Body Shop continued to optimize its network as well as lower sales in Hong Kong, an important market for The Body Shop. Excluding the impact of the events in Hong Kong, net revenues grew 6.4% at constant currency. In the U.K., The Body Shop's home market and its biggest 1, on store like-for-like sales were up 3.1% in the quarter. This is a very encouraging performance that confirms the successful first effects of the brand rejuvenation. At the end of the quarter, The Body Shop had 2,863 stores, 1,006 owned stores and 1,857 franchise stores. In the 9 months, The Body Shop's net revenue was up 6% in reais and 1.7% in constant currency. Excluding Hong Kong, constant currency growth was 3.8% in the period.

On Slide 16, we see that the Body Shop adjusted EBITDA in the quarter, which excludes transformation costs, stood at BRL 69 million, down 10.9%. This resulted in an adjusted margin of 7.4%, down by 100 basis points. This drop is mainly attributed to the events in Hong Kong. Excluding that effect, adjusted EBITDA margin was up 30 basis points to 8% in Q3 and up 220 basis points to 7.5% in the 9 months. The Body Shop's transformation program is advancing well with costs and benefits in line with trend. As Roberto mentioned, we opened a new concept store in London on Bond Street that revived the brand's activism and sustainability values. Transformation costs were BRL 6.4 million or GBP 1.2 million in the quarter. As a reminder, we expect to incur circa GBP 10 million in transformation costs in 2019, of which GBP 6.9 million have already been incurred in the first 9 months.

On Slide 18, we round off this look at the performance of our business with Aesop. We posted solid growth in sales and profitability in Q3. Net revenue grew in reais by 10.8%. At constant currency, growth was 10.2%. Like-for-like growth in signature stores increased 9% in Q3, and the 21 new openings in the 12 months, of which 4 in the past quarter, Aesop has now 240 signature stores.

Profitability also grew in strong double digits in reais, with EBITDA up 47.1% in Q3, resulting in an EBITDA margin of 12%, up 300 basis points. In the first 9 months, Aesop revenue increased 20.8% in reais, and EBITDA was up 34.7%, also in reais. Margin rose 120 basis points to 12.1%.

Let me now hand over to Roberto for his concluding remarks.

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Roberto de Oliveira Marques, Natura Cosméticos S.A. - Executive Chairman of the Board [5]

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Thank you very much, Filippo. Before concluding, let me first thank all of our associates across the globe of both Natura, The Body Shop and Aesop for again posting a very positive and strong quarter which continues to contribute to building this very special group. So thank you very much to everybody. I also would like to update you on where we stand on the acquisition of Avon, whose integration planning is ongoing. As I mentioned in my introduction, we have passed 2 major milestones in the past few days with the approval by the Brazilian anti-trust authorities of the transaction and its approval just today by the shareholders of both Natura and Avon. Thank you very much for your confidence.

We have also approved the corporate restructuring for the transaction with the creation of Natura &Co Holding Company, which will become our listed entity. Minority shareholders of Natura Cosmetics will migrate to Natura &Co in mid-December, and trading will begin on B3 Stock Exchange in São Paulo.

As you know, a few conditions still remain, including anti-trust approval by a handful of remaining jurisdictions, but we are fully on track for closing as planned in the first quarter of 2020. Upon closing, Natura &Co will also trade on New York Stock Exchange with ADRs. We are hugely excited by this transaction, which creates the world's fourth largest pure-play beauty company. It marks another transformation step towards building a global, multi-brand, multi-channel group, reaching over 200 million consumers through our iconic brands.

So in conclusion, what are the key takeaways? So let me just mention 3, as you see on Slide 20.

First of all, Natura &Co post a solid performance in Q3. Its strong revenue growth demonstrates the good momentum of the global multibrand, multichannel group we are building. Second, the investments we have made in Natura in its digitalization and its brand transformation underway at The Body Shop and the costs we incurred this quarter for the acquisition of Avon are all moves to lay the foundation for sustainable long-term growth. And third, we are on track to close the acquisition of Avon in Q1 2020, a transaction that will help accelerate growth.

Thank you very much for your attention. Before opening the Q&A, I would just like to tell you that, as you know and you are curious to know more about the Avon transaction. But as you can appreciate, we cannot comment further at this stage beyond what was already said until the closing process. We'll, of course, update you in due course.

Let me now hand over to Viviane Behar.

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Viviane Behar de Castro, Natura Cosméticos S.A. - IR Director [6]

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Thank you, Roberto. We are now going to open the Q&A session. And Roberto, Filippo and JP are happy to take your questions. So the floor is now yours.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from Helena Villares from Itaú.

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Helena Villares, Itaú Corretora de Valores S.A., Research Division - Analyst [2]

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Just have 2 quick questions. So the first one is about The Body Shop. Because we are seeing an acceleration in constant currency growth in the top line. And I just wanted to ask you if you could give us some more detail and some highlights about this growth. So which channels are growing more, which regions? Just first, you have some highlights about this. And actually, the EBITDA margin, which is growing without the Hong Kong situation. So do you have any impacts on mix or something like this? Can you tell more about this, please? And second, about the Natura going to Malaysia. I just wanted some details what -- which are the characteristics of this partnership, and if it is scalable to another region?

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Roberto de Oliveira Marques, Natura Cosméticos S.A. - Executive Chairman of the Board [3]

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Elena, good morning. Roberto here. I will start answering a little bit of The Body Shop question, and then I will invite JP to comment on Natura entering Malaysia, okay? So on The Body Shop, you're right. I mean, we are very pleased with the progress on the top line growth, and it's coming actually as a combination. It's coming from some markets and also channels. In terms of markets, we are very pleased to see the growth in U.K. really a very, very strong growth as well as Middle East and Latin America. And from a channel perspective, we're also pleased to see high-growth on our at home, which is the direct selling part of the business, The Body Shop, especially in U.K. But for the first time also, now that we consolidated some of the tools and management, we're also seeing some good results on at home in Australia, which is another market that we have a presence of The Body Shop at home.

From a margin perspective, again, this is the result of our transformation, and it's on track, which is both a combination of closing non-efficient stores, running the business in a more efficient way. Also, our continued effort to reduce some levels of discount. So those are the key contributors for the margin improvement. So, JP, you want to comment on Malaysia and the enter this quarter in Natura, please?

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João Paulo Brotto Gonçalves Ferreira, Natura Cosméticos S.A. - CEO [4]

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Yes, Roberto. Elena, thank you for the question. So our initiative in Malaysia, first of all, is perhaps an excellent example of the power of the Natura &Co Group. It's been done in partnership with The Body Shop, especially with The Body Shop's head franchisee, who has been operating for decades with that brand in Malaysia. So that helps us entering a new country, as you would imagine, given the depth of knowledge this group has around that market. So that initiative is omni-channel, which means it includes retail, e-commerce and digital social selling, right? It's early days so far, but we are very pleased with the first results. And perhaps the last important attribute of this initiative is that it's totally scalable, which means that when we are happy with the setup, that will allow us to grow into new countries.

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Operator [5]

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Our following question comes from Bob Ford from Bank of America Merrill Lynch.

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Robert Erick Ford Aguilar, BofA Merrill Lynch, Research Division - MD in Equity Research [6]

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Congratulations on the underlying improvements. I was hoping you might be able to give some context for Hong Kong. In the press release, you mentioned some growth numbers with and without Hong Kong. But that helps convey its relative size and the impact of the period. Now it seems as if things have gotten a little bit worse. I was hoping you might be able to touch on the disruption you're seeing and what we should be prepared for in the current quarter, please?

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Roberto de Oliveira Marques, Natura Cosméticos S.A. - Executive Chairman of the Board [7]

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Bob, Roberto here. You are right. I mean, the situation, it's not improving in Hong Kong. And our first and foremost responsibility is the safety of our people and really supporting them through this specific moment, and we are doing that and really making sure that we're supporting them. Hong Kong, as you know, it is as an important market for both The Body Shop and Aesop. It represents more or less mid-single digit in terms of sales and even more from a profitability perspective. We have over 40 stores at The Body Shop in Hong Kong. And the fact that also, as you know, we don't have a physical presence in China because of our non-animal testing makes Hong Kong even more important for us than eventually some of our competitors on a global scale. But we think that, that's -- we continue to remain very committed to our nonanimal testing. And the long-term solution for us is to find a way to potentially increase our presence in China, while at the same time keeping our values and principles, which we're not going to compromise.

So short term, we don't think that, that's going to improve. I think we needed to continue to support the business, support our people in, I would say, more medium, long-term solution would be to potentially increase our presence, which are already starting to do with Tmall Global. We already have that presence with Aesop, and we started now with The Body Shop. But, of course, not at the scale that we need. And I think the medium, long-term solution is for us to find a way to increase our presence in China.

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Robert Erick Ford Aguilar, BofA Merrill Lynch, Research Division - MD in Equity Research [8]

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Understood. And then can you talk a little bit about the relative sales lift you're seeing at the Bond Street Body Shop Store in London versus some of the controlled units and maybe touch on its cost and the outlook for broader store remodels?

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Roberto de Oliveira Marques, Natura Cosméticos S.A. - Executive Chairman of the Board [9]

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Yes. So we are very pleased with the result on Bond Street in London with the new design of The Body Shop store. I would say that the early results compared to control stores are very positive, I would say, which is encouraging. Our goal is to roll out that, especially in 2020, to probably a dozen, a little -- 10 to a dozen stores. We're not going to disclose the cost of the refurbishing, but I would tell you that it's pretty much in line to a normal refurbishing. So it's not something significantly more expensive. I think the team has done a tremendous job in being very creative and bringing back some of the elements of the activism, some of the elements of the values of The Body Shop, like with the refill station that has been a huge success. So we are pretty encouraged. But, of course, we still need to get some more learnings.

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Robert Erick Ford Aguilar, BofA Merrill Lynch, Research Division - MD in Equity Research [10]

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Understood. And then lastly, JP, what are your estimates of industry growth rates right now in Brazil? And as you look into year-end in Brazil, how do you feel about your innovation, your gift assortments and the ability to take further market share?

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João Paulo Brotto Gonçalves Ferreira, Natura Cosméticos S.A. - CEO [11]

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Well, in order -- we keep investing in innovation, and we launched an incredible range of new products, relaunched some of our core lines to support growth going forward. Similarly, we keep developing the network of our consultants, especially through digitalization, and that's been growing significantly. Currently, 1.2 million of our 1.7 million consultants across Latin America are actively utilizing our mobile digital platform. So with that, we consider -- and by the way, we keep launching new services and features on almost weekly basis to improve their offerings with our clients. So hopefully, that will keep supporting our growth going forward, and we continue to aim gaining not only maintain leadership in the countries where we are already leading but gaining market share in all of our operations.

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Robert Erick Ford Aguilar, BofA Merrill Lynch, Research Division - MD in Equity Research [12]

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That's helpful, JP. And can you touch a little bit on the relative productivity of your digital consultants versus your average offline consultant?

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João Paulo Brotto Gonçalves Ferreira, Natura Cosméticos S.A. - CEO [13]

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No, I don't feel very comfortable to disclose that number, Bob. But just to remind everyone that when consultants adopt, in addition to their traditional way of selling the digital solutions, their productivity goes up. But when you look at our 12 consecutive quarter of increased productivity, you can figure out that how things is working out a little bit, right.

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Operator [14]

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Our following question comes from Ruben Couto from Santander.

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Ruben Couto, Santander Investment Securities Inc., Research Division - Research Analyst [15]

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I have 2 questions actually. First, on the margins in Brazil. I think all of the efforts to foster top line growth for us seems to be working, but expenses are also catching up and we're still at a flat EBITDA in the first 9 months of this year. So when should we expect this accelerating sales to dilute expenses and generate some margin gains? Can we expect some EBITDA margin expansion in the fourth quarter already? Or is it due some additional increase in market investments projected for this year or even -- or even for next year?

And a second part still on this consultant's productivity and overall digital use in Brazil. Can you give a little bit more color on the performance of Rede Natura as a whole? I think after you made this convergence program in June, you mentioned that around 60% of the channel already have a virtual consultant staff, but how relevant is the channel for this consultants? Like on average, how much of this consultant sales are coming from these virtual stores? Any numbers on that sense would actually help.

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José Antonio de Almeida Filippo, Natura Cosméticos S.A. - Chief Financial & IR Officer [16]

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Ruben, it's Filippo. Let me start with the margin and then JP will go. As we mentioned, the -- we had in the third quarter some impacts related to phasing of investments, especially in Brazil. Some related to digitalization, those marketing investments. The product launch that impacted in specifics here, which you should not consider as a recurring type of impact. Talking about the fourth quarter, we cannot -- I don't think we plan -- that's not our guidance. But if you take the 9 months, I think we'll be what we should expect in terms of recurring impact here. That's basically that. But I will also say that there are other positive things that sometimes cannot be captured immediately, which is the working capital improvement, which was something that we achieved this quarter, especially related to inventories, which can also bring some efficiencies and in the combination of the impact going forward. So basically, I would focus more on the 9 months. That could be maybe a recurring trend for the future.

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João Paulo Brotto Gonçalves Ferreira, Natura Cosméticos S.A. - CEO [17]

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Okay. If I may add, going back to your questions. The number of consultants with online stores grew more than 70% year-on-year, which shows that this is becoming increasingly more relevant to our consultant network, right? And as is, by the way, other formats like the consultant stores, like Rede Natura, which is also increasing in number but also in productivity, as we are seeing like-for-like growth of -- double-digit like-for-like growth in those stores. So although still not big, this is growing very fast.

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Ruben Couto, Santander Investment Securities Inc., Research Division - Research Analyst [18]

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But can you share like how much of the virtual stores account for these consultants that have the virtual stores on average?

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João Paulo Brotto Gonçalves Ferreira, Natura Cosméticos S.A. - CEO [19]

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No.

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Ruben Couto, Santander Investment Securities Inc., Research Division - Research Analyst [20]

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Like, the thing that I kind of want to understand is like you changed your way on encouraging consultants to adopt these virtual stores. But are they just like adding these virtual stores? Are they actually selling a good amount of products? Or they are just like moving towards your incentives or going just to get a sense if they are actually using or if they are just there?

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João Paulo Brotto Gonçalves Ferreira, Natura Cosméticos S.A. - CEO [21]

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No, they are using -- they are actually using that and increasingly -- an increasing rate so there is also -- the adoption that's learning. But we track not only the penetration but how much of -- is their activity, what is their activity in their online stores, and that is -- that continues to grow.

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Operator [22]

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Our next question comes from Tobias Stingelin from Citibank.

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Tobias Stingelin, Citigroup Inc, Research Division - Director [23]

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A question for JP. Last year, we had a very strong fourth quarter. And then at the end of the day, the first quarter was kind of a little weaker or just because of some sort of inventory build in the channel. As we look into the fourth quarter right now in Brazil, considering also the economic environment and all of the investments that we have been doing, what should we expect to see given that you're facing kind of these tougher comps as well?

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João Paulo Brotto Gonçalves Ferreira, Natura Cosméticos S.A. - CEO [24]

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So yes, indeed, we have a hard comp for fourth quarter, but we are positive when we look at Black Friday and Christmas. We are positive. Despite the very weak consumption environment, which I described already.

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Tobias Stingelin, Citigroup Inc, Research Division - Director [25]

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As a follow-up, in terms of sales, trends have been in kind of in upward trend or kind of still volatile. So some weeks there or some cycles there and then worse, or has it been kind of smoothly, readily kind of moving in the right direction?

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João Paulo Brotto Gonçalves Ferreira, Natura Cosméticos S.A. - CEO [26]

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You referred to the market or to our performance to this?

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Tobias Stingelin, Citigroup Inc, Research Division - Director [27]

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Both, I think. The market, maybe if you're seeing kind of some sort of market more stable and you're kind of benefiting from that or specifically also in your case, if you can kind of -- just as a trend because you should hear that there was a lot of volatility between the performance we've seen in months. And I just want to get a sense if we are kind of gradually going kind of a gradual recovery mode.

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João Paulo Brotto Gonçalves Ferreira, Natura Cosméticos S.A. - CEO [28]

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Yes. We don't see from here spikes in the market. So they're moving relatively smoothly in a very contained way so far. So when you look at our performance, it is also affected by our phasing, the initiatives. Q3 was heavily loaded on innovation, 50th anniversary, Rock in Rio activation, et cetera, et cetera. But the market as a whole is relatively steady.

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Tobias Stingelin, Citigroup Inc, Research Division - Director [29]

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Okay. And if I may just kind of follow-up. In regard to all of these digital solutions that you are kind of implementing in the adoption that has been growing kind of significantly, can you kind of just give us some examples about how this kind of has transformed the productivity or the -- kind of the operation of the consultant?

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João Paulo Brotto Gonçalves Ferreira, Natura Cosméticos S.A. - CEO [30]

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Well, first of all, we see already a growing number of consultants acting as micro influencers, so using digital content to reach more often, more frequently and with more relevance their own client base, which is supporting recurrence and reach for those consultants. You've heard before about our payment solutions, which also enables our growing number of consultants to offer different payment alternatives to their customers, credit card and stuff like that, which also help improving productivity. I think these are 2 good examples for now.

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Operator [31]

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Our next question comes from Irma Sgarz from Goldman Sachs.

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Irma Sgarz, Goldman Sachs Group Inc., Research Division - Equity Analyst [32]

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I have 2 quick questions. Firstly, on the new channels that you're building out in Brazil for the Natura brand I think some years ago or some maybe 18, 24 months ago when you were starting to launch or starting to see more traction in both owned stores and so-called franchise stores exiting Natura. You were, I think, at that point, sort of saying that over the years, you'd expect these new channels to achieve something, I'm not mistaken, like 10%, 15% is probably what I have in my head in terms of the Natura base. Can you give us an idea of where we are in the journey? How relevant these new channels are already when you sort of add together direct-to-consumer e-commerce plus franchise channels, plus owned stores? How relevant is that already overall? Are we still looking at less than 10%? Is it already more than 10%? And then when you -- given that you have quite substantial growth at some of these channels, what's the underlying growth that you're seeing if you just look in isolation, just at the direct sales channel?

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João Paulo Brotto Gonçalves Ferreira, Natura Cosméticos S.A. - CEO [33]

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So Irma, direct sales are still is the most important of our channels, the traditional selling format, if you want. So when you look at our performance and look at the market, it is slightly above the market, the direct selling. Otherwise, we wouldn't protect or even gain share given it's still big relevance. Having said that, our own stores plus our consultant stores, plus the online format, we are already, I don't know, probably halfway through the targets that you referred to.

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Operator [34]

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Our following question comes from Joseph Giordano from JPMorgan.

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Joseph Giordano, JP Morgan Chase & Co, Research Division - Senior LatAm Healthcare Analyst [35]

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I would like to explore a little bit like the very good trends we've seen in Latin America. So I would like to understand how the competitive environment is shaping up. Particularly in Argentina, how the expansion maybe a little bit more aggressive now in Mexico is also playing out. Then going back to Brazil, like, if you like to understand a little bit the volume trends. So I'm not sure like if you have like any kind of statistical thing, like brand bundling, because volumes have not been growing? And then second, about any potential changes to the commission structure, as you mentioned in the release that most of the sales reps are branding to the silver kind of level.

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João Paulo Brotto Gonçalves Ferreira, Natura Cosméticos S.A. - CEO [36]

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JP speaking. As regards Latin America, we are so pleased with the performance of all of our operations so far. I mean, really, really nice to see how that is developing. Argentina, as you know, in tougher environment, it's difficult to compete there. But the strength of our model, the preference of the brand, the loyalty of the consultants keep pushing our business up and volumes keep growing, market share keeps growing. And so pretty pleased with that. As we have in Mexico, as you said, I mean, we continue to see double-digit growth in our Mexican operation in spite of a relatively softer economy. I mean, our operation is doing really pretty well. So very happy with our operations across Latin America.

When it comes to Brazil, you asked about volume. Well, first of all, the market itself is showing negative volume growth at this point in time. But when you look at our numbers, that is somewhat twisted by the fact that we have a higher proportion of gifts in our mix, which do not count precisely -- 1 gift is not necessarily 1 item and that distorts a little bit of volume, as well as a much more premium mix, higher -- a growing number of fragrances, especially prestige, which is helping our top line growth as you could see there, improving our gross margin. And so it's a more prestige portfolio as well. It also has the bulk commission. There is no change in the commissioning structure. We just see a higher number of more productive consultants developing, which is great. That's the idea of our model. They dedicated more time to our brands, to know more about our launches and recommend our products to their clients and which makes them more productive. We are very pleased with that.

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Operator [37]

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Our next question comes from Gustavo Oliveira from UBS.

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Gustavo Piras Oliveira, UBS Investment Bank, Research Division - Head of LatAm Research & Latin America Consumer Analyst [38]

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JP, also a follow-up on the price mix growth and volumes. Are you also implementing lower discounts in your products? Is this something that you are seeing? And also, if you could comment on the new products, the new product launches in very important categories that you implemented this quarter, right. Mamãe e Bebê and also the Tododia. If you're already seeing a phase -- during the phasing process and acceleration in growth, meaning that you could even see a much faster 4Q number from the launches. If you could comment on that as well.

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João Paulo Brotto Gonçalves Ferreira, Natura Cosméticos S.A. - CEO [39]

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Gustavo, thank you for the question. As you can appreciate our gross margin, our promotional policies keep well in control and so on our intention to make any significant change to our promotional policy. And as it regards -- as regards our new launches, they are not -- they are all performing very, very well. You mentioned most of them to the new Tododia, they're our largest brand, Mamãe e Bebê, all of them vegan formulas, the Lumina, new hair care line, which was launched beginning of the quarter and the previous quarter. Very happy with that. And just now, we launched UNA just starting in Q4. We launched UNA with huge success, not to mention the nail polish, which keeps surprising us. But so far, all the new launches are performing above expectations.

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Operator [40]

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This concludes today's question-and-answer session. I would like to invite Mr. Roberto Marques to proceed with his closing statements. Please go ahead, sir.

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Roberto de Oliveira Marques, Natura Cosméticos S.A. - Executive Chairman of the Board [41]

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Thank you. And again, thank you all for joining the call this morning. As you saw from today's results, we continue with the strong momentum in making further progress toward delivering our targets even as we work to close the acquisition of Avon. We look forward to talking to you again very soon, and we'll keep you posted on the development of the transaction. So thank you so very much for your attention and wish you all a good day on behalf of all of us. So thank you very much.

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Operator [42]

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That concludes the Natura &Co audio conference for today. Thank you very much for your participation, and have a good day.