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Edited Transcript of NATU3.SA earnings conference call or presentation 27-Apr-17 1:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Natura Cosmeticos SA Earnings Call

SAO PAULO May 4, 2017 (Thomson StreetEvents) -- Edited Transcript of Natura Cosmeticos SA earnings conference call or presentation Thursday, April 27, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrea Alvares

* Joao Paulo Ferreira

* José Roberto Lettiere

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Conference Call Participants

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* Alexander Reid Robarts

Citigroup Inc, Research Division - MD and Head of Latin American Consumer Staples Equity Research Team

* Fábio Monteiro

Banco BTG Pactual S.A., Research Division - Analyst

* Franco T Abelardo

Morgan Stanley, Research Division - Equity Analyst

* Guilherme Assis

Brasil Plural Corretora de Cambio, Titulose Valores Mobiliários S.A., Research Division - Analyst

* Gustavo Piras Oliveira

UBS Investment Bank, Research Division - Executive Director, Head of LatAm Research, and Latin America Consumer Analyst

* Irma Sgarz

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Maria Paula Cantusio

BB-Banco de Investimento S.A., Research Division - Senior Analyst

* Olivia B. Petronilho

JP Morgan Chase & Co, Research Division - Analyst

* Thiago Capucci Macruz

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

* Tobias Stingelin

Crédit Suisse AG, 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. Welcome to Natura's Q1 2017 Conference Call Results. We have Mr. Joao Paulo Ferreira, CEO; Mr. José Roberto Lettiere, CFO; Ms. Andrea Alvares, Vice President of Marketing, Innovation and Sustainability; Mr. Marcio Bologna, Financial Director and Investor Relations; Mr. Luiz Palhares, Investor Relations; Mr. Marcio Bologna, Financial Controller. This event is being recorded. (Operator Instructions) We have simultaneous translation into English, and questions may be asked normally by participants from abroad. (Operator Instructions) We have simultaneous webcast that may be accessed through Natura's IR website at www.natura.net/investor. The slide presentation may be downloaded from this website. There will be a replay for this call on the website after the end of this event.

Before proceeding, let me mention that forward-looking statements are being made under the company's -- are based on beliefs and assumptions of Natura's management on information currently available to the company. They invoke risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect future results of Natura. It could cause results that differ materially from those expressed in such forward-looking statements.

Now I will turn the conference over to Mr. Joao Paulo Ferreira, CEO. Mr. Ferreira, you may begin the conference.

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Joao Paulo Ferreira, [2]

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Good morning, everyone. Welcome to our teleconference of Q1 2017. I just would like to talk about what's in the news. Recently Natura has been asked about its involvement in selling of the brand called Body Shop. Analyzing of the brand's other articles, other assets are part and parcel of the business world, and we are indeed involved in that initial analysis. No definition has been made yet. If in any case we decide to move forward, you will be informed transparently, just like we have always done. Today, I would like you to focus on the presentation at hand. The questions should be related to our performance in Q1, and of course, we have very interesting aspects to discuss today.

Having said that, our gross revenue grew in all operations in this quarter. We've had the second consecutive growing quarter in Brazil. That is an indication of some stabilization but we have to be cautious because there may be some volatility in the short term. In our international operations, we've grown in local currency, 23% in Latin America and 31% at Aesop. When we convert that to Real's, they have been impacted by exchange effects.

Consolidated EBITDA and net revenue are BRL 365 million and BRL 189 million. They have been positively affected by nonrecurring events in Brazil, mostly the reversal of provisions of tax contingencies and Lettiere will be discussing that later on. Excluding those nonrecurring events, we've had 5% growth in our EBITDA in Brazil and a small 3% retention in the consolidated EBITDA because of the exchange impact. The consolidated net revenue, also excluding nonrecurring events, amounted to BRL 28 million, almost BRL 100 million more than the previous years reverting the losses reported in Q1 2016. There was positive cash generation in this quarter when compared to cash consumption in the year before.

Our priority, as I have said before, is to strengthen our business in Brazil. And to that end, we have moved forward our modernization, segmentation and digitalization of our portfolio on top of the support of our -- on our key product categories. We have more than 300,000 reps using our app. They -- or it provides gains of productivity and we have a closer relationship with our representatives. Our online sales through Rede Natura have grown 400% when compared to last year with a positive EBITDA already. We have reached more than 1.7 million consumers. We are now operating in Chile. That started last year, and we have recently started operations in Argentina.

As far as retail in Brazil goes, we are now operating 10 exclusive stores and we have over 3,000 drugstores with these sold brand. As to the report -- as to the support of our branded categories, we would like to highlight our cosmetics division using the campaign called (foreign language), that expands the attributes of the Natura brand showing that our fragrance express the exuberance we have in Brazil, like no other brand. Top launches include new feminine fragrances of well-known brands, such as EKOS Flor da Manha and kayak of Ventura; and also the relaunch of our Faces, the makeup line with a new positioning urban, young and contemporary style. And we're very optimistic about it.

In Latin America, as I said, we've had healthy growth. And according to Euromonitor, we finished 2016 with an important market share improvement. Aesop has been growing steadily with the boost of same-store sales of about 11% a year, and we have opened 33 exclusive stores all over the world.

Another highlight is the consistency with which we have managed our general expenses and our cash flow. Admin expenses have grown less than the revenue and the inflation, and we have managed to control our budget. Once again, it was based on the zero-based model. We've also had good results from our working capital, with the better coverage of our inventories in Brazil and Latin America and efficient management of our CapEx. As a result, cash generation was positive.

All in all, we have been focused on executing the strategy we have expressed before. We are now focused on short-term priorities trying to stabilize the business in Brazil and to maintain the vitality of our international operations. These were the highlights I wanted to point out.

I would like to turn over to Lettiere, our CFO. Over to you, Lettiere.

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José Roberto Lettiere, [3]

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Thank you, Joao. Good morning. This is the first quarter conference. I'll be briefly describing our earnings results, and I'm going to point out our indicators. Let's start with net revenue.

Consolidated revenue grew by 2.3% in Q1, and that's the result of a 3.3% growth in Brazil and it also was impacted by our local currency appreciation vis-à-vis foreign exchanges in the countries we operate, and I'll be discussing that later on. Let me drill down on the operation in Brazil first.

Net revenue grew by 3.3% as I said. That was driven by the good performance of our perfume division and also the gift strategy. The drop in the number of reps was offset by the productivity gain. We had a 9% increase in productivity.

Net revenue in Latin America is what I'm going to talk about now. A 22% growth in local currency, that was the result of the expansion of the number of representatives. They grew by 7% and also from productivity gains at about 13% in local currency. Given the appreciation of Real, LATAM had a retraction of 2.5% in first quarter. Let me just give you an idea that I mentioned of the exchange rate impact. In Argentina, for example, the Real was appreciated when compared to Argentinian peso of about 34%, and in Mexico, at 40%.

Let me now talk about net revenue at Aesop. It grew 31.4% in local currency. But given the exchange rates and the Real appreciation, growth amounted to 11%, representing 8.4% of the consolidated net revenue when compared to 7.7% in first quarter 2016. We had 180 exclusive stores, 33 more than in first quarter last year, with 11% annual same-store sales in local currency. In Australian dollar, the Real was also appreciated by 18%. That has also contributed to the growth in our net revenue.

Let me now move on to EBITDA, consolidated EBITDA. It grew by 68% vis-à-vis Q1 2016. Moving on to Brazil, we have to comment on nonrecurring events. Just like Joao said, we had a reversal of provision referring to taxes, PIS and Cofins based on sales tax. This is a long process that on March 17, our Supreme Court awarded that decision. Taxpayers came out winners in that decision. In the case of Natura, it's a very robust case. We did not pay out taxes. We resorted to the judicial system but we had to have that provision that impacted our results but we did not pay those taxes. So we were awarded that decision. Taxpayers were benefited from that decision. Our legal department, our independent auditors, we reverted that provision. The total is BRL 297 million before income tax.

Let me move on. Without those recurring things, EBITDA would be BRL 210 million, 3.3% smaller than Q1 2016. In Brazil with nonrecurring events, the EBITDA growth would be 5%, benefiting from the higher revenue and also our gross margin expansion.

International Operations were heavily impacted by the Real appreciation but in local terms the performance is still very good. EBITDA in Brazil. In Q1 2016, BRL 156 million that was the generated EBITDA, about 14% margin. And then we had a growth in our net revenue. We had better productivity and a better mix, especially in Fragrances, so we have improved our gross margin overall. We managed to control our expenses across the board. And within the zero-based budget, we considered part of those expenses savings to reinvest more strategically in marketing and sales activation to make our categories and our sales more competitive.

So with that, excluding (inaudible) our EBITDA was USD [416.9] million. This is the ICMS taxes were to raise this year that created an impact of BRL 2 million for us. With the exchange rate appreciation of the Brazilian Real, there was a gain of around BRL 17 million as I've said and with no -- nonrecurring events, we managed to reach a total EBITDA of BRL 318 million, a margin of 27.5%.

Consolidated net income now. Net income was BRL 189 million, without nonrecurring effects it would be BRL 28.2 million. This is an important increase in comparison to Q1 2016 when we had a very challenging environment. This result was boosted by the excellent performance we had in controlling expenses and controlling the top line in Brazil. But it was also supported by the performance we had in our own expenses. In the first quarter 2017, we were able to reduce our long term loans and the average cost, that was also reduced in comparison to last year. As for our financial investments, although we reduced the total amount of investments, we've managed to invest them at a higher return rate in comparison to the previous year. Meaning that we reached BRL 189 million net recurring income with nonrecurring effects which results in about 11% growth.

Next slide, CapEx. Our BRL 350 million CapEx was approved for 2017 so our budget CapEx was approved in April in our committee. This is the lowest level we've had in the last 2 years. We went from BRL 383 million in 2015 and now in 2017, we'll continue with the same trend. Strong control in line with the growth strategy and also our innovation process with technology to support all of our sales channels.

Free cash flow generation. This was positive. Our turnaround in comparison to the first quarter 2016 results were positive. And highlighting what Joao Paulo mentioned before, this is a result of our controlled working capital. We had a good free cash conversion cycle, meaning that our working capital is now being monetized more efficiently and quickly. Our stocks and inventories are low. We have better control and our due dates with suppliers are better tailored to our needs. And this is due to the partnerships we have with our strategic suppliers and suppliers overall. Meaning that the free cash flow generation was about BRL 17 million this quarter, which is significantly higher than the first quarter 2016. Without nonrecurring effects, this free cash flow would not change. So this was cash generated by the business itself without considering nonrecurring items.

Now we go up to the company's net debt. Our indebtedness level has decreased. We managed to close the quarter with 1.3x EBITDA, which is the best indebtedness ratio we've had in the past few quarters considering the first quarter of 2016.

So to conclude, another important factor for us are the sustainability indicators we follow. A positive highlight is the relative carbon emissions measure. Here, we can see that our ambition for 2020 and we have kept the same level from 2016 to 2017 which is very good. Our percentage of post consumption recycle materials has gone up significantly from 4.3 to 5.1. And I would also highlight our Crer Para Ver program funding. We had a record level in 2016 and we've already started the first quarter of 2017 very well. This is basically in line with our goal, with our ambition for 2020.

This concludes my talk on the triple bottom line, our performance indicators and now we're open for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Thiago Macruz with Itaú Bank.

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Thiago Capucci Macruz, Itaú Corretora de Valores S.A., Research Division - Research Analyst [2]

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I had 2 questions. The first of which is about sales -- I would just like to understand if in the first quarter, you've managed to anticipate the Mother's Day sales cycle. Since we still have 1 week left, is that a sale that was included there before they would be? I also have a question about the credit policy with consultants this quarter. We heard that accounts receivable are under control but there was an increase this quarter in comparison to the same period last year. I'd just like to know if there were any changes about the credit policies for consultants. That's my question.

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Joao Paulo Ferreira, [3]

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Good morning, Thiago. This is Joao Paulo. So to talk about Mother's Day, our commercial calendar had -- our Mother's Day campaign starting 1 week earlier than last year. Mother's Day is a very important cycle that usually turns the business on for us very well. Since we started it earlier, yes, that does create a difference in comparison to last year. That's not too significant but yes. Lettiere will answer about our credit policies.

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José Roberto Lettiere, [4]

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Thiago. Before I answer your question, I have to highlight that we for some time have been following a new policy, a new way, a new process in managing the credit cycle. And this is essential for running our business model. Today, we have a platform with some technology where we have the behavior score. So we understand how consultants are doing, what their wages are, the ones that have seniority. So we've been monitoring this daily. Our control of the way they work and the best way to operate credit to them is much better. But what we have seen in 2016 and also this quarter is that the market consumers evolve and also consultants are obviously facing some budget restrictions. People have less cash in their wallets, so to say. So as a result, the credit cycle has been an unfortunate tool for us to support and optimize our sales.

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Thiago Capucci Macruz, Itaú Corretora de Valores S.A., Research Division - Research Analyst [5]

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If I may, I have one more question about sales. We've been hearing some feedback from your competitors facing challenges in their signature stores. Do you see any changes in the market share dynamics here in Brazil? I'm not if you're really sure but do you think that we're reverting some of the shares that we lost in the last few years? Are there any positive signs for the margins?

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Andrea Alvares, [6]

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Thiago. This is Andrea. While we've been working tirelessly in recovering our market share here in Brazil, it is a long path. We don't believe that this will happen on the short term because the Brazilian market is becoming more and more competitive. But we have been trying to direct our actions and strategy to focus on key categories. So we have been making more investments in that category. So on the medium to long term, we believe that we will recover some of the market shares. More Brazilian consumers will choose our brands.

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Operator [7]

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The next question comes from Guilherme Assis with Brasil Plural.

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Guilherme Assis, Brasil Plural Corretora de Cambio, Titulose Valores Mobiliários S.A., Research Division - Analyst [8]

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I have a few questions, actually. What we've been seeing for the second quarter in a row is an improvement in sales in Brazil. I think the company went through some difficult times because of macroeconomic issues, competition. For some time for some years, we've been hearing a lot from you about restrengthening direct sales and trying to reactivate consultants. I know that macro-economically the environment is still unfavorable but it seems like you were doing this well. In the last meeting, I think you showed this a bit more clearly how you want to create different segments with consultants and create better incentives. I know there are other variables involved, but can you tell us about the actions you're taking in direct sales that have been creating the most impact to the results? That's my question. Another question I have is I want to understand better the price mix and gross margins. I think one of the highlights was the gain in gross margins in Brazil this quarter. If I'm not mistaken, I think the last time you mentioned this was the first quarter of last year. But you've been creating new marketing campaigns, sales, especially with the mix focusing on Fragrances, so I just like to understand that better. First, price, then mix and also gross margins. And if we can expect that these gains we've seen in gross margins this quarter will be maintained throughout the year and over the last months. That's my question.

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Andrea Alvares, [9]

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Guilherme. This is Andrea. I just want to start by answering your last question about mix and prices. Yes, there was an improvement in the Fragrances margin overall. So our strategy of focusing on gifts, facial care and fragrances has created this result. About prices, last year because of tax and exchange issues, we were unable to raise the prices as much as they ideally should, and the effects were felt for the rest of the year. So at the end of the year, we raised prices again closer to the levels necessary but we have better cost improvements. Now since the exchange rates are stabilized, we were able to raise prices again, so now we have a more advantageous position in comparison to where we were before. Continuing here, Guilherme, to answer your question about our consultants network. The main changes we had in our sales model are still being implemented. We mentioned when we met a few weeks ago that the major part of the changes will start in the middle of the year, around June and July. We've been trying to advance some of these changes in policy to create positive results within our current policy changes. So this has been contributing to increasing the productivity of consultants. What you've seen essentially is productivity gains so far.

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Guilherme Assis, Brasil Plural Corretora de Cambio, Titulose Valores Mobiliários S.A., Research Division - Analyst [10]

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Okay. If I may, I have just one more question. During this meeting, I also got the impression that you mentioned that in the first quarter, there was a problem that had not happened for some time, which was a lack of inventory for some products that sold very well. You mentioned that you have made an effort to reduce inventory and so on but I just want to reconcile these 2 things. Should we expect increased inventories in the future, if you can quantify, maybe what is the impact if we did not have any stock out in any product lines, what percentage sales we would have additionally? I'm just trying to understand that what happens and try to quantify it. And what will change in the future? That's my last question.

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Unidentified Company Representative, [11]

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Guilherme. In terms of inventory, there's no point expecting any significant change. The shortages were because of differences in product lines. We have revisited our estimate process so that we can be more aligned with very short-term tendencies so that the final result would be neutral. Despite a few stockouts just like we said, then our percentage of shortages is still very small when compared to our historical data of 5, 6 years. Any stockout will be translated into lost sales, of course, but it was not that significant, I can assure you that.

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Operator [12]

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Next question from Irma Sgarz from Goldman Sachs.

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Irma Sgarz, Goldman Sachs Group Inc., Research Division - Equity Analyst [13]

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I have 2 very quick questions. Can you please give me an update on activation initiatives? And what does the management think about the size of the channel and the sales force? We'll still see that fall on year-on-year 4%, but it's a little smaller when you look at the number at the period's end. Are you planning to launch a campaign to hire more representatives? Are you going to remain letting those consultants that are not active to leave that base? And the other question is can you tell me a bit about the calculation of the innovation index? I couldn't understand what actually changed in the calculation process. Are the numbers going to be better?

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Unidentified Company Representative, [14]

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Irma, good morning. As to the size of the channel in Brazil, we do not expect any growth for this year. It will be up to par with last year's numbers. There may be some variations up and down. Consultants that are not active, they naturally leave the channel. We rather have them stay. We are conducting campaigns to make them stay. The more they get involved, the more productive they are. They bring in new business. But overall, we should remain the same size. That's our expectation there. Let me talk about innovation index and I'll turn it over to Andrea.

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Andrea Alvares, [15]

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Irma. We can actually see a recovery or an uptick in our initiative revenue. On both calculation systems, you can detect that trend. And we had already said that we're including that index to make sure that we would bring more relevant innovations to the company. And during that review process, some components were not truly innovative, and there were others -- other that we're not -- other indices that were truly innovative were not being considered but it's not substantial to change the trend or to change the total result. It would be a 3% variation, plus or minus.

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Operator [16]

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Next question, Franco Abelardo from Morgan Stanley.

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Franco T Abelardo, Morgan Stanley, Research Division - Equity Analyst [17]

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I have a couple of questions. Let me just follow up on the first question of sales anticipation in Brazil. Would you be able to quantify how much that anticipation of a week impacted Q1 results and that would be taken away from Q2 revenue? Do you expect further growth in revenue in Q2? Do you believe that this uptick in the economy will continue or maybe 4%, 5% would be the range that you are going to be satisfied with for the entire year? That's the first question. My second question is could you please break down how much of the revenue in Brazil came from new channels, direct sales, for example? Did it also grow or is it from online or retail or new stores? My third question is about Latin America. Growth in Latin America is still very good at 3% but it has been slowing down. It was at 30% about a year ago and now it's at 20% -- lower-20s. What's behind that? Is that across the board or is it because of any specific country? And what's behind that slowdown? Productivity grew by 15% in Latin America in Q1. How does that compare with other quarters? We see that drop in SOU products. In Brazil we have less volume, more productivity or what's behind, what's happening in Latin America, please?

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Unidentified Company Representative, [18]

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Franco. Let's go. Step-by-step. Q1 and Q2 in Brazil, we can quantify so much the first week before the campaign was but I'm not going to tell you. What's in store for us? We are at the turnaround generally. So we're very confident on what we're doing but we are very cautious. And we shouldn't remain so. There may be some volatility out there. Consumption is not exuberant. You have many holidays in the second half of the year. So we have to be cautious. On the short term, we have a lot of volatility. Midterm, long term, we are very confident on what we are building. Second question, new channels, right? On average, they are not substantial. You can see that in our annual report. You can extrapolate. It's not that big of an impact. Our online impact is much better. Based on our online track record, we can determine the impacts in Q1. That's the best way to approach it. And finally, Latin America. There was one country that was highly affected by an exceptional event this quarter. Peru was affected by a weather disaster. So that stopped the entire country. Our operation in Peru and our revenue there was affected by that problem in Peru. It's just something that happened off the gulf. But they'll go back and try, hopefully. We're now starting a new recovery or an uptick period in Mexico. So Mexico has shown signs of improvement we have adjusted our operations there and they are picking up speed, so that may be reflected in our midterm. And finally, I would like to remind you that Argentina, in local currency, has abnormal inflation rate. When inflation rates go down there, that will impact their overall currency.

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Franco T Abelardo, Morgan Stanley, Research Division - Equity Analyst [19]

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Well that is very clear. Let me just go back to the first question. Do you have an idea of the potential growth for Natura this year, just like you said before, do you want to maintain market share and what's your expectation there?

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José Roberto Lettiere, [20]

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Let me just go back to the Latin American question again. Is there some pressure in gross margin in the last 4 quarters? Is it more comparable? Is it going to be more up to par with the rest of the margin -- company margin overall. In terms of margin, well, Franco, this is Lettiere speaking. As far as margins go, we have seen this impact, both because of the CMV effect on costs and also when you translate the P&L from the currency that's in Latin America, Argentina. When you convert that to Real, we have 2 exchange components. We have begin -- begun to see that more clearly, starting in Q2 2016. Despite the volatility in exchange rate. But when we compare these numbers, these margins should be more comparable when compared to last years. But again, it was a very strong impact. I mentioned at the start of my presentation, the devaluation level in several countries with no exception in Latin America. So that volatility impacts on both -- on 2 fronts. On the monetization of costs because an important portion of our products are produced in Brazil. So when you conclude the P&L and financial indications those country have to convert to Real and we have a second wave of impact there.

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Andrea Alvares, [21]

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This is Andrea. Let me talk about the market now. In 2016, I'd like to remind you that the market was very, very retracted. We had been seeing volume drops but we maintain profitability. But in 2016, that curve reverted so we have drops in revenue and volume, especially the first half of the year but we've picked up a little bit with levels that were not as high as those in the past. And now in the first quarter, we have a growth in value and volume. We believe that this is a continued trend. So when we expect to grow as the market grows.

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Operator [22]

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Our next question comes from Fábio Monteiro, BTG Pactual Bank.

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Fábio Monteiro, Banco BTG Pactual S.A., Research Division - Analyst [23]

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I just want to talk a bit about sales expenses. If you can tell us a bit more about the increased expenses and marketing incentive. And what is your incentive strategies for the market today? Are there any changes depending on the type or category of consultant?

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Unidentified Company Representative, [24]

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Fabio. The changes that we've made to the incentive structures for our consultants, well structural changes will start in the middle of this year, as I've said during our meeting a few weeks ago. The ones that took place in the first quarter are circumstantial; sales campaigns, reorganizing the sales force and this has just some one-off costs. About supporting the brand, yes, our desire is to support brands so that we can regain share, regain penetration and this quarter, we decided to invest specifically on repositioning our fragrances.

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Operator [25]

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The next question comes from Alex Robarts, Citibank.

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Alexander Reid Robarts, Citigroup Inc, Research Division - MD and Head of Latin American Consumer Staples Equity Research Team [26]

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I would like to focus specifically on the international side of the business, and I have 2 questions. For Aesop, we have been seeing an 8% margin for Q1, which is a reduction from the fourth quarter. We of course, understand that Q1 is the weakest quarter of the year but it's below 10%. So it's a single digit that really drew our attention, and I want to understand if there's anything there besides just the fact that it's a week quarter. I suppose that you started opening many stores at the end of last year. So of course, we understand that it's an expense. It's still going into that market. But is there really an idea of having a new expensive level for sales? Can you just tell us a bit about this margin levels in Aesop for Q1?

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Unidentified Company Representative, [27]

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Thank you for your question, Alex. So I'll start with your last question. Aesop is not a concern for us. It's actually a source of joy and pride. We consider our margins to be stable and we believe that they will grow in the fore turn. The effects of the first quarter are exactly what you mentioned. Just regular seasonality and some stores that open at the end of the last year which reduced the margins for this quarter. So that's what explains this level. But we feel at ease with how Aesop is developing. Just to add to this answer, there's an issue that I mentioned before which is the exchange.

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Alexander Reid Robarts, Citigroup Inc, Research Division - MD and Head of Latin American Consumer Staples Equity Research Team [28]

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So now the Brazilian Real has appreciated and this creates an impact. So is your goal still to open 40 stores external?

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Unidentified Company Representative, [29]

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Sorry, what was your question, Alex?

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Alexander Reid Robarts, Citigroup Inc, Research Division - MD and Head of Latin American Consumer Staples Equity Research Team [30]

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Is your target for new stores to be opened in 2017 still 40 for Aesop?

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Unidentified Company Representative, [31]

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Well, it's been growing at about that rate so that's what we expect to see this year. Okay. Just 1 second. That's not a goal. We don't see that as a goal. It's not a guideline but that's just a trend we have been seeing in the last few years. So we should not see any slowdown of new store openings, but that's not a goal.

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Alexander Reid Robarts, Citigroup Inc, Research Division - MD and Head of Latin American Consumer Staples Equity Research Team [32]

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Okay. I understand. So my second question is about the fact...

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Operator [33]

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Excuse me, the last question -- the last caller was disconnected so we'll continue with Gustavo Oliveira from UBS.

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Gustavo Piras Oliveira, UBS Investment Bank, Research Division - Executive Director, Head of LatAm Research, and Latin America Consumer Analyst [34]

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I have a couple of questions. And to continue the conversation on Aesop, what is the maturation time for a new store? So what does that curve look like just so we can understand the margin for these in the first quarter?

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Unidentified Company Representative, [35]

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Well, that varies depending on location. A new store that opens in a well-established country where the brand is well-established can vary from 1 to 2, 2 to 3 years depending on location.

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Gustavo Piras Oliveira, UBS Investment Bank, Research Division - Executive Director, Head of LatAm Research, and Latin America Consumer Analyst [36]

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Okay. I remember many of the stores you opened had very low rent, and as the strategy developed, these rent amounts are adjusted. You've said once that part of the pressure was due to rent, the amount and also salaries. So can you tell us a bit more about what refers to salaries, what refers to rent. And if this is only related to new stores or if you still will see major readjustments in older stores?

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Unidentified Company Representative, [37]

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Gustavio. Yes. So as you start expanding the number of stores and as you enter new countries, you start facing different dynamics. That are very distinct from what you're used to when you're at a certain maturity level. So obviously when you go into a region or a country for the first time, you don't have the same scale that you've gained throughout your history in the countries and regions where you've been for longer. So new stores have been opening in more developed countries and also in developing countries such as Brazil. We opened 2 stores recently here, and the conditions, taxes, the sales force all add their own impact, which can make this more difficult or more easy depending on the situation.

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

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Okay. So we'll go into detail during follow-up. I have a question about Brazil, though. I would like to understand what is the connection between your consultant space, that how it's developing as you start implementing new incentives. When you implement new incentives, it will create an important change. A new consultant will have a lower commission. So maybe their incentives for joining Natura will be lower than before. And I don't think that your term will stabilize because it takes some time for consultants to understand it. So when you compare Q4 to Q1, that was a very positive result. The consultants base grew but we expect a stable one for the year. So you're assuming a growth for the rest of the year but the incentives from July should start affecting your base negatively. I'd just like to understand how that will work and if you're going to use any investments in marketing, if you're going to invest in your image to offset the natural reduction if that should happen. Maybe I don't understand it. Your pilot studies show a completely different scenarios so that's just what I want to understand.

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Unidentified Company Representative, [39]

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Yes, we would need more time to provide the segmentation processes. This is a longer process but the idea of adding incentives was to create a progression. Consultants come in thinking about their benefits but after the first cycle, they should also be incentivized. An average consultant has 2 cycles of incentives so it's very easy to overcome the first 2 barriers. And in pilot studies, we don't believe that attraction will be decreased by this. I think contrary. In fact, our policies will help retain consultants. So the system was now balanced to operate at the same level of investment but we expect to distribute it better among different consultant segments. Okay?

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Operator [40]

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Mr. Alex Robarts will continue with his question.

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Alexander Reid Robarts, Citigroup Inc, Research Division - MD and Head of Latin American Consumer Staples Equity Research Team [41]

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I'm sorry, I got disconnected. So here's my second question. It was about this relevant track that you have announced and I'm referring to the fact that you're now considering purchase -- or purchasing Body Shop assets. I don't know whether you can comment on what's going on but my question is divided into 2 parts. First, would it be reasonable to conclude that Natura is considering nonorganic growth by having an omni-channel? And is the company going to look for other channels? What drew my attention was the $800 million ticket. You would get into debt, you would double your leverage standard or is it fair to assume that you're looking for nonorganic sources to expand the companies -- or the company? Size wouldn't be a problem in looking for other sources of organic -- nonorganic growth.

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José Roberto Lettiere, [42]

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This is Lettiere, Alex. Let me just make a couple of comments. The purpose of this call, when Joao Paulo started out this teleconference, he made an important comment about this issue. I don't know whether you were attending from the beginning. While it was not relevant at all, this was just an answer to our CDM and to our stock exchange to BOVESPA so this was something that was established by the media. So this is what we replied, yes, it's a very early evaluation phase. It would be a potential project with Body Shop. So we confirmed it. We have no further information on the topic for 2 reasons. Number one, this is company policy. We never talk about M&A processes before we are committed to it, which is -- which applies to this case. And number two, we have no information whatsoever because it's a very initial phase. I'm sorry, I'm sorry. But this is what we have available.

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Operator [43]

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Next question from Tobias Stingelin from Crédit Suisse.

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Tobias Stingelin, Crédit Suisse AG, Research Division - Director [44]

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Let me just follow-up on the change and the effects may be clear in the beginning of the second half of the year. You haven't really started, right, implementing it? I think you mentioned it in the last call. So we were already rolling it out. Why is it that we are still in the rollout phase? I thought we were further ahead of the process? I may be wrong. Could you elaborate on that, please? How can we monitor whether the change will be significant?

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Unidentified Company Representative, [45]

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Tobias, good morning. That rollout started in early July. What we have now are the preparatory activities. We are adjusting business roles, our communication, things that are currently underway. There are some cities in which all changes have been implemented, Belo Horizonte and Porto Alegre. But the change will be in early July, approximately.

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Tobias Stingelin, Crédit Suisse AG, Research Division - Director [46]

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So I got mixed up. I'm sorry. My question now is to Lettiere. I didn't see the explanatory notes, but in total, operational results amounted to BRL 180 million. You've translated BRL 155 million in nonrecurring. So you have BRL 50 million -- BRL 25 positive million that affected the results, right? What's that's exactly?

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José Roberto Lettiere, [47]

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Tobias, good morning. No, you captured everything. Your analysis is perfect.

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Tobias Stingelin, Crédit Suisse AG, Research Division - Director [48]

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What does that mean? What are those BRL 25 million? What is behind that BRL 25 million that is recurring?

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José Roberto Lettiere, [49]

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We had a better mix. Fragrances and productivity, manufacturing, distribution and service and expense control that offset what we mentioned. We have a very robust marketing campaign activation. We have a lot of exposure in the marketplace that yielded good results.

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Operator [50]

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Next question comes from Maria Paula Cantusio from BB Investments.

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Maria Paula Cantusio, BB-Banco de Investimento S.A., Research Division - Senior Analyst [51]

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I would like to follow-up on the nonrecurring reversals. Can we expect anything other than that for the following quarters?

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José Roberto Lettiere, [52]

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Maria Paula. This is Lettiere speaking. I wish we had those nonrecurring every quarter. Of course, we monitor everything. It's a very stringent process to control provisions but that's dependent upon several factors. We're monitoring our legal team, and of course, it takes time. Our tax authorities take time to analyze these processes but that was a nonrecurring event. We cannot determine when other impacts of that nature may occur in the future.

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Maria Paula Cantusio, BB-Banco de Investimento S.A., Research Division - Senior Analyst [53]

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My second question is about channels. What's the performance of this line that you have now in progress? Are you starting to sell Faces, the Faces category? And what's the partnership like with Brenner? Are you seeing other products in the Faces product line? Are you considering other networks? Can you talk about the project on the beauty consultants? What's the projection of number of units, what's the estimate for the long run?

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Andrea Alvares, [54]

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Maria Paula. This is Andrea. Let me answer your question about tests. We have conducted some tests at the Raia network, after some time and then revisiting or reviewing our facial care strategy, and we decided it didn't make sense we are removing that test. At the same time, we've had introduction of Faces, and we are more convinced that, that's the best way to go. We are now expanding our (foreign language), and we're still going on with the partnership with Brenner. That operation may be implanted by year-end. We do not have any other plans with department -- other department stores. It's a brand building strategy rather than a supplementary channel. I wouldn't say that we are not going to expand other than initiative with Brenner for department stores. We are very optimistic with initial results of Faces for both direct sales and at the drugstore.

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Unidentified Company Representative, [55]

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Let me jump in here with the beauty consultants. We have expanded the base of consultants that are interested in the format. We may pick up in the number of point-of-sale within the same format but I cannot tell you what that number is right now.

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Operator [56]

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Next question from only the Olivia Petronilho from JPMorgan.

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Olivia B. Petronilho, JP Morgan Chase & Co, Research Division - Analyst [57]

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Let me follow-up on margins of International Operations. The FX issue and opening up new stores at Aesop but our question is about whether you're planning to change prices to recur over those margins. Can we expect some price changes in the near future?

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Unidentified Company Representative, [58]

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Olivia. Yes, that's right. Price management, especially in countries -- in Latin America -- like Latin America with higher inflation rates, that's key to monitor that for our margins. We have to be aligned because costs and expenses come first before price changes. We have to be very cautious and effective in managing prices. And by doing so, we have managed to maintain our margins. The problem, as I've said before, that -- is that most of our products are produced in Brazil with that exchange rate difference, with a Real appreciation, generated impact. In order to offset it, we've been doing that for a couple of years, of course, which is to develop local manufacturing. This is what we have been doing for some years, and we are now revisiting our sourcing matrix that we can resort to the sourcing strategy in the region, the whole region. Let me talk about this in foreign exchange, and that has to do with a translation. Again, we have that impact for good or worse.

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Operator [59]

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And that concludes today's question-and-answer. I would like to give the floor to Mr. Joao Paulo Ferreira for his closing remarks.

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Joao Paulo Ferreira, [60]

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Once again, thank you very much for your interest, and of course, questions were excellent. They help us better examine our business. Our IR department is available to talk to you at any time. Thank you. Have a good day.

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Unidentified Company Representative, [61]

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Have a great weekend.

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Operator [62]

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That concludes Natura's audio conference. Thank you for attending. Have a good day.