International Conference Call Natura Fourth Quarter Earnings Results March 15 th, 2018

Transcription

1 International Conference Call Natura Fourth Quarter Earnings Results March 15 th, 2018 Operator: Good morning ladies and gentlemen, thank you for waiting. At this time, we would like to welcome everyone to Natura & Co conference call on the fourth quarter results. Today with us we have: Mr. Roberto Marques Executive Chairman of the Board for Natura & Co Mr. João Paulo Ferreira Natura s CEO Mr. Michael O keeffe Aesop s CEO Mr. David Boynton The Body Shop s CEO Mr. Marcel Goya Director of Finance and Investor Relations Mr. Luiz Palhares, Investor Relations Mr. Marcio Bolonha: Natura s Financial Controller This event is being recorded and all participants will be in listen-only mode during the Company s presentation. After Natura s remarks are completed, there will be a question and answer session. At that time, further instructions will be given. We have simultaneous translation into Portuguese and questions may be asked normally by participants connect from abroad, either in English or Portuguese Should any participant need assistance during this call, please press *0 to reach the operator. We have a simultaneous webcast that may be accessed through Natura s IR website: 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. Before proceeding, please be informed that forward-looking statements are being made under the safe harbor of the Securities litigation reform act of Forward-looking statements are based on the beliefs and assumptions of Natura management, and on information currently available to the Company. They involve 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 the future results of Natura and could cause results to differ materially from those expressed in such forward-looking statements. 1

2 Now, I will turn the conference over Mr. Roberto Marques, Natura and Co s Executive Chairman of the Board. Mr. Marques, the floor is yours. Mr. Roberto Marques: Thank you Paula, and good morning or good afternoon to all of you of course depending on where you are on the globe. Thank you for joining us on this call to present the Natura & Co fourth quarter and the year 2017 results. This call today is actually taking place from London as the Natura Board of Directors was held here in order to take a deep dive into our Body Shop and Aesop businesses, and I think I speak for all of us when I say that was really a truly great experience that reinforce our confidence in the potential of our 3 businesses. As Paula said, today with me on this call are João Paulo Ferreira, our CEO of Natura, David Boynton, CEO of The Body Shop, Michael O'Keeffe, CEO of Aesop, Robert Chatwin, our Chief Transformation Officer, and Marcel Goya, our IR and Finance Director. As all of you know, we are also in the process of hiring a new Chief Financial Officer for Natura and for the group and we should be in a position to announce the appointment in the near future. Let me begin with an overview of an exceptional and transformational year for Natura & Co. Marcel will then run us through our financials and then each CEO, João Paulo, Michael and David will give you some color on their respective companies. We will then return with some concluding remarks and then we will open the floor to the Q&A session. Throughout this call, we will be referring to a presentation that you ll find on our website, it complements other press release issued last night, which I'm sure you have already seen it. So, let's begin on slide 3 with the key business highlights of the year was truly a transformational year for Natura with the acquisition of The Body Shop, which closed in September. Natura has made a step change becoming a multibrand and a multinational group that now boosts a strong global footprint. The group we have created brings together 3 very distinctive and very strong brands, but actually share a common purpose and vision. We are committed to doing business in an ethical and sustainable matter to generate positive economic, social and environmental impact. 2

3 To symbolize this change, we recently unveiled our new corporate identity. The combined group is now named Natura & Co and its logo appears on the cover page of this presentation. Natura & Co at the same time refers to the brand that gave birth to this group while also expressing the bond between us through the & symbol and the Co in our name represents: Connection, collaboration, cocreation and coexistent; behaviors that we want to really strengthen throughout our 3 businesses. In order to leverage the scale and know-how of this group while presenting brand autonomy, we have also created a new governance structure that we already talked about, including the group operating committee which brings together the Executive Chairman, a new position within the Board, the brand s CEOs and key functional positions in order to oversee the group, identify and capture synergies. And one example that we already established since we put together this governance is the global procurement process, aiming important savings among 3 companies. The great potential of this combination is already evident in our 2017 numbers. As you see in this presentation, we posted solid sales and profitability across the board, even excluding the 4 months-contribution in our numbers from The Body Shop. Each one of our businesses posted a strong performance, which we are very proud. Natura continues to regain momentum and leadership in key categories help by a new relationship selling model in a more focused strategy while Natura in Latin America grew strongly and continued to expand its sales channels. The Body Shop integration is proceeding smoothly. Measures to improve performance are already being taken and we are pleased with the year-end performance of the business; one of the best we have had in the last couple of years. In Aesop, accelerated growth driven by store opening and an outstanding same-store sales performance. At the same time, we also made new advance in sustainability, providing further evidence of our strong commitment to the triple bottom line. We will detail all of this in this presentation, and with that I will now hand over to Marcel Goya to tell you all on this in numbers. Marcel, to you. Mr. Marcel Goya: Thank you Roberto. On slide number 4, to provide you with an overview of our headline number and as Roberto had said, they showed 3

4 strong sales and profit growth throughout the business, both in Q4 and in the full year. Consolidated net revenue rose sharply at 24.5% in the full year, including 4 months of The Body Shop. In Q4, reported sales were up 62.7%. On a pro forma basis, revenue rose 7.2% in the year and 7.8% in the quarter at constant exchange rate. We posted a strong improvement in profitability. Consolidated Ebitda was up 29.6% in the full year and up 36% in Q4. Comparable Ebitda adjusted to exclude certain non-usual effects and excluding all TBS-related figures was up by n the year and 8% in the quarter. We provide a waterfall graph in our earnings release with full details. Consolidated net income was up 117.5% in full year and up 23% in Q4. If you look at net income on a comparable basis, also excluding TBS-related effects, net income grew by 186.5% in the year and in the 4Q it grew by 29.9%. Again, please refer to our earnings release to see an illustration of this effect. Cash flow generation was very strong as we generated R$ 617 million in cash in the year, R$ 147 million more than what we generated in This is a very strong performance, even that this amount is after tax settlement made in October 2016, that I will detail a bit later. Without this, cash generation was R$ 859 million, and we've managed to significantly deleverage the company with our net debt to Ebitda ratio coming down to 3 times, well ahead of our target of 3.6 times. These are the consolidated numbers, which of course were impacted over the year by the integration of The Body Shop and some other factors. We will look into this in greater detail at both consolidated and brand level in the coming slides. Let me start with our consolidated net revenues on slide 6. In the full year, net revenues reached nearly R$ 9.9 billion, representing a gain of 24.5% over the previous year driven by growth now 3 of our business. On a pro forma basis considering The Body Shop for the full year 2017 and 2016 at constant exchange rate, revenue grew by 7.2% in the year. Of this total, Natura represented R$ 7.7 billion growing by 7.8%, while Aesop revenue grew 30.3%. We had a 4 month-contribution of The Body Shop of R$ 1.5 billion. The Body Shop reported 2.2% growth in the year on a pro forma basis and at constant exchange rate. In Q4, consolidated sales rose 62.7%, again with solid growth by Natura up 9% and strong double-digit growth by Aesop up 27.2%. Of course, the very strong growth in the quarter was also due to the addition of The Body Shop, which 4

5 contributed to R$ 1.2 billion in sales. If we consider The Body Shop on a pro forma basis, consolidated net revenue at constant exchange rate increased 7.8% in the quarter with The Body Shop posting 2.1% growth. On slide 7 we turn into profitability, and as you can see, this slide also tells a growth story. In the full year, consolidated Ebitda debt stood at R$ 1.74 billion rising by 29.6% year-on-year. Margin gained 7 basis points reaching 17.7%. In the fourth quarter, Ebitda rose 36% to R$ million, including a contribution of million from The Body Shop. Now, if you look at the Ebitda on a comparable basis, that is excluding The Body Shop Ebitda and its effects, such as acquisition expenses and excluding other operating income and expense, which are not usual in nature, underlined Ebitda was still up by 3.8% in the year, which is an Ebitda margin of 16.6%. In the quarter, Ebitda was up by 8%, which virtually stable margin of 19.8%. We have provided waterfall graphic in our earnings release detailing these figures. In the slide 8 you can see details about our consolidated net income. In the full year, net income was up by a very strong 117.5% on a reported basis, reaching R$ million, with margin nearly doubling to 6.8%. Of course, this number is also boosted by the inclusion of 4 months of The Body Shop. In Q4, consolidated net income is up 23% on a reported basis to R$ million with margin of 6.9%. As you see on the chart on the bottom of the slide, comparable net income adjusted to exclude all the effects related to The Body Shop, including all acquisitions and transactions costs, was up 183.5% in the full year and 29.9% in Q4. We also provided graphic in our earnings release to explain these adjustments. Before looking at our performance brand by brand, let's take a quick look on slide 9, at key aggregate of our balance sheet. In the full year, we generated free cash flow of R$ million, a gain of close to R$ 150 million year-onyear. This figure comes after paying out R$ million in previously accrued tax, which in Brazil special tax regularization program known as PERT. We had a tax provision since 2009 for income tax on interest on late payments by our consultants, which is used to settle under this program. Excluding this payment, cash flow was a strong R$ million. In Q4, cash generation was R$ million, this is down versus Q when we generated R$ 403 million, but it includes the tax payment I just mentioned. If you exclude PERT, cash flow was R$ million. 5

6 This number reflects our rigorous management of cash leading to working capital improvement, both at Natura and at The Body Shop, with relatively lower inventories level an improvement in Accounts Payable. Our strong performance allowed us to significantly deleverage our balance sheet and we ended the year with a net debt to Ebitda ratio of 3 times; well ahead of our guidance of 3.6 times. Let's now look at our performance by each business starting with the Natura. So, I will hand over to João Paulo. JP. Mr. João Paulo Ferreira: Thank you Marcel. Hello everyone. I am now on slide 11. We are going to look at Natura's sales performance. As you can see on the charts, Natura posted solid sales increase, both in the full year and in Q4. In the full year, sales rose 7.8% at constant exchange rate to R$ 7.7 billion, while in Q4 growth peaked up reaching 9% at constant exchange rate to R$ 2.3 billion. These numbers reflect growth at the same time in Brazil and in Latin America with a particularly strong performance in Q4. Sales in Brazil increased by 4.5% in year and 6.5% in the quarter. If we look at Latin America at constant exchange rate, growth was even stronger, the year saw sales growth by 18% while in the quarter sales grew by 17.5% at constant exchange rate. We are particularly satisfied with our performance in Brazil, where we posted our second consecutive quarter of solid growth, underscoring our strong underlying fundamentals. We regained the number one position in core categories, such as fragrances and gifts and maintained leadership in body care. This allowed us to resume overall market share growth as of Q2 thanks to our focused strategy, diligence execution, our renewed commercial model and stronger innovation pipeline. Our multichannel strategy is also advancing, now with 19 Natura stores in shopping malls in São Paulo and Rio de Janeiro, and a presence in about 3600 drug stores. Rede Natura (our online business) posted strong double-digit growth in the year, and by the way, last week we won the prize for the best online store in Brazil, where we were also designated for the third straight year as the most desired cosmetics webstore. As you see on the bottom part of this slide, our new relationship selling model has resulted again in strong productivity gains of more than 15% in the fourth quarter over a comparable period when we had already reported higher productivity, and we saw the total number of consultants decline by 9.6% in the quarter. 6

7 We continued our accelerated digital transformation towards the convergence of our online and off-line business models, leading to more than half a million consultants using our mobile platform, which boosts their productivity and consumer experience, and, by the way, our latest consultant loyalty survey produced its best-ever results. In Latin America we are also seeing productivity gains even though we are still increasing the number of consultants. We are also complementing our direct sales presence in the region through the introduction of our first stores in Argentina and Chile, where we already have introduced our online channel. Let's move to slide 12, where we are going to look at Natura's profitability. In full year, Natura's Ebitda was up 23.1% at constant currency to R$ 1.5 billion, and margin was up by 270 basis points to 19.8%, reflecting the strong performance I just described. Brazil's Ebitda was up 21.8% in the year with margin gaining 320 basis points to reach 22.6%. In Q4, Natura s consolidated Ebitda was down 8.5% and margin stood at The drop was caused mainly by changes in other operating income and expenses, as well as in G&A, primarily driven by some nonrecurring effects, such as the change in estimates for useful life of our intangible assets, which hit both depreciation and write-offs, as much as some investments in strategic growth projects. We also had an effect of an increase in short and long-term executive incentives as opposed to a reversal which was experienced in previous years. Nevertheless, we maintained our tight control over expenses, which you can see in selling expenses which grew only 1.9% in the quarter and 4.3% in the year, as we had higher investments in marketing. In Latin America Ebitda was up in strong double-digit, both in the full year and in Q4. On slide 13 we point out 3 key highlights of our sustainability performance in the year. First of all, Natura was included for the 13th successive year in the ISE, the Corporate Sustainability Index of the B3 stock exchange in São Paulo, which comprises companies with the highest levels of sustainable practices in the country. Secondly, Natura was elected Company of the Year by the Exame Sustainability Guide, and this is the first time a company receives that distinction twice. Third, we saw a record high number of Natura beauty consultants engaged in selling the Crer para Ver product line, whose profits are reverted to educational programs. The penetration of this product lines in Brazil reached 28.5% of our beauty consultants. Let me conclude on slide 14 with the priority for Overall, we continue to strengthen our business in Brazil and maintain our strong momentum in Latin America. We will do this through continued revitalization of direct selling, a repositioning of the Natura brand and a strategic review of our brands 7

8 architecture. We also aim to continue expanding both in developed and developing markets introducing our brands to new geographies and continue to rollout our omnichannel buying experience. With this, let me hand over to Michael O'Keefe, CEO of Aesop. Mr. Michael O'Keefe: Thanks very much, JP. In 2017 and in Q4, Aesop accelerated its sales growth as you can see on slide 16. Our sales in the full year reached R$ 706 million; a 21.9% rise in reported terms and 30.3% increase at constant exchange rates. We saw a similar strong trend in Q4 with sales up 30.1% on a reported basis and 27.2% at constant currencies. This resulted from the combination of very strong lifelike sales growth and sustained pace of expansion. Same-store sales over full year increased by 14.8%, but in the period, we also added 33 standalone signatures stores and 14 stores within departments stores to reach a total of 308 retail stores at year-end. During the year we also entered 2 new geographies, opening up 3 stores in Austria and in the United Arabic Emirates. On slide 17 we look at Aesop's profitability. In the full year, Ebitda at constant currency is up 2.2%. On comparable basis, when we exclude one-off inventory adjustments of approximately R$ 8.7 million or AU$ 3.5 million and excluding the acquisition related to retention plan, Ebitda would've grown 24.1% leading to an Ebitda margin of approximately 19%. In Q4 Ebitda was up 24.3% at constant currency, and that already includes the retention plan impact. On slide 18 we discuss our 2018 priorities. We will continue to build a strong omnichannel presence that provides a high-level of customer service, we will generate strong cash in order to fund continued expansion and develop backend abilities to support our growth. We will continue to build and reinforce a distinct culture and develop a strong learning organization, and lastly, we will further strengthen our social and environmental activities. With this, let me now hand over to David Boynton, from The Body Shop. Mr. David Boynton: Thanks very much Michael and hello ladies and gentlemen. It is a great pleasure to join Natura & Co and The Body Shop and to be on this call with you today. Before going to the numbers, I would like to say that the integration within Natura has been very smooth; with no pun intended, a very natural fit. 8

9 My first few months on the job let me firmly convinced of the huge potential to grow the brand. The Body Shop has always been different; corky and outspoken, and over the last 10 years we struggled to express that side of its personality. These aspects of the brand as well as its ethics and activism have been welcomed and appreciated by Natura & Co, and we can now express them better and find a distinctive voice in the marketplace. We are in the final stages of our medium-term plan and we look forward to coming back to you to present it. The plan is based on 5 pillars of activity as the key drivers of growth. Four of those pillars you may be familiar with from last year: Rejuvenate the brand; optimize our retail operations; hence omnichannel; and improve operational efficiency. We've added the 5th and final pillar, which is redesign the organization to ensure we have the right structure and operating model to support profitable growth. As a consequence, we worked up 17 detailed work streams during the process of mobilizing the work force behind them. On slide 20 you can see our sales performance in both the full year and Q4 with growth in both periods even as we started working on our integration plan. In the year, sales stood at almost the 795 million, which represents a gain of 2.2% at constant exchange rates from 2015, impulse largely by growth in North America and the important Asia Pacific region, as well as by 9% online growth and 4% growth in franchisees. This is solid growth, but it can be improved upon. This growth came despite a net reduction of 35 own stores, ending the year at 1099 own stores, while we have 2 stores on the franchise on the net basis ending the year at 1950 stores on the franchise. But at the end of last year, The Body Shop had 3049 stores in total. In Q4, our sales were up by 2.1% at constant exchange rates to 280 million with online sales up by 11% and sales by franchisees up by 6%. This reflects the solid Christmas holiday period for us, which is very encouraging. One of our key objectives was to protect trade through the important Christmas period while we developed our transformation plans. It's also pleasing that our performance during Christmas was driven by sales of our core best-sellers. Turning to profitability on slide 21, you see that Ebitda margin was up by 50 basis points in the full year to 8.3% reflecting the sales growth and solid control of expenses. In Q4, Ebitda margin was 18% as a result of nonrecurring separation and integration costs, as well as costs linked to the implementation of the first transition programs. Comparably, Ebitda excluding these costs linked to the separation and integration would've been 21.4%. 9

10 Slide 22 to round off one of our priorities for Firstly, as discussed, we will rejuvenate the brand and give it back the spirit I mentioned in my opening remarks. Secondly, what will continue optimizing retail operations and strengthen our relations with franchisees. Thirdly, we will pursue efforts to improve operational efficiency, focus to enhance our omnichannel model and customer experience, both on and off-line. And finally, as I mentioned earlier, we will complete the redesign of our organizational structure. I'll now I'm back to Roberto Marques for his closing remarks. Mr. Roberto Marques: Thank you David and thank all of you for this overview of our different business, which I think has provided you with the real sense of the strength of our brands. I want to take a parenthesis here and send a shout-out to all of our associates across our businesses for this remarkable performance in 2017, at the same time complement our 3 CEOs; we are very fortunate to have 3 great leaders driving our businesses was a transformational year will be a year of consolidation of the strong gains we recorded in this past year. Each of our brands will build on its achievements and rollout the priorities that their CEOs have described in line with our decentralized management structure. All of this will be supported by the group level using strict financial discipline to return to a pre-acquisition leverage ratio by As we recorded yesterday, this is one year ahead of schedule, as, again, we disclosed yesterday at the Brazilian regulatory front reflecting our strong confidence in the business, the restrict working capital management we intend to continue generating strong cash flow, and last but not least, we expect profitability to keep improving and moving up. We will also have an opportunity to discuss this in a greater detail at our Natura & Co Day, which will take place on April 20. More details will be provided shortly. For now, thank you very much for your attention. The speakers on this call as well as Robert Chatwin, our Chief Transformation Officer, are happy to take your questions, and the floor is now yours. Question-and-Answer Session Operator: Ladies and gentlemen, we will now begin the question-and-answer session. If you have a question, please press the star key followed by the 1 key on your touchtone phone now. If at any time you would like to remove yourself from the questioning queue, press star 2. 10

11 Our first question comes from Guilherme Assis, Brasil Plural. Mr. Assis: Hi, hello everyone. Thanks for taking my question. I'd like to explore a little bit the results in Brazil if I may, and to ask João Paulo not only about the performance in this quarter with the 15% increase in productivity for the consultants, but I'd like to understand a little bit about how much has the company been investing in incentives, economics to consultants to ignite the channel? I understand all the initiatives that is being implemented with the change, like, in the segmentation and economics. I'd like to know what would be like if we didn't have the positive impacts from the tax burden, how much would the new incentive structure would represent, or would the company have to give up on margins in order to do this kind of result? And I think also on that sense, maybe another question would be: you mentioned also on the final remarks about Brazil operations and Natura operations the prepositioning of the Natura brand. I'd like to understand a little bit more what you mean about prepositioning of the brand, like, are you talking about also rejuvenating the brand like you say when you talk about The Body Shop? Those are my questions. Thank you. Mr. Ferreira: Oi Guilherme! So, let's go one by one. As we mentioned before, the new incentive scheme has no significant additional cost increase to our previous structure. Truly, it does shuffle the investment across different profiles of consultants. So it wouldn't have hit our margins significantly at all. It just shows that the strategy is working, that we are getting more productive consultants and they get a higher incentive tied to the higher business volume that they bring, and the other way around, of course. When we talk about repositioning of the brand it's also a scheme that we mentioned before, we have been talking about that over the last 12 months and it is to do with getting the brand closer to a younger target, also closer to young consumers and strengthening some beauty attributes of the brand. So that's already in place, it's been already in place for a year and a half, there is some perceivable changes in our communication, but also in the design of our portfolio. If you look closer to our portfolio it will be reflecting those strengths already and we will continue to do that. Mr. Assis: Okay. João Paulo, just if I may, like, follow-up on the first part of the question, like, you mentioned (and I know you talked about this before) you're not giving up on margins or in the structuring process, like, in the new incentives segmentation system, right? But if you look at the results from the fourth quarter, you guys had, like, flatish margins and you also had some parts of 11

12 impacts from lower tax burden in the quarter. So, in one way or the other, you should have had lower margins in the quarter. I just wanted to make it clear that this is not coming from the segmentation. So, is it like pricing strategy that you are being more aggressive in your brand positioning and market share positioning? Mr. Ferreira: Okay, I can guarantee there is no margin dilution due to the new segmentation scheme. We have been investing or making higher investments in marketing as a whole because we want to support our brands further, and by the way, it's paying off because we have resumed market share growth, so we have been investing more in marketing as a whole. Now the Ebitda margin has been affected by other elements which we briefly mentioned, which are part of the report, some are nonrecurring effects, like the change in use of lifetime software, which needed significant correction this quarter plus some financial adjustments and financial profits that disappeared due to the reduction of the SELIC tax. But this had nothing to do with the new incentive scheme, okay Guilherme? Mr. Assis: Okay, I think it's pretty clear João Paulo. Obrigado. I actually had a lot more questions, but I ll leave the floor to my colleagues here and we can follow up later. Mr. Ferreira: Okay, bye-bye. Operator: The next question comes from Gustavo Oliveira, UBS. Mr. Oliveira: Hi, thank you very much for taking my questions. I have 2 questions. One is: I'd like to understand how recurring is the increase in G&A expenses in Brazil. That would be the first question. The second question is on working capital improvements. You mentioned that you manage it's quite a difficult line to understand now given the consolidation of The Body Shop, but you mentioned in the press release during the presentation that that is related to inventory management, but also when we look at the balance sheet I think we see a lot of benefits coming from Accounts Payables. So, I'd like your help in understanding if when we consolidate The Body Shop here, The Body Shop has much higher payment terms and that benefits you going forward, or whether it is something kind of nonrecurring in the fourth quarter as you consolidate that? 12

13 And the last question as for The Body Shop team. I'd like to understand in terms of the brand rejuvenation strategy what you guys are thinking in terms of investments needed for that both in terms of Opex and Capex, and the timing for capturing some of the potential benefits that you see there. Those are the 3 questions. Thank you. Operator: Ladies and gentlemen, please, hold. Speakers, you may continue. Mr. Ferreira: Hello? Mr. Oliveira: Hello? Mr. Ferreira: Opa, é o Gustavo? Mr. Oliveira: Yes, it's Gustavo here. Mr. Ferreira: Okay, we are back. We couldn't hear you. Could you repeat the question, please? Mr. Oliveira: Oh, my apologies. Okay. No problem. I have 3 questions, the first one is understanding your G&A expenses in Brazil, the recurrence of that and whether we will continue to see pressures in 2018 coming from the expense line. The second question is on working capital improvements, you mentioned that you had lower inventory levels in the quarter, but we also noticed improvements in Accounts Payables and I don t know if that is related to The Body Shop and whether the Accounts Payable The Body Shop has longer credit terms and therefore that is kind of recurring benefit or whether it is a one-off benefit. So I d like to understand those 2 accounts. And last question is: when you're thinking about The Body Shop, the brand rejuvenation strategy, what do you think in terms of investments in Opex and Capex and the timing for that? Thank you. Mr. Ferreira: So Gustavo, JP speaking. I'll take the first then we move to the others here. So you asked about the pressure on G&A going forward and I do want to highlight that many of those elements impacted mainly Q4. So there was a significant portion to do with our short and long-term incentives for executives compared to previously years, where we had to do a reversal of that given that 13

14 this year we are achieving our targets that didn't happen. So, going forward I would expect this to be stable. Changes in the way we account for intangibles assets Operator: Ladies and gentlemen, please, hold. Ladies and gentlemen, please, hold. Ladies and gentlemen, please hold we are waiting for the reconnection of the speakers. Sir, you may proceed. Speakers, your line is open. Mr. Marques: Okay Gustavo, Roberto here. So, David will address I think your last question. If we heard correctly, it was regarding The Body Shop brand rejuvenation and the plans and what is the timing. So, I'll turn it to David to address that. So, thank you. Mr. Oliveira: Thank you, and if I may, I don't know if the lines but it seems that the line dropped on the other 2 questions, so we couldn't hear anything you guys said. Mr. Marques: Okay, so JP's going to repeat the first one, so we will address the first 2 ones again Gustavo, and I'm sorry for the line drop. Mr. Oliveira: No problem. Mr. Ferreira: Okay Gustavo, so your first question was on G&A in Brazil and I explained that most of these effects impacted us only in Q4 this year. There were elements related to our executive compensation plan, which in previous year had to be reversed, even the better performance this year, even that we did well, we accrued for the executive compensation going forward, we would expect that to be the pattern and hence no significant changes. I also mentioned that we were affected by changes in accounting procedures for intangible assets, mainly software which caused us to write-off part of that value and accelerate depreciation. So, again, going forward that should not be repeated, apart from an additional or incremental portion of the accelerated depreciation, of course. And finally, we did invest in some growth projects. That should continue, but of course, then we would expect top line growth to come together with it, okay? So that was on G&A. I'll pass on to Marcel to talk about working capital. 14

15 Mr. Goya: Hi Gustavo. Regarding the working capital, we don't have any big change when you incorporate the TBS figures because it has very similar cash conversion timeline as Natura, and we just had some difference between counts, for example, the inventory in TBS is a little higher than Natura because of the nature of the business and because of the geography, at the same time their receivables are faster than Natura because the retail model. So, we have some changes, but overall, we don't have big changes. Mr. Boynton: Hi Gustavo, it's David here. We got a team conducting a full review of capital allocation for the transformation under the pillars I described earlier of the complete improvement of operational efficiency. So, we don't have the details to share with you right now, but we are working on that plan right now as we speak and will be in the position to be able to present the full plan, back to you, of course we will do. Mr. Assis: I understand David, thank you. On that, do you think the plan of maintaining margins relatively flat I think that was de original plan that Natura announced. I don't remember if you were already on board when that was announced, but I think the original plan was to maintain revenue more or less flat for the next 2-3 years with margin improving over time. Do you think that is a reasonable formula is to be followed or you envision some changes in strategy on that? Mr. Marques: Hi Gustavo, just to confirm, Roberto here. As you saw yesterday, not only are we confident on that, we are even more comfortable and confident on that plan, which is again as we indicated just after we closed our plan is actually to double the Ebitda of The Body Shop in the five-year period, which is moving roughly the 8% Ebitda to roughly 14% in 5 years, and we are actually confirming that we are sticking to those numbers and actually increasing our confidence based on the work that is being done and how we finished the year in 2007, we are even more confident that we are going to be able to deliver. Mr. Assis: Okay, thank you very much. Operator: The next question comes from Leandro Bastos, Credit Suisse. Mr. Tobias: Yes, hi. This is Tobias is speaking. Just a quick follow-up, a followup question, but can you just, João Paulo, maybe tell us what we should expect in terms of these incremental investments that you are doing and, to some extent, how they might be related to technology, if we might see some major productivity enhancements, if there is something that will be eventually more tangible? Even in the results I think it's pretty clear what's going on, it's happening fast, but if you can maybe provide us a little bit more details about what's going on maybe on the technology front going forward. 15

16 The second question, I would like to see: do you have an estimate about what's the potential of store, total store footprint of Aesop as of now? So how many more stores do you think that the company thinks could be opened over the next few years? And the last question I think is to Roberto. Basically, in the material you say that there will be further you are further redesigning the corporate structure of the company in 2018, this is another priority. There has been a lot of changes in the whole structure over the last few months. So, what's going to change again? What is still missing? Mr. Ferreira: Should I start? Hey Tobias, JP speaking. Mr. Tobias: Good morning. Mr. Ferreira: Thanks for your question. As we mentioned before, the off/online conversion of our business models is one of our priorities. We've seen by now that as our consultants adopted our online platform, mobile platform, that increases the rate of contact between consultants, our sales force, Natura and customers, and through that platform we can tell news and give them more information about products, promotions, content, provide additional services, financial services and so on and so forth, and that is a significant driver of their productivity gains. Currently, we have already 500,000 of those consultants actively using that platform. I do expect and when they do, their purchase grow more than double-digit with the current set of services, which changes every day. So we do expect that by the end of this year we should have roughly 1 million of those consultants actively using our digital platform and driving additional sales growth, right. And by the way, a portion of our investment is indeed on growing and improving our digital platform. Mr. Tobias: Just very quickly, so some of the expenses that we might have seen, for instance, on the G&A front in Brazil they might be related to investments in technology? And you mentioned that the productivity when the consultant adopts the online platform increases by a factor of 2? Mr. Ferreira: No, I said double-digit, not by a factor of 2. Not there yet, but we are working hard Tobias. Mr. Tobias: Okay, fair enough. Mr. Ferreira: Okay? 16

17 Mr. O'Keefe: From an Aesop perspective, in terms of the growth pace I would say that over the last 2 or 3 years we have really built up our internal capabilities to develop new stores working with both internal and external architects, and now we have a presence across 22 countries, over those years we ve scaled up the amount of stores that we ve opened until now, you know, between 30 and 40 standalone stores per year and in 10 to 20 countries. I think for us, for the foreseeable future that level of growth should continue, we still see a really substantial opportunity for Aesop across the globe. But I would just say that increasingly we are looking at it from an omnichannel perspective and digital and retail combined is really our focus in both channels, standalone, physical bricks-and-mortar retail and our digital presence, both growing very quickly, and we ll continue to do so on the foreseeable future. Mr. Tobias: How much is digital right now for Aesop, just for online? Mr. O'Keefe: Alone website is a little bit over 5% in terms of total sales, but if you include our digital wholesale partners the total comes to closer to 10%. You know, I mean, we are focused on our relationship basis of selling their personal connection is still very important and so the physical retail experience is still key over our strategy. But we know that digital commerce is increasingly important, and we are growing that channel very quickly as well. Mr. Tobias: Thank you very much again. Mr. Marques: Tobias, its Roberto here. Your last point, so we are not planning to make any further changes, what we put together this corporate governance, we feel good about it, we are starting to work together through the group operating committee, already some very positive things coming out of this collaboration between the 3 business, like global procurement as I mentioned. So we want to stabilize that, we want this to progress and continue to evolve as we needed, but at this point we feel pretty good about the governance that we put in place. Mr. Tobias: Okay, perfect. Thank you. Operator: The next question comes from Thiago Macruz, Itaú. Mr. Macruz: Hi guys. My question is regarding The Body Shop. Can you give us an idea of the revenue seasonality for that asset? What percentage of sales happens in the fourth quarter and what would be the full Ebitda margin implied, what you've managed to achieve in the fourth quarter in terms of profitability? That would help us a lot forecasting this operation. Thank you. 17

18 Mr. Marques: Could you repeat the question? We just aren t sure that we captured correctly the information. Mr. Macruz: There is no problem at all. What I want to try to understand is the following: first, this is an operation that has roughly 8 or 8 point something Ebitda margin for a full year perspective, the adjusted Ebitda margin for the fourth quarter was 21. So I just wanted to understand what's the seasonality of top line for The Body Shop in terms of quarters, if you can just give me the fourth quarter that would be great. And the other question is: I just want to understand if you ended the year on a high note. So, my question is: what would be the implied full year Ebitda margin given what you managed to achieve in the fourth quarter in terms of profitability? These are my 2 questions. Thank you. Mr. Marques: Thiago, Roberto here. We are not going to give you by quarter, but again, the profile that you saw is always very common on the retail business, you do have a much higher profitability Ebitda margin on Q4. So, what you saw in Q4 for The Body Shop is kind of what we expected. We ended a little better than what we expected, but in general terms, that kind of the profile of the Ebitda margin that you will see in that kind of business for a Q4 compared to the rest of the year. Sales is slightly different the ratio, but the Ebitda margin is very much aligned to what you saw in the Q4 results. Mr. Boynton: If I may just make a quick comment. So, I mean, the nature of the business like The Body Shop it's highly focused on gifts. That's completely normal. My past experience you might be familiar with it, it s a very similar picture. So the final quarter of the year represents more than a third of top line sales, it s significant. We took as encouraging from performance in our first quarter when we had control of the business is that the run rate of top line growth was in line with the overall year. So we ended the quarter at 2.1%, we were pretty satisfied with that performance. So it is a seasonal business, we understand that, that's when we make our money, the way we plan operations through the course of the year, it is about being able to deliver strong performance during that peak, and the thing that was pleasing for us when we entered into the business was that we maintained the same sales trend. Mr. Macruz: Fantastic guys, thank you very much. Operator: The next question comes Olívia Petronílho, Banco JP Morgan. 18

19 Mr. Giordano: Hi, this is actually Joseph Giordano here. I have a question regarding The Body Shop and the turnaround plan. So, based on the release, you mentioned that the company grew 2% on a year over year basis and when we look into the guidance we can extrapolate and get an implicit expected growth of about 7% the top line over the next 5 years. So here I d like to understand: first, what should be the initial action plan here, so in terms of store closures and refurbishment and how this should also affect Capex and what is also the actual plan here to revamp sales growth on this operation? Thank you. Mr. Boynton: Hi Joseph, David here. One of the things that is striking about The Body Shop as we inherited it today is that actual individual store productivity is not especially high compared with industry benchmarks, and growth going forward will be a function of significant investments in stores. There will be investments in stores and there will be a rebalancing of the retail portfolio, you know, we have a lot of stores that are well-established in locations over a long period of time, but possibly not in the right place right now, and we need to reconsider relocation. And there is a big piece of work as part of the transformation plan really understanding what the future shape of the retail portfolio needs to be. The thing that's really clear is when we look at our benchmark competitive is there is a big opportunity in this rejuvenating of the brand, and actually making the brand more relevant, getting back to the original roots of the brand and what we stand for, we think it's a fantastic opportunity in connecting with today's customers. So really, we believe that we can drive sales, we are very confident that we can drive sales through rediscovering our purpose and rejuvenating the brand that way. We got work streams looking at pricing and how we make sure that there is a clear and more effective communication of our price points, we are planning to invest also more in customer relationship marketing, which we see being big opportunities for the business. We have a very large database that we can explore more. So it isn't so much about the brick-and-mortar investments in stores, we will do that, we will rebalance our portfolio, but there is a lot more that we can do around branding and the way we manage our stores. Mr. Giordano: All right, perfect. Thank you. Operator: Unfortunately, we will not have I'm sorry, we will have to wrap up the call at 12:15 PM in Brazil, or 3:15 PM in the UK. So, we will be able to take another question only, but the IR team will be available to assist you afterwards. 19

20 The next question comes from Franco Abelardo, Morgan Stanley. Mr. Abelardo: Hi, hello everybody. Thanks for taking my question. First question is regarding market share gains in Brazil in Can you share how much did you see the market growing in the year and what are your expectations for 2018? And should the better macro environment help to accelerate sales growth in the country for the segment? And if you can share how has been the trend in the first quarter. We know that you started to face a little more difficult sales comps growth, so I'd like to check if you can keep growing or accelerating growth in Brazil in the first quarter as well. That's the first question. The second, back to the G&A expenses also in Brazil, you mentioned some new projects that put some pressure for the G&A in the 4Q. Could you give more examples or details of these projects? I think you mentioned the mobile app. Is there anything else that you are doing that are putting pressure in the G&A expenses and whether or not these projects should keep putting some pressure. So talking about margins, I think the idea is to keep investing margins to accelerate growth, is that the plan? Thanks. Mr. Ferreira: Hi Franco. JP. So, on market share growth, so I will not give you the number, I will just confirm that as of Q2 we resumed market share growth. I mean, we started gaining share again, and we recovered leadership in our key categories; fragrances, body care and gifts, that we also recovered, so there we are leading the category, and in all our categories we are gaining share again. So, good, I mean, it's been quite a while since we last saw that, and we are very happy and confident. Expectations for market growth for this year? All of our models suggest that market should grow at similar levels as in 2017 given the projections of the economy and disposable income. It's looking very similar. So we will see. We are regaining market share is one of our priorities, that is what we said last year, it continues to be so, we are working in that direction, and so far, we are pleased with the advances we ve achieved. On the strategic projects, I cannot reveal them given the fact that they are strategic and it's too early for us to review. Maybe in our conference in a couple of months, right? Mr. Abelardo: Okay, right. So, we should expect more of these expenses related to these projects in the P&L this year, is that right? 20

21 Mr. Ferreira: Could you repeat Franco? I couldn't hear you well. Mr. Abelardo: Just checking whether or not we should see more pressure on margin coming from these strategic projects now in Mr. Ferreira: Our objective I mean, this year our margins improved significantly. So let me call your attention to that. Our full year results showed a significant margin increase with top line recovery and market share again. And this is the game we want to keep playing. So it's not our intention to dilute market share. To do that we don't see the need for that, but we will continue to pursue top line growth. Mr. Abelardo: Okay. If I can just point out, in your press release you say that the Ebitda margin for Natura in Brazil actually declined 50 basis points on comparable basis, and actually increased because of the other expenses. Should we take the margin including all the income, actually the 22.6, as actually the base margin for 2017, or should we look to the 19% margin that you call like comparable margin? What's the right one to look thinking about what you said about margins? Mr. Ferreira: We want to keep gaining margins Franco, and the decrease was mainly in Q4, only in Q4, and our expectation is to continue to deliver higher and sound Ebitda margins. Mr. Abelardo: Okay. Operator: 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. Mr. Marques: So thank you Paula, and I just want to thank everybody for joining the call. Again, apologies for some of the technical difficulties here, but again, we are calling from London, so I appreciate the patience from every body and again invite all of you to our Natura & Co Day, which we will continue to address the some of the questions, further elaborate on the plans and the excitement about the Natura & Co and our 3 businesses. So I look forward to seeing you, maybe some of you, or all of you on April 20, okay? So thank you very much, have a great rest of the day. Thank you. 21