Individual and Consolidated Interim Financial Statements Natura Cosméticos S.A.

Transcription

1 Individual and Interim Financial Statements Natura Cosméticos S.A. For the quarter ended September 30, 2014

2 Individual and consolidated interim financial information For the quarter ended September 30, 2014 Contents Independent auditor s report on review of quarterly information... 1 Reviewed financial statements Balance sheet... 3 Statements of income... 4 Statements of comprehensive income... 5 Statements of changes in shareholders' equity... 6 Statements of cash flows... 7 Statements of value added... 8 Notes to financial statements... 9

3 (A free translation from Portuguese into English of Individual Interim Financial Information prepared in Brazilian currency in accordance with accounting practices adopted in Brazil, and of Interim Financial Information prepared in Brazilian currency in accordance with International Financial Reporting Standards (IFRS), issued by International Accounting Standards Board IASB and accounting practices adopted in Brazil) Report on review of quarterly information To the Shareholders, Board of Directors and Officers Natura Cosméticos S.A. São Paulo - SP Introduction We reviewed the accompanying individual and consolidated interim financial information of Natura Cosméticos S.A. and subsidiaries ( ), included in the Quarterly Information Form (ITR) for the quarter ended September 30, 2014, comprising the balance sheet as of September 30, 2014, the related income statement and the statement of comprehensive income for the three and nine-month period then ended and the statement of changes in equity and statement of cash flows for the nine-month period then ended, and the explanatory notes. Management is responsible for the preparation of these individual interim financial information in accordance with Accounting Pronouncement CPC 21(R1) Interim Financial Information and of the consolidated interim financial information in accordance with CPC 21(R1) and with IAS 34 Interim Financial Reporting, issued by the International Accounting Standards Board IASB, as well as for the fair presentation of this information in conformity with the standards issued by the Brazilian Securities and Exchange Commission (CVM) applicable to the preparation of Quarterly Financial Information (ITR). Our responsibility is to express a conclusion on this interim financial information based on our review. Scope of review We conducted our review in accordance with Brazilian and International Standards on Review Engagements (NBC TR Review of Interim Financial Information Performed by the Independent Auditor of the Entity and ISRE Review of Interim Financial Information Performed by the Independent Auditor of the Entity, respectively). A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. The scope of a review is significantly narrower than an audit conducted in accordance with Brazilian and International Standards on Auditing and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might have be identified in an audit. Therefore, we do not express an audit opinion.

4 Conclusion on the individual interim financial information Based on our review, nothing came to our attention that causes us to believe that the accompanying individual interim financial information included in the quarterly information referred to above is not fairly presented, in all material respects, in accordance with CPC 21(R1) applicable to the preparation of Quarterly Financial Information (ITR), consistently with the standards issued by the Brazilian Securities Commission (CVM). Conclusion on the consolidated interim financial information Based on our review, nothing came to our attention that causes us to believe that the accompanying consolidated interim financial information included in the quarterly information referred to above is not fairly presented, in all material respects, in accordance with CPC 21(R1) and IAS 34 applicable to the preparation of Quarterly Financial Information (ITR), consistently with the standards issued by the Brazilian Securities Commission (CVM). Other matters Statements of value added We have also reviewed the individual and consolidated statements of value added for the ninemonth period ended September 30, 2013, prepared under the responsibility of management, the presentation of which in the interim financial information is required by rules issued by the Brazilian Securities Commission (CVM) applicable to the preparation of Quarterly Financial Information (ITR), and as supplementary information by IFRS, whereby no statement of value added presentation is required. These statements have been subjected to the same review procedures previously described and, based on our review, nothing has come to our attention that causes us to believe that they are not prepared, in all material respects, in accordance with the overall accompanying interim individual and consolidated financial information. São Paulo, October 22, ERNST & YOUNG Auditores Independentes S.S. CRC-2SP015199/O-6 Drayton Teixeira de Melo Accountant CRC-1SP236947/O-3 Alessandra Aur Raso Accountant CRC-1SP248878/O-7

5 (A free translation from Portuguese into English of Individual Interim Financial Information prepared in Brazilian currency in accordance with accounting practices adopted in Brazil, and of Interim Financial Information prepared in Brazilian currency in accordance with International Financial Reporting Standards (IFRS), issued by International Accounting Standards Board IASB and accounting practices adopted in Brazil) NATURA COSMÉTICOS S.A. 'BALANCE SHEETS AS OF SEPTEMBER 30, 2014 AND DECEMBER 31, 2013 (In thousands of Brazilian reais - R$) ( BR GAAP) (BR GAAP and IFRS) ( BR GAAP) (BR GAAP and IFRS) ASSETS Note 09/ / / /2013 LIABILITIES AND SHAREHOLDERS' EQUITY Note 09/ / / /2013 CURRENT ASSETS CURRENT LIABILITIES Cash and cash equivalents 5 47,110 99, ,657 1,016,293 Borrowings and financing , , , ,117 Short-term investments 6 766, , , ,015 Trade and other payables , , , ,586 Trade receivables 7 656, , , ,001 Suppliers - related parties , , Inventories 8 261, ,290 1,073, ,521 Payroll, profit sharing and related taxes 116,701 99, , ,636 Recoverable taxes 9 54,959 23, , ,104 Taxes payable , , , ,309 Related parties 28 6,694 9, Other payables 49,863 52,775 71,315 90,192 Derivatives , , , ,634 Total current liabilities 1,709,410 1,674,745 2,592,416 2,326,840 Other receivables , , , ,365 Total current assets 2,169,458 2,239,016 3,707,589 3,512,933 NON CURRENT LIABILITIES Borrowings and financing 15 2,047,602 1,828,351 2,651,680 2,200,789 NON CURRENT ASSETS Taxes payable , , , ,647 Long-term assets: Provision for tax, civil and labor risks 18 50,915 50,859 75,731 73,829 Recoverable taxes 9 23,191 24, , ,062 Provision for acquisition of non-controlling interest 19 a. 145, , , ,600 Deferred income tax and social contribution 10.a) 51,567 56, , ,767 Others provisions 19 b. 54,004 56, , ,366 Escrow deposits , , , ,404 Total non current liabilities 2,462,605 2,218,386 3,243,461 2,753,231 Other noncurrent assets 12 44,442 19,057 62,425 37,165 Investments 13 1,519,667 1,522, SHAREHOLDERS' EQUITY Property, plant and equipment , ,696 1,601,665 1,439,704 Capital 20.a) 427, , , ,073 Intangible assets , , , ,286 Treasury shares 20.c) (38,287) (83,984) (38,287) (83,984) Total noncurrent assets 2,913,773 2,799,752 3,064,998 2,735,388 Capital reserves 141, , , ,442 Earnings reserves 412, , , ,612 Proposed additional dividend 20.b) - 496, ,393 Other comprehensive losses (31,493) (6,899) (31,493) (6,899) Total equity attributable to owners of the 911,216 1,145, ,216 1,145,637 Non controlling interests ,494 22,613 Total shareholders' equity 911,216 1,145, ,710 1,168,250 TOTAL ASSETS 5,083,231 5,038,768 6,772,587 6,248,321 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 5,083,231 5,038,768 6,772,587 6,248,321 The notes are an integral part of these financial statements. 3

6 (A free translation from Portuguese into English of Individual Interim Financial Information prepared in Brazilian currency in accordance with accounting practices adopted in Brazil, and of Interim Financial Information prepared in Brazilian currency in accordance with International Financial Reporting Standards (IFRS), issued by International Accounting Standards Board IASB and accounting practices adopted in Brazil) NATURA COSMÉTICOS S.A. STATEMENTS OF INCOME FOR THE PERIODS OF THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013 (In thousands of Brazilian reais - R$, except earnings per share) Nota explicativa Controladora ( BR GAAP) Consolidado (BR GAAP e IFRS) 07/01/2014 to 07/01/2013 to 01/01/2014 to 01/01/2013 to 07/01/2014 to 07/01/2013 to 01/01/2014 to 01/01/2013 to 09/30/ /30/ /30/ /30/ /30/ /30/ /30/ /30/2013 NET REVENUE 22 1,597,132 1,581,339 4,531,769 4,405,435 1,867,296 1,777,654 5,226,162 4,844,724 Cost of sales 23 (552,547) (577,650) (1,646,243) (1,607,548) (544,297) (520,200) (1,578,312) (1,427,755) GROSS PROFIT 1,044,585 1,003,689 2,885,526 2,797,887 1,322,999 1,257,454 3,647,850 3,416,969 OPERATING (EXPENSES) INCOME Selling, Marketing and Logistics expenses 23 (508,797) (409,215) (1,496,927) (1,321,503) (664,803) (620,010) (1,927,768) (1,740,466) Administrative, P&D, IT and Project Expenses 23 (191,497) (284,372) (561,092) (668,221) (284,280) (289,087) (818,539) (762,888) Equity in subsidiaries 13 3,348 24,512 5,622 63, Other operating (expenses) income, net 26 (2,756) (9,977) (460) (12,051) 1,517 (3,078) 17,099 14,417 INCOME FROM OPERATIONS BEFORE FINANCIAL INCOME (EXPENSES) 344, , , , , , , ,032 Financial income 25 (37,762) 32, , ,940 (4,691) 68, , ,548 Financial expenses 25 (16,885) (110,964) (321,301) (316,856) (58,966) (153,742) (409,875) (378,733) INCOME BEFORE INCOME TAX AND SOCIAL CONTRIBUTION 290, , , , , , , ,847 Income tax and social contribution 10.b) (75,607) (62,847) (196,192) (195,498) (98,211) (77,221) (233,706) (245,298) NET INCOME 214, , , , , , , ,549 ATTRIBUTABLE TO Owners of the 214, , , , , , , ,517 Noncontrolling (1,064) (633) , , , , , , , ,549 EARNINGS PER SHARE - R$ Basic Diluted The notes are an integral part of these financial statements.

7 (Convenience Translation into English from the Original Previously Issued in Portuguese) NATURA COSMÉTICOS S.A. STATEMENTS OF COMPREHENSIVE INCOME FOR THE PERIODS OF THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013 (In thousands of Brazilian reais - R$) Note ( BR GAAP) (BR GAAP and IFRS) 07/01/2014 to 07/01/2013 to 01/01/2014 to 01/01/2013 a 01/07/2014 a 01/07/2013 to 01/01/2014 to 01/01/2013 to 09/30/ /30/ /30/ /30/ /30/ /30/ /30/ /30/2013 NET INCOME 214, , , , , , , ,549 Other comprehensive losses: Gain (losses) from translation of financial statements of foreign subsidiaries 13 13,675 (3,200) (22,517) ,675 (3,200) (22,517) 592 Gain (losses) of cash flow hedge (not of taxes) 4.2 (2,077) - (2,077) - (2,077) - (2,077) - 226, , , , , , , ,141 ATTRIBUTABLE TO Owners of the 226, , , , , , , ,109 Noncontrolling (1,064) (633) , , , , , , , ,141 The notes are an integral part of these financial statements. 5

8 NATURA COSMÉTICOS S.A. STATEMENTS OF CHANGES IN SHAREHOLDERS` EQUITY (Convenience Translation into English from the Original Previously Issued in Portuguese) NATURA COSMÉTICOS S.A. STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE QUARTERS ENDED SEPTEMBER 30, 2014 AND 2013 (In thousands of Brazilian reais - R$, except for dividends per share) Capital reserves Tax Earning reserves Equity incentive reserve Additional Reserve for Proposed Other attributable to Non-controlling Total acquisition of Treasury Share Investments paid -in Tax non-controlling Earnings Retained additional comprehensive owners of the interest in subsidiaries Shareholders` Note Capital shares premium grants Capital Legal Incentives interest retention earnings dividend income (Losses) company equity equity BALANCES AS OF DECEMBER ,073 (66,105) 97,333 17,378 41,194 18,650 20, , ,343 (10,199) 1,306, ,306,097 Net income , , ,517 Other comprehensive income Total comprehensive income , , , Dividends and interest on capital approved at the Annual Shareholders' Meeting of April 12, (491,343) - (491,343) - (491,343) Antecipation of dividends and interest on interest capital (364,833) - - (364,833) - (364,833) Aquisition of treasury shares - (60,163) (60,163) - (60,163) Sale of treasury shares by exercise of options to purchase shares 20.d) - 38,780 (5,904) ,876-32,876 Changes in stock option plans of actions: Grant of stock options , ,138-9,138 Exercise of stock options (8,921) , Reserve for acquisition of non - controlling interest 19.a) (83,153) - (83,153) (83,153) Total equity attributable to owners of the ,691 17,691 BALANCES AS OF SEPTEMBER 30, ,073 (87,488) 91,429 17,378 41,411 18,650 20,957 (83,153) 277, ,684 - (9,607) 897,727 17, ,419 BALANCES AS OF DECEMBER 31, ,073 (83,984) 90,580 17,378 44,061 18,650 20,957 (141,640) 263, ,393 (6,899) 1,145,637 22,613 1,168,250 Net income , , ,217 Other comprehensive income (24,594) (24,594) - (24,594) Total comprehensive income ,637 - (24,594) 483, ,623 Dividends and interest on capital for the period year ended December 31, b) (496,393) - (496,393) - (496,393) Antecipation of dividends and interest on interest capital 20.b) (260,143) - - (260,143) - (260,143) Sale of treasury shares by exercise of options to purchase shares 20.d) - 45,697 (12,246) ,451-33,451 Changes in stock option plans of actions: Grant of stock options , ,621-5,621 Exercise of stock options (3,672) , Reserve for acquisition of non controlling interest 19.a) (3,476) - 3, Effects from the participation on non-controlling on the shareholders`equity subsidiaries ,301 2,301 BALANCES AS OF SEPTEMBER 30, ,073 (38,287) 78,334 17,378 46,010 18,650 20,957 (145,116) 266, ,970 - (31,493) 911,216 25, ,710 The notes are an integral part of these financial statements. 6

9 (Convenience Translation into English from the Original Previously Issued in Portuguese) NATURA COSMÉTICOS S.A. STATEMENTS OF CASH FLOWS FOR THE QUARTERS ENDED SEPTEMBER 30, 2014 AND 2013 (In thousands of Brazilian reais - R$) Note 09/ / / /2013 CASH FLOW FROM OPERATING ACTIVITIES Net income 507, , , ,517 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14 65,720 78, , ,237 Provision (reversal ) for losses on transactions with derivative contracts " swap " and "forward " 55,614 (63,829) 53,754 (39,297) Provision (reversal ) for tax, civil and labor contingencies 18 6,474 14,219 7,741 13,874 Monetary restatement of escrow deposits (18,953) (9,431) (24,064) (12,995) Income tax and social contribution 10.b) 196, , , ,298 Loss on sale and disposal of fixed and intangible assets 12,432 14,730 19,992 5,383 Equity income (5,624) (63,819) - - Interest and exchange variation on loans and financing 64, ,523 69, ,447 Exchange variation on other assets and liabilities (1,253) 1,176 (23,687) 874 Expenses related to the grant of options to purchase shares 3,526 5,186 5,621 9,138 Provision for discount on assignment of ICMS credits (3,519) Provision ( reversal) for doubtful accounts 7 6,514 6,390 13,375 8,873 Provision (reversal ) for losses on inventories 8 (7,683) (8,673) (17,357) 35,920 Provision of health care plan and carbon credits 19.b) 4, ,601 (568) Net income attributable to non-controlling Belated recognition of tax credit (3,822) (2,736) (13,454) (6,769) Provision for acquisition of non-controlling 19.a) 3,516-3,516 - Effects from the participation on non-controlling on the shareholders`equity subsidiaries 2,300 Hedge of cash flow (2,077) (2,077) 887, , ,092 1,184,445 (INCREASE) DECREASE IN ASSETS Trade receivables 6,342 (12,809) (9,354) (62,746) Inventories (91,634) (23,661) (257,121) (210,435) Recoverable taxes (25,868) (13,916) (64,597) (72,942) Other receivables (22,567) 24,219 (19,479) (17,719) Subtotal (133,727) (26,167) (350,551) (363,842) INCREASE (DECREASE) IN LIABILITIES Domestic and foreign suppliers (78,227) (42,955) 27,745 36,541 Payroll, profit sharing and related taxes, net 17,454 13,520 55,626 5,716 Taxes payable 15,410 (30,151) 15,941 (32,248) Other payables (28,300) (50,823) (19,371) 20,746 Payments of provision for tax, civil and labor risks (6,418) (4,344) (5,839) (4,646) Subtotal (80,081) (114,753) 74,102 26,109 CASH GENERATED BY OPERATING ACTIVITIES 673, , , ,712 OUTHERS CASH FLOWS BY OPERATING ACTIVITIES Payments of income tax and social contribution (225,640) (132,869) (246,054) (182,480) Payments of derivatives (84,405) 15,597 (89,847) 2,110 Payment of interest on borrowings and financing (76,383) (94,699) (109,032) (121,780) Withdrawal (payment) of escrow deposits (23,433) (32,587) (20,687) (35,963) NET CASH GENERATED BY OPERATING ACTIVITIES 263, , , ,599 CASH FLOW FROM INVESTING ACTIVITIES Acquisition of property, plant and equipment and intangible assets 14 (133,597) (139,192) (338,459) (368,424) Proceeds from sale of property, plant and equipment and intangible assets - 1,913-21,166 Short-term investments (2,462,407) (2,324,513) 3,472,357 (3,363,860) Redemption of short-term investments 2,623,133 3,036,497 (3,426,727) 3,659,433 Dividends received from subsidiaries 17,000 96, Capital increase in subsidiaries 13 (28,805) (171,152) - - Cash acquised in business combination - - (114,302) NET CASH GENERATED BY (USED IN) INVESTING ACTIVITIES 15, ,633 (292,829) (165,987) CASH FLOW FROM INVESTING ACTIVITIES Repayments of borrowings and financing - principal (459,253) (573,781) (565,386) (692,918) Proceeds from borrowings and financing 850, ,393 1,209, ,578 Sale of treasury shares by exercise of options to purchase shares 33,451 32,876 33,452 32,876 Purchase of treasury shares - (60,164) - (60,164) Payment of dividends and interest on capital of the prior year (756,536) (491,343) (756,536) (491,343) Payment of dividends and interest on capital of the current year - (364,833) - (364,833.00) NET CASH USED IN FINANCING ACTIVITIES (331,475) (1,023,852) (78,830) (848,804) Gains arising on translating foreign currency cash and cash equivalents INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (52,425) 12,407 (126,636) (505,372) Cash and cash equivalents at the beginning of the year/period 99,535 72,767 1,016,293 1,144,390 Cash and cash equivalents at the end of the year/period 47,110 85, , ,018 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (52,425) 12,407 (126,636) (505,372) ADDITIONAL STATEMENTS OF CASH FLOWS INFORMATION: Bank overdrafts - unused 117, , , ,900 Non cash itens Capitalization of financial leasing - 171,800 72, ,800 Reserve for acquisition of non controlling interest - 83,153-83,153 The notes are an integral part of these financial statements. 7

10 (Convenience Translation into English from the Original Previously Issued in Portuguese) NATURA COSMÉTICOS S.A. STATEMENTS OF VALUE ADDED FOR THE QUARTERS ENDED SEPTEMBER 30, 2014 AND 2013 (In thousands of Brazilian reais - R$) ( BR GAAP) (BR GAAP and IFRS) Note 09/ / / /2013 REVENUES 5,694,934 5,492,723 6,931,513 6,535,293 Sales of products and services 5,797,078 5,577,665 7,016,381 6,607,628 Allowance for doubtful accounts 7 (101,684) (72,891) (101,967) (86,752) Other operating (expenses) income, net 26 (460) (12,051) 17,099 14,417 INPUTS PURCHASED FROM THIRD PARTIES (3,447,259) (3,368,117) (4,280,689) (3,816,890) Cost of sales and services (1,965,475) (1,888,702) (2,290,244) (2,016,888) Materials, electricity, services and others (1,481,784) (1,479,415) (1,990,445) (1,800,002) GROSS VALUE ADDED 2,247,675 2,124,606 2,650,824 2,718,403 RETENTIONS (65,720) (78,504) (144,411) (142,237) Depreciation and amortization 14 (65,720) (78,504) (144,411) (142,237) VALUE ADDED GENERATED BY THE COMPANY 2,181,955 2,046,102 2,506,413 2,576,166 TRANSFERRED VALUE ADDED 198, , , ,548 Equity in subsidiaries 13 5,624 63, Financial income - includes inflation and exchange rate variations , , , ,548 TOTAL VALUE ADDED TO BE DISTRIBUTED 2,380,040 2,310,861 2,739,569 2,820,714 DISTRIBUTION OF VALUE ADDED: (2,380,040) 100% (2,310,861) (2,739,569) 100% (2,820,714) 100% Employees and social charges (324,237) -14% (288,812) (650,228) -27% (666,224) -28% Taxes and contributions (1,206,834) -51% (1,137,617) (1,132,003) -48% (1,191,357) -50% Financial expenses and rentals (341,332) -14% (335,915) (450,282) -19% (414,584) -17% Net income atrtributable to Noncontrolling - 0% % (32) 0% Retained earnings (507,637) -21% (548,517) (507,637) -21% (548,517) -23% Supplemental statement of value added information The amounts recorded under "Taxes and contributions" in september 2014 and 2013, the amounts of R$ 540,658 and R$ 555,061, respectively, refer to the Tax on Circulation of Goods and Services - Replacement Tax - ICMS - ST levied on the presumed profit margin defined by the State Finance Secretariats obtained from sales made by (the) Consultants (the) Natura for the end consumer. For the analysis of this tax impact on value added statements, such amounts shall be deducted from those recorded under "Sales of goods, products and services" and the heading itself "Taxes and contributions", since the revenue figures of sales do not include the estimated profit of (the) Consultants (the) Natura sale of the products in the amounts of R$ R$2,456,925 and R$ R$2,360,531, in september 2014 and 2013, respectively, considering the estimated profit margin 30%. The notes are an integral part of these financial statements. 8

11 (A free translation from Portuguese into English of Individual Financial Information prepared in Brazilian currency in accordance with accounting practices adopted in Brazil, and of Financial Information prepared in Brazilian currency in accordance with International Financial Reporting Standards (IFRS), issued by International Accounting Standards Board IASB and accounting practices adopted in Brazil) NATURA COSMÉTICOS S.A. NOTES TO THE INDIVIDUAL AND CONSOLIDATED INTERIM FINANCIAL INFORMATION FOR THE PERIOD OF THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) 1. GENERAL INFORMATION Natura Cosméticos S.A. ( ) is a publicly-traded company, registered in the special trading segment called Novo Mercado in the São Paulo Stock Exchange (BM&FBOVESPA), under the ticker NATU3, and headquartered in São Paulo, Alexandre Colares Avenue, 1188, Vila Jaguara, Postal Code , State of São Paulo. The s and its subsidiaries activities ( Natura Group or Group ) include the development, production, distribution and sale of cosmetics, fragrances, and hygiene products, substantially through direct sales by Natura Beauty Consultants. The also holds equity interests in other companies in Brazil and abroad. 2. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES 2.1. Statement of compliance and basis of preparation The s interim financial information, include in the Interim Financial Information- ITR as of September.30, 2014, includes: The consolidated interim financial information prepared in accordance with CPC 21 Interim Financial Information and IAS 34 Interim Financial Reporting, issued by the International Accounting Standards Board - IASB and presented in accordance with the standards established by the Brazilian Securities and Exchange Commission (CVM), applicable to the Interim Financial Information - ITR. The individual interim financial information prepared in accordance with CPC 21 Interim Financial Information and presented in accordance with the standards established by the Brazilian Securities and Exchange Commission (CVM), applicable to the Interim Financial Information ITR. The individual financial information includes investments in subsidiaries and joint ventures which are measured under the equity method, as required by the legislation prevailing in Brazil. Therefore, the individual financial information is not fully compliant with IFRS, which requires that these investments be stated at fair value or 9

12 acquisition cost. The interim financial information have been prepared on the historical cost basis except for certain financial instruments that are measured at fair values, as explained in the accounting policies below. Historical cost is generally based on the fair value of the consideration given in exchange for assets. Certain amounts included in the financial statements of December 31, 2013 and the interim financial statements of September 30, 2013, presented herein for comparative purposes have been reclassified for better comparability.. The significant accounting practices used in the preparation of these individual and consolidated interim financial information are disclosed in Note 2 to the s financial statements for the year ended December 31, 2013, published on February 12, 2014, except for application of the hedge accounting methodology in the quarter ended September 30, 2014, which is presented in item Hedge accounting: On December 9, 2013, Natura s Board of Directors approved the hedge accounting practice for derivative financial instruments taken out for hedge purposes: (i) of loans taken out in foreign currency, subject to variable interest rate, or (ii) of loans taken out in the functional currency (Brazilian Real), subject to fixed interest rate. Hedged risks are, respectively: (i) risk of variation in future cash flows resulting from changes in exchange rates, to which cash flow hedge accounting is applicable and (ii) interest rate risk, to which fair value hedge accounting is applicable. Cash flow hedge This consists in providing hedge against variation in cash flows attributable to a specific risk related to a known asset or liability or a highly probable forecast transaction and that may affect P&L. The effective portion of changes in fair value of derivatives that is designated and qualified as cash flow hedge is recognized in other comprehensive income and accumulated in Gain (loss) from cash flow hedge operations. In a cash flow hedge, the effective portion of gain or loss from the hedge instrument is recognized directly in equity in other comprehensive income, while the ineffective portion of hedge is immediately recognized in financial income (expenses). Fair value hedges Changes in fair value of derivatives designated and qualified as fair value hedge are recorded in P&L together with any changes in fair value of items subject matter of hedge attributable to the hedged risk. The changes in fair value of hedge instruments and in the item subject matter of hedge attributable to the hedge risk are recognized in income statement heading related to the hedged item. 10

13 In the three and nine-month periods ended September 30, 2014, the used derivative financial instruments, applying cash flow hedge accounting and, as disclosed in Note 4, for hedge against the risk of change in exchange rates related to loans in foreign currency and that: (i) are highly related to the changes in the market value of the hedged item, both at the beginning as well as during contract term (effectiveness between 80% and 125%); (ii) have documentation of the operation, hedged risk, risk management process and methodology used in assessing effectiveness; and (iii) are considered effective to reduce the risk related to the exposure to be hedged. They are accounted for according to CPC 38 Financial Instruments: Recognizing and Measurement, which allows application of the hedge accounting methodology, with effect from measurement of their fair value on equity and from their realization on P&L in the heading related to the hedged item. In the three and nine-month periods ended September 30, 2014, there were no losses related to the ineffective portion recognized in P&L for the period. Hedge accounting is discontinued when the cancels the hedge relationship, the hedge instrument matures or is sold, revoked or executed, or no longer qualifies to hedge accounting. Any gains or losses recognized in other comprehensive income and accumulated in equity as of a certain date remain in equity and are recognized when the forecast transaction is eventually recognized in P&L. When the forecast transaction is no longer expected, cumulative gains or losses deferred in equity are immediately recognized in P&L for the period. The checks, along the hedge term, the effectiveness of its derivative financial instruments, as well as changes in their fair value Consolidation a) Subsidiaries and joint-controlled entities Subsidiaries are all entities over which the has the power to govern the financial and operating policies so as to obtain benefits from their activities. In the applicable cases, the existence and the effect of potential voting rights, currently exercisable or convertible, are taken into consideration to determine if the company control another entity. Subsidiaries are fully consolidated from the date in which control is transferred to the and cease to be consolidated, when applicable, from the date that control ceases. b) Companies include in the consolidated financial statements Equity interest - % 09/ /2013 Direct interest: Indústria e Comércio de Cosméticos Natura Ltda Natura Biosphera Franqueadora Ltda

14 Equity interest - % 09/ /2013 Natura Cosméticos S.A. - Chile Natura Cosméticos C.A - Venezuela Natura Cosméticos S.A. - Peru Natura Cosméticos S.A. - Argentina Natura Inovação e Tecnologia de Produtos Ltda Natura Cosméticos y Servicios de Mexico, S.A. de C.V Natura Cosméticos de Mexico, S.A. de C.V Natura Distribuidora de Mexico, S.A. de C.V Natura Cosméticos Ltda. - Colombia Natura Cosméticos España S.L. - Spain Natura (Brazil) International B.V. - The Netherlands Natura Brazil PTY Ltd - Australia Sintonia Investment Fund Essencial Investment Fund Indirect interest: Via Indústria e Comércio de Cosméticos Natura Ltda.- Natura Logística e Serviços Ltda Via Natura Inovação e Tecnologia de Produtos Ltda.: Natura Innovation et Technologie de Produits SAS - France Via Natura (Brazil) International B.V. - The Netherlands: Natura Brasil Inc. - USA Delaware Natura Europa SAS France Via Brasil Inc.- EUA - Delaware Natura International Inc. EUA Nova York Via Natura Brazil Pty Ltda - Natura Cosmetics Australia Pty Ltd. Australia Via Natura Cosmetics Australia Pty Ltd.- Australia Emeis Holdings Pty Lty - Australia The consolidated financial statements have been prepared based on the financial statements as of the same date and consistent with the s accounting policies. Investments in subsidiaries have been eliminated proportionately to the investor s interests in the subsidiaries shareholders equity and net income or loss, intergroup balances and transactions and unrealized profits, net of taxes. Third party participation in shareholders' equity and net income of subsidiaries is 12

15 reported as a component of consolidated equity and consolidated statement of income, respectively, under the caption "Noncontrolling interest". The operations of the direct and indirect subsidiaries are as follows: Indústria e Comércio de Cosméticos Natura Ltda.: engaged principally in the production and sale of Natura products to Natura Cosméticos S.A. - Brazil, Natura Cosméticos S.A. - Chile, Natura Cosméticos S.A. - Peru, Natura Cosméticos S.A. - Argentina, Natura Cosméticos Ltda. - Colombia, Natura Europa SAS - France, and Natura Cosméticos de Mexico S.A. de C.V.. Natura Biosphera Franqueadora Ltda: engaged in trading, including by electronic means, of products from Natura brand. Natura Cosméticos S.A. - Chile, Natura Cosméticos S.A. - Peru, Natura Cosméticos S.A. - Argentina, Natura Cosméticos Ltda. - Colombia and Natura Distribuidora de Mexico, S.A. de C.V.: their activities are an extension of the activities conducted by the parent company Natura Cosméticos S.A. - Brazil. Natura Cosméticos C.A. Venezuela: The company is in the process of closing. Natura Inovação e Tecnologia de Produtos Ltda.: it is engaged in product and technology development and market research. It is the only owner of Natura Innovation et Technologie de Products SAS - France, a research and technology satellite center opened in 2007 in Paris. Natura Cosméticos y Servicios de Mexico, S.A. de C.V.: engaged in the provision of administrative and logistics services to companies Natura Cosméticos de Mexico, S.A. de C.V. e Natura Distribuidora de Mexico, S.A. de C.V.. Natura Cosméticos de Mexico, S.A. de C.V.: engaged in the import and sale of cosmetics, fragrances in general, and hygiene products to Natura Distribuidora de Mexico, S.A. de C.V.. Natura Cosméticos España S.L.: company in start-up stage and its activities will be an extension of the activities carried out by its parent company Natura Cosméticos S.A. - Brazil. Natura (Brazil) International B.V - Netherlands.: holding controller of the Natura Europe SAS France, Natura Brazil Inc. and Natura International Inc. Natura Logística e Serviços Ltda.: engaged in the provision of administrative and logistics services to Natura Group companies based in Brazil. Natura Innovation et Technologie de Produits SAS - France: engaged mainly in research activities developed for in vitro testing as an alternative to animals testing, for to the safety and efficiency of test active compounds, skincare products and new packaging materials. Natura Brazil Inc.: Holding controller of Natura International Inc. Natura International Inc: Holding controller of Natura Europe SAS. 13

16 Natura Europa SAS - France: activities are concentrated in the purchase, sale, import, export and distribution of cosmetics, fragrances, and toiletries. On October 31, 2012, Natura Europa SAS has incorporated all the shares of Natura Brazil SAS. Natura Brazil Pty Ltd Holding controller of Natura Cosmetics Australia Pty Ltd operations. Natura Cosmetics Australia Pty Ltd Holding controller of Emeis Holdings Pty Ltd. Emeis Holdings Pty Ltda: Activities focused on developing manufacturing and marketing of premium cosmetics, which operates under the brand of Aesop. Fundo de Investimento Essencial: refer to fixed income funds of private credit New standards, amendments and interpretations to existing standards a) Effective for periods beginning on or after January 1, 2014 Investment Entities (Revisions of IFRS 10 IFRS 12 and IAS 27):Provide an exception to the consolidation requirements for entities that meet the definition of investment entity in accordance with IFRS 10. This exception requires entities to record the investment of investments in subsidiaries at fair value in earnings. The does not expect these reviews to be relevant to its interim financial information, since none of its entities qualify as investment entity. IAS 32 Offsetting Financial Assets and Financial Liabilities - Revised IAS 32:These revisions clarify the meaning of currently has a legally enforceable right off the recognized amounts and the criteria that would make the settlement mechanisms not simultaneous clearing houses to qualify for compensation. The does not expect these reviews to be relevant in its interim financial information. IFRIC 21 Tributes:IFRIC 21 clarifies when an entity should recognize a liability for a tax when the event that triggers payment occurs. For a tax that requires your payment originates due to the achievement of some metric, the interpretation indicates that no liability shall be recognized until the metric is achieved. The does not expect IFRIC 21 to have a material impact on its interim financial information. Replacement of IAS 39 Derivatives and Hedge Accounting Continued - Revised IAS 39: This amendment introduces a relief regarding discontinuance of hedge accounting where a derivative, which is designated as hedging instrument, is renovated if specific conditions are met. The renovated certain of its derivative instruments during the period of application of the review and all the new designations meet the criteria necessary for hedge accounting. 14

17 b) Standards, interpretations and revised standards not yet effective and which were not early adopted by the : New pronouncements IFRS 9 Financial Instruments:IFRS 9 as issued reflects the first phase of the work of the IASB to replace IAS 39 and applies to classification and measurement of financial assets and liabilities as defined in IAS 39. The announcement was initially applied to fiscal years beginning on or after January 1, 2013, but the pronouncement Amendments to IFRS 9 Mandatory Effective Date of IFRS 9 and Transition Disclosures, issued in December 2011, has postponed its term to January 1,2015. In subsequent phases, the IASB will address issues such as accounting hedges and provision for losses of financial assets. The adoption of the first phase of IFRS 9 will have an impact on the classification and valuation of the 's financial assets, but will not impact on the classification and measurement of financial liabilities. The will quantify the effect in conjunction with the effects of the remaining phases of the IASB's project, once the final rule is issued consolidated. IFRS 15 Revenue from contracts with customers: It establishes a template of five stages applicable to revenue from a contract with a customer, irrespective of the type of revenue transaction or industry. It applies to all revenue contracts and provides a template for the recognition and measurement of gains or losses on the disposal of certain non-financial assets that are not related to the entity s ordinary activities (for instance, disposals of properties, premises and equipment or intangible asset items). Extensive disclosures are also required by this new standard. This pronouncement shall be applied to annual periods beginning on or after January 1, 2017, of which early adoption is allowed. Amendments to existing pronouncements IFRS 5 Noncurrent assets held for sale and discontinued operations Changes in the disposal method: It clarifies that the change in the asset disposal method, whether through sale or distribution to owners, should not be considered as a new disposal plan but a continuation of the original plan. Thus, there is no interruption of application of IFRS 15 requirements. The amendment also clarifies that the change in the disposal method does not change the date of classification. This amendment shall be applied prospectively for changes in the disposal method that take place in annual periods beginning on or after January 1, 2016, of which early adoption is allowed. IFRS 7 Financial instruments (Disclosure) Servicing contracts: It clarifies that a service agreement that includes administration fee may characterize continuing involvement in a financial asset. An entity must evaluate the nature of the fee and the provision about continuing involvement in paragraphs IFRS 7.B30 and IFRS 7.42C, in order to evaluate whether the disclosures are necessary. This amendment shall be applied to annual periods beginning on or after January 1, 2016, of which early adoption is allowed. 15

18 IFRS 7 Financial instruments (Disclosure) Applicability of offset disclosures to the condensed financial statements: The amendment suppresses the expression and interim periods within these annual periods of paragraph 44R, clarifying that these disclosure requirements of IFRS 7 are not required in condensed financial statements. However, IAS 34 requires that an entity disclose an explanation of the events and transactions that are significant to understand the changes in the financial position and the entity s performance since the end of the last annual period. Therefore, if IFRS 7 disclosures represent a significant updating for information included in the most recent annual report, it is expected that it be included in the condensed financial statements. This amendment shall be applied retrospectively to annual periods beginning on or after January 1, 2016, of which early adoption is allowed. IAS 19 Employee benefits Discount rate, issue in the regional market: The amendment clarifies that high quality corporate securities in the market must be assessed based on the currency in which the obligation is denominated, and not on the country of the obligation. When there is no market of high quality corporate securities in a given currency, public debt security rates must be used. This amendment shall be applied to annual periods beginning on or after January 1, 2016, of which early adoption is allowed. IAS 34 Interim financial statements Disclosure of information in other parts of the interim financial statements : It establishes that necessary interim disclosures must be included in the interim financial statements or incorporated by reference in the interim financial statements and where they are included in the interim information (for instance, in management s comments or the risk report). This amendment shall be applied retrospectively to annual periods beginning on or after January 1, 2016, of which early adoption is allowed. Considering the actual operations of the and its subsidiaries, management das not anticipate that these new standards and amendments will have any material effect in the interim financial information when initially adopted. There are no other standards and interpretations issued but not yet adopted that, in management's opinion, have a significant impact on the income or equity issued by the. 3. CRITICAL ACCOUNTANTING ESTIMATES AND ASSUMPTIONS The preparation of financial statements requires the use of certain critical accounting estimates and the exercise of judgment by the s management in the process of application of accounting policies. The accounting estimates and underlying assumptions are reviewed on an ongoing basis and are based on historical experience and other factors that are considered to be relevant in the circumstances. Actual results may differ from those estimates. The effects resulting from the revision of accounting estimates are recognized in the revision period. 16

19 These significant assumptions and accounting estimates are follows: a) Income tax, social contribution, and other taxes The recognizes deferred tax assets and liabilities based on differences between the carrying amount stated in the financial statements and the tax base assets and liabilities using statutory tax rates. The reviews regularly deferred tax assets in terms of possible recovery, considering the history of earnings generated and projected future taxable income, based on a technical feasibility study. b) Provision for tax, civil, and labor contingencies The is a party to several lawsuits and administrative proceedings, as described in note 18. Provisions are recognized for all contingent liabilities arising from lawsuits that represent probable losses and can be reliably estimated. The probability assessment includes assessing available evidences, the hierarchy of laws, available previous decisions, most recent court decisions and their relevance within the legal system, and the assessment of the outside legal counsel. Management believes that these provisions for tax, civil and labor contingencies are fairly presented in the financial statements. c) Retirees healthcare plan The current amount of the retirees healthcare plan is contingent to a series of factors determined based on actuarial calculations that update a series of assumptions, for example, the discount and other rates, which are disclosed in note 19.b). d) Stock option plan The stock option plan is measured at fair value on grant date and is expensed during the vesting period as a balancing item to Additional paid-in capital, in shareholders equity. At the end of the reporting period, the s management reviews its estimates on the number of options vesting based on the conditions fulfilled and, when applicable, recognizes in the income statement the effect arising from the revision of the initial estimates as a balancing item to shareholders equity. The details are disclosed in note e) Fair Value measurement of contingent consideration Contingent, from a business combination is measured at fair value at the acquisition date as part of the business combination. If the contingent consideration is classified a financial liability shall be subsequently remeasured to fair value at the balance sheet date. The fair value is based on discounted cash flow. The main assumptions consider the probability of achieving each objective and the discount factor. f) Provision for acquisition of non-controlling interest Reflects a Liability recorded as obligation signed the purchase and sale of noncontrolling interest arising from a business combination and it is measured at fair value at 17

20 the acquisition date, with subsequent adjustment by the remeasurement of the obligation should be recognized in the income statement. 4 FINANCIAL RISK MANAGEMENT 4.1 General considerations and policies Risks and the financial instruments are managed through the definition of policies and strategies and implementation of control systems, defined by the s Treasury Committee and approved by the Board of Directors. The compliance of the treasury area s positions in financial instruments, including derivatives, in relation to these policies, is presented and assessed on a monthly basis by the Treasury Committee and subsequently submitted to the analysis of the Audit Committee, the Executive Committee and the Board of Directors. Risk management is performed by the s general treasury function, which is also responsible for approving the short-term investments and loan transactions conducted by the Group s subsidiaries Financial risk factors The Group s activities expose them to several financial risks: market risk (including currency and interest risks), credit risk and liquidity risk. The s overall risk management program is focused on the unpredictability of financial markets and seeks to minimize potential adverse effects on the financial performance, using derivatives to protect certain risk exposures. a) Market risks The Group is exposed to market risks arising from their business activities. These risks mainly comprise possible changes in exchange and interest rates. i) Foreign exchange risk The Group is exposed to the foreign exchange risk arising from financial instruments denominated in currencies different from their functional currencies. To reduce this exposure, the Group implanted a policy to hedge against the foreign exchange risk that establishes exposure limits linked to this risk (Foreign Exchange Hedging Policy). The treasury area s procedures defined based on the current policy include monthly projection and assessment of the s and its subsidiaries foreign exchange exposure, on which management s decision-making is based. Exchange rate Protection Policy considers the values of foreign currency receivables and Payables balances of commitments already made and recorded in the financial statements from the operations of the and its 18

21 subsidiaries, as well as future cash flows, with an average of nine months, still not recorded in the balance sheet. As of September 30, 2014 and of December 31, 2013, the Group is basically exposed to risks of fluctuations in the U.S. dollar. The subsidiary in Argentina is exposed to Real. To hedge against foreign exchange exposures, the Group contracts derivative (swaps) and non-deliverable forward (NDF) transactions. The Foreign Exchange Hedging Policy establishes that the derivatives contracted by the Group should limit loss due to exchange rate depreciation related to the net income estimated for the current year considering the expected depreciation of the Brazilian real against the U.S. dollar. This limit sets the cap on the maximum foreign exchange exposure that the Group can undertake in relation to the U.S. dollar. As of September 30, 2014, the s and the consolidated balance sheets include accounts denominated in foreign currency which, in the aggregate, represent net liabilities of R$ and R$ , respectively ( R$ e R$ , as of December 31, 2013, respectively). These accounts are substantially represented by borrowings and financing which, as of September 30, 2014 and December 31, 2013, are hedged by swap arrangements. Derivatives to hedge foreign exchange risk The classifies derivatives into financial and operating. Financial derivatives include swaps or forwards contracted to hedge against the foreign exchange risk associated with foreign-currency-denominated borrowings and financing. Operating derivatives (usually forwards) include derivatives contracted to hedge against the foreign exchange risk on the business s operating cash flows. As of September 30, 2014, outstanding swap and forward contracts, with maturities between October 2014 and October 2020, were entered into the counterparties represented by the banks of America (36%), HSBC (22%), Itaú (21%), Bradesco (8%), Citibank (5%) e Banco de Tokyo (8%) broken down as follows: Financial swaps Notional Fair value Gain (Loss) for the period (adjustment Mtm) Type of transaction 09/ / / / / /2013 Swap contracts (1) Asset position: Long position U.S. dollar 1,651,951 1,897,430 1,893,831 2,115, , ,732 19