Edited Transcript of NTCO3.SA earnings conference call or presentation 8-May-20 1:00pm GMT

In the face of the pandemic, Natura &Co took quick actions to adapt with 3 key priorities: care for our people, care for our communities and societies in which we operate and care for our company. First and foremost, care for our people. Even before lockdown measures were implemented, Natura &Co took steps to protect the health and safety of our associates, consultants and representatives and suppliers. We impose strict social distancing measures, gave job security assurance to employees, provided credit flexibility to our consultants and representatives and offer such service as telemedicines to our network as well.

Second, to care for our communities and societies in which we operate. Because we sell essential products as soap and hand sanitizers, Natura &Co quickly retool its operations across its brands to step up their production by 30%. Sales of hand sanitizer increased by over 500%, both at The Body Shop and Aesop. And Natura used some underutilized capacity at Avon plants to produce [60] million units of alcogel and 1 million liter of [alco] with partners, mainly directly to donation.

All of our businesses made significant donations to hospital, health workers and NGOs. And I will also like to highlight that the group also launched a very important campaign focusing on the increase of domestic violence associated with social distance, and the Avon Foundation donated over $1 million to organizations in 50 countries. These actions are a clear demonstration of Natura &Co purpose-driven approach. I would like at this moment to express my heartfelt gratitude to our teams for their exceptional commitment that they have shown during this very challenging times, allowing us to meet essential needs across our network and across all the communities that we operate.

Finally, care for our company. The group also implemented measures to protect cash and liquidity, including reducing operating expenses, limiting capital expenditure to essential projects, implementing a hiring freeze and reducing executive pay on a voluntary basis. We have a solid cash position of BRL 4.6 billion and no immediate debt maturities. We have also strengthened our balance sheet and enhanced our liquidity through an infusion of fresh equity of between BRL 1 billion to BRL 2 billion led by our controlling shareholders into an additional financing line of BRL 750 million without impacting our net debt. This give us additional financial flexibility to navigate the current challenging environment.

We have also continued to deleverage with the net debt-to-EBITDA ratio at Natura Cosméticos improving to 2.70x at the end of Q1 versus 2.95x 1 year earlier. From a business standpoint, this crisis has shown Natura &Co remarkable resilience in the strength of its multichannel model. Across our brands and businesses, digital sales helped offset the impact of store closures at The Body Shop and Aesop who have strengthened social selling as their response to social distancing at Natura and Avon.

We launched, for instance, a digital and interactive essential item sales catalog that can be shared over instant messaging tools and social media. And our consultants and representatives showed remarkable adaptability.

At Avon International, representatives increased adoption of digital assets from a very low single digit in 2019 to over 37% in recent weeks, very exciting.

E-commerce sales have grown exponentially in the past few weeks as a reaction to lockdown and are up almost 250% at a group level with growth of 150% of Natura and Avon combined, over 300% at The Body Shop and 500%, yes, 500% at Aesop. This strong growth in digital and online sales across our brands and the resilience of our direct sales channel in Natura allow us to post almost 2% growth in consolidated revenue in reais, while adjusted EBITDA continued to reflect one-off costs related to the acquisition of Avon and the impact of the COVID-19 pandemic. The integration of Avon is making great strides, and the company continues to see progress in its Open Up strategy to stabilize the core business and to rapidly set up digital adoption in the face of the current situation.

The rapid progress in integration led us to raise our total synergy target, including our top line synergies in Latin America to $300 million to $400 million over the next 4 years. We will have the opportunity to detail this later today at our Investor Day, but for now, let me now hand over to Filippo to go into our financials in greater detail.

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José Antonio de Almeida Filippo, Natura &Co Holding S.A. – Chief Financial & IR Officer [4]

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

This includes nonrecurring costs associated with the Avon acquisition, transformation costs at both Natura &Co Latam and Avon International this quarter and at The Body Shop in the first quarter of last year, purchase price allocation as a result of the business combination with Avon, a reversal of a provision for ICMS tax in Q1 2019, and a gain on the sale of a label manufacturing facility in China in 2019.

That said, let’s now look at our Q1 performance. I will start this overview of our P&L with our consolidated net revenue on Slide 6. Our consolidated net sales grew by 1.9% to BRL 7.5 billion in Q1. In constant currency, net revenue was down 6.2%, excluding currency effects in the quarter. The solid increase in sales was driven by double-digit growth in reais at Aesop, a solid performance at Natura and The Body Shop despite the impact of COVID-19 in the second half of March, and a strong acceleration in digital social selling and online sales across all brands with e-commerce sales up almost 250% of at group level in the past few weeks.

On Slide 7, we turn to consolidated adjusted EBITDA, which stood at BRL 71.5 million in Q1, excluding pre-effects: first, nonrecurring Avon-related acquisition costs of BRL 298.3 million; second, a noncash, nonrecurring purchase price allocation effect of BRL 102.9 million, resulting from the fair market value assessment of Avon, which reflects a step-up in inventory value in the cost of goods sold; and finally, the transformation costs at Natura &Co Latam and Avon International for BRL 25.1 million. Adjusted EBITDA margin in the quarter was 7.6%, down 220 basis points. On a reported basis, EBITDA was BRL 145.3 million.

Turning to Slide 8. We look at Natura &Co’s underlying net income in Q1, which excludes nonrecurring and/or noncash effects and which stood at a negative BRL 284.8 million. This reflects 2 main effects: first, BRL 510.9 million in expense associated with the Avon acquisition; and second, BRL 25.1 million in transformation costs at Natura &Co Latam and Avon International. We recorded a net loss of BRL 820.8 million in the quarter, reflecting COVID-19 impacts on EBITDA, a higher effective tax rate due to nondeductible acquisition-related expenses and PPA effects at The Body Shop.

On Slide 9, we look at our balance sheet items and capital structure. We have a strong cash position with BRL 4.6 billion in cash at the end of the quarter. Cash flow in the quarter was an outflow of about BRL 1.7 billion, as expected, reflecting our historical seasonality and further impacted by COVID-19 effects. It includes Avon and is mainly related to nonrecurring acquisition costs of BRL 501 million, financial expenses, COVID-19 impact on sales and foreign exchange effects due to the depreciation of the Brazilian real in working capital at Avon International, The Body Shop and Aesop. Working capital was also impacted by extended payment terms offered to consultants and representatives at Natura and Avon. On an estimated and nonaudit basis, pro forma cash flow in Q1 2019 would have been an outflow of BRL 765 million.

As Roberto mentioned in his opening remarks, in the current environment, we have taken 2 additional steps to further strengthen our capital structure and our liquidity. First, we are raising fresh equity of BRL 1 billion to BRL 2 billion, and we have already secured BRL 1 billion through the commitment from the controlling shareholders and a select group of investors. Subscription rights will be available to all current shareholders based on their ownership position as of close of trading on May 12 at a price of BRL 32 per share. This will result in an improved capital structure and reduced leverage. Second, to improve liquidity, we have raised new 1-year financing of BRL 750 million with no impact in net debt.

On Slide 10, we show that we continue deleveraging in Q1 with Natura Cosméticos net debt-to-EBITDA ratio dropped to 2.7x compared to 2.95x in the same quarter last year. At Natura &Co Holding, consolidated net debt to EBITDA stood at 4.91x and at 3.84x adjusted for nonrecurring transaction costs and PPA impact on EBITDA. Please note that indebtedness ratio at the holding company level will not be considered for financial covenant purpose in June 2020.

On Slide 11, we provide some color on our consolidated indebtedness. As shown in the first pie chart, 66% of our debt is in bonds, of which 45% in Avon bonds and 21% in Natura bonds. Another 22% is in debentures and 6% in promissory notes. By currency, as shown on the second pie chart, 52% is in reais and 45% in dollars. The average maturity is 3.9 years. We have no major maturities until September 2021. The main maturities are in 2022 and 2023, and there are no further maturities between 2024 and 2043.

After looking at our consolidated numbers, let me now comment on the individual performance of our 4 businesses, including Avon for the first time, starting on Page 13 with the key highlights of Natura &Co Latam. As you know, that is the new business unit and reporting segment we set up that encompasses all 4 of our brands in the region, Avon, Natura, The Body Shop and Aesop. To allow comparison, we adjusted 2019 results pro forma. The brands combined are the biggest player in the Latin America CFT market with #1 position in such markets as Brazil, Argentina and Colombia.

Total net sales were up 2.4% to BRL 4.1 billion in Q1 driven by strong growth at Natura, both in Brazil and Latin America, despite challenging market conditions. In constant currency, sales were down 1.3%.

On Slide 14, we look at Natura brand. Sales at Natura brand in Brazil rose 9.8% in Q1, which represents a very strong performance in a challenging environment. This reflects record revenue in January and February with a strong price/mix improvement. The trend was interrupted in March by the COVID-19 pandemic, but we were able to keep our operations running to produce essential products such as suit and hand sanitizers. And a big increase in digital sales contributed to the strong performance.

The Natura brand’s solid performance reflects the success of our relationship selling [module], which is leading to higher productivity in Brazil. Consultants’ productivity increased by the 14th consecutive quarter, up to a strong 7.6%. The average number of consultants were up 1.6% versus the same quarter last year.

Digital played a critical role in the current context, and the adoption of our digital tools by consultants doubled in the weeks following the COVID-19 impact as well as the number of orders from our consultant digital stores. As a response to social distancing, we implemented a digital and interactive brochure focused on essential items that can be shared over instant messaging and social media in addition to our complete e-catalog. Over 95% of our consultants use our digital platforms, and approximately 700,000 consultants have virtual stores in Rede Natura, a 40% increase versus last year.

In the last few weeks, since lockdown measures began, Rede Natura sales grew over 200%. In the retail channels, own store performance remained strong until lockdown in mid-March with increased traffic and higher conversion resulting in a strong double-digit growth in net revenue. Our 400 franchise stores accelerated sell-out sales in the quarter until lockdown.

At the Natura brand in Hispanic Latin America, Q1 net sales grew 25.8% in reais and 19.7% at constant currency. We saw very strong growth in volumes, up 18.2% with strong sales momentum in Argentina, Mexico and Chile. We also felt the impact of COVID-19-related lockdowns in Argentina, Peru and Colombia in the second part of March. The number of consultants grew by a strong 12.1% versus Q1 2019 to almost 714 million, and strong adoption of the mobile platform has contributed to significant growth in consultant productivity.

Turning to Avon on Slide 15. The Avon brand’s revenue in Brazil declined 4.3% in Q1 with an encouraging price/mix increase of 9.8%. The quarter saw important launches in skin care and in color cosmetics, both significantly outperforming estimates. Sales via digital brochure have increased 5x since January 1, and e-commerce sales grew 85% at Avon Brazil and Hispanic Latam combined.

In Hispanic Latam, the Avon brand’s revenue declined 8.9% in Q1 in reais and 16.8% at constant currency due to a 13.6% reduction in average number of representatives and lower units sold. The second half of March was significantly impacted by strict lockdowns due to COVID-19 in Central America, Argentina, Peru, Colombia and Ecuador. The period also saw important launches in fragrances that are outperforming expectations.

I will conclude in Natura &Co Latam with its adjusted EBITDA on Slide 16, which rose in double digit by 10.5% to BRL 287.5 million in Q1. Adjusted EBITDA margin was up 50 basis points to 6.9%. Adjusted EBITDA excludes transformation costs of BRL 10.5 million and a nonrecurring purchase price allocation impact on cost of goods sold for BRL 42.3 million. On a reported basis, EBITDA was down 0.5% at BRL 234.7 million. Excluding PPA effects, selling, marketing and logistics expenses increased by 300 basis points to 43.8% of net revenue, mainly driven by commercial measures to mitigate COVID-19 impacts such as extended payment terms for consultants, more flexible credit conditions and higher online sales commissions. Also, excluding PPA effect, administrative R&D, IT and projects expenses reached 13.5% of net revenue, down 80 basis points in the quarter on the back of cost control initiatives adopted by both Natura and Avon to offset COVID-19 impacts, which included freezes in hiring, pay rises, promotion and travel as well as a reduction in executive remuneration and discretionary spending.

Let’s now move to Avon International on Slide 18. This is the first quarter in which Avon is included in our scope, and Avon International comprises Avon’s activity in 50 markets in Europe, Asia, Africa and Middle East with 3.7 million representatives. In the first 3 months since completing the acquisition of Avon, there has been a continued focus on stabilizing the core business, which will continue throughout 2020. Q1 saw continuing signs of recovery, building on the turnaround initiated in the second half of 2018 with the launch of the Open Up Avon plan, including another quarter of stabilization in the representative count compared to the previous quarter and increased digital adoption compared to Q1 2019. Net revenue declined 2.4% in Q1 and 15% at constant currency to BRL 2.1 billion mainly impacted by a 6.3% reduction in average number of representatives partially offset by improved price/mix of 2.6% across most markets. Units sold declined 17.4%. In the quarter, representatives were equipped by a new digital capabilities, including new order management features in the instant messaging, digital brochure and direct-to-consumer shipping available in 25 markets. Sales via digital brochure have increased nearly fivefold since January 1 (inaudible).

As shown in Slide 19, Avon International’s adjusted EBITDA was BRL 102.9 million with adjusted EBITDA margin of 4.8%. This was impacted by the previously described revenue decrease and lower gross margin, which was partially offset by a positive price/mix effect. Selling, marketing and logistics expenses were up as a result of commercial measures to mitigate COVID-19’s impact. And G&A expenses were also up but contained thanks to spending cuts.

We now move on to The Body Shop on Slide 21. Net revenue in reais increased by 2.6% in Q1 to a little over BRL 893 million and was down by 10.5% at constant currency. This reflects the closure of 21 owned stores in the last 12 months as part of the store footprint optimization plan as well as the impact of store closures due to the COVID-19 impact. Retail in January reported positive like-for-like sales growth, but this was interrupted by — COVID-19 started to spread first in APAC, then in European markets and in North America in March, leaving about only 25% of company stores open in some markets. In this context, digital sales and direct selling stood out. Since closure of most of the stores due to the lockdown restrictions, e-commerce grew 300%, recovering 40% of lost retail sales, and we saw 61% growth in at-home direct sales in the quarter, largely driven by the U.K. The Body Shop benefited from having about 35% of its sales comprised of essential items. Two new concept stores were launched in the period in Toronto and in Hong Kong. The quarter ended with 977 owned stores and 1,728 franchise stores for a total of 2,705.

On Slide 22, we show that The Body Shop’s EBITDA in the quarter stood at BRL 133.6 million with margin of 15% down 460 basis points on an adjusted basis. The margin decline was due to revenue reduction from store closures and lockdown measures and the phasing of cost measures taken in Q1 that will benefit coming quarters. SG&A expenses increased in reais due to the foreign exchange impact. At constant currency, these expenses decreased by 2.5%. It is worth highlighting that The Body Shops no longer incurred transformation costs as of this quarter.

On Slide 24, we look at Aesop whose success story continued with strong double-digit growth in both sales and profitability in Q1. Net revenue grew in reais by 26.6% in Q1 and by 10.5% at constant currency to BRL 340.9 million despite physical store closures reaching about 90% of market by the end of Q1. Retail revenue still grew in the quarter although at a lower rate, supported by key markets in Asia, while online sales were the highlight. Since closures of most of the stores due to lockdown restrictions, e-commerce grew over 500% in recent weeks over the same period of last year, recovering 50% of lost retail sales.

Market highlights included the Americas, Asia and Europe, which posted double-digit sales growth, offsetting sales drop in Australia and New Zealand due to COVID-19 lockdowns. Signature stores reached 247 in the quarter, up 17 since Q1 2019 and flat versus Q4 2019. There were 91 department stores in Q1 2020, stable versus Q1 2019 and down 8 stores since Q4 2019. Profitability also grew in strong double-digit in reais with EBITDA up 28.1% to BRL 77.8 million with EBITDA margin of 22.8%, up 30 basis points, supported by sales growth and cost reduction initiatives, including discretionary spending cuts, hiring and travel freeze and furloughing of staff.

Let me now hand back to Roberto.

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Roberto de Oliveira Marques, Natura &Co Holding S.A. – Executive Chairman of the Board & Group CEO [5]

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Thank you, Filippo. Let me now conclude on Slide 26 with key takeaways. Let me mention 3. First of all, Natura &Co multichannel model has shown its resilience in the matter of the COVID-19 crisis with strong growth in digital social selling and e-commerce. Second, with the addition of Avon, Natura &Co is the leading player in the Latin American CFT market. We are very pleased with the integration and have raised our target synergies to be achieved of 4 years by $100 million, now between $300 million to $400 million. And third, we have strengthened our financial structure to be able to capture future growth opportunities.

The environment continues to be challenging. In this changing environment, social distance and lockdown measures will continue to have a significant impact on the CFT market and in our business, especially second quarter. But markets in which measures were eased have shown some rebounds already, especially in Asia, we’re starting to see and some countries in Europe.

We have decided to suspend the guidance that we had provided before for Natura Cosméticos for medium-term compound annual growth rates, for revenues and EBITDA, both as a result of the changed scope of the group following the Avon acquisition but also due to the current uncertainty. We will provide new group guidance in due course as visibility improves.

Thank you very much for your attention. We are now going to open our Q&A session, and Filippo and JP and myself will be happy to take your questions. So the floor now is yours.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And from Bank of America, we have Bob Ford online.

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Robert Erick Ford Aguilar, BofA Merrill Lynch, Research Division – MD in Equity Research [2]

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I hope you and your families are all very well. Roberto, how are you thinking about trough earnings and cash consumption in the pandemic? And with much of The Body Shop selling space closed, can you give us an update on the outlook for store-based expenses or the ability perhaps to deploy salespeople with e-commerce tools?

And then also at Avon, can you talk a little bit about the decline in consultant numbers? Is that similar to what was done at Natura? Or is this something else? And should we expect faster adjustments to the network in terms of the structure, the compensation packages and processes given your early successes and the added pressure from the pandemic?

And then lastly, your e-commerce and digitalization benchmarks were impressive. Which e-commerce tools have proven to be the most effective? And what are you doing to accelerate the availability and adoption of those?

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Roberto de Oliveira Marques, Natura &Co Holding S.A. – Executive Chairman of the Board & Group CEO [3]

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Bob, Roberto here, and hope you’re doing well and your family as well. So thank you for the question. So on the retail side, we got to a certain point on the peak of the crisis that we had almost 90% of our stores between Aesop and The Body Shop closed. This number now, it’s coming down because we are seeing a reopening, especially in Asia, in some countries in Europe starting to come back up. So — but during this period, I think that the key learning was the amazing response on our e-commerce business, both at The Body Shop and Aesop. It forced us to be very creative and very agile. The Body Shop was quickly responding to create a new distribution center to be able to meet the demand on a different fulfillment with smaller quantities shipping directly to customers versus selling to stores.

Aesop, for instance, use over 8 of their stores to become fulfillment centers where they were able to then divide the orders and ship directly to customers. The good news is that we are seeing a surge on e-commerce on both business, Body Shop grow, in the last couple of weeks, over 300%, and Aesop over 500%, which is pretty impressive.

As we look forward, we are starting to modeling with the business, and we’re going to talk more a little bit in more detail this afternoon that we don’t think we’re ever going to go back to — prior to the crisis. So we are now doubling down on the e-commerce. Of course, retail will be important, but we are really now reassessing what’s the right mix between physical and e-commerce with the surge that we are seeing on e-commerce.

Your second question on Avon decline on representatives. I would say that at this point, model was more directly linked to the lockdown that we’ve seen in many markets. But I think it’s fair to say that as the same thing that Natura has done, one of the key strategies that JP is putting in place and Angela is changing the earnings model and the segmentation of our representatives at Avon. And that most likely might continue to see some kind of streaming of number of reps overall. But I would say this quarter was more particularly impacted by some of the lockdown.

And finally, in terms of your question on digital tools that are really working well. So no question, especially in Natura, and JP can comment, the growth of utilization of the online consultant page has been very, very successful. And I would say that Avon is the expansion of the digital brochures. We now are at pretty much 40 markets at Avon with the digital brochures with a growth of almost 500% compared to prior year. So we are seeing a tremendously growth in terms of adoption of social selling tools, and we think that this will be also something very promising moving forward.

JP, do you want to comment specific on some of the tools in digitalization for Natura and Avon?

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João Paulo Brotto Gonçalves Ferreira, Natura &Co Holding S.A. – CEO of Natura & Co Latin America [4]

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Sure, Roberto. So first of all, the growth you see in our online channels, so to say, has not been driven by increasing promotions, for instance. That has all been driven by the reduction of barriers for our consultant representatives. So we made it even easier for them to open their online stores or start sharing the catalogs, the brochures that pose — customizing the content. So we made it even easier and very fast. We did that very quickly during this period as well as we enhanced training and improved their margins so that they could try and maintain their profitability by shifting their business to the online channel. And both for Avon and for Natura, that caused that amazing growth in all of our operations.

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Robert Erick Ford Aguilar, BofA Merrill Lynch, Research Division – MD in Equity Research [5]

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Right. That’s very helpful. And then just, Filippo, if you could comment a little bit about how you’re thinking about trough earnings and cash consumption in the environment.

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Roberto de Oliveira Marques, Natura &Co Holding S.A. – Executive Chairman of the Board & Group CEO [6]

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Filippo, do you want to answer that just in terms of cash consumption?

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José Antonio de Almeida Filippo, Natura &Co Holding S.A. – Chief Financial & IR Officer [7]

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Sure. Thanks, Roberto. As Roberto mentioned, of course, we have a lot of actions in place to really prioritize cash and also results. A lot of things that we did, we already mentioned during the presentation, so we’re still very focused on that. The ones — as you also noticed, we ended up first quarter with a very strong cash position with BRL 4.6 billion of cash. And recently, those initiatives of strengthening our cash and our balance sheet about the capitalization and also the new borrowing for 1 year also help us on making sure that we keep that position. So there’s no net debt increase, definitely is a reduction of the capitalization, but also we’re taking care that no spending happens. So we created a lot of ways of control in the leaders of — financial leaders of each business to track that and to monitor. Discretionary spendings are really concentrated and centralized so — to make sure that we keep this.

Generally, we’ve taken those initiatives and making sure that we monitor that very, very close to make sure that we keep this. So I believe that the cash position, I think we’re happy the way we are, the way we finish. Although first quarter, as you know, is the consumption of cash normally, but we end up with a very strong position that lead us to a very comfortable situation going forward. Basically, that’s how we are addressing this.

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Roberto de Oliveira Marques, Natura &Co Holding S.A. – Executive Chairman of the Board & Group CEO [8]

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Yes. One thing to add. Just one thing to add, Bob. Again, just to be clear, this capitalization and the line of credit of $750 million, we are doing that not actually to consume that. We want to keep it really as a reserve for us at this point. So we didn’t do that because we need it from a cash perspective. To Filippo’s point, we feel very strong about how we finished the quarter with over BRL 4.5 billion in cash. In our projections, even in a scenario more conservative, we still would be, without the use of the capitalization or this new line of credit, above our minimum threshold. So at this point, we feel pretty good about the usage and our starting point.

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Operator [9]

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From JPMorgan, we have Joseph Giordano.

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Joseph Giordano, JP Morgan Chase & Co, Research Division – Senior LatAm Healthcare Analyst [10]

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So I have like a few questions. The first one is related to synergies. So I kind of understand like how much you guys feel you should need to reinvest of those synergies to reaccelerate growth in the operations of Avon. So I understand that this $300 million to $400 million, it’s mostly like on a gross basis. So I’d like to understand like how much really like stays afterwards.

And the second one, Roberto mentioned and JP then followed up on the efforts and initiatives related to Avon’s sales rep base. I would like to understand like how you guys plan to revamp volume growth within those sales reps because I understand that probably with the segmentation strategy here, we do have member base continue to decline. But on the flip side, we need to see volumes growing, and that’s been a challenge. Any color here would be great.

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Roberto de Oliveira Marques, Natura &Co Holding S.A. – Executive Chairman of the Board & Group CEO [11]

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This is Roberto here. So starting with the synergies. Again, I want to highlight again that this has been a result of a acceleration of the integration and the teams working together since January that has given us strong confidence about those numbers. Different than when we announced it in January was the synergy between $200 million to $300 million. This time, we are including some synergies that will come from revenue growth in Latin America. And we’re going to explain more later this afternoon, but it’s really a component of 3 different waves of a turnaround of Avon in Latin America, an opportunity that what we call cross-sell and upsell among households that either buy Natura or buy Avon or consultants that potentially work with one product and versus the other catalog and the opportunity to really expand the portfolio. And the third wave is the expansion of Natura brand in markets in Latin America that are not present. And JP will detail that later this afternoon on Investor Day.

We feel pretty good about that. And as we communicate

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we think that this will create — fuel those synergies that we can then reinvest to accelerate growth. In — specifically in areas like digital, this momentum that we are seeing, we want to build on that momentum. We think that this might be a little bit of a silver lining of this very devastating crisis, is that maybe some of the plans that we have on digitalization that we are planning maybe in 18, 24 months, it’s happening in a much shorter period of time. And we want to seize that opportunity and double down on that as well as the relaunch of the Avon brand. The team is already working on that, and we are very excited about potentially in the third quarter to relaunch Avon as a brand and at the same time take all the learnings from Natura about, again, the earnings model and the segmentation of the representatives and consultants that Natura will serve almost like as a footprint both in Latin America but also a very good collaboration between JP and Angela’s to make sure that we take all the learning to Avon International as well. So we don’t have exactly what is the percentage of the synergies that we want to reinvest at this point, but I would say, we are very excited that the number went up with a high degree of confidence and that we’re going to reinvest to accelerate growth in some of those areas.

The other thing that is just important to highlight because I don’t know if all of you noticed, but the synergies actually went up by $100 million on a different exchange rate, right? When we announced back in January the synergies between $200 million to $300 million, we were using exchange rates of BRL 3.85. We actually now are using a more close to current exchange rate and even with that is increasing $100 million on an annual basis. If we were to use the same apples-to-apples constant currency compared to January, the synergies would have gone up almost $200 million on this revised plan. So we feel pretty good about that, and that will create a lot of fuel for us to not only improve the bottom line but be able to reinvest.

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Operator [12]

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From Bradesco, we have Richard Cathcart.

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Richard M. Cathcart, Banco Bradesco BBI S.A., Research Division – LatAm Retailers Senior Analyst [13]

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Thanks for the disclosure between the Natura and Avon brands in Latin America and Brazil. That’s very helpful. And that’s actually one of the first question that I had just about Natura in Brazil. The growth was very strong there. So perhaps, JP, you could just talk a little bit about what were the main drivers there. Any new product launches or particular promotional campaigns that went well? And just the second part to that question, if you can give us any idea of how the [Akitei] Natura stores were performing in terms of same-store sales growth before the COVID crisis hit.

And then the second question, Roberto, you mentioned that you’re seeing some of your markets beginning to open up, particularly in Asia. So is there anything that you can tell us about stores, perhaps in Hong Kong, to help us understand kind of the dynamics around footfall once we come out with these lockdown measures that could perhaps help us as a read across for some of the markets in Europe?

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Roberto de Oliveira Marques, Natura &Co Holding S.A. – Executive Chairman of the Board & Group CEO [14]

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Great. JP, go ahead first, and I’ll take the latter part of Richard’s question.

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João Paulo Brotto Gonçalves Ferreira, Natura &Co Holding S.A. – CEO of Natura & Co Latin America [15]

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Okay. Richard, as regards the — Natura’s performance in Brazil, so in Q1, indeed, very, very strong, and that was driven by commercial strategy or the way we built first quarter and that we leverage now the different segments of our consultants in the network. So that is now allowing us to be even more precise in our commercial strategy targeting them differently, together with investment in certain categories and brands, the more demanded — typically more demanded in first quarter, almost very well combined the support of the categories and brands with new commercial strategy for the quarter. So that was basically it.

And as regards [Akitei] Natura’s performance, we were extremely happy with that, double-digit like-for-like sales growth so far before the shutdown of the COVID. Roberto?

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Roberto de Oliveira Marques, Natura &Co Holding S.A. – Executive Chairman of the Board & Group CEO [16]

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Yes. Yes. Richard, regarding Asia, what we are seeing is, again, and some of that we are incorporating also in our modeling, it’s a more gradual recovery, right? So even though some of the lockdown are being eased or lift, there is still very much attention to resurge of contagions and the virus, and therefore, a lot of still measures to make sure that it doesn’t go back in large scale. So for the most part, traffic is still down, and that varies by category. But we are seeing between — some categories between still traffic minus 20% to minus 40%. We are seeing a higher basket in general, so people are making fewer trips but potentially buying more. And e-commerce and digital selling continues to be very, very strong. So I think to the point I was making to Bob, I think we see this really as an opportunity to double down in digitalization, and we needed to be prepared, and we’ll continue to invest behind that. So those are kind of early signs of what we’re seeing in Asia, Richard.

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Richard M. Cathcart, Banco Bradesco BBI S.A., Research Division – LatAm Retailers Senior Analyst [17]

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Great. And if I may, just a follow-up perhaps for Filippo, this one. Just on Avon International, if you could just talk a little bit more about the profit decline there. Obviously, there was weakness in revenue because of COVID-19, but perhaps we could have expected to see a little bit more cushion from variable costs falling. So if you can just give us a little bit more insight into the drivers of the margin decline in Avon International.

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Roberto de Oliveira Marques, Natura &Co Holding S.A. – Executive Chairman of the Board & Group CEO [18]

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Filippo, go ahead, please.

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José Antonio de Almeida Filippo, Natura &Co Holding S.A. – Chief Financial & IR Officer [19]

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Yes. Richard, as we said, we’re starting the turnaround, and there’s a new business unit that was created. So there’s a lot of focus now on keeping and increasing the profitability of the business. I think there’s still some situation that was affected, like we said, in terms of the COVID-19 impact, most of some markets. Lat Am was a little bit in the end of the quarter. I think Central Europe and Asia, which is the core, most participants of Avon International was in that. But there is a very important thing about Avon International regarding the cost reduction. As you know, there was — after we did the decision to change and to have the business units separate and Avon International, the business unit, we no longer have that corporate structure that Avon used to carry. Of course, as a public company that has a board and has a lot of compliance requirements for that, this is no longer — this was absorbed by Natura &Co, which already had the structure in place. So this is going to be something that we’re going to see going forward, this effect of not the burden of that structure into Avon International. But this quarter, still Avon International was affected by some of the transaction costs that — because we really said that most of the quarter. But going forward, if we can see an evolution for that reduction in those costs, that will benefit the profitability of the business. That’s what I see.

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Operator [20]

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From Citibank, we have Tobias Stingelin.

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Tobias Stingelin, Citigroup Inc, Research Division – Director [21]

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Yes. Congratulations for the disclosure. I think you have a lot of information to process. Thank you very much there. If I can just make a question, I know there are several moving parts. The group is much more geographically dispersed right now and have differentiated realities in the different markets because of the COVID situation. But is it possible to get a sense of kind of what’s happening during the month of April, the beginning of May. So maybe you can just give us a sense that, well, if we compare with last year, we are earning regards to sales on an X amount of level, something like that, just to have an idea of the running rate. And I know that there are several moving parts, Asia starting to improve again and Brazil, probably still be hit. If you can maybe give us any sense of what’s going, it will help. And then also just given all of this transformation taking place in regards to digital, what’s kind of the running rate right now of e-commerce of the group as a whole or maybe some specific markets just to kind of let us know what are these?

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Roberto de Oliveira Marques, Natura &Co Holding S.A. – Executive Chairman of the Board & Group CEO [22]

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I will start, Tobias. I hope all well with you as well. And so listen, to your point, there’s a lot of moving parts, right? And again, I think it’s fair to say there’s — as a result of that, there’s still a lot of uncertainty. We do project a second quarter probably to be the toughest one, right, which probably will be the biggest impact of the lockdown in most of the geographies and the ones that are most critical for us. If you take Brazil, if you take the U.K., even parts of the United States for The Body Shop and Aesop, are important markets that we believe will see the biggest impact in Q2.

We are, again, as I’ve seen — we highlighted, seen tremendous agility and resilience and response from our business and actually finding ways to mitigate the lockdown. We always talk about the resilience of the direct selling channel, which clearly we’re seeing this and the adoption of social selling tools and consultants and representatives becoming — continue to be active by using more and more social selling tools and the e-commerce component that is growing exponentially. We got — what I can tell you is that for the most part, and this is still a very — a moving part. We saw — you heard from Filippo The Body Shop with the growth of e-commerce and at home, at some point, compensating between 50% to 60% of store closure, which is pretty remarkable if you think about that almost 90% of the stores at the peak were closed. Aesop compensated even more than that, growing 500% their e-commerce business. So we are seeing an ability for the business to really navigate and respond to that in a way that probably we did not anticipate. But by having said all of that, of course, there will be and will continue to have an impact in terms of business, and we believe Q2 will probably will be the most challenging one.

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

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Perfect. And in regard to the second question, regard to kind of just the basis on the [digitalization or e-commerce], I don’t know, like to be objective I like to have a kind of number of how much you’re selling right now in e-commerce on a consolidated basis. But I know it might be hard to provide something like that. But any color just to understand where the base is in e-commerce? Because this, for sure, I think from what — everything that you are seeing will change completely, right or it’s going very fast and will be the future as well.

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Roberto de Oliveira Marques, Natura &Co Holding S.A. – Executive Chairman of the Board & Group CEO [24]

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Yes. I mean it is — Tobias, it’s a hard question because it depends, right? So at some point, for example, when you had, for Aesop and The Body Shop, almost 90% of the stores closed, you were pretty much almost at 85% of your business in e-commerce, right? But that is actually not very realistic to say that our business will be 85% in e-commerce because you had all your physical stores closed. As we are reopening the stores, I think we’re going to have a different accommodation. But what I can tell you is that before the crisis, so let’s just take the business of Body Shop and Aesop that they were about 12% of percentage in e-commerce before the crisis. We think that, again, based on what we are seeing of growing of 200%, 300%, 500%, this will probably going to double, right, even after the crisis. So we think that it’s realistic to say that as we are seeing growth of 300%, 500%, even if you have some accommodation with, of course, all those stores coming back up, we don’t see e-commerce going back to 12%. So it’s going to be at a much higher level.

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

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Perfect. It’s great. And if I can maybe just ask simply, you cannot address already some of these issues. But what kind of are the long-lasting changes that are expected to see that you have been able to identify already in regards to the whole sales process? I think you already kind of mentioned that probably you have to revise the stores at some point because everything’s kind of moving to digital. But you also spoke about the groups and about all of the digitalization. Is it something else that you’re seeing really in regards to kind of the sales forces or even from the consultant perspective and trends that maybe might not be obvious that you’re seeing right now but they can be very important long term?

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Roberto de Oliveira Marques, Natura &Co Holding S.A. – Executive Chairman of the Board & Group CEO [26]

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Yes. So I’ll start answering, and then I will invite JP to share his perspectives on Latin America. But I think, again, we are very excited about the acceleration of the integration with Avon, right? And I would say that, again, maybe another silver lining of this very unfortunate crisis is that we are seeing the teams working together in a way that probably would have taken longer for us to get to that point. So one example, we’re already seeing Natura products being produced at Avon manufacturing sites. We are already seeing Body Shop products being produced at Avon sites. Probably things that we want to do it over time and it’s already happening, so this integration, it’s been accelerated, and we see that very positively.

We see the digitalization and the e-commerce. We talk a lot about already on the call, but we are very bullish about that because we always believe in this notion of social selling and direct selling evolving to be much more off-line and online relationship selling. And the adoption and the training and the tools that are becoming more and more available, I think it is something that will continue after the crisis.

I would add the third one is the portfolio. There is no question about we are seeing high demand of parts of our more essential products, soap, hand sanitizer, more personal care items. And I think even coming out of the crisis, there’s going to be a change in terms of consumer behaviors. Consumers are being much more aware about some of those caring aspect, hygiene, et cetera. And we are already working with the business in terms of innovation and new product development to be able that we can really seize this consumer demand and new consumer habit.

JP, what else do you want to share from your perspective that you’re seeing more specifically in Latam?

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João Paulo Brotto Gonçalves Ferreira, Natura &Co Holding S.A. – CEO of Natura & Co Latin America [27]

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Well, I think you highlighted a big one, which is the integration. I think as regards the digitalization, which is almost obvious, but I’d just like to point out that as our online sales are growing at a rate of many 100%, depending on the country, it’s interesting to see that, from the incoming orders, the orders coming from new customers are growing [too as fast]. And that means that we are bringing customers in. And from previous research, we know that many of them that buy through the channel were not buying our products as frequently as the average. So that is interesting because we’re bringing more customers to the brands. And also very interesting that most of these new customers have been acquired by the consultants and representatives, which shows that there is a structural change in the way they do the direct selling, into social selling, digitally enhanced, which is not going to come back.

Also, perhaps interesting to notice, Tobias, that through this crisis, certainly, delivery or home delivery is something that is part of everyone’s lives. So everyone accepts that having products and services delivered to your home is safe and convenient. So here’s the opportunity where the new direct selling, if you want, has the opportunity of being positioned as perhaps one of the fair, most trustful, convenient and safest means of commercialization. And so I think the way we see direct selling may be positioning on the even stronger way for the society after the crisis. That’s all I wanted to add.

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Operator [28]

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We’ll now turn it back to Mr. Roberto Marques for closing remarks.

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Roberto de Oliveira Marques, Natura &Co Holding S.A. – Executive Chairman of the Board & Group CEO [29]

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So thank you, everybody, and I appreciate it. As you know, we’re going to have our Investor Day later this afternoon where each CEO will talk a little bit about in more details all the great things that they’re doing to cope with the crisis and then really starting to think about the new normal, some of the areas that we want to really double down and think about how we needed to continue to position Natura &Co Group.

Listen, we still feel very good about where we are going. Number one, I think we are seeing progress on the integration — acceleration of this integration, which is very important with the synergies now going up, which is very important not only to improve profitability but to create fuel for growth in some of those strategic areas.

Number two, we are seeing tremendous growth in social selling, which is something that we always believe in terms of the future of direct selling in e-commerce as a way to really truly become even more omni-channel business. We are seeing the importance of having iconic brands. Consumers are choosing our brands and making those changes from channel to channel because we have strong and iconic brands in our portfolio. And last but not least, we have a very solid financial position not only in terms of cash position, in terms of how we are managing cost moving forward but also now this infusion of fresh capitalization and a line of credit that will give us even more strength to go through these challenging times.

So thank you very much for your time. I hope we all stay well and safe, and I’ll talk to you, maybe most of you, later today at our Investor Day. So thank you very much.

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Operator [30]

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Thank you. Ladies and gentlemen, this concludes the Natura audio conference for today. Thank you very much for your participation, and have a good day.