Natura Cosméticos S.A. (NTCO3) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for waiting. At this time, we would like to welcome everyone to Natura &Co conference call. This event is being recorded. [Operator Instructions] This call may contain forward-looking statements. Such statements are not statements of historical fact and reflect the beliefs and expectations of Natura &Co's management. Forward-looking statements speak only as of the date they are made, and the company does not undertake any obligation to update them in light of new information or future developments. We're joined today by Mr. Roberto Marques, Group CEO and Executive Chairman of Natura &Co; Mr. Guilherme Castellan, CFO of Natura &Co; and Mr. Fábio Barbosa, who is assuming the role of main executive of Natura &Co. Guilherme and Fábio will be available for the Q&A session. [Operator Instructions] Thank you for your understanding and cooperation on this. Now I will turn the conference over to Mr. Roberto Marques. Mr. Marques, the floor is yours.

Good morning or good afternoon to all of you, and thank you very much for joining us at short notice for this conference call to provide you with a bit more context on today's announcement of a corporate reorganization at Natura &Co. I'm here with Fábio Barbosa. We'll both share some brief introductory comments. And then he and Guil Castellan, our CFO, will open the floor and take your questions. You have seen the material fact and press release we issued today. And we thought it would be helpful to give you a bit more insight on the reasons behind this decision and what this represents going forward. Let me begin by saying that I'm enormously proud of what has been achieved collectively over these last 5 years. We have built a strong global purpose-led group of amazing brands with an unparalleled direct-to-customer reach. We have strongly advanced our omnichannel approach, including meaningful progress on our digitally enabled sales across all of our businesses. We have unveiled a very ambitious sustainability vision, our 2030 commitment to life that reflects our ESG-driven approach. We also have put in place a unique ways of working that leverages the know-how and scale of the group while preserving brand autonomy. All of this has been achieved in a challenging context, facing headwinds that were unthinkable only 2 years ago with the global pandemic, macroeconomic disruptions and a war, impacting not only Europe but with global consequences. My heartfelt thank you to our teams across our businesses and group, our network of consultants and representatives, our partners in all areas across the globe. Your dedication, resilience and support of these last 5 years has been nothing less than extraordinary. Let me also thank you, all of you on this call, for your partnership, belief in the Natura &Co investment case, but also by providing us feedback, challenging us appropriately and engaging with us. Of course, there has been bumps along the way, opportunities to do things better and different, but the direction is clear. And we remain extremely confident about the future of our company, the performance of our brands and our passion to become the best beauty company, not in the world, but for the world. Having built all of this, now it's time for a new chapter. While we believe that the current structure was necessary in a moment of businesses expansion, integration and standardization of some practices across our business units, now we needed to reset with even more focus on our brand plans to unleash their full potential. We live in a challenging and changing world. And more than ever, we believe we need to move faster and adapt with even more agility. And our reorganization announcement reflect exactly this. We are aiming to simplify our structure, giving more latitude and accountability for our business units, united by a leaner group that will continue to look to deliver efficiencies across the businesses. One of the key takeaways of our Investor Day last month was simplification of our operating model, and that is exactly what we are doing here. We are determined to reduce complexity and to implement a new organization that allows the brand to flourish and grow while preserving key group functions. And we also thought that to do this, not only a new structure is required, but also a new leader, a fresh perspective. And therefore, I will be stepping down and Fábio Barbosa will be stepping up effectively immediately. As you're probably aware, Fábio has been an active Board member for the past 5 years, and he has a fairly strong track record as a principal executive of major companies. He is the right leader at this time to redesign Natura &Co's model, and I couldn't be happier to pass the baton to him for this new chapter in our growth history. I wish Fábio every success, and I'll continue to support him as I will remain on our Board of Directors for the coming months to ensure a smooth transition before planning to retire as an executive at year-end. I know that Natura &Co is in very good hands with Fábio and the rest of our leadership team. Let me now hand over to him for his remarks. Fábio, the floor is yours.

And also speak on behalf of the founders and the entire Board of Directors and myself, I mean, I congratulate to all you have done, bringing the company from basically a local business to an international business. As we said that there is a cycle, many things that had to be done were done. And now it's time to go to another cycle. And thank you very much for helping and supporting the process throughout this quick transition that we are starting now. For those of you, I think most of you may know me, for those of you that do not know me, I was involved with Natura in terms of concepts and so on for the last 24 years. Sustainability has been something that I worked for very deeply when I was heading the bank, but also throughout my life. And I believe very much and I share very much Natura's values. And the important thing is that following that -- those values, Natura became the leader that it is and expanded internationally. We have suffered a lot also in the last 3 years, means the Russia-Ukrainian crisis and the fact that impacted even international. But we also cannot -- we cannot only blame the international situation. But also look at the noise that we are getting inside the company, but also from new investors, giving us hints on here and there on what would have to be done in order for us to speed up the process of recovery of the company. And that goes very much along the idea of having a lighter structure at the top, as Roberto was saying, given more latitude to each business unit. We will maintain the business unit as they are headed by the people, which they are being headed today. So no change on that. But what we want to do is to make sure that they have a more latitude and accountability, it comes altogether, of course. And having said that, we already did some small movements right now, like sustainable growth and group transformation of functions, which were at the corporate and that we are already, let's say, redistributing it to the individual units, business units, or even reducing it depending on the case. We have a lot to do in front of us. I have -- it's a challenge I'm very happy with it. I have been, let's say, a Board member for the last 5 to 6 years. I have spoken a lot to Roberto and understanding what are the challenges and so on, also with the Board, also with the BU heads. And therefore, we know more or less what to do. Of course, today is day 1. I do not expect to come with any consideration more profound than the guidelines that I'll give now. We have a transition committee, which I will be heading. The transition committee will be lean also, basically formed by the CFO, the HR Head and also the Legal Head and one Board member. And we will work on what activities should be decentralized, what activity should be eliminated, what strategies in terms of geographies. But talking about geographies by where we want our brands to be playing or not, shall we be playing every single brand in every single market, of course not, or where do we concentrate and things like that. So the idea is that we have this. Expanded transition committee will count on the CEOs and [ José ], which is responsible -- [ José de Almeida ], which is responsible for the entire supply chain, so to speak. But we would like them to do devote time for the activities and then we share with them decisions, which will make their life easier. The whole thing is centered on making the business units having more space, more responsibility and having more room to run and devote their time to do that and not to have too much of a headquarter on top of it, which was necessary in the first moment to harmonize, to bring things together and so on. But from now on, that's not what we would like to do. So we already did this sustainable growth and so on, as I mentioned. But the transition committee, which we'll start operating next Monday already, is -- the idea is that we define what activities shall we be prioritizing, what activities shall we be decentralizing, what activities shall we be maybe keeping it centralized, but always with the goal towards having a much leaner structure, which will also address another part, which was very much pointed out by the investors as well as by the CEOs of the various units, which is reduced complexity. I mean it gets complex, it gets more difficult for people to understand, to understand their role, also the remuneration. Everything will be addressed from now on with this perspective of this new cycle that we are living on. I'm very happy actually with the responsibility that I'm taking now. As I said, I have been very close to Natura, I mean, officially in the last 6 years. But throughout 24 years, I have followed and been together. So to me, it's an honor to be responsible now for this position. By the way, as Roberto pointed out, but I want to stress, we are decoupling also the position because Roberto was the Executive Chairman as well as the CEO. So we don't have those positions and we don't have that accumulation. I will be the main executive. But the founders will be the Chairman. So we do not have, for the moment, for legal purposes, the position of Executive Chairman is vacant. But we will eliminate that at the next assembly. So that we will also address one of the good issues in terms of governance, which is to have the CEO and the Chairman as a separate responsibility. So I'm looking forward to it. I believe on the brands. I believe on the possibilities that we have ahead of us. I believe on the team. And I believe that we will be able to focus on what is to be focused and to continue basing electively swaying umbrella on our values, our commitment for life and things that made Natura what Natura is today. And the acquisitions that Natura was able to make has to do exactly with the culture on which it was built. So I'm very happy for that. I will pass the word now to Guilherme, please hand the Q&A. The ball is with you now. Thank you.

Thank you, Fábio. Thank you for Roberto for your words. Fábio, thank you for your words as well. I just want to give a quick reminder to the audience, please to focus the questions on the material fact that we published today. And then we will take it from there. I'll pass the word to the operator now.

[Operator Instructions] And the first question comes from Joseph Giordano of JPMorgan.

Good luck, Roberto, and welcome, Fábio. My question to you guys goes into like this leaner structure that you guys are seeking, right? So over the past few quarters, you've seen the company doing a good job in controlling costs and expenses amid a very, very challenging environment. So my question to you is that like when you look specifically at this whole new structure that we have now, like it's about 1.5% of sales, how lean do you think this could become? And the second part of like the simplification strategies is if -- when you look at the business units today, like if you have like anything that when you think about the midterm strategy would not fit, so basically meaning that like if you have any potential assets that could be divested from the company?

Thank you, Joseph. Actually, the main priority when we decided to go through this new cycle was not exactly the cutting costs, although it's absolutely important. Don't take me wrong. I have a financial -- strong financial background, as I like to say. But it's to have the organizations to be leaner and to be able to be more agile and, therefore, we also have a focus on the revenue side. So it's also -- each unit will have its own strategy and we will define their SKUs or things like that. We'll, of course, have guidelines in terms of geographies, as I mentioned. But each BU define on that. So it's also a focus on the revenue side, allowing the business units to work on what they understand or their priorities and giving them latitude to make a decision that will make it a lot easier and less complex for them to move. So that's -- of course, there is a definition. By definition, this will bring a reduction on the corporate center expenses. But it's not like this was the target, reduce it and leave it as it is. It's not to reduce this, it's to make sure that we decentralize what is to be decentralized, to eliminate what is to be eliminated. And as a consequence, as I said, it will be leaner, but that's not the reason why we are doing that, okay? And the transition committee will work on that. And in due time, I will be able to come here and talk a little bit more about that. As he was saying, I do not have the financials on that. But we have to -- we know that we have to improve margins, and we know we have to increase revenues, have to continue to pay attention to costs. By the way, recently, we did some adjustments on Natura and Natura Latam, being Avon and Natura here in Latin America. As for the assets, we have not revisited anything. I mean I am just -- as Roberto said, it starts immediately. But effectively, it means that I have to -- we'll sit down. We'll revisit many things together, altogether with this committee, of course, under the guideline of the Board. But we will revisit and then we will make out any assessment, but that's to be done over the next quarter or so. The idea, by the way, is that transition committee will have its job, let's say, done by the end of the year or before that, much before I hope. But that's -- the transition committee itself is something transitory. But of course, my commitment in terms of the CEO is not transitory, but the transition committee is by definition transitioning.

The next question comes from Irma Sgarz of Goldman Sachs.

Also welcome, Fábio, and good luck, Roberto. On -- from your prior experience, either at Banco Real or Santander or your average set of experiences in the past, but I know you've gone through different integrations of past acquisitions of transformations. Is there 1 or 2 examples of your prior experiences that you think are particularly applicable to the current context from what you can see what is needed for Natura at this point of the company's cycle?

Irma, thank you very much for the question. By the way, I also had -- actually, a few people know that, but I spent 12 years of my life at Nestle, so I was in this business, the retail business for 12 years, working in Brazil, in the United States and Switzerland before I joined the bank. But at the bank, you're right, that's where we had many acquisitions. And yes, I think the thing I look at the most is that -- and Roberto did work on that, which is to have some harmonization and bring something to have a certain culture on that. But what I learned at the end is that imposing, which is not what we want to do and not have been doing -- but it's not to impose some, let's say, synergies that we believe are good, but the business may refrain from accepting that because from their perspective, it's not good. So what I would like to do, and that was my experience, Irma, is how can we make it the good balance between giving the authority and the accountability, but also keeping the culture. So if you have a good culture and if you have some functions, which, of course, will be necessary, finance and financial control or things like that for the group and capital allocation, I think giving space for the people and giving -- and respecting each people, if you notice that they are specialized in different things. Aesop works more, let's say, upscale. When you go to The Body Shop, it's more retail. When you go to Avon, it's an international -- to markets that we had not known before. And if you go to Latin America, of course, that's where we found the synergies, and we use that and we capture that a lot. And I think Roberto stressed that in previous calls. But now, let's say, it's not time anymore for stressing efforts to capture synergies, but really to go and say to the people, okay, you know your business, you go and you do and we'll be here controlling given the boundaries, also working on the capital allocation. But answering to your question is, I think, is to respect that people on the ground. They know better what they could be doing and is up to us just to give the boundaries. But up to them to go for the, let's say, the tactics for each business given the strategies that they are following. Thank you.

The next question comes from João Soares of Citibank.

I just wanted to understand a little bit more of the context of what may have triggered this corporate restructuring at this time. We understand it's a challenging time, full of exogenous effects. So Fábio, maybe you could talk a little bit more about that, I think it would be interesting.

Thank you, João. Actually, this -- the idea that we would have to do some restructuring and some refocusing on the business and so on, I think it started early in the year. Roberto was also part of that discussion of what we do and so on. And I think we also heard the market. I'm putting aside here the external difficulties, which were difficult to everyone. But in our case, especially on the very critical situation in Russia and Ukraine, which we all regret, but it had an impact in various fronts. And it was an important business there. But having said that, the idea was more having heard the internal people. We had a very good conversation in the last 2, 3 months with the CEOs and so on. The Board evolved as well and Roberto as well. And okay, we heard and say, listen, I think there is a major complaint going on here in terms of what kind of pressure they feel they are under. As you know, João, there will be false problems and true problems, some of them are people's perception. We will work on that at transition, what is perception, what is reality, what is not working well because by design, it does not work well or what is not working well because it's just somebody's fault or something like that. But so the trigger was -- and then we heard the investors. We heard the investors -- we talked, we heard the investors, we heard the market leaders, we saw the stock price and so on. By the way, it's not a unique problem for Natura, but we heard the investors and say, it's time for us to have a leaner, less complex organization, and it's time for us to revisit some of the scenarios that we have been working on, so define and reveal some of the boundaries for each brand, so that we have them allocating their resources to the best of each one and not that we go a little bit -- one example I'll give you, we don't want every brand, for instance, to be present in a single market. If you allow me, it's not a joke, but that's not to give any [ hints ], but we don't have to have every brand in, I don't know, in Afghanistan. And we don't have to have Natura and Avon and The Body Shop and Aesop. Maybe we can have some of them in some markets, some of them in other markets. So these kind of things will be defined by this holding by the stent organization. But then the strategy on how to play there and so on, we'll leave up to each one of them. Okay, João?

Fábio, good luck on the new role.

Thank you. I need it.

The next question comes from Robert Ford of Bank of America.

And Fábio and Roberto, I wish you both the very best. Fábio, in your opinion, what do you think has been holding back the direct sales channels for more aggressively leveraging technology in your view? And what can you do to remedy that? And does this management change have implications for the plans in China?

I will be very vague on the second part of the question because as I said, we are revisiting it, everything, and I have not even addressed that, Roberto know, I'm not hiding anything. I just have not addressed it. But that goes along with the idea that we have to make sure that we are putting the best brands or not taking -- let's rephrase, taking the best of each brands to that particular market. The brands may do well, some others may not. And of course, we have also the issue of capital allocation, where do we want to put our bet. We cannot be betting in every brand in every single market. So I will come back on that. Regarding the direct sales and so on, I think we have -- I mean, Brazil right now or Lat Am, I should say. Joao Paulo, he has made a major restructuring on the team and so on. He has had a reduction and he has focus and he has another strategy in terms of how to remunerate and so on. I'm talking about the direct sales, especially in Lat Am. So that's the kind of thing, Robert, which I would like the units to do it, not to discuss it centralized. I would like to work a little bit on this. The way you know many companies work. We can discuss. I'm not a specialist on that. I have Joao Paulo and many other people who are and Angela also running the Avon International. They decide on what kind of, let's say, incentives they want to work, what kind of people they want to work, what kind of pricing strategy. And also in terms of the digitalization, which is very important. And what was holding us back a little bit was the idea of having a good backbone, which would allow the digitalization to be built on top of it. And I understand that we are advanced on that. I would look at it when we have the transition committee in place. But that's one of the main priorities, to make sure that we have the backbone. But I don't want to go into specifically, for instance, trying to have the same direct sales approach, for instance, please always, for instance, please, in Brazil that we have, I don't know, in Turkey or in Philippines for that purpose. I think that the markets ought to be more, let's say, working on their specificities rather than us trying to standardize everything, which, by the way, going back to Irma's question of Goldman Sachs, is one of the things that I learned in this, is trying to standardize everything in different markets is not a very sound process. It may be for some companies. But for consumer B2C, like we are, there is no way we can standardize things. So that will be, Robert, up to each business unit to decide on exactly how to perform on that. But you're right, that's one of the concerns. That's why we have synergies, and that's one of the strengths of our group. Thank you.

The next question will be from Helena Villares of Itaú.

Fábio, my question is actually for you. You have a brilliant carrier on the financial institutions. And you also know the challenges that Natura &Co has ahead. So our question is basically, what do you think that your career helps to and adds to these challenges that Natura is going to face?

I missed your name at the opening, please. Your name is?

Helena.

Helena, thank you. That's a good question. I mean I have been working primarily, although I was on -- my financial background, my primary consideration has always been on people. So an organization motivation and incentives and taking the right people at the right place and taking the best out of it. I love it actually, working with people. I worked with numbers many years and I found out that working with people is very exciting. So I love it. So I think that my background, although I have a little knowledge on the retail, which I said, many, many years ago, but I think it's more on the organization. It's more on the fact that we are going to have more, say, decentralization, how to work, how to put it in place and how to keep -- get the right people in the right places with the right incentives. That's something we will also revisit. What kind of incentives we are giving to the people, are we incentivizing people on the right way to get what we want. Sometimes we have some complaints here and there. So we will revisit that as well. So I would say that my main cooperation and my other factor I can corporate the most is on organization, the motivation, mobilization and incentives. Having said that, I think we should not lose the perspective that this company was built on strong values. This company was built around sustainability, was around the purpose, around everything, which are things I share. And by the way, I think they are more and more important. I would say that nowadays, this kind of attitude are even more, let's say, appreciated than they were in the past when it was like a stand-alone initiatives, be it by Natura or by Banco Real if you allow me. And today, we see everybody coming on that. But this is like an umbrella. We do not want to touch that, we want to live under that, we really want to base our growth on that. But the real focus is more on how to allocate people, how to have the right people on the right place and with the right incentives. I normally summarize saying that managing is about aligning incentives, right? People will do whatever is good for them. It's up to us to make sure that when they do the best for them, we get the best for the company. Of course, it's a simplification with all the shortcomings of any simplification. But that's the way I see, and that's how I think I can collaborate, Helena.

Apologies, but unfortunately, we do not have time for further questions. This will conclude today's question-and-answer session. I would like to turn the call back over to Guilherme Castellan and Fábio Barbosa for any closing remarks.

Guilherme?

I'll go and talk. Okay. Just saying, thank you very much for the call. I mean, of course, this is more about the structure that we are building with the goals that we have in mind. With the direction that we have in mind, we'll be able to be more specific as we have this transition committee working and coming up with the results. As I said, we hope that this transition committee is really transitioned. And therefore, we have it up to year-end. Most of the items are already decided, and I will keep you updated. I mean I'm very -- I have always been very close to the market, and I hope I will be able to talk to you guys several times. And I mean, we've seen the right perspective and the good governance, of course, making sure that we don't have any, let's say, commitments at this point in time because I'm just joining. But I will be able to talk to you guys over time under an organized matter, and Guilherme will help me on that. Thank you, everybody, and wish you all good holidays for the ones which are in Brazil.

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