Natura Cosmeticos : Earnings Releases 3Q16

Earnings Release 3Q16

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EARNINGS RELEASE 3Q16

São Paulo, October 26, 2016 Nat ura Cosméticos S.A. (BM&FBOVESPA: NATU3) announces today it s result s for t he t hird quarter of 2016 (3Q16). Except where st ated ot herwise, t he financial and operating information in t his release is present ed on a consolidated basis, in accordance wit h International Financial Reporting St andards (IFRS).

In t he t hird quarter of 2016, Nat ura post ed consolidat ed net revenue of R$1,90 2.6 million (- 4.7% vs. 3Q15), EBITDA of R$319.8 million (- 20 % vs. 3Q15), net revenue of R$ 73.1million (- 44.6% vs. 3Q15) and free cash generat ion of R$138.3 million (- 56.7% vs. 3Q15).

In Brazil, profitabilit y was heavily affected by t he higher effective t ax rate (31.6% in 3Q16 vs 30 .2% in 3Q15), which has increased cont inuously since 2014. In 9M16 compared t o 9M14, t his impact amount ed t o R$236.8 million (4.3 p.p. of gross revenue).

In Brazil, our consolidated net revenue cont ract ed 7.1% from 3Q15, due t o t he st ill challenging scenario, in which consumers int ensified t heir search for products wit h lower prices (t rade down), especially in fragrances, body and face care, which are more sensitive t o disposable income and account for some 60 % of our revenue.

This cont ext cont ributed t o t he decline in buying frequency and t o t he 21.9% cont ract ion in sales volumes (product unit s for resale), interrupt ing t he growt h recovery observed in 2Q16.

In view of t his scenario, we have already adjust ed our promotions and product mix t o more effect ively act ivat e our consumers and encourage t he placement of orders by consult ant s.

In addit ion t o t hese t act ical act ions, we cont inued t o make progress on executing our st rategic plan, whose focus is on revit alizing t he direct selling channel, innovat ive proposit ions for products and concept s wit h unique technologies and performance, st reamlining our port folio, reviewing our brand positioning and st rategy, developing new alternative channels, designing a more agile and efficient organization and maintaining accelerated growt h in t he Internat ional Operations.

Wit h regard t o t he development of new channels, t he SOU line is already in 1,334 st ores in t he drugst ore channel. The result s are positive and we are preparing t o expand our presence t hrough t his channel as of 2017. Regarding our owned st ores, four units have been opened since April 2016 in shopping malls in t he cit y of São Paulo and t he init ial results are positive. Nat ura Net work, our online channel, cont inues to post double- digit sales growt h and has 82,0 0 0 digit al franchisees (54,0 0 0 in 3Q15) and 1,20 0 registered consumers.

We relaunched important product lines in our port folio (EKOS, Tododia and Humor), which were supported by significant market ing invest ments in t he period, as well as Chronos, an import ant line for st imulat ing consumer loyalt y, which was relaunched in June 2016.

Wit h regard t o innovat ing our direct selling model, t he CN APP, a mobile applicat ion for consult ants t o access products and promot ions and place orders, was downloaded over 246 ,0 0 0 t imes and it s init ial result s showed an 8% increase in product ivit y for t hose consult ants using it .

In our operat ions out side Brazil, Latam and Aesop, we maintained accelerated double- digit growt h in local currency wit h operat ional leverage and margin expansion. In t he case of Lat am, as t he following chart shows, it s result s, after t ranslat ed int o Brazilian real, were adversely affect ed by t he currency st rengt hening against a basket of Latam currencies.

Latam Net Revenue (% year over year) Aesop Net Revenue (% year over year)

53,0 %

29,3%

59,6%

39,6%

73,4%

62,1%

31,8%

64,7%

91,3% 95,6%96,5%

37,4%

25,7%

22,3%

27,7% 29,4% 30,8% 26,9% 29,3%

33,3%

30,0 %

43,0 %

67,1%

49,4%

19,9%

22,9% 16,2%21,6%

20,4%

- 3,5%

38,0 % 47,8% 46,2% 38,0 %45,1% 18,5%

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16	1Q15	2Q15	3Q15 4Q15	1Q16	2Q16	3Q16
Local Currency R$	Local Currency	R$

R$ million

3Q16

3Q15

Change (%)

9M16

9M15

Change (%)

Consolidated Gross Revenue

2.656,2

2.763,1

-3,9

7.791,7

7.60 6,2

2,4

Brazil Net Revenue	1.265,5	1.362,1	(7,1)	3.763,3	4.013,9	(6 ,2)
International Net Revenue*	637,1	633,8	0 ,5	1.854,6	1.552,7	19 ,4

In t he case of Lat am, our channel (average number of consult ant s in t he period) grew 10 .6% from 3Q15 while volumes (product unit s for resale) increased 18.7%. Aesop ended t he quart er wit h 169 stores in 20 count ries (120 st ores in 18 count ries in 3Q15) and same- st ore sale growth of around 13%.

Brazil Gross Revenue	1.849,5	1.952,8	(5,3)	5.464,6	5.635,8	(3,0 )
International Gross Revenue	80 6,7	810 ,2	(0 ,4)	2.327,0	1.970 ,4	18 ,1

Consolidated Net Revenue	1.90 2,6	1.995,9	-4 ,7	5.618,0	5.566,6	0 ,9
% Share International Net Revenue	33,5%	31,8%	1,7 pp	33,0 %	27,9%	5,1 pp
Brazil pro- forma EBITDA	218,3	331,7	(34,2)	645,6	90 5,9	(28 ,7)
% Brazil pro- forma EBITDA Margin	17,3%	24,4%	(7,1) pp	17,2%	22,6 %	(5,4) pp

Consolidated Net Income	73,1	131,8	(44,6 )	94,9	368,1	(74,2)
% Consolidated Net Margin	3,8%	6,6%	(2,8 ) pp	1,7%	6,6%	(4,9 ) pp
Internal cash generation	161,5	228,0	(29 ,2)	382,3	629,7	(39 ,3)
Free cash flow	138,3	319,0	(56 ,7)	66,9	648,7	n/a
Net Debt / EBITDA	n/a	n/a	n/a	1,47	1,11	32,45

Consolidated EBITDA	319,8	399,6	(20 ,0 )	881,5	1.0 42,7	(15,5)
% Consolidated EBITDA Margin	16,8%	20 ,0 %	(3,2) pp	15,7%	18 ,7%	(3,0 ) pp

International pro- forma EBITDA	101,5	67,9	49 ,4	235,9	136,9	72,4
% International pro- forma EBITDA Margin	15,9%	10 ,7%	5,2 pp	12,7%	8 ,8 %	3,9 pp

*Net (Loss) income attributable to owners of the Copany

Note: Growth in Local Currency ex Aesop: 30 % in 3Q16 vs. 3Q15 and 30 ,5% in 9M16 vs. 9M15

Consolidat ed EBITDA amount ed t o R$319.8 million in t he period, 20 % lower t han in 3Q15.

In Brazil, as t he chart on t he left shows, t he

12

332

42

Brazil's EBITDA change

30

29

25

218

34.2% drop in EBITDA is explained by t he 7.1% cont raction in net revenue, reflecting t he non- recurring effects t hat benefited t he 3Q15 results (asset divest ment ), higher advertising expenses focusing on t he aforement ioned relaunches, a slight increase in administrative expenses (+2.9% vs. 3Q15) and t he higher effect ive t ax rate (31.6% in 3Q16 vs. 30 .3% in 3Q15), given t he

3Q15 Gross margin Revenue

decrease

Non-recurring

effects 3 Q15

Expenses Taxburden 3Q16

increase in value added margin (MVA) in several St at es.

EBITDA from t he Int ernat ional Operat ions (Lat am, Aesop and France) amount ed t o R$ 101 million, increasing 49% from 3Q15 and account ing for 32% of consolidat ed EBITDA (17% in 3Q15). When EBITDA

from t he Internat ional Operat ions is t ranslat ed int o Brazilian real and incorporated int o t he consolidated results, t he adverse effect from t he appreciation on t he result s of Lat am was neut ralized by t he continued accelerated growth in revenue wit h operat ional leverage.

80

Change in consolidated net profit

28

5

132 6 3

73

Consolidat ed net income for t he quart er amount ed t o R$ 73 million (R$ 132 million in 3Q15), wit h t his contraction due t o t he following fact ors:

_EBITDA: deterioration primarily due t o t he lower revenue and t he higher effect ive t ax rate in Brazil;

_Depreciation: larger asset base due t o t he invest ment s made in recent years;

_Financial Result : income of R$ 3 million due t o a combinat ion of various positive and negative fact ors t o be explained lat er;

_Income and Social Cont ribut ion taxes: lower income tax in 3Q16 due t o t he lower EBIT compared t o 3Q15;

Free cash flow in 3Q16 was R$ 138 million (R$ 319 million in 3Q15). The decrease of R$ 181million is basically explained by t he investment in working capit al due t o t he higher inventory coverage in Brazil and Lat am.

Wit h regard t o CAPEX for 2016, we are adjusting our guidance for t he year from R$ 350 million t o R$ 30 0 million. This reduction was due t o t he increased efficiency in sourcing and t o t he appreciation in t he Brazilian real against a basket of Lat am currencies.

R$ million Net Income* Depreciation and amortization Non- cash/Others Provision fo r acquirin g Aeso p's remainin g in t erest	3Q16 3Q15 Change R$ Change % 73,1 131,8 (58,7) (44,6) 68,4 62,6 5,8 9,2 14,5 1,1 13,4 n/a 5,5 32,4 (27,0 ) (83,1)			9M16 9M15 Change R$ Change % 94,9 368,1 (273,2) (74,2) 195,8 172,5 23,3 13,5 35,3 (11,1) 46,4 n/a 5 6,3 10 0 ,2 (43,9) (43,8)
Int er nal cash gener a t ion 161,5 228,0 (6 6,5) (29,2)				3 82,3 629,7 (247,4) (3 9,3)
Wo rkin g Ca pit al (Increase)/Decrease	41,7 18 8,8 (147,0 ) (77,9)			(13 9,9) 257,7 (3 97,6) (15 4,3)
Oper a t ing cash gener a t ion	20 3,2 416,8 (213,5) (51,2)			242,5 8 87,4 (6 45,0 ) (72,7)
Capex	(65,0 ) (97,8)	32,8	(33,6)	(175,6) (23 8,7)	63,1	(26,4)
Free cash flow**	138,3 319,0	(180 ,7)	(56,7)	66,9 648,7	(581,8)	(89,7)

(*) Net income attributable to owners of the Company