Fitch Affirms Natura's IDR at 'BBB'; Outlook Stable
RIO DE JANEIRO & SAO PAULO -- October 05, 2012
Fitch Ratings has affirmed Natura Cosmeticos S.A.'s (Natura) 'BBB' Foreign and
Local Currency Issuer Default Ratings (IDRs) and National Scale Rating at
'AAA(bra)'. The Rating Outlook is Stable.
Natura's investment-grade ratings reflect its very strong capital structure,
robust operational cash flow generation and its consistent and profitable
business model. The ratings also consider a somewhat limited geographic
diversification, with almost all of its cash flow generation derived from
Brazil. The still favorable outlook for the consumer industry's growth in
Brazil is also factored into the ratings. Natura's ability to maintain robust
operating margins in an environment of greater competition is a key challenge.
Profitable Business Profile; Challenges Under Greater Competitive Threats
Natura's business strength is supported by its leading market position in the
Cosmetics, Fragrances and Toilette (CF&T) sector in Brazil, its competitive
cost structure, strong brand recognition, and a successful direct sales
structure in the country.. The company's reach through its extensive sales
structure is considered an important competitive advantage (as of June 30
2012, Natura had 1.5 million sales consultants). Natura's strategy focuses on
sustainability, and continuous efforts are made to innovate and launch new
products. The company also benefits from the characteristics of the direct
sales channel in Brazil, which has increased its share within total CF&T sales
and complements the revenues of the sales consultants.
Going forward, Natura's main challenge is to continue to conduct its
activities on a profitable basis while preserving its strong market position
in Brazil, within the context of fierce competition and lower market growth
rates. The company is currently moving on a new strategy based on increasing
productivity, instead of the previous expanding sales channel strategy. Fitch
believes that the company will be able to capture benefits from the internal
actions it has taken aimed at improving operational efficiency and reducing
delivery time. Fitch expects that these improvements will partially offset the
impact of tough competition, not only from direct sale competitors but also
from retailers and drugstores.
Very Robust and Resilient Cash Flow From Operations
Natura has historically had a sound operational performance, with increasing
revenues (compound annual growth rate [CAGR] of 12% from 2008 to 2011) and
stable EBITDA margins at around 23%-25% in the last five years. These margins
are higher than those posted by some of its key competitors. Natura's
competitive advantages and its low average sales ticket, which allows the
company to mitigate demand fluctuations due to credit constraints, are the
main factors that contribute to this resilient performance even during periods
of lower economic activity. For the last 12 months (LTM) ended June. 30, 2012,
net revenues and EBITDA reached BRL5.9 billion and BRL1.5 billion,
respectively, which compares positively with the BRL5.1 billion and BRL1.2
billion posted in 2010. Funds from operations (FFO) and cash flow from
operations (CFFO) remained robust at BRL958 million and BRL930 million,
Natura's free cash flow (FCF) generation is pressured by its aggressive
dividends payouts. Nonetheless, Fitch considers that Natura has financial
flexibility to reduce these payments if needed, as the dividend distribution
has been mainly underpinned by the lack of alternative use of resources under
the unleveraged capital structure. Over the last five years, Natura's dividend
payout was over 90% on average. During the LTM ended June 30, 2012, FCF was
negative at BRL212 million, resulting from record capex during 2011 of BRL346
million, and BRL343 million during the LTM ended June 30, 2012. Over the
period of 2007-2010, FCF ranged from negative BRL190 million to BRL90 million.
Going forward, FCF should continue to be negative as the company is expected
to maintain its aggressive dividend payout while financing its planned
Unleveraged Capital Structure
Natura has historically maintained low leverage ratios, in spite of strong
dividends and investments made in the recent years. For the LTM ended June.
30, 2012, the total debt to EBITDA ratio was 1.0x and net debt to EBITDA was
0.5x. Interest coverage by EBITDA was strong at 14.5x for the same period.
From 2008 to June 2012, the company reported, on average, total leverage of
0.7x and net leverage of 0.2x. Going forward, Fitch expects Natura's leverage
to remain low, with net debt to EBITDA maintained below 0.8x, despite higher
planned capital expenditures.
Natura has a track record of strong liquidity. As of June 30, 2012, Natura
showed a high debt level coming due in the short term, BRL1,1 billion compared
to BRL803 million in cash. Fitch believes the company has ample access to
credit lines and should soon refinance this debt. As of June 2012, total debt
amounted to BRL1.6 billion.
Challenge to Increase Geographic Diversification
Natura's operating cash flow generation is still concentrated in Brazil, which
represents almost all of consolidated EBITDA. Natura's international
operations, which are concentrated in other Latin America countries, still
require high marketing expenses and as a result have generated negative
operational results. Fitch understands that this is inherent to Natura's
business model, since the direct sales structure demands brand recognition,
which takes some time to develop before sales are large enough to dilute high
marketing expenses. Fitch views as positive the company's goal of achieving
broader geographic diversification in the medium term as well as the fact that
these activities have been developed without being capital intensive.
Key Rating Drivers:
The ratings could be positively affected if Natura succeeds in reaching
broader geographic diversification, thus mitigating macroeconomic risks.
Negative rating actions could be triggered by a severe reduction in operating
cash flow generation and by a liquidity position that could lead to a
worsening of the company's credit metrics and/or a deterioration in its
brands' reputation and in its leading market position. Furthermore, a
leveraging transaction or one that illustrates a departure from Natura's
traditional commitment to its conservative financial strategy could cause
downward ratings pressure.
Additional information is available at www.fitchratings.com. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--Methodology' (Aug. 08, 2012);
--'National Ratings - Methodology Update' (Jan. 19, 2011).
Applicable Criteria and Related Research:
National Ratings Criteria
Corporate Rating Methodology
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