Fitch Affirms Natura's IDR at 'BBB'; Outlook Stable
RIO DE JANEIRO & SAO PAULO -- October 2, 2013
Fitch Ratings has affirmed Natura Cosmeticos S.A.'s (Natura) Foreign and Local
Currency Issuer Default Ratings (IDRs) at 'BBB' and National Scale Rating at
'AAA(bra)'. The Ratings Outlook is Stable.
KEY RATING DRIVERS
Natura's 'BBB' ratings reflect its very strong capital structure, robust
operational cash flow generation and a track record of consistent and
profitable business model. The company has a leading market position in the
Cosmetics, Fragrances and Toilette (CF&T) sector in Brazil. This position is a
result of its competitive cost structure, strong brand recognition, and a
successful direct sales structure in the country. The favorable medium-term to
long-term outlook for the consumer industry's growth in Brazil is also
factored into the ratings. Natura's ratings are constrained by the very
competitive business environment. The ratings are constrained by company's
somewhat limited geographic diversification, with almost all of its cash flow
generation derived from Brazil.
Highly Competitive Market
As of June 30 2013, Natura had 1.5 million sales consultants. The company's
ability to reach consumers through these sales reps is considered an important
competitive advantage. Natura's main challenge is to find alternatives to
improve its operating efficiency in order to offset pressure from fierce
competition and lower market growth rates. Competitive threats in direct sales
have heightened due to a new relevant entrant, Boticario, and a recovery of
Natura's main competitor, Avon. Competition has also increased from retailers
and drugstores, which have been receiving strong support and incentives from
global consumers companies.
Natura's market share has declined to 21.4% in the first four months of 2013
from 24.1% in 2010, in accordance with Sipastec. Fitch believes that the
company might be able to capture benefits from the internal actions to reduce
costs but, at the same, stronger marketing initiatives, higher R&D expenses
and, a somewhat lower product mix should avoid a full recovery. Fitch's base
case considers EBITDA margins remaining in the range of 22% - 23%.
New Business Strategy
The structural change in the competitive environment is leading Natura to
alter its business strategy. The company has developed new initiatives to
recover market-share and support consistent revenue growth. In the near-term,
Natura is seeking to strength its innovation pipeline to occupy new categories
in the CF&T market in an effort to be more competitive at the retail level, as
with the recently launched 'Sou' brand. The company has also increased sales
terms and promotional items throughout the sales cycle in order to boost their
consultants' productivity. In the medium-term, Natura is looking for
opportunities outside of CF&T market to leverage its distribution platform.
Very Robust and Resilient Cash Flow From Operations
Natura has historically reported sound operational performance, with
increasing revenues (compound annual growth rate [CAGR] of 10% from 2009 to
2012) 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 allow the
company to mitigate demand fluctuations due to credit constraints.
During the last 12 months (LTM) ended June 30, 2013, Natura's net revenues and
EBITDA reached BRL6.5 billion and BRL1.5 billion, respectively, which compares
positively with the BRL5.6 billion and BRL1.4 billion posted in 2011. Funds
from operations (FFO) and cash flow from operations (CFFO) remain robust at
BRL1.0 billion and BRL948 million, respectively.
Natura's free cash flow (FCF) generation has been pressured by its aggressive
dividends payouts. Nonetheless, Fitch considers that Natura has financial
flexibility to reduce these payments if needed. During the LTM ended June 30,
2013, FCF was negative at BRL558 million, resulting from record capex in the
period of BRL656 million and BRL851 million of dividend distributions. Going
forward, FCF should continue to be negative as Natura should maintain its
aggressive dividend payout while financing its planned investments. From 2009
to 2012, total dividends disbursements reached BRL2.8 billion while FCF was
negative in BRL405 million.
Leveraging Trending Up; Still Conservative
Fitch expects net leverage ratios to move into a range of 1.0x to 1.5x, which
remains consistent with the 'BBB' rating category. The structural changes in
the company's business going forward should require higher capex volumes
oriented to IT, R&D expenses and working capital that should further pressure
FCF, and consequently, its leverage ratios. Shareholder friendly policy should
be maintained as the company seems comfortable with a net leverage level of
around 1.0x, which is still conservative. From 2009 to June 2012, Natura
reported, on average, a total leverage ratio of 1.0x and a net leverage ratio
Natura has a track record of strong liquidity. As of June 30, 2013, cash and
marketable securities totaled BRL779 billion. This compares with BRL2.3
billion of total debt, of which BRL405 million in the short term. The
cash/short-term debt ratio is healthy, at approximately 1.9x, and when
incorporating the cash flow from operations (CFFO), Natura's cash plus
CFFO/short-term debt ratio is robust at 4.3x.
Challenge to Increase Geographic Diversification
Natura's operating cash flow generation is still concentrated in Brazil, which
represents almost all of its consolidated EBITDA. International operations,
which are concentrated in other Latin American countries, are still in a
ramp-up curve, and over the last quarters have shown improvement that has
resulted in positive EBITDA. Fitch does not expected relevant cash flow from
these operations in the medium term, but it should benefit consolidate
operating margins and stop consuming resources from the Brazilian operations.
Fitch views as positive the company's goal to achieve broader geographic
diversification as well as the fact that these activities have been developed
with low capital allocation.
Negative rating actions could be triggered by a severe reduction in operating
cash flow generation that could lead to a worsening of the company's credit
metrics and/or a significant deterioration in its brands' reputation and/or in
its leading market position. A relevant leveraged acquisition or one that
illustrates a departure from Natura's traditional commitment to its
conservative financial strategy may also trigger a downgrade.
An upgrade is unlikely in the medium term, given the current challenging
competitive scenario and the company?s ongoing strategy to boost revenue,
while maintain market-share and profitability.
Additional information is available at 'www.fitchratings.com'.
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