Natura &Co Holding S.A. Annual Report 2010

Plain-text annual report

1 1. WHAT WE BELIEVE IN 3 Reason for being 3 Vision 3 Beliefs 4 Culture drivers 2. OUR MOMENT 3. WHAT WE AIM FOR 4. WHO WE WORK WITH 5. WHAT FOOTPRINT WE LEAVE 5 Message from the Chairmen 7 Message from the Executive Committee 9 Organizational proﬁ le 15 Our commitments 17 Governance 25 Natura Management System 26 Outlook and strategy 29 High-priority sustainability topics 35 Innovating innovation 38 Collective construction 39 Quality of relationships 44 Employees 53 Consultants and NCAs 59 Consumers 61 Suppliers 64 Supplier communities 68 Surrounding communities 71 Shareholders 73 Government 79 Natura value chain 80 Creation of environmental value 93 Creation of social value 99 Creation of economic value 6. ATTACHMENTS 104 Financial Statements 135 DNV Statement 138 About This Report 139 Global Compact Principles 140 GRI Index 2 1. WHAT WE BELIEVE IN REASON FOR BEING Our Reason for Being is to create and sell products and services that promote well- being/being well. WELL-BEING is the harmonious and pleasant relationship of a person with oneself, with one’s body. BEING WELL is the empathetic, successful, and gratifying relationship of a person with others, with nature, and with the whole. VISION Because of its corporate behavior, the quality of the relationships it establishes, and the quality of its products and services, Natura will be an international brand, identiﬁ ed with the community of people who are committed to building a better world, based on better relationships with themselves, with others, with nature of which they are part, and with the whole. BELIEFS Life is a chain of relationships. Nothing in the universe exists alone. Everything is interdependent. We believe that valuing relationships is the foundation of an enormous human revolution in the search for peace, solidarity, and life in all of its manifestations. Continuously striving for improvement develops individuals, organizations, and society. Commitment to the truth is the route to perfecting the quality of relationships. The greater the diversity, the greater the wealth and vitality of the whole system. The search for beauty, which is the genuine aspiration of every human being, must be free from preconceived ideas and manipulation. The company, a living organism, is a dynamic set of relationships. Its value and longevity are connected to its ability to contribute to the evolution of society and its sustainable development. 3 CULTURE DRIVERS THE CULTURE DRIVERS ARE BASED ON OUR ESSENCE, AND WERE CREATED TO GUIDE OUR CHOICES AND ATTITUDES. THEY ARE LIKE TRACKS, TRACING A CONCRETE ROUTE AND SIGNALING WHAT DESERVES OUR SPECIAL ATTENTION IN OUR DAY-TO-DAY WORK. THE DRIVERS WERE FORMED IN A COLLABORATIVE PROCESS INVOLVING THE FOUNDERS OF THE COMPANY, THE MEMBERS OF THE EXECUTIVE COMMITTEE, AND THE LEADERSHIP TEAM. WE ALSO TOOK INSPIRATION FROM THE CULTURE DIALOGUES, WHICH WERE HELD IN 2009 WITH 150 EMPLOYEES FROM THE ADMINISTRATIVE, OPERATIONAL, AND SALES STAFFS. THE CULTURE DRIVERS ARE: COMMITMENT TO THE TRUTH Be authentic and steadfast, making this commitment to oneself and to others. Defend what you believe and act consistently with one’s beliefs. LOOKING AFTER RELATIONSHIPS Doing things together is better if one opens up to others with generosity and empathy, creating an environment of trust with quality interaction. Recognize that others are different from you, listen without judging, respect others’ opinions, welcoming disagreements in order to ﬁ nd the best outcome for everyone. CONTINUOUS IMPROVEMENT Always strive to improve, moving forward in all dimensions: material, emotional, intellectual, and spiritual. Continuously seek to know oneself, recognizing one’s talents and limitations. Create an environment that fosters learning and continuous improvement and that recognizes high performance. DOING THINGS WELL Resolve to do everything with simplicity, but also with beauty, quality, and with an eye for detail. Have the discipline to deliver what was promised. INNOVATION Be an entrepreneur, take a leading role, do what has never been done before, and take risks. Continually question the status quo and encourage the search for new ideas. SUSTAINABLE DEVELOPMENT Constantly deliver superior results and relevant value in the economic, social, and environmental dimensions. Manage the short term with a commitment to building the future of the company. PLEASURE AND HAPPINESS Face day-to-day challenges with optimism, composure, and good spirit. Celebrate achievements, fueling the enthusiasm and energy that encourage us to move forward, to do more, and to do it better. Find fulﬁ llment in your work and afﬁ nity with your life purpose by ﬁ nding meaning in everything you do. 4 2. OUR MOMENT W E A R E CONNECTED TO THE PEOPLE AND THE CHALLENGES OF OUR TIME. WE WORK TOWARDS THE P E R M A N E N T E V O L U T I O N O F O U R AC T I V I T I E S A N D THEIR IMPACT ON THE THE C O M M U N I T I E S THAT WELCOME US. 2.1MESSAGE FROM THE CHAIRMEN IN A REAL SENSE, A L L O F L I F E I S I N T E R R E L A T E D. A LL PERSO NS A RE C AU GHT IN A N I N E S C A PA B L E N E T W O R K O F M U T U A L I T Y, T I E D I N A S I N G L E G A R M E N T O F D E S T I N Y. WHATEVER A F F E C T S O N E D I R E C T L Y, A F F E C T S A L L INDIRECTLY. I CAN NEVER BE WHAT I OUGHT TO BE UNTIL YOU ARE WHAT YOU OUGHT TO BE, AND YOU CAN NEVER BE WHAT YOU OUGHT TO BE UNTIL I AM WHAT I OUGHT TO BE. THIS IS THE INTERRELATED STRUCTURE O F R E A L I T Y . Martin Luther King License granted by Intellectual Properties Management, Inc., Atlanta, Georgia, as exclusive licensor of the Estate of Dr. Martin Luther King, Jr. THE POWER OF TRANSFORMATION INDIVIDUALS, COMPANIES, AND NATIONS NEED A GUIDING FORCE. AN OBJECTIVE. AN IDEAL. WE STILL USED TO HEAR, WHEN WE FOUNDED NATURA, STRONG ECHOES OF THE MESSAGE, THE DREAMS AND THE UTOPIAS OF MARTIN LUTHER KING, AND WE WERE ALSO DRIVEN BY A PURPOSE THAT SEEMED UNATTAINABLE. Since then, the determination to build our company has been nurtured by the dream of building a better world. Like Martin Luther King, we are convinced that life makes sense only if we think, feel, and act in a systematic way. 5 We are now observing the clash of sometimes opposing forces. Exacerbated individualism seek- ing only to maximize material values coexists with the growth of a vision focused on the collective interest. Actions and greater awareness concerning the socio-environmental cause are revealing examples of the emergence of a change in the direction of civilization. We must therefore mobilize society to build an agenda of transformation. Over the years, it has become increasingly clear that if this agenda is to ﬂ ourish, it must be lived by all those who make Natura what it is and – so we aspire – by those with whom we relate. We live this objective intensely, aware of the fact that in the world there are those who have been excluded, there is prejudice, social inequality, corruption.. In other words, shadows that engender indignation and demand immediate action, as they are an affront to the ethics of life, justice and the possibility of peace. The individualist vision may consider it naïve for a company to have an ideal that recognizes the need for societal change. With all due respect for those who have a different opinion, we believe we must take into account the world that surrounds us. Looking back at our history — beginning with the dream that is, little by little, blossoming into a tangible reality — we know we can be successful. And the progress we have made at Natura shows that we have made the right choices. In 2008, we began to prepare our business structure for future development. At that time, we took steps to strengthen the foundation of our organizational culture, align our leadership more closely with our Essence, develop a new management system, redesign our logistics model, and concentrate on expanding our market share in Latin America and building our leadership position in Brazil. The future holds both opportunities and challenges. We are aware of the tougher competitive environment and remain conﬁ dent in our strengths. These include a strong brand that inspires our consumers, who are now served by 1.2 million sales consultants, both male and female; our renewed management abilities; and our ability to innovate — which is apparent in everything we do, from promoting quality in our relationships to transforming biodiversity assets into products. We would like to express our acknowledgement of the motivated and talented leadership team that carried out this process and which is now channeling its energy into pursuing the plans to expand our activities. We would also like to extend our gratitude to the entire Natura community for its effort and engagement in our common causes. The collective energy of our leadership and all of those with whom we work will power the ex- pansion of this movement. We believe we can contribute to meeting the challenges of the future through our willingness to ﬁ nd solutions that transform socioenvironmental dilemmas into sustain- able business opportunities, while generating prosperity for everyone. This, Natura’s historical calling, makes our value proposition even more attractive, thus enabling us to set our sights beyond the current borders and to see our brand transforming even more distant realities. ANTONIO LUIZ DA CUNHA SEABRA PEDRO LUIZ BARREIROS PASSOS Co-Chairmen of the Board of Directors 6 2.2 MESSAGE FROM THE EXECUTIVE COMMITTEE NATUR A IS IN A POSITION TO RESPOND TO THE CHALLENGES OF THESE NEW TIMES. OUR CONFIDENCE STEMS FROM OUR CONTINUED ROBUST PERFORMANCE IN RECENT YEARS. IN 2010, WE WERE DELIGHTED T O R E P O R T S T R O N G E A R N I N G S — E V E N A S W E C O N T I N U E D TO E X E C U T E T H E P L A N B E G U N I N 2 0 0 8 T H AT I S I N T E N D E D TO M A I N TA I N O U R PA C E O F G R O W T H I N BRAZIL AND ESTABLISH BASES FOR FUTURE E XPANSION. COMMITMENT TO THE FUTURE ALTHOUGH SOME OF OUR INITIATIVES ARE STRUCTURAL AND REQUIRE MORE TIME IN ORDER TO MATURE, OUR ENTHUSIASM IS FUELED, BY THE KNOWLEDGE THAT WE HAVE ACHIEVED ALL OF OUR INITIAL OBJECTIVES. We saw yet another year of vigorous business expansion. Consolidated net revenues rose 21.1%, and EBITDA was up 24.6%. We took on more sales consultants in all of our operations. Latin America is a fertile market for business expansion and is increasingly important to our ability to grow. To meet our expansion plans in the region, we initiated local production through partnerships in Argentina, Colombia, and Mexico. In Brazil, Natura made strong gains, reaching a preference rate of 49% among consumers. We expanded our leadership position by 1.1 percentage points, reaching a 23.6% share of our target market. We created and distributed more value to all of our major stakeholders. And we mobilized the business sector around the topic of biodiversity and reduced the environmental impact of our products. Not everything turned out as we had planned. Despite these advances, we still have progress to make in the level of service we provide to our consultants. Nevertheless, we are conﬁ dent that the invest- ments we have made in our infrastructure will raise our level of service to the standard we desire. Despite our efforts, we also failed to achieve the results we had hoped for in organizational climate, which were below the progress expected. However, we are convinced that we have taken the right steps to improve the quality of our relationships with our employees. Because this is such an impor- tant issue for Natura, we are redoubling our efforts to raise these stakeholders’ level of satisfaction. 7 The plan we put in place in 2008 included initiatives that have both an immediate impact and long- term impacts. Several of these measures have contributed to our current results: innovation in our business model with the establishment of Natura Consultant Advisers (NCA); concentrating our portfolio on important product launches, such as the Una make-up range, Amó perfume, and Chro- nos anti-aging facial cream; and greater investment in marketing and communications through an ad- ditional injection of R$410 million, enabled by productivity gains of R$449 million. We also undertook longer-lasting actions. We implemented a new process-based management model structured around business units and regions; we refreshed our organizational culture, focusing on developing and attracting leaders who are aligned with our Essence; we set the pace for managing the quality of our relationships by expanding engagement practices; and we invested in our infrastructure, upgrading our production, logistics, and information technology capabilities to improve services. Concurrently, we turned our gaze to a more distant horizon and built our 2030 Vision. This is a long- range commitment to strengthening Natura’s future while alerting us to the challenges and uncertain- ties of a world in rapid transformation. It reiterates our intention to create sustainable results and to contribute to a fairer, more inclusive and more responsible society. Many of the events of 2010 have a common thread: enthusiasm for a project that imbues us with new energy at every cycle of achievement. We wish to thank all of you who have been so dedicated in your support for Natura. By working together, we will achieve innovative solutions that transform the busi- ness challenges of the next 20 years into development opportunities that beneﬁ t society as a whole. ALESSANDRO CARLUCCI Chief Executive Ofﬁ cer JOÃO PAULO FERREIRA Senior Vice President of Supply Chain JOSÉ VICENTE MARINO Senior Vice President of Sales and Marketing MARCELO CARDOSO Senior Vice President of Organizational Development and Sustainability ROBERTO PEDOTE Senior Vice President of Finance, Legal Affairs, and Information Technology TELMA SINICIO Senior Vice President of Innovation 8 2.3 ORGANIZATIONAL PROFILE THROUGH OUR PRODUCTS AND SERVICES, WE SEEK TO ENCOURAGE SELF- AWARENESS AND PROMOTE WELL- BEING WELL. WE ASPIRE TO PROVIDE CONSUMERS WITH NEW WAYS OF ESTABLISHING RELATIONSHIPS WITH THEMSELVES, WITH THOSE AROUND T H E M , A N D W I T H T H E WO R L D. We are a Brazilian cosmetics, fragrances and personal care company with a strong presence in Latin America. Since our founding in 1969, we have built a culture that values relationships. Our corporate behavior is focused on promoting sustainable development by improving awareness about responsible and innovative use of bio- diversity assets. We strive to create value through solutions and new opportunities that we identify in partner- ship with our stakeholders — always with an eye to ﬁ nding a balance between the social, environmental, and economic impacts of our business. We have adopted a direct sales business model because we believe in our ability to generate and distribute income, offer development alternatives and inspire more than 1.2 million sales consultants to disseminate our value proposition to our consumers. Natura directly employs more than 7,000 professionals. Our head ofﬁ ce is in Cajamar, state of São Paulo, and we have ﬁ ve commercial ofﬁ ces in Brazil: Salvador (Bahia), Campinas and Alphaville (São Paulo), Rio de Janeiro (Rio de Janeiro), and Porto Alegre (Rio Grande do Sul). Our plants and Research and Technology centers are located in Cajamar (São Paulo) and Benevides (Pará), and in 2006, we opened an Advanced Technology Center in Paris, France. In Brazil, our products are delivered to our consultants and consumers from distribution centers in Cajamar and Jundiaí (São Paulo), Canoas (Rio Grande do Sul), Matias Barbosa and Uberlândia (Minas Gerais), Simões Filho (Bahia), Jaboatão dos Guararapes (Pernambuco), and Castanhal (Pará). We have company-owned operations in France, Argentina, Chile, Colombia, Mexico, and Peru. In addition, we use local distributors to sell our products in Bolivia, Guatemala, Honduras, and El Salvador. In 2010, we began manufacturing in Argentina through local partnerships. We also have Natura Houses, which are centers where our consultants can work and train and where consumers can get to know our products. We have seven of these in Brazil, all in the state of São Paulo, 14 elsewhere in Latin America, and one in France. We have been a publicly traded company since 2004, with about 40% of our shares listed on the New Market of the São Paulo Stock Exchange (BM&FBovespa). For ﬁ ve consecutive years, we have been included in Bovespa´s Corporate Sustainability Index (CSI) (learn more on page 71, Shareholders). MAIN HIGHLIGHTS OF THE YEAR ECONOMIC ¾ Our net revenues totaled R$5.1 billion, a growth of 21.1%. ¾ We recorded EBITDA of R$1.2 billion, up 24.6% from the previous year, and an EBITDA margin of 24.5%, compared with 23.8% in 2009. ¾ We achieved net income of R$744.1 million, 8.8% above the previous year. ¾ We distributed more wealth to our stakeholders. The wealth generated to our employees increa- sed 20%, for our consultants 19% and for our shareholders 17%. ¾ International manufacturing began through partnerships in Argentina. In 2011, we will begin operations in Mexico and Colombia. 9 SOCIAL ¾ Natura had 1.2 million consultants at the end of 2010. This represents a growth of 17% in Brazil and of more than 20% in our international operations. ¾ The Natura Crer para Ver (Believing Is Seeing) program, which invests in education, received a record R$10 million in funding, 168% more than in 2009. Funding is based on sales of speciﬁ c items in our portfolio. Revenues from sales of these items outside of Brazil totaled R$1.3 million. ¾ Although progress has been made, the quality of the service we provide to consultants has not yet reached the level we desire. We continue working to reduce our nonservice rate (NSR), which keeps track of products that are ordered by consultants but are unavailable. ¾ The survey on working climate generated a 73% overall favorable response rate from our employees, one percentage point below 2009. Declines in ratings in our international operations and among operational staff in Brazil contributed to this decrease. ¾ The loyalty of our consultants in Brazil rose from 17% to 21%, but declined among Natura Con- sultant Advisers, from 37% to 32%. ENVIRONMENTAL ¾ We extended the period for achieving a 33% reduction in our relative greenhouse gas emissions to 2013. The original target date was 2011. By 2011, our reduction was 21% ¾ We launched the ﬁ rst reﬁ ll packaging made of polyethylene from sugar cane, a renewable source of energy. In addition to being 100% recyclable, it reduces greenhouse gas emissions that cause global warming by 58% compared with common plastic. ¾ We reduced relative water consumption by 10%, thanks to improvements that are intended to guarantee efﬁ cient use of resources. ¾ We created a methodology that measures the socioenvironmental impacts of our supply chain, in an effort to improve the selection of our suppliers. ¾ We were charged by the Brazilian Institute of the Environment and Renewable Natural Resources (Ibama) for failing to secure prior authorization to conduct research using inputs from Brazilian biodiversity. Natura does not agree with the procedure and has formally contested these charges. AWARDS AND RECOGNITIONS RECEIVED BY NATURA IN 2010 CUSTOMER SERVICE Recognition Organization Category Awarded Top 25 Companies in Customer Service in the Country IBRC/Exame Top Companies in Customer Service in the country Cosmetics Industry Ranking COMMUNICATION Recognition Comunique-se FINANCE Recognition Top 100 Shares Organization Category Awarded Comunique-se Magazine Corporate Communication Professional: Rodolfo Guttilla, Director of Corporate Affairs and Government Relations at Natura Organization Você S/A magazine Category Awarded Top 100 Shares As Melhores da Dinheiro (The Best of Dinheiro) Isto É Dinheiro magazine Best Company in the Pharmaceutical, Hygiene and Cleaning industry The top 1000 companies with greatest revenues - Argentina Mercado magazine General Ranking The biggest companies in Latin America America Económica magazine General Ranking Agência Estado Distinguished Companies Estado de S. Paulo General ranking of the top 10 companies listed on Bovespa Valor 1000 Valor Econômico newspaper Best Company in the Hygiene and Cosmetics industry Place 2nd 1st Place 1st Place 7th 1st 120th 92nd 5th 1st 10 INSTITUTIONAL Recognition Organization Category Awarded Place Most Admired - Carta Capital Carta Capital magazine Biggest and Best Exame “What is a Company Image Worth” Survey Exame Magazine and Reputation Institute - NY Euromoney Ranking Euromoney magazine Most Admired Companies in Brazil Most Admired Company in the Personal Hygiene Industry Most Admired Leader: Alessandro Carlucci Best Company in the Consumer Goods Category Biggest and Best Ranking The 10 Companies in Brazil with the Best Reputation The Best Company in the Consumer Goods Category in Latin America Excellence in Corporate Management in Brazil Image Ranking - Top 100 – Argentina Imagen magazine General Ranking GRI and RCA Awards The Bizz INTERNET Recognition The GRI Amsterdam Global Conference The Value Chain Award The GRI Reader’s Choice Award - Best Overall World Confederation of Businesses Business Excellence Organization Category Awarded Quality Standard in B2B B2B magazine Top of Mind Internet Award UOL Best Company in the Cosmetics, Hygiene and Cleaning category We were recognized as the most remembered Brand by consumers on the Internet in the Beauty Products category BRAND Recognition Organization Category Awarded Brands for Decision Makers Jornal do Comércio RS Recognized as the Leading Brand in the Personal Beauty and Hygiene industry and in Environmental Preservation Most Valuable Brands in Brazil Interbrand and Isto É Dinheiro 5th place in the ranking of Most Valuable Brands. Apex Brazil Award Apex Best International Brand Management IMPARAward – Preferred Brands and Regional Afﬁ nity Index Impar Magazine/PR 2nd place in the preference of State of Paraná in the Perfume and Cosmetics Segment Brazil Intangibles Award – PIB Brand Recall Award Grupo Padrão and Consumidor Moderno magazine Pioneering in Intangibles Jornal do Commércio Newspaper – Recife Sustainability Top 100 most valuable brands in Brazil The Brander magazine/IAM Most valuable brands in Brazil Top of Mind Folha de São Paulo Most remembered brand in the category of Environmental Preservation. Top of Mind Successful Brands Minas Gerais Mercado Comum magazine (MG) Most remembered brand in the category Leadership in Women's Beauty Products. Top of Mind Amanhã Magazine – Porto Alegre Amanhã magazine Most remembered brand in the categories Perfumes and Sustainability Top Vale Vale Paraibano newspaper Category Cosmetics & Environment World’s Hottest Brands Advertising Age Brasil Advertising Age Trusted Brands Readers’ Digest Natura was recognized as a regional brand - Brazil South America Voted the most socially responsible company, Best Brand in the category "skin creams”. In addition, the CEO Alessandro Carlucci was named "Executive of the Year”. 1st 1st 10th 3rd 68th 5th 1st 1st 59th 1st 5th 1st Place 1st 1st Place 1st 5th 1st 2nd 1st 1st 48th 1st 1st 1st 1st 1st 1st 11 MARKETING, PRODUCT AND PACKAGING Recognition Organization Category Awarded Place ABRE Design and Packaging Brazilian Packaging Association Best Packaging for Cosmetics and Personal Care - New Natura Chronos Line Módulo Marketing - Best Communication Strategy Açaí Harvest 2009 Atualidade Cosmética Atualidade Cosmética magazine and J.R. Paula Jr. Design Chronos Facial Treatment Latin American Men's Perfume: Essencial Exclusivo Elle Beauty Awards – Mexico Expansión Group Best spa product Nova Beleza Award Nova magazine Hair: Natura Fixplant Post Hair Straightening Anti-Frizz Finishing Cream. Best Shampoo and Conditioner for straight hair - Natura Smooth Plant Chronos Facial Exfoliant Double Action - Natura Una Lipstick Bar soap Natura Ekos - Cupuaçu Soap for slicing HUMAN RESOURCES Recognition Organization Category Awarded Place HR Personality of the Year Award from ABTD/ PR ABTD/PR Você HR Professional of the Year Award Editora Abril Marcelo Cardoso was recognized as HR Personality of the Year Marcelo Cardoso was recognized as professional of the Year 2009 in the Hygiene and Cleaning Industry. HR of the Year: Marcelo Cardoso, Vice President of Organizational Development and Sustainability Great Place to Work - Peru Great Place to Work Institute and El Comércio Newspaper Best Companies to work for in Peru Best companies to work for Mexico Great Place to Work One of the best companies to work for Company of the Dreams of Youngsters DMRH Group and Cia de Talentos Awarded in the ranking of the top 10 companies in the preference of young Brazilians SUSTAINABILITY Recognition 2011 Global 100 Organization Category Awarded Place Corporate Knights 100 Most Sustainable Corporations in the World ET Carbon Veriﬁ cation Leaders Award – Environmental Investment Organization (EIO) Carbon Disclosure Project Global company for its strategies of control, veriﬁ cation and dissemination of carbon emissions 1st 1st 1st 1st 1st 1st 1st 1st 1st 1st 1st 1st 33rd 11th 5th 66th 1st Global 100 Most Sustainable Corporations in the World Best Practices for Social Responsibility – Mexico Corporate Knights Inc., Innovest Strategic Value Advisors, Asset 4 and Bloomberg Centro Mexícano para La Filantropia (Mexican Center for Philanthropy) The 100 most sustainable companies in the world 99th Best practices 2010: Bond with the community AMCHAM Corporate Citizenship Award – Argentina AMCHAM Argentina Awarded in the category Sustainability-Oriented Management Top 100 most sustainable corporations according to the media Mídia B + Portal Imprensa Ranking Fundación Chile: Companies Best Prepared for Climate Change Fundación Chile and Revista Capital Overall Ranking Health, Cosmetics and Cleaning - Pharmaceutical Industry Companies Best Prepared for Climate Change RSE National Ranking - Chilean Socially Responsible Companies Fundación Prohumana and Que Pasa magazine Honorable Mention in Chilean Socially Responsible Companies RSE Ranking - Argentina Road to Credibility Apertura magazine Overall Ranking SustainAbility and FBDS Best Sustainability Report 1st 2nd 2nd 1st 3rd 16th 16th 1st Top Consumer Excellence in Consumer Relations and Respect for the Environment - Rio Grande do Sul INEC - National Institute for the Consumer and Citizen and Consumer Test Distinguished Commitment to Sustainable Consumption 1st 12 INVESTOR RELATIONS Recognition Abrasca - Best Annual Report Organization Public Company Category Awarded Ibovespa Most Transparent Companies BM&FBovespa Ibovespa’s Most Transparent Companies Top Companies for Shareholders Capital Aberto magazine Top Companies for Shareholders IR Magazine BRazil Awards IBRE – Instituto Brasileiro de Economia and FGV – Fundação Getúlio Vargas Best Corporate Governance and Best Environmental Sustainability Place 7th 6º 1st 1st 13 OPERATIONS MAP Mexico Colombia France Peru Brazil Chile Argentina COMMERCIAL OPERATIONS PLANTS COMMERCIAL OFFICES DISTRIBUTION CENTERS NATURA HOUSES RESEARCH AND TECHNOLOGY CENTERS OUR MARKET Once again, the cosmetics, fragrances, and personal hygiene sector continued growing at a record pace last year, this time, however, amid a scenario of strong expansion of Brazilian economy, estimated at 7.5% of GDP in 2010. With less strength, but with the same consistency, the rest of Latin America — notably Chile and Mexico — also reported increases in economic activity. The growth of the Latin American cosmetics market was double that of Europe and the United States over the past decade. The region now represents nearly 15% of the global cosmetics market, revealing the scale of opportunities in Latin America. According to data published by the Brazilian Association of the Cosmetic, Toiletry, and Fragrance Industries (Sipatesp/Abihpec), Brazil’s target market registered a nominal growth of 13.5% in 2010. Our value pro- position once again boosted our leadership by more than 1.1 percentage points and reached a 24% share of our target market. Year after year, the direct-sales industry continues to attract people. According to the Brazilian Association of Direct Seles Companies (ABEVD), there are 2.7 million direct-sales representatives in Brazil. This repre- sents a 12.2% increase over 2009. 14 2.4 OUR COMMITMENTS EMPLOYEES QUALITY OF RELATIONSHIPS O V E R T H E Y E A R S , W E H A V E D E M O N S T R AT E D A C O M M I T M E N T TO S T R E N G T H E N I N G O U R P E R F O R M A N C E INDIC ATORS. THESE INDIC ATORS REFLECT O U R W I L L I N G N E S S TO I N C O R P O R AT E I M P ROV E D M A N AG E M E N T O F O U R PRIORITY SUSTAINABILITY TOPICS INTO OUR STRATEGIC PLANNING. TO LEARN MORE ABOUT THE TARGETS OUTLINED IN THIS TABLE, PLEASE REFER TO THE CHAPTERS “WHO WE WORK WITH” AND “WHAT WE AIM FOR.” 7 COMMITMENTS NOT ACHIEVED 2 COMMITMENTS UNDER WAY 8 COMMITMENTS ACHIEVED 1. 2010 COMMITMENT: Achieve a 76%1 favorable response rate in the Natura climate survey. NOT ACHIEVED: Natura achieved a 73% favorable response rate. 2011 COMMITMENT: Achieve a 76% favorable response rate in the Natura climate survey. 2011 COMMITMENT: Achieve a 32% loyalty rate with Natura employees. 1. Due to a calculation error, we recorded a target in the previous report a target of 77%. EDUCATION 2. 2010 COMMITMENT: Achieve an average of 100 hours of training per employee in Brazil. NOT ACHIEVED: We recorded an average of 90 hours of training per employee in the Brazilian operations. 2011 COMMITMENT: Record an average of 100 hours of training per employee in Brazil. 2011 COMMITMENT: Record an average of 88 hours of training in Natura’s overall average, including international operations. SUPPLIER COMMUNITIES QUALITY OF RELATIONSHIPS 3. 2010 COMMITMENT: Increase resources allocated to supplier communities by 44% (made up of supply, distribution of beneﬁ ts, funding, and support, use of image, training, certiﬁ cation, studies, and assistance). ACHIEVED: We increased resources by 57% compared to 2009. 2011 COMMITMENT: Increase resources allocated to communities by 25% from 2010. 2011 COMMITMENT: Record an average grade of 3.7 in the BioQlicar (Quality, Logistics, Innovation, Competitiveness, Ser- vice, and Relationship) assessment. 2011 COMMITMENT: Achieve a 44% loyalty rate with supplier communities. CONSULTANTS AND (NCAs) QUALITY OF RELATIONSHIPS 4. 2011 COMMITMENT: Achieve an 18% loyalty rate with consultants. ACHIEVED: We achieved a 21% loyalty rate. 2011 COMMITMENT: Record a 22% loyalty rate with consultants. 5. 2010 COMMITMENT: Achieve a 40% loyalty rate with NCAs. NOT ACHIEVED: The loyalty rate with NCAs was 32%. 2011 COMMITMENT: Achieve a 37% loyalty rate among NCAs. EDUCATION 6. 2010 COMMITMENT: Register the participation of 517,400 consultants in training programs. ACHIEVED: We had the participation of 540,000 consultants in our training programs. 2011 COMMITMENT: Achieve the participation of 540,000 consultants in our training programs. 7. 2010 COMMITMENT: Raise R$6 million from the sale of products of the Crer para Ver (Believing Is Seeing) line. ACHIEVED: We achieved record revenues of R$10 million. 2011 COMMITMENT: Record R$13 million from the sale of products of the Crer para Ver line. 15 8. 2010 COMMITMENT: Have 100,000 consultants engaged in the Natura Movement. ACHIEVED: 113,100 consultants engaged in the Natura Movement. 2011 COMMITMENT: Reach 135,000 consultants engaged in the Natura Movement. 2011 COMMITMENT: Reach a 13% engagement rate among consultants in the Crer para Ver program. 2. target refers to Brazilian operations CONSUMERS PRODUCT IMPACT 9. 2010 COMMITMENT: Eliminate parabens from our product portfolio by December 1, 2010. NOT ACHIEVED: Due to technical difﬁ culties related to the process, system, and formulation, we were not able to ex- clude parabens as an ingredient in the formulation of all products in this portfolio, including in our international operations. 2011 COMMITMENT: Eliminate this ingredient completely from our portfolio by June 30, 2011. 10. 2010 COMMITMENT: Eliminate phthalates from our portfolio as an ingredient in product formulation by July 1, 2010. ACHIEVED: Natura excluded phthalates as an ingredient in the formulation of all products in its portfolio. QUALITY OF RELATIONSHIPS 11. 2010 COMMITMENT: Maintain the consumer loyalty rate at 46%. ACHIEVED: We achieved a 53% loyalty rate among consumers. 2011 COMMITMENT: Maintain a 54% loyalty rate with Brazilian consumers. SUPPLIERS QUALITY OF RELATIONSHIPS 12. 2010 COMMITMENT: Achieve a satisfaction rate of 85% with the company. NOT ACHIEVED: We recorded a rate of 81%, the same level achieved in 2009. 2011 COMMITMENT: Maintain a 28% loyalty rate with Natura. ENVIRONMENT GREENHOUSE GASES (GHGs) 13. 2010 COMMITMENT: Reduce our relative emissions of GHGs by 33% by 2011, based on the inventory conducted in 2006. COMMITMENT UNDERWAY: As of 2010, we achieved a 21% reduction. TARGET: The estimated 33% reduction was postponed to 2013. 14. 2010 COMMITMENT: Reduce our emissions of GHGs related to scope 1 and 2 of GHG Protocol by 10% by 2012, based on 2008 emissions. COMMITMENT UNDERWAY: Accumulated variation from 2008 to 2010 indicated an increase of 38%. TARGET: Reduce our emissions of GHGs related to scope 1 and 2 of GHG Protocol by 10% by 2012, based on 2008 emissions. PRODUCT IMPACT 15. 2010 COMMITMENT: Reach a rate of 18.5% on the sale of reﬁ lls on items billed in Brazil. NOT ACHIEVED: We achieved a 16.9% rate of reﬁ ll sales, which represents a lower percentage compared to 2009. 16. 2010 COMMITMENT: Reduce the total weight of waste per unit billed by 6%. NOT ACHIEVED: Our index increased by 8% to 25.7 grams per unit billed. 2011 COMMITMENT: Reduce the total weight of waste per unit billed by 3%. 17. 2010 COMMITMENT: Reduce water consumption per unit billed by 10%. ACHIEVED: Consumption was reduced by 10%. 2011 COMMITMENT: Reduce total water consumption per unit billed by 3%. Notes: 1.In order to have a more thorough picture of the quality of our relationship with our stakeholders, we have also adopted a loyalty index that includes three aspects: satisfaction, intention to continue the relationship with Natura, and the recommendation of our brand, unlike the satisfaction survey, which considers only one of these aspects. Concerning our employees, in addition to the loyalty index, we also conduct the climate survey, which assesses more speciﬁ c issues related to the work environment, careers and job satisfaction. 2. The above indicators for quality of relations have an error margin corresponding to a 95% conﬁ dence interval. 3. Except for the favorable responses in the Climate Survey, the commitments for quality of relationships refer to the Brazilian operations. 16 2.5 GOVERNANCE NATURA CORPORATE GOVERNANCE IS PERMANENTLY ENHANCED. W E H AV E B E E N S I G N I F I C A N T LY FOCUSED ON THIS OBJECTIVE SINCE 2 0 0 4 , W H E N N AT U R A W E N T PUBLIC AND LISTED ITS SHARES ON THE SÃO PAULO STOCK EXCHANGE. Our Board of Directors comprises six members, including two founding partners, Antonio Luiz da Cunha Seabra and Pedro Luiz Barreiros Passos. The third founding partner, Guilherme Peirão Leal, resigned in 2010 to run as the Green Party vice presidential candidate. Of the other four members of the Board, three are independent. Board members are selected for their qualiﬁ cations, knowledge on sustainability, experience in executive posi- tions, and the absence of conﬂ icts of interest. Board members’ compensation includes a ﬁ xed monthly compo- nent and a variable annual component linked to Natura’s economic, ﬁ nancial, social, and environmental results. We continually improve and reinforce internal controls and processes, which has enabled Natura to achieve SOX certiﬁ cation for accounting controls and ﬁ nancial reporting. SOX certiﬁ cation is based on criteria in the 2002 U.S. Sarbanes-Oxley Act and is required of companies listed on the New York Stock Exchange. Natura is among the ﬁ rst Brazilian companies to obtain SOX certiﬁ cation, though this is not a Brazilian legal requirement. We believe that an efﬁ cient control environment produces transparency in the performance of our operations, ensures that our ﬁ nancial statements accurately present our business processes, and provides security for our stakeholders. In an effort to acquaint Board members with the customs of the various regions where we operate, the Board has scheduled meetings outside the company’s head ofﬁ ce. Of the six regular meetings held last year, one took place in Rio de Janeiro in April, and another was held in Mexico in September. We will maintain this practice in 2011, holding one meeting annually in a Brazilian regional ofﬁ ce and another meeting each year in one of the countries in which we do business. The Board of Directors is supported by four committees: Strategy; Corporate Governance; People and Or- ganizational Development; and Audit, Risk Management, and Finance. The latter was reorganized in December 2010, and now only external and independent members may serve on this committee. This reorganization was intended to improve internal controls. The Audit, Risk Management, and Finance Committee is responsible for evaluating accounting, taxes, corporate affairs, and new investments. New members who took ofﬁ ce in February 2011 receive technical support from a group of external specialists and Natura executives. In 2010, we sought to expand the participation of individual shareholders at the Annual Shareholders’ Meeting. We gathered 200 investors at our Cajamar unit, and they were able to follow — in real time — the sharehol- ders’ meeting taking place at Natura’s head ofﬁ ce in Itapecerica da Serra. Through this event, investors were able to come into closer contact with our company, its controlling shareholders, and executives (learn more on page 71 – Shareholders). Since 2007, Natura has been a member of the Company Circle of Latin American Corporate Governance, which consists of a group of Latin American corporations selected by the International Financial Corporation of the World Bank based on the quality of their governance practices. BOARD OF DIRECTORS PEDRO LUIZ BARREIROS PASSOS Co-chairman of the Board of Directors in ofﬁ ce ANTONIO LUIZ DA CUNHA SEABRA Co-chairman of the Board of Directors EDSON VAZ MUSA Member JOSÉ GUIMARÃES MONFORTE Member; President of the Audit, Risk Management, and Finance Committee JULIO MOURA NETO Member; President of the Strategy Committee LUIZ ERNESTO GEMIGNANI Member; President of the People and Organizational Development Committee 17 PRESIDENTIAL ELECTIONS The decision of one of the co-chairmen of our Board of Directors, Guilherme Leal, to participate in the 2010 presidential elections was one of Natura’s key governance challenges for the year. Guilherme Leal resigned from Natura shortly after the Green Party announced him as its candidate for vice president. Throughout this process, we emphasized transparency, clearly separating Natura’s business operations from an individual’s decision to run for public ofﬁ ce. Natura’s governance structure ensured that the company took all steps required to insulate corporate governance from political inﬂ uence. Our campaign donation policy, in force since 2006, forbids donations to candidates or political parties — a policy that gained greater signiﬁ cance last year. We also set up a special committee to monitor media exposure of Natura and its founding partner during the elections. EVALUATION OF THE BOARD OF DIRECTORS In 2010, we conducted two evaluations of the members of our Board of Directors and the members of the committees advising the Board: one self-evaluation and one external evaluation, which enabled us to identify oppor tunities to improve our governance. The self-evaluation was carried out by the Governance Committee, which conducted a series of indi- vidual interviews to capture the impressions of the members concerning the dynamics of the Board and its autonomy to make decisions, among other issues. The main findings and conclusions were compiled and presented to the Board itself. Among the progress identified in this self-evaluation are: the resump- tion of the executive sessions and the improvements in the working agendas. The external evaluation, conducted by a consulting firm, involved an analysis of the size and composition of the Board and its advisory committees, the degree of empowerment, the working climate and the value added by its members, among other matters. Individual interviews were organized independently by the consulting firm, based on a comparison of Natura’s initiatives with the best governance practices identified internationally. The aspects that received the highest marks in the external evaluation refer to the good working climate, the freedom to address issues and to express opinions, and the clarity of the information submitted to the Board for consideration. Never theless, it was also found that the criteria for the process of evaluat- ing the Board and its committees should be better disseminated to the company’s senior management. Fur thermore, it was discovered that while the general information is adequately transmitted, the flow could be improved to give the members more time to analyze the issues. The changes resulting from this evaluation will be implemented throughout 2011. COMMITTEES SUPPORTING THE BOARD OF DIRECTORS AUDIT, RISK MANAGEMENT AND FINANCE Since early 2011, it has been formed by the independent Board members José Guimarães Monfor te, Edson Vaz Musa and Luiz Ernesto Gemignani, and by the external specialists Gilber to Mifano and Taiki Hirashima, the Senior Vice President of Financial, Legal and Information Technology, Affairs Rober to Pedote, the Corporate Governance Director, Moacir Salzstein, and the Risk Management and Internal Audit Manager, Mercedes Stinco, who serves as the committee secretary. It meets four times a year and is primarily responsible for advising the Board of Directors in its financial and risk analysis and in its relationship with external auditors. STRATEGY This committee is made up of three Board members – Pedro Luiz Barreiros Passos, Julio Moura Neto and Edson Vaz Musa – in addition to the CEO Alessandro Carlucci. They analyze strategic issues, prepar- ing guidelines and recommendations for the Board of Directors. The committee monitors the strategic projects in progress, defined in Natura’s Strategic Planning, and discusses the company’s long-term ac- tions. It meets on a monthly basis, except in January and June. CORPORATE GOVERNANCE Among the functions of this committee is to discuss improvements and progress in governance and in running the business. It is made up of three Board members: Pedro Luiz Barreiros Passos, José Guimarães 18 Monfor te and Júlio Moura Neto, in addition to Corporate Governance Director, Moacir Salzstein, who serves as the committee secretary. The meetings are held on a quar terly basis, although the committee convened five times in 2010, once in an extraordinary meeting to discuss the changes to the Audit, Risk Management and Finance Committee. The Corporate Governance committee was also responsible for the self-evaluation process of the Board of Directors and its advisory committees, as well as for oversee- ing the external evaluation process that occurred in the last quar ter of 2010. PEOPLE AND ORGANIZATIONAL DEVELOPMENT This committee is comprised of three Board members – Pedro Luiz Barreiros Passos, Edson Vaz Musa and Luiz Ernesto Gemignani – and Fátima Raimondi, an external member who joined in 2010, as well as the CEO Alessandro Carlucci and the Senior Vice President of Organizational Development and Sustain- ability, Marcelo Cardoso. The meetings are held on a monthly basis, except in January and July. The com- mittee addresses topics such as remuneration, leadership projects, succession, training and topics of in- terest to the Human Resources Depar tment, the Culture Program and the Natura Management System. EXECUTIVE GOVERNANCE Natura’s main executive body, the Executive Committee (Comex), is made up of Natura’s Chief Executive Ofﬁ cer, Alessandro Carlucci, and ﬁ ve deputy chairmen. Comex’s priorities are management of the business and assessment of economic, social, and environmental results. Comex also monitors strategic planning and our strategic projects. The structure of Comex was consolidated in 2010 to enable a global outlook on business. Comex is sup- ported by eight committees that discuss thematic topics and represent the executive body. The original six committees supported Comex on issues related to brand, sustainability, ethics, commercial innovation, products, and processes. Two new committees, the Customer Committee and the Ideas and Concepts Committee, were established in early 2011. NATURA EXECUTIVE COMMITTEE ALESSANDRO CARLUCCI Chief Executive Ofﬁ cer JOÃO PAULO FERREIRA Senior Vice President of Supply Chain JOSÉ VICENTE MARINO Senior Vice President of Sales and Marketing MARCELO CARDOSO Senior Vice President, Organizational Development and Sustainability ROBERTO PEDOTE Senior Vice President of Finance, Legal Affairs, and Information Technology TELMA SINICIO Senior Vice President of Innovation 19 NATURA EXECUTIVE BOARD IN 2010 ALEXANDRE CRESCENZI Commercial Vice President – Brazil ALESSANDRA DA COSTA Human Resources Vice President – Brazil ANA LUIZA MACHADO ALVES Brand Vice President ANGEL MEDEIROS Logistics Innovation Vice President ARMANDO MARCHESAN NETO Customer Services Vice President – Brazil ARNÔ ARAÚJO Commercial Vice President – Mexico AXCEL MORICZ General Vice President – Colombia CECÍLIA GOYA MEADE General Vice President – Mexico DANIEL GONZAGA General Vice President – Peru DANIEL LEVY New Business Vice President DENISE ALVES Culture Vice President DENISE FIGUEIREDO Business Unit Vice President DIEGO DE LEONE Business Unit Vice President ERASMO TOLEDO Commercial Development and Innovation Vice President FLÁVIO PESIGUELO Organizational Development and Sustainability Vice President – International Operations GILBERTO XANDÓ Business Vice President – Brazil JOÃO AUGUSTO PEDREIRA Business Unit Vice President Lucilene Prado Legal Vice President LUIS BUENO Regional Unit Vice President LUIZ CARLOS LIMA Corporate Finance Vice President MARCEL GOYA Finance Vice President – International Operations MARCOS PELAEZ Information Technology Vice President MARCUS OLIVER RISSEL Regional Unit Vice President MOACIR SALZSTEIN Corporate Governance Vice President MÔNICA GREGORI Communication and Marketing Vice President NESTOR FELPI Customer Services Vice President – International Operations PEDRO GONZALES General Vice President – Argentina PEDRO VILLARES Superintendent of Natura Institute RENATO ABRAMOVICH Regional Unit Vice President RICARDO FAUCON Supply Vice President ROBERT CLAUS CHATWIN Business Development Vice President RODOLFO WITZIG GUTTILLA Corporate Affairs and Government Relations Vice President HERIOVALDO SILVA Commercial Vice President – International Operations ROGÉRIO CHER Corporate Human Resources Vice President JORGE ROSOLINO Financial Vice President – Brazil JOSELENA PERESSINOTO ROMERO Product Availability Vice President JOÃO CARLOS MOCELIN Industrial Vice President TATIANA PIGNATARI Business Unit Vice President TOMAS JANS Business Vice President – International Operations VICTOR FERNANDES Ideas, Concepts, Science and Technology Vice President 20 COMMITTEES SUPPORTING COMEX CUSTOMERS Created in January 2011, the main function of this committee is to monitor the quality of the services provided by Natura to its ﬁ nal consumers and consultants. It is chaired by the Senior Vice President of Operations and Logistics, João Paulo Ferreira, and another Comex representative, the Senior Vice President of Innovation, Telma Sinicio, also serves on the committee. ETHICS Monitors issues related to the Natura Relationship Principles and makes decisions on cases of violations of these principles. It is headed up by the Senior Vice President of Financial, Legal and Information Technology Affairs Ro- berto Pedote, and other Comex members include the CEO Alessandro Carlucci and the Senior Vice President of Organizational Development and Sustainability, Marcelo Cardoso. IDEAS AND CONCEPTS Chaired by the CEO Alessandro Carlucci, this committee was created in March 2011 to deﬁ ne the long-term innovative ideas and concepts for the company. Also serving on this committee are Senior Vice President of Innovation, Telma Sinicio, and the shareholders and members of the Board of Directors Pedro Luiz Barreiros Passos and Antonio Luiz da Cunha Seabra. COMMERCIAL INNOVATION Its primary function is to analyze the projects that bring commercial innovation to the business. This committee is chaired by the Senior Vice President of Business, José Vicente Marino, while also serving is the Senior Vice President of Finance, Legal Affairs and Information Technology, Roberto Pedote. BRAND Responsible for management of the Natura brand and analyzing topics such as brand architecture, assessing the Natura language and reviewing its main developments. It is chaired by the CEO Alessandro Carlucci, with the Senior Vice President of Business, José Vicente Marino, and the Senior Vice President of Organizational Develop- ment and Sustainability, Marcelo Cardoso, also serving. PROCESSES Monitors the implementation of the Management by Process model, deﬁ ning focuses of attention and strategies. It is chaired by the Senior Vice President of Organizational Development and Sustainability, Marcelo Cardoso. The Senior Vice President of Operations and Logistics, João Paulo Ferreira, also represents Comex on this com- mittee. PRODUCTS Oversees the steps and processes involved in the approval of new products created by Natura. It is chaired by the Senior Vice President of Innovation, Telma Sinicio, while also serving is the CEO Alessandro Carlucci and the Senior Vice President of Business, José Vicente Marino. SUSTAINABILITY Monitors the management of the sustainability topics associated with the company’s Integrated Planning meth- odology, namely: monitoring the Socio-Environmental Budget (targets and commitments assumed by Natura in these areas) and deﬁ ning the Materiality Matrix. Furthermore, it also oversees the management of strategic projects related to sustainability, such as Carbon Neutral and the Solid Waste project. The committee is also responsible for evaluating positions and strategies concerning the company’s vision of sustainability and Quality of Relationships. It is chaired by the Senior Vice President of Organizational Development and Sustainability, Mar- celo Cardoso, with the participation of the Senior Vice Presidents of Financial, Legal and Information Technology Affairs, Roberto Pedote, and of Operations and Logistics, João Paulo Ferreira. 21 RISK MANAGEMENT Natura’s risk management strategy involves analysis of two primary risks to our business: strategic risks, which are external threats to the continuity of our business; and operational risks. Responsible managers and their teams evaluate internal processes to identify potential operational risks. In both cases, the analysis considers potential economic, social, and environmental outcomes. Natura’s risk management strategy identiﬁ es processes and control mechanisms to address Natura’s pri- mary strategic and operational risks. These include physical risks, but not risks related to climate change. Our actions do, however, evaluate regulatory risks and identify opportunities to offer new technologies and products that address the challenges posed by climate change. An important development in 2010 was the consolidation of Natura’s strategic risks map, which was incorporated into our strategic planning. This map is now monitored by all committees that support the corporate governance and executive structures. As part of a more comprehensive contingency plan, we have established a crisis prevention system based on the most relevant scenarios experienced by the company. This initiative has been developed by Natura since 2009. As part of the review of our internal control processes, we redeﬁ ned the user proﬁ les for accessing Natura information and data, thereby streamlining our fraud prevention management. We also reviewed our Relationship Principles, including more details and clariﬁ cations about two speciﬁ c principles for our employees and in-house outsourced workers, on conﬂ icts of interest and personal favoritism (read more on page 45 – Employees). Since 2009, Natura has been conducting an Internal Controls Evaluation to identify the main operational risks and the controls of all its 132 processes. Last year, the evaluation involved the application of 212 questionnaires and the mobilization of 219 managers and directors. In addition to forwarding the most important identiﬁ ed risks to Strategic Planning, they were also incorporated into the Natura’s process planning. We also developed speciﬁ c action plans to mitigate the higher risks. INTERNAL AUDIT Made up of 16 professionals, Natura’s internal audit team reports to the Audit, Risk Management, and Fi- nance Committee. This structure guarantees the independence of auditors, who are free from interference from other areas of the company. In 2010, the team performed 33 audits of Natura’s technical capabilities, management and operational processes, and international operations. This number far exceeded the 13 audits conducted in 2009. Internal audits include a series of tests and procedures to evaluate the control environment and evaluate the potential for fraud and corruption. Of the 33 audits performed in 2010, 11 cases required investigation. Five of these cases ultimately were found to involve irregularities, and those involving misconduct resulted in the dismissal of six employees. Each of these cases led Natura to strengthen its control mechanisms. SENIOR MANAGEMENT COMPENSATION Natura’s executive compensation package intends to stimulate entrepreneurship and promote executive enga- gement, and is, in part, linked to the company’s growth and capital appreciation. Our proﬁ t-sharing system for executives is based on multiples of base salary, in accordance with their duties. When this model was reviewed in 2009, the variable pay component was expanded, thus enabling the company to be more competitive. The remuneration received by the chief executive ofﬁ cer, vice presidents, ofﬁ cers and senior managers is consistently linked to the commitment to our long-term project by means of the Stock Option or Share Subscription Plan. The Share Purchase or Subscription Option Program has stipulated, since 2009, that adherence to the program is bound by the agreement of the executive to invest at least 50% of the amount received as proﬁ t sharing in the acquisition of Natura shares. The shares may only be exercised after a vesting period of three years for 50% of the shares, and of four years for 100% of the shares. In either case, there is an eight year validity, and the shares are not available for sale until the end of the third year. In 2008, the Board of Directors established an annual limit of 0.6% of total shares and a maximum limit of 3% for the program. The model established in 2009, more aggressive than the previous year, set an annual limit of 0.75% and a maximum of 4% . In December 2010, the amount of options held by execu- tives represented nearly 1.59% of Natura’s shares, compared to 1.29% in December 2009. The number of Natura shares on December 31, 2010, totaled 430,881,416. Since 2002, we have granted 19,638,804 options, of which 23% have been cancelled due to the resigna- tion of executives. 22 NUMBER OF OPTIONS Plan 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total Granted Exercised Mature Balance Non-Mature Balance Cancelled 3,533,610 3,969,220 1,901,460 1,120,760 1,153,756 1,305,508 1,800,010 2,742,128 2,112,352 2,712,645 3,404,495 1,606,063 567,874 230,227 110,852 0 0 0 0 0 0 83,48 392,492 236,987 0 0 0 19,638,804 8,632,156 712,959 0 0 0 0 0 347,839 1,039,961 2,404,809 2,077,658 5,870,267 820,965 564,725 295,397 469,406 531,037 609,831 760,049 337,319 34,694 4,423,423 23% 14% 16% 42% 46% 47% 42% 12% 2% 23% APPRECIATION OF THE PLANS Amounts in Thousands of R$ Restated Amount of the Plan Real Discount Obtained in the Year Discount Obtained in the Year1 Potential Discount of the Mature Balance2 Potential Discount of the Non-Mature Balance 2 R$ 6.85 R$ 3.84 R$ 9.44 R$ 20.25 R$ 30.17 R$ 28.53 R$ 22.16 R$ 24.17 R$ 35.46 42,412.4 66,917.3 26,152.8 6,712.1 2,664.6 1,703.9 0.0 0.0 0.0 52,216.3 79,701.6 29,308.9 7,032.5 2,739.4 1,742.2 0.0 0.0 0.0 0.0 0.0 0.0 2,302.6 6,930.7 4,573.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 6,712.4 26,700.5 56,909.6 25,706.1 146,563.1 172,740.9 13,806.6 116,028.6 Status of the Plan Expired Expired Expired 100% Mature 100% Mature 50% Mature Não Mature Não Mature Não Mature Plan 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total 1. Accumulated amounts, adjusted by the brazilian IPCA (Extended National Consumer Price Index) until December 2010. 2. Price of Natura shares (NATU3) on December 30, 2010: R$ 47.83. 50% Mature 10-apr-05 10-apr-06 10-apr-07 16-mar-08 29-mar-09 25-apr-10 22-apr-11 22-apr-12 19-mar-13 100% Mature 10-apr-06 10-apr-07 10-apr-08 16-mar-09 29-mar-10 25-apr-11 22-apr-12 22-apr-13 19-mar-14 Validity 10-apr-08 10-apr-09 10-apr-10 16-mar-11 29-mar-12 25-apr-13 22-apr-14 22-apr-17 19-mar-18 VARIABLE REMUNERATION Variable Remuneration is intended to recognize and reward the executives of Natura for their performance and results over the year, to guarantee a competitive compensation package and to align the interests of executives and shareholders. The total amount of annual proﬁ t sharing, the basis of the long-term compensation program, is limited to 10% of the company’s net proﬁ t. With these limits, Natura has a consistent and well-controlled system that avoids distortions between remuneration and the company performance. The variable component, whether short-term or long-term gains, allocates a larger amount for senior executives than for other employees. In addition to well-deﬁ ned limits, all variable remuneration is tied to the effective at- tainment of targets and to the surpassing of minimum growth expectations established annually by management. Natura’s performance, therefore, must reach a minimum set for this remuneration to be paid. 23 The criteria determining the variable component take into account three sets of performance indicators, all derived from the Strategic Planning. In 2010, the following indicators were used: ¾ Economic – Consolidated Ebitda, Brazilian and international operations; ¾ Social – Organizational climate survey in the Brazilian and international operations and the consultant loyalty index; ¾ Environmental – Carbon emissions; ¾ Other – Non-Service Rate (NSR), which shows the percentage of products that are unavailable when orders are placed by our consultants, in the Brazilian and international operations. See below the remuneration amounts of the main staff groups: 2010 Board of Directors Executive Committee Senior Management and Ofﬁ cers Middle Management Administrative Staff Sales Force Operational Staff Total 2010 Average number of employees Total salary (in millions)1 Total variable (in millions)2 Stock Options Plan for 2011 (in number of options)3 6 6 86 336 1,255 905 2,542 5,135 2.64 5.25 27.04 42.17 63.63 44.60 41.89 2.08 6.28 17.83 18.14 6.29 43.19 10.33 227.23 104.13 - - - - - - - - 1. Total Salary: Includes annual average base pay over 12 months (net) plus overtime in millions. 2. Total Variable: Bonuses, Proﬁ t Sharing and Sales Prizes paid over the year. 3. Stock Options: Plan for 2011 will be approved in March 2011. 2009 Average number of employees Total salary (in millions)1 Total variable (in millions)2 Board of Directors4 Executive Committee4 Senior Management and Ofﬁ cers Middle Management Administrative Staff Sales Force Operational Staff Total 2009 7 5 74 283 903 981 2,239 4,492 3.49 3.96 19.77 32.86 44.63 43.76 37.09 1.33 7.78 20.17 20.50 5.59 46.25 5.59 185.56 107.21 2,031,095 1. Total Salary: Includes annual average base pay over 12 months (net) plus overtime in millions. 2. Total Variable: Total Salary plus Bonuses, Proﬁ t Sharing and Sales Prizes. Proﬁ t Sharing refers to the stated year, paid in the subsequent year. 3. The number of options refers to the plan of the current year. 4. Employee numbers revised after one member of the Executive Committee was mistakenly counted as a member of the Board of Directors in the 2009 report. 2008 Average number of employees Total salary (in millions)1 Total variable (in millions)2 Board of Directors5 Executive Committee5 Senior Management and Ofﬁ cers Middle Management Administrative Staff Sales Force Operational Staff Total 2009 7 6 81 302 971 1,097 2,132 4,597 2.64 5.45 24.31 39.85 53.54 43.81 37.89 1.33 7.29 21.22 22.57 8.67 40.06 8.63 Stock Options Plan for 2010 (in number of options)3 - 683,656 1,347,440 0 0 0 0 Stock Options Plan for 2009 (in number of options)4 0 694,726 2,040,931 0 0 0 0 207.50 109.77 2,735,657 24 2.6 NATURA MANAGEMENT SYSTEM OUR ACTIONS ARE INTENDED TO E N G AG E A N D I N S P I R E O U R EMPLOYEES, SUPPORTING THEM IN CLEARLY DEFINED PROCESSES, ENABLING THE IMPLEMENTATION OF THE COMPANY’S STRATEGY AND PLANS, AND GUARANTEEING THE EXPANSION OF OUR DIFFERENTIATED BUSINESS MODEL. In order to organize the information ﬂ ow across all Natura’s processes and guarantee the alignment of deci- sions with our principles, the Natura Management System has been under development since 2008, when the model incorporated our Regional Units (in all Brazilian regions and international operations) and Business Units (by product segment). The System is designed to reproduce our method of operating wherever we are by means of well-deﬁ ned processes and routines, enhancing a non-centralized and integrated management model that allows greater independence for managers and greater proximity to consultants and consumers. The expansion of our in- ternational actions allows greater importance on the new model. In the coming years, our challenge will be to have this integrated management system become understood and adopted by all Natura employees, becoming an instrinsic way of how Natura routinely does business. To assist with this challenge, we have identiﬁ ed 12 interrelated priority components that are critical to the success of the Natura Management System: leadership, strategic planning, relationships, sustainability, learning, individuals, processes, brand, culture, customers, innovation, and triple bottom-line results. The component of this new management system that is in the most advanced stage of completion is the Management by Process model, which was established with the creation of our Business Units and Regional Units. In 2010, we fully integrated 22 key processes in Natura. To guarantee proper implementation, we stage assessments and process certiﬁ cation. We have created indicators for each process and have designed six new processes to be certiﬁ ed in 2011. This has created a more effective structure for monitoring of Natura’s 18 strategic projects. They are all directly attached to our growth proposal for the coming years and they have been approved by the Board of Directors. They are also regularly monitored by senior management. 25 3. WHAT WE AIM FOR WE BELIEVE IN THE TRANSFORMATIVE POWER O F P E O P L E , C O M P A N I E S , NETWORKS, AND COMMUNITIES, A N D W E WA N T TO P L AY A L E A D I N G R O L E I N T H E EVOLUTION OF OUR SOCIETY . 3.1 OUTLOOK AND STRATEGY OVER THE PAST THREE YEARS, WE HAVE COMBINED SIGNIFICANT B U S I N E S S G R OW T H W I T H CHANGES IN OUR MANAGEMENT AND INFR ASTRUCTURE MODEL AND IN OUR RELATIONSHIPS W ITH STA K E H O LD E R S . As a result of these intense structural developments, Natura is poised to take advantage of opportunities in the cosmetics, fragrances and personal care market in Brazil and Latin America. We are strengthening our competitive advantage at a time when our region enjoys a positive outlook. The expansion of manufacturing, the participation of women in the job market, falling unemployment, and rising family incomes have led to prolonged periods of economic growth in several Latin American countries. We understand that the attractiveness of our market results in increased competition. We believe, however, that the Brazilian market still offers many growth opportunities through the regionalization of our operations and by ﬁ lling the space where our brand is not yet present. Our international operations are becoming stronger year after year. We now have the infrastructure, market knowledge, leadership, products, sales channels, and relation- ship networks needed to increase our share in these markets. We are entering a cycle in which innovation is increasingly relevant in all aspects of our business — not only in product development, but also in our sales model, in building relationships, and in ﬁ nding solutions to social and environmental challenges. Inspired in our culture, we intend to deepen the search for solutions related to the performance of our role as change agents in society. STRUCTURAL CHANGES In 2010, we initiated international production through partnerships. The shift from an exportation model to a local production model will beneﬁ t society and reduce environmental impacts, in a combination that enables the construction of a sustainable development model. Operations in Argentina started in the second half of 2010 with perfume-bottling activities. In 2011, we will initi- ate operations in Mexico and Colombia. Within three years, we intend for 50% of revenues from our interna- tional operations in Latin America to come from products manufactured outside Brazil. When fully deployed by 2013, this new manufacturing structure will eliminate 70% of greenhouse gas emissions that result from supply logistics in these countries. 26 We restructured some executive positions to monitor operations more closely, giving us the agility required for superior management. We merged our Business and Internationalization vice presidencies and created two general executive ofﬁ ces, one for Brazil and another for international operations. These initiatives provided our leaders with greater autonomy and our Executive Committee with a more global and strategic vision. In January 2010, our ofﬁ ce in Buenos Aires, Argentina, began to manage our international operations. We expect this new production-and-logistics model to drive expansion in our domestic and international busi- ness. Additional innovations in the planning stage will improve the assistance we provide to our sales consultants and consumers. We have made signiﬁ cant investments in information technology, which will support our growth cycle in the coming years. This initiative will provide greater scalability, integration, and connectivity to our systems platform. Approximately 85% of orders from our sales consultants are received via the Internet. To prepare for the changes taking place at Natura, we will transfer our administrative unit and the distribution center in Itapecerica da Serra this year to a new facility in the city of São Paulo. We understand that these chan- ges, which aim to provide employees with better working conditions, will also impact the local community, espe- cially with respect to tax collection. To mitigate these impacts, we are engaging in a dialogue with the municipal administration about the pending relocation and our plans to continue to invest in the community (learn more on page 68, Surrounding Communities). Some administrative functions now based in Cajamar, as well as the pic- king center (preparation of boxes with products for sending to consultants) will also be transferred to São Paulo. OUR PLANNING In 2010, we set up a new Strategic Planning cycle for the period from 2011 to 2015. We deﬁ ned targets and identiﬁ ed critical success factors, indicators, and milestones required to achieve our objectives. We know that the success of this initiative rests in part on our ability to develop leaders whose actions align with our Essence so that they can become real agents of social transformation. We also intend to create an internal environment with constant learning opportunities, supported by a strong organizational culture enhanced by the many countries in which we operate. We place a high priority on taking advantage of opportunities that derive from connectivity so that we can foster sustainable development. These elements will guide our strategic planning for the next ﬁ ve years, allowing us to maintain our leadership position in Brazil and to expand our direct sales model in Latin America. They will also help us generate more value for Natura’s stakeholders. As a result, we will continue to delight and be delighted by our customers, fos- tering our well-being well concept in an innovative manner, strengthening our brand, and maintaining the quality of relationships with our stakeholders. Thinking about the future is the ﬁ rst step toward innovation. In 2010, one outgrowth of our strategic planning process was the development of our 2030 Vision. With the support of senior management, we stretched our vision beyond the ﬁ ve-year planning cycle to focus on long-term scenarios and potential challenges. Given the potential scenarios we predict for the world in 2030, we note one positive trend: a growing col- lective awareness awakened by the threat posed by climate change. Nevertheless, if current patterns of pro- duction and consumption are maintained, environmental degradation may take on devastating proportions. In this context, we should reassert our position as social change agents and channel our capacity to inno- vate towards ﬁ nding a balance in our business activities, by investing in new technologies and production practices, and by inﬂ uencing the partners in our production chain – from suppliers of raw materials to our consumers. We want to be part of the network of organizations committed to the creation of a new model of development. EXECUTIVE SUMMARY OF THE VISION OF NATURA IN 2030 One quick look at what humanity is experiencing reveals the inequality, corruption, hunger, disease and war that plague our societies. Against this backdrop, the environmental devastation and growing global warming, also consequences of man’s actions, indicate that our life in 2030 is under threat. Faced with this desolate outlook, globalization presses on with fast-growing economic activity in large centers, but without the global governance aimed at solving the socio-environmental challenges. Nevertheless, given the scale of the threat posed to the future of the planet, we have noticed the awakening of a collective aware- ness of respect for life rising above any other value or interest. When confronted with this new hope, we see that our range of beliefs, values and Reason for Being will be- come even more appreciated. We also believe that Brazil could be a source of inspiration for this imbalanced world that is advancing rapidly towards globalization and universalization. Brazil could inspire the world, since it is an extremely diverse country abounding with cultural, social and environmental wealth. And, like the Brazilian company we are, we will help us become a leading country in the development of a new economy for the 21st century. 27 To be living in this world in constant transformation not only inspires us, it also motivates us towards a more radical, broad and thorough application of our values. We all have the opportunity to contribute to the de- velopment of a new civilizational process and we believe that the international community will increasingly appreciate the initiatives of companies that are committed to this change. At Natura, we shall continue our dedicated pursuit of balance in our business activities, diminishing our negative impacts on the environment until we can guarantee positive processes throughout our production chain. At the same time, and with just as much determination, we will try – demonstrating the contagious enthusiasm that the world needs – to fulﬁ ll our vocation as social change agents, justly remunerating the network involved in the development and sale of our products and providing inclusion opportunities for the excluded population. We need to share knowledge and opportunities so that everyone can, in a positive and autonomous manner, be part of a collective awareness of respect for life, for the human condition and for the planet. Therefore, we believe that our brand will enjoy global presence and recognition, and that we will be known for our pioneering work in the development of new business based on the transformation of socio-environmental challenges into opportunities. We also believe that we will be part of a network of interconnected entrepre- neurs and companies recognized for producing leaders who are committed to the creation of a new model of development. With equal responsibility, we shall employ our capacity to innovate more comprehensively, considering the integral vision of the human being and our mission to creatively meet consumer needs, while also seeking to respect and preserve the threatened web of life, taking our inspiration from the collective dream to shape a healthier future for the planet. SUSTAINABILITY MANAGEMENT The way we do business is guided by our search for a sustainable development plan. We are aware that the joint management of economic, social and environmental aspects of all processes is a major challenge. However, we have managed to effectively incorporate this integrated vision into our routine operations. Sustainability is one of the cornerstones of our processes and a part of Natura’s Strategic Planning, which is approved by the Board of Directors and closely monitored by senior management. Our main socioenviron- mental indicators serve to integrate the company’s strategic plan, and these indicators are communicated to all business units to guide their processes. The Executive Sustainability Ofﬁ ce is responsible for this process, educating and disseminating practices throug- hout the company. In both Brazil and in our international operations, we rely on a network of sustainability leaders who convey global practices to each unit and assure that these practices are integrated into decision making. Our Biodiversity Management Group systematically monitors our sustainable use of biodiversity so that through technology development, stewardship, ethical trade actions, and beneﬁ t sharing, we preserve natural resources and have a positive impact in our local communities. We also seek to make continual progress in the construction of our materiality matrix. This involves a pro- cess of determining which aspects of our company’s sustainability efforts are viewed as most relevant by our stakeholders. This process is carried out every two years. The results of the actions related to our six priority topics in 2010 (Amazon, Biodiversity, Greenhouse Gas Emissions, Education, Product Impact and Quality of Relationships) are reported to Natura’s senior management by the Sustainability Committee. In 2010, for the ﬁ rst time, we invited our international operations to take part in this process. The new materiality matrix will be included in the next reporting cycle and incorporated into 2011 strategic planning (learn more on page 109, About this Report). Maintaining the quality of the relationships we have established with our stakeholders is also part of our sustain- ability management process, and this includes our educational programs on relations and dialogue with stakeholders (read more on page 38, Quality of Relationships). 28 3.2 HIGH PRIORITY SUSTAINABILITY TOPICS AMAZON W E S E E T H E A M A ZO N R E G I O N A S A S T R AT E G I C D R I V E R F O R B R A Z I L ’ S ECONOMIC DEVELOPMENT. FINDING NEW OPPORTUNITIES FOR SUSTAINABLE USE OF THE AMA ZON ’ S R ESOURCES IS PARAMOUNT TO GUARANTEEING QUALITY OF LIFE FOR FUTURE GENER ATIONS. Twelve years ago, we decided to incorporate biodiversity assets into our products in a sustainable manner, respecting the ways of traditional communities and the livelihoods of local families. Based on this experience, we developed the Amazon Program, which seeks to stimulate the crea- tion of sustainable supply chains and new businesses based on science, innovation, and entrepre- neurship, in addition to the natural and cultural resources offered by the region. Through the Ama- zon Program, we can contribute to sustainable development proposals that offer opportunities to local inhabitants while keeping the forest standing. In preparing this strategy, we reﬂ ected on the lessons of our previous actions and from workshops on the Amazon with Natura’s senior management. The knowledge gained from these actions gave rise to the program, which is based on the expansion of our activities in science, technology and innovation; sustainable production chains; and the region’s institutional strengthening. PALM OIL We convened a panel of key opinion leaders, experts, and representatives of civil society, govern- ment, and nongovernmental organizations to discuss a sustainable model for palm cultivation in the region. What we learned from this process gave rise to the Amazon Program, which allows us to build guidelines that will help us to develop a balanced production plan. Because of improper agricultural practices that have damaged ecosystems in Asian countries, the production of palm oil has negatively affected the biodiversity in tropical forests. However, we be- lieve that the sustainable production and use of palm oil is possible, driving income generation and regional development. In 2010, we joined the Roundtable On Sustainable Palm Oil (RSPO), a global initiative led by the WWF to certify the production process and assure compliance with social, environmental and eco- nomic criteria. Our palm oil supplier, Agropalma, has begun the process to certify its production and Natura will pursue its own certiﬁ cation once this has been completed. We want to accompany the national discussions on the impact of palm and engage in dialogue with regional leaders to develop a domestic plan for sustainable production. Since 2008, we have been working in partnership with Embrapa to research agroforestry systems for palm production in con- junction with other species in the Amazon, and its combined use with other oilseed crops. 29 BIODIVERSITY W E R E COG N IZE T H AT CO M PA N I E S , SOCIETY, AND GOVERNMENT SHARE R E S P O N S I B I L I T Y F O R T H E CONSERVATION OF BIOMES AND FOR PURSUING ECONOMIC OPPORTUNITIES FOR THE SUSTAINABLE MANAGEMENT OF NATURAL RESOURCES. Our experience shows that production processes with lower environmental impact and innova- tive solutions may generate positive results for both society and business. Our production model involves some 2,300 families in Brazil and is based on the creation of fair trade and compensation for the use of genetic heritage and traditional knowledge, proper handling of raw materials, and promotion of local development (learn more on page 30, Supplier Communities). Our opera- tions are guided by the Policy for the Sustainable Use of Biodiversity and Cultural Heritage, crea- ted in 2008 based on the Convention on Biological Diversity (CBD), which establishes guidelines for the use of raw materials and for the sharing of their beneﬁ ts. Reaffirming our leadership role in the area of biodiversity, we headed the Brazilian Business Movement for the Conservation and Sustainable Use of Biodiversity . More than 80 par tici- pating companies and civil organizations signed a letter declaring their commitment to the conservation of Brazilian biodiversity. This document encourages the government to define a regulatory framework that fosters research and scientific advances that integrate production, use, and conservation. The Movement sent the letter to the federal government and presented it at the 10th Conference of the Par ties to the Convention on Biological Diversity (COP 10), in Nagoya, Japan. As a result of this imperfect legislation, in 2010 we received infraction notices from the Brazilian Institute of the Environment and Renewable Natural Resources (Ibama) for alleged irregular ac- cess to biodiversity (learn more on page 80, Creation of Environmental Value). “SUSTAINABILITY SHOULD BE SEEN AS AN INTEGRAL, INSEPARABLE PART OF THE BUSINESS.” Christian Moura, Supplier. 30 EDUCATION EDUCATION IS A MAJOR CHALLENGE THROUGHOUT L ATIN AMERIC A . THE GEOGR APHICAL OUTREACH OF OUR B U S I N E S S O F F E R S T H E S C O P E AND CONDITIONS FOR LARGE-SCALE PROJECTS AND INITIATIVES, POSITIVELY INFLUENCING A MOVEMENT FOR THE NEED FOR QUALIT Y EDUCATION. In 2010, we created the Natura Institute, a non-proﬁ t organization that is responsible for all our private social investment. Through the Crer para Ver (Believing Is Seeing) program, we invest the proceeds from the sale of a special line of products into initiatives that can affect the quality of education in Brazil and Latin America. In addition, we offer educational technologies to society that can have a positive inﬂ uence on public education policies to improve literacy skills for preschool- aged children. This would be similar to what we achieved in Brazil with the Trilhas (Trails) Project, and we will share this with the Ministry of Education. In 2010, the Crer para Ver program obtained the highest funding in its history, R$10 million, 168% higher than the previous year. Revenues from international operations contributed R$1.3 million to this program in 2010 (learn more on page 93, Creation of Social Value). Our concern with education extends to our employees, suppliers, and consultants. At a time when Brazil faces the challenge of ﬁ nding a qualiﬁ ed workforce to drive its development, there is a clear shortfall in secondary, technical, and higher education. Accordingly, we seek to offer our employees education and professional development for all positions. In 2010, we created a program for the operational staff that links career development to education. We also signiﬁ cantly increased the number of young apprentices and launched a program that prepares these young workers for the professional market (learn more on page 44, Employees). In 2011, we will offer preparatory courses for job openings at Natura in the community of Cajamar to increase the number of qualiﬁ ed candidates at Natura and other companies (learn more on page 68, Surrounding Communities). We also invest in the training of our consultants. In 2010, more than 500,000 consultants participated in training; most had less than 3 years of experience working for Natura (learn more on page 54, Consultants and NCAs). 31 GREEN HOUSE GASES WE KNOW THAT ONLY SIGNIFICANT C UT S I N T H E VO LU M E S O F C A R B O N LAUNCHED INTO THE ATMOSPHERE WILL EFFEC TIVELY CONTAIN THE FORCES THAT C R E ATE C LI MATE C HANG E . TO HELP TO ACHIEVE THIS, WE CREATED THE CARBON-NEUTRAL PROGRAM IN 2007. Besides offsetting our emissions through support to socioenvironmental projects, we committed to reducing our relative greenhouse gas (GHG) emissions by 33% between 2007 and 2011. By the end of 2010, we had reached a total reduction of 21%, even with an increase in production. Given what we have learned over these past ﬁ ve years, we have deferred our achievement of this goal to 2013. Due to the reduction obtained in the last four years, even with the increase in our production, we have learned important lessons. Today, the carbon issue is an integral part of Natura’s strategy and inﬂ uences the company’s decision making. We have adopted innovative initiatives and conducted an in-depth analysis of the impact of our processes so that our managers understand the contribution of each process to GHG emissions. We carried out a broad diagnosis of our operations in 2010 to identify new opportunities for re- ducing and mobilizing the entire company so that these targets are met. The new study includes the expected gains from various ongoing structural projects, from the revision of product mass and use of biopolymers in packaging to the distribution process with the new logistic model and the start of international manufacturing. The complexity of these actions, involving a deep transformation of how we run our business, partially explains the revision of our goals. An important point to highlight is that our commitment to reduction is not limited to our own operations, but also the extraction of raw materials by all our suppliers, which makes our reduction efforts all the more complex and our achievements all the more signiﬁ - cant. (Learn more on page 80, Creation of Environmental Value). We also face the additional challenge of reducing 2012 absolute emissions in the Brazilian operation by 10% from 2008 levels. These are emissions that result from our internal production processes. We maintained our target despite delays in the implementation of internal programs that could help us achieve this goal, and despite the change in the Brazilian electricity matrix. The latter increased the use of thermal plants, thereby raising the rate of carbon emissions to produce electricity. “ IT IS NOT EASY TO CHANGE THE POLITICS OF A COUNTRY. BUT IT IS POSSIBLE TO EDUCATE AND CREATE A CRITICAL MASS THAT WILL MAKE “ SUSTAINABLE DECISIONS. Claudia Rodríguez, civil society organization representative 32 PRODUCT IMPACT ONE OF OUR PRIMARY CHALLENGES IS TO R E D U C E T H E I M PAC T C AU S E D B Y THE MANUFACTURE, DISTRIBUTION, AND USE OF OUR PRODUCTS. THIS HAS LED US TO INVEST IN PRACTICES AND TECHNOLOGIES THAT AIM TO MINIMIZE THESE IMPACTS, ESPECIALLY IN TWO A S P E C T S : M A N A G E M E N T O F S O L I D WASTE AND WATER CONSUMPTION. The management of solid waste was a priority in our discussion panels with stakeholders. In 2010, we developed a more extensive program, enlisting the help of 40 people, among packaging manu- facturers, garbage collectors, industry professionals, academics, specialists, and consumers in deﬁ ning issues and guidelines for improvement. Our ﬁ rst action, to be implemented in 2011, will be to work with our suppliers and outsourced production partners to search for efﬁ ciencies and innovative waste solutions — from the time raw materials are extracted all the way through postconsumption. It is worth mentioning that new concepts were acknowledged in the recently instituted National Policy for Solid Waste, such as the priority assigned to reduction prior to recycling and the responsi- bility of the consumer, who is a part of the chain. The business community now faces the additional challenge of searching for alternative treatments for its waste, including in the postconsumption phase. Management of water consumption is another priority. This year, we decided to broaden the analysis of our impact on this natural resource. Previously, we had focused on our internal processes and our main suppliers. More recently, however, we started to use the water footprint concept, which gives us a more comprehensive vision of the impact of water usage throughout the life cycle of a product or process. The water footprint includes not only consumption, but also the potential for pollution. In 2009, we became a partner of the Water Footprint Network (WFN) group, the purpose of which is to promote sustainable, equitable, and efﬁ cient use of water. In 2010, we used the methodology des- cribed in the Water Footprint Manual in two of our products to learn how this applies to our business. Natura is the ﬁ rst cosmetics company in the world to use this methodology in the manufacture of cosmetic products (learn more on page 80, Creation of Environmental Value). “ THE FOCUS IS ON HOW TO FACE THE PROBLEM. LITTLE HAS BEEN DISCUSSED ABOUT HOW NOT TO GENERATE IT. “ Lucio Di Domenico, civil society organization representative 33 QUALITY OF RELATIONSHIPS W E B E L I E V E T H AT SOLUTIONS TO T H E C U R R E N T C H A L L E N G E S FAC E D BY HUMANITY ENTAIL A COLLECTIVE PROCESS OF THINKING ABOUT THE FUTURE WITH A FOCUS ON RAISING AW A R E N E S S A N D D I A L O G U E . T H E R E F O R E , N AT U R A B E L I E V E S I N THE IMPORTANCE OF MAINTAINING THE QUALITY OF ITS RELATIONSHIPS. We invest in the development of efficient channels for dialogue, in sharing experiences, in transparency, in ethical behavior, and in the creation of oppor tunities to find shared solutions. We rely on formal channels of interaction, such as the Natura Service Channel and Natura Consumer Service Channel, specifically created for our consultants and consumers. Through our Ombudsman’s Office, our employees, suppliers, and Natura Consultant Advisers can also obtain information or file complaints. Our objective is to listen to our stakeholders, who we believe can help us improve the way we plan and manage our operations. Last year, we demonstrated this by hosting discussion panels that ultimately led to the establishment of a series of new initiatives at Natura. These initiatives included a waste management program (learn more on the previous page, High-priority Topics/ Product Impact) and our position on the sustainable use of palm (learn more on page 29, High- priority Topics/Amazon). The results of these dialogues inﬂ uenced our decision-making and the development of our strategic planning, and also helped us develop our processes and behaviors, which contributed to raising the standard of our relationships. We also started to include our international operations in the process of deﬁ ning the materiality matrix (learn more on page 109, About the Report), by holding discussion panels in Colombia, Mexico, Peru, and Argentina in 2010, and in Chile in March 2011 (learn more on page 39, Quality of Relationships). 34 3.3 INNOVATING INNOVATION INNOVATION IS AT THE CENTER OF NATURA’S VALUE CREATION AND INVOLVES ALL THE COMPANY’S STRATEGIC PILLARS. IT IS EXPRESSED THROUGH THE INNOVATION O F O U R P R O D U C T S , S A L E S M O D E L S , T H E M A N AG E M E N T S Y S T E M A N D T H E WAY IN WHICH WE TRANSFORM SOCIAL A N D E N V I R O N M E N TA L C H A L L E N G E S I N TO O P P O RT U N I T I E S F O R L E A R N I N G A N D S U P P O R T I N G S U S TA I N A B L E DEVELOPMENT. FOR US, INNOVATION MEANS CREATING A FLOW OF WELL- B E I N G W E L L T H AT S U R PA S S E S T H E EXPECTATIONS OF OUR STAKEHOLDERS. Two important developments took place in 2010: the construction of our Vision 2030 (learn more on page 23) and Natura’s Vision of Innovation. These independent projects give us a long-term perspective, outlining future opportunities and deﬁ ning the paths we want to follow. We have identiﬁ ed the need to develop new competencies, beyond the classical sciences, developing a more comprehensive approach. These strategies include increasing our knowledge of sciences that govern sustainability, social biodiversity, and sensorial experience, while pursuing innovation in other ﬁ elds of knowledge associated with the perceptions, behaviors, and rituals of groups of people. Through these new strategic fronts, we are ﬁ ne-tuning our direction in science and technology. This vision has also reinforced our commitment to searching for alternatives to reduce our environmental impact and to embracing the principles of ecodesign (the development of products, processes, and services that take environmental impact into account). As part of this commitment, for example, Natura established a carbon-emissions limit for the approval of new products in the company (learn more on page 63, Crea- tion of Environmental Value). Among other innovative initiatives in sustainability management, we prepared a methodology for evaluating the social and economic impacts of our suppliers (learn more on page 49, Suppliers) and developed a pilot experiment to calculate the water footprint of two products in our portfolio – including, in addition to our own operations, the consumption from extracting the raw material. (learn more on page 63, Creation of Environmental Value). To support these changes, we expanded our investments in research, science, and technology, and in the creation of knowledge networks. The investment of our net revenues in innovation-related activities increa- sed to 2.8% (R$139.7 million). This amount was invested exclusively in science and technology, innovation management and partnerships, product development and marketing, regulatory affairs management, and product safety (graphs 1 and 2). 1. INVESTMENT IN INNOVATION (R$ MILLIONS) 139.7 111.8 103.0 2008 2009 2010 2. NUMBER OF PRODUCTS LAUNCHED (UN) 168 118 103 Strategic portfolio management dictates that the ideal level of innovation, as measured by the Innovation Index (see formula below), should range between 55% and 65%. In 2010, we recorded 61% that guaran- teed to Natura a differentiated market presence and the appropriate strenght to the channel. 2008 2009 2010 35 INNOVATION INDICATORS (%) Percentage of net sales invested in innovation Innovation Index 1 2008 2.8 67.5 2009 2.6 67.6 2010 2.8 61.4 1. Gross revenues for the past 12 months from products launched in the past 24 months, divided by total gross revenues for the past 12 months. Natura’s innovation is sustained by its search for excellence in: ¾ Scientiﬁ c research to identify ingredients from Brazilian sociobiodiversity and to enable the use of these new ingredients in the manufacturing of products that offer special beneﬁ ts; ¾ Scientiﬁ c fundamentals on hair and skin, and in-depth knowledge of consumer needs; ¾ New models and methods to ensure product safety and global strategies on regulatory matters; ¾ Cosmetic Vigilance System, which monitors possible adverse impacts of products, supports the con- sumer, and drives the innovation process; ¾ Focus on scientiﬁ c understanding of controversial ingredients and replacement strategy; ¾ Systemic understanding of well-being and its relations in the physical, emotional, cultural, and social dimensions; ¾ Concept creation and development of new products that provide a continuous ﬂ ow of product launches in both the short and long term; ¾ New packaging, and other innovative and different ways of providing beneﬁ ts to the consumer, with the lowest possible environmental impact; ¾ Transformation of socio-environmental challenges into business opportunities and products, including the sustainable use of natural resources, social biodiversity, ecodesign, and environmental indicators. We launched products with concepts that are deeply connected to our beliefs, leading the consumer toward new ideals and experiences. One example is Natura Chronos, a line of anti-aging cream, which we relaunched last year. Knowing that signs of aging can differ among women in the same age group, we developed an innovative product designed for people with different skin types rather than one based on a consumer’s age. The new Amó fragrance, meanwhile, is intended to stimulate the senses, the intimacy and the closeness be- tween people. The product line aims to encourage consumers to reﬂ ect on their relationships and propose the redemption of true love. Similarly, when developing the new Natura UNA cosmetic line, we reﬂ ected on the motivation behind wear- ing make-up and its symbology. In addition to using high performance raw materials, the new line is also in- novative in its packaging and in the ingredients used in the products, combining sophistication and naturalness. The high technology at the service of sustainability was also spotlighted with the launch of reﬁ lls for the Na- tura Erva Doce liquid hand soap, which use green polyethylene made from sugarcane. It is the ﬁ rst cosmetic with this kind of packaging available on the market, helping us meet our product impact reduction target (read more on pages 86, Creation of Environmental Value). OPEN INNOVATION The broadening of the scope of innovation in 2010 is part of our open innovation strategy, ﬁ rst develo- ped in 2005. This strategy is the foundation for the development of our products, processes, and tools, through partnerships with science and research centers in Brazil and abroad. In 2010, we teamed up with leading technological centers, such as the Massachusetts Institute of Technology, in Boston, United States of America, and we streamlined relationships with our other international partners. We also qualiﬁ ed 27 employees in innovation management through the international certiﬁ cation program offered by the Hult Business School in partnership with the IXL Center. This qualiﬁ cation is accredited by the Global Innovation Management Institute. We improved employee training to include the development of innovation competencies, including: how to best generate new ideas and concepts; how to leverage technological convergence and our knowledge of sustainability; and other themes related to our Essence. Staff in our business units and Brand and Sustaina- bility departments received more than 8,000 hours of innovation training in 2010. Additionally, we offered technical and functional training in the more traditional areas of science and technology. We believe that a scientiﬁ c foundation, together with the systematic acquisition of knowledge using the open-innovation model, will enable the creation of innovative concepts and ideas, enabling more rapid development of new products and processes at a reduced cost to Natura. 36 NATURA CAMPUS Created in 2007, the Natura Campus Technological Innovation Program is part of our open innovation program. It has the support of the National Council for Scientiﬁ c and Technological Development, the São Paulo State Research Support Foundation, and the Research and Financing Projects of the Brazilian Innovation Agency to develop partnerships with the academic community. These institutions contribute to the joint ﬁ nancing of pro- jects and provide participants with equipment, scientiﬁ c scholarships, and research materials. The Natura Campus Portal (www.natura.net/campus) registered 6,000 visits in 2010. It contains a database of voluntary researchers and has 280 research groups linked to 108 science and technology institutions. The website, which was updated last year, is an important tool for our relationship with the academic community. Through this portal, we received 13 new proposals from nine institutions. Two of these proposals have already been approved. We staged the second edition of the Natura Innovation Award last year, and the winning project was a study by the Institute of Nuclear Energy Research, which intends to develop a non-invasive methodology for making skin diagnoses. Held every two years, the award, supported by the Brazilian Development Bank (BNDES), recognizes Brazil’s scientiﬁ c production and its contribution to the technological innovation process at Natura. In 2010, we received R$900,000 in ﬁ nancial support from Finep for research and development projects. We also obtained another R$135.7 million in BNDES ﬁ nancing for innovation, industrial training, logistics and information technology. COMMERCIAL AND RELATIONSHIP INNOVATION Commercial innovation was in the spotlight last year after the creation of a committee dedicated to this area. We also increased the use of digital tools in our contact and relationships with our sales consultants and consu- mers. This year, our sales consultants placed 85% of their orders through the Internet. We continued to improve our relationship with consultants through use of the “Consultancy” blog (www.blogconsultoria.natura.net) and Twitter; we use these media to give our consultants information about our actions, products, and sustainability measures (learn more on page 45, Consultants and NCAs). Internet access to the Natura digital magazine (www.natura.net) increased more than 100% in the period. In February 2011, we launched a version of this publication for the iPad. This application allows for more interactive contact and gives users a 360-degree view of the products. Additionally, on the make-up pages, users can change the color of the products used by the model and gain access to make-up hints. Our pages on Facebook and Twitter and our blogs have also become strategic relationship tools that allow us to offer ﬂ exible assistance to our consumers (learn more on page 59, Consumers). We also redesigned, in February 2011, the Natura Conecta portal (www.naturaconecta.com.br). This allowed us to continue improving the company’s use of virtual instruments in its relationship with stakeholders (learn more on page 38, Quality of Relationships). 37 3.4 COLLECTIVE CONSTRUCTION W E SEEK TO I N CLU D E DI FFER EN T PERSPECTIVES AND TO STRENGTHEN T R A N S PA R E N C Y R E G A R D I N G THE DISCLOSURE OF OUR RESULTS BY MEANS OF INNOVATIVE AND COLLABOR ATIVE TOOLS. THIS STRATEGY IS PART OF OUR GOAL TO CONTINUOUSLY INCREASE THE SPACE GIVEN TO OUR STAKEHOLDERS T O E X P R E S S T H E M S E LV E S . As part of the preparation of this annual report, we relied once again on the Wiki Report, a virtual com- munity of the Natura Conecta platform (www.naturaconecta.com.br) open to the participation of anyone who is interested in our activities. This is an innovative and collaborative experience that enables conti- nuous improvement by capturing the opinions and suggestions of different stakeholders. The discussions held in the virtual forums gave rise to “The Natura we share” letter, published in our 2009 annual report. In 2010, we did not make the progress we had hoped for because of the reframing of Natu- ra Conecta, which was relaunched in February 2011 (learn more on page 3, Quality of Relationships). We hope to increase the use of this tool and transform the Wiki Report into an active forum for discussion. We used Wiki to build Natura’s new corporate materiality matrix. The main issues identiﬁ ed in dialogues online in Brazil and in our international operations were put to a vote by the online community. More than 150 participants chose the most relevant issues. The results are being analyzed and the new materiality matrix will be disclosed in 2011. Another initiative to promote dialogue with our stakeholders was the panel to discuss the “Future of the Report.” The meeting, held in December 2010, engaged experts in communication and sustainability, as well as employees and suppliers involved in our reporting process, in a discussion about choices for the next 20 years. Many promising ideas arose from this event. Some of the subjects that participants discussed are in line with our goals; these include the need to create more collaborative platforms for reporting and to establish multidisciplinary teams to run the process of disclosing our ﬁ nancial results. The discussions have continued on the virtual platform. As a result of this meeting, we expanded our most recent annual disclosure. In addition to the traditional videoconference for investors and analysts, we organized an open conference to present our results. This event, held on February 25, 2011, was chaired by Natura’s CEO and the Senior Vice President of Financial, Legal, and Information Technology Affairs. The executives presented the key economic, social, and environ- mental highlights of 2010, and answered questions from participants. Our goal is to continue to expand these collaborative opportunities. To participate in Natura Conecta, register at www.naturaconecta.com and join the Wiki Report community. 38 4. WHO WE WORK WITH OUR RESULTS A R E T H E F R U I T O F C O L L E C T I V E C O N S T R U C T I O N . T H U S , W E S E E K T O DEVELOP SPACES AND Q U A L I T Y RELATIONSHIPS T H A T E N A B L E T H E JOINT CREATION OF SOLUTIONS 4.1 QUALITY OF RELATIONSHIPS S I N C E 2 0 0 9, N AT U R A H A S B E E N D E V E L O P I N G S T R U C T U R E D REL ATIONSHIP- MANAGEMENT P R A C T I C E S . T H E S E P R A C T I C E S E N CO U R AG E A CO L L A B O R AT I V E APPROACH TO FINDING SOLUTIONS TO C H A L L E N G E S W E A L L FAC E . THIS SPIRIT IS REFLECTED IN THE IN- PERSON DIALOGUE PANELS WE HOLD WITH OUR STAKEHOLDERS, AS WELL AS IN EVENTS THAT INTENDED T O I M P R O V E T H E I R S E L F - DEVELOPMENT AND AWARENESS. In 2010, we heard from 824 people through meetings with employees, consultants, shareholders, suppli- ers, supplier communities, consumers, the media, and people from the surrounding communities. We also included others in this process — experts on speciﬁ c issues, key opinion leaders, and representatives of government and civil society. In all, we held 22 dialogue panels, more than twice as many as in 2009, when nine meetings were held. They included dialogue panels held in our operations in Latin America (Colombia, Mexico, Peru, and Argentina), which together contributed to the construction of our materiality matrix. The purpose was to develop a cor- porate matrix that reﬂ ects the interests of stakeholders from all operations. In February 2011, this cycle will be concluded with the organization of a meeting in Chile. Key issues identiﬁ ed in this process become part of our strategic planning (learn more on page 136, About This Report). In addition to this quantitative accomplishment, we experienced signiﬁ cant advancements in quality. Through a process of “co-construction,” participants discussed priority issues, such as the mapping of external factors linked to our production chain, in partnership with suppliers (learn more on page 49, Suppliers), and the initia- tives related to the sustainable use of palm oil and solid waste management (learn more on page 28 and 32, High-High-priority Topics/Amazon and Impact of Products). In 2011, we relaunched the Natura Conecta virtual network (www.naturaconecta.com.br), which now has its own platform and is integrated with other Natura virtual communities. Because of this relaunch, the use of virtual resources to build relationships with stakeholders did not reach the extent we envisioned; however, these activities have resumed, and everyone who is interested in our business is invited to participate (learn more on page 37, Collective Construction). 39 With the goal of building transparent and straightforward relationships, we organized a series of actions for different stakeholders. One such activity was the Reﬂ ection Cycle on Cultural Biology, with biologist Hum- berto Maturana and professor Ximena Dávila. This event was designed to foster awareness and generate positive change in relationships. We also continue to develop the Você tem fome de quê? (What Do You Crave?) program by including stakeholders beyond our employees. This program involves lunch-hour talks at the Cajamar unit. In 2010, presenters included top international thinkers, such as quantum physicist Amit Go- swami, American entrepreneur Charles Watson, Massachusetts Institute of Technology innovation specialist Otto Scharmer, and spiritual teacher Diane Hamilton. For the ﬁ rst time ever, we held a meeting with former employees. The event in Cajamar brought together more than 200 people. We thanked each of them for their contributions to the company, seeking to build relationships of friendship and trust with this group. Among the activities to promote individual development, we staged the Reﬂ ection Cycle on Cultural Biol- ogy with the Chilean biologist Humberto Maturana and the human relations professor Ximena Dávila. This activity was intended to raise the awareness of the participants and generate positive changes in relationships. Some 100 representatives from different stakeholder groups took part in the activities. We also organized a series of eight lectures as part of the program “Você tem fome de quê?” (What do you crave?), offering other stakeholders, including our employees, the opportunity to participate. The program is held periodically during the lunch period at our headquarters in Cajamar. In 2010, lectures were given by lead- ing international thinkers, such as the Indian physicist Amit Goswami, the creative process specialist Charles Watson, the Massachusetts Institute of Technology professor Otto Scharmer and the Zen Buddhist teacher Diane Hamilton. We also gave away 100 free admissions to the International Conference of the Ethos Institute 2010, which was held under the theme “The World Under New Management – Sustainability: Society’s New Contract with the Planet”. DIALOGUE PANELS HELD IN 2010 Number of participants Date (month) and Place Main topics Stakeholder Consumers Surrounding community Consultants Surrounding community Surrounding community 22 10 33 19 10 Multistakeholder 55 Multistakeholder 65 Multistakeholder 40 January/2010 Cajamar (SP) April/2010 Cajamar (SP) Analysis of Natura’s strategy based on the pillars of product, channel and corporate behavior Presentation of the new system of resource allocation for the Municipal Councils of Children and Adolescents (CMDCAs); discussion and agreement of the principles of relationship May/2010 Cajamar (SP) Diagnosis of problems and opportunities for improvement of consulting activities May/2010 Itapecerica da Serra (SP) June/2010 Cajamar (SP) July/2010 Colombia July/2010 Argentina August/2010 Cajamar SP Presentation of the new system of resource allocation for the Municipal Councils of Children and Adolescents (CMDCAs); discussion and agreement of the principles of relationship Dialogue between the groups with presentation of projects under development in the municipality and discussions between them Deﬁ nition of priority topics for corporate materiality matrix. Deﬁ nition of priority topics for corporate materiality matrix. Debate on Natura’s positioning and practices in relation to solid waste. Discussions contributed to the guidelines of the new waste management project Surrounding community Natura Consultant Adviser (NCA) 26 40 August/2010 Itapecerica da Serra (SP) Dialogue between the groups with presentation of projects under development in the municipality and discussions between them August/2010 Osasco (SP) Diagnosis of problems and opportunities for improvement of consulting activities 40 Number of participants Date (month) and Place Main topics 70 people August/2010 Cajamar (SP) October/2010 Belo Horizonte (MG) Discussion to determine the social and environmental impacts to which the supply chains are exposed (Mapping externalities) Dialogue with NCs with up to 18 months of activity to diagnose the key problems and opportunities for improvement on beginning consultant activities October/2010 Belo Horizonte (MG) Dialogue with former NCs who left Natura with less than 18 months of activity to diagnose the key problems and improvement opportunities October/2010 Rio de Janeiro (RJ) October/2010 Rio de Janeiro (RJ) Dialogue with NCAs with up to 18 months of activity to diagnose the key problems and opportunities for improvement on beginning NCA activities Dialogue with former NCAs who left Natura with less than 18 months of activity to diagnose the key problems and improvement opportunities Stakeholder Suppliers Consultants – Central Region of Brazil Former consultants - Central Region of Brazil Natura Consultant Advisers (NCAs) - Central Region of Brazil Former Natura Consultant Advisers (NCAs) - Central Region of Brazil Supplier and processing communities 22 11 31 20 60 November/2010 Cajamar (SP) Multistakeholder 40 Multistakeholder 40 Multistakeholder 30 Multistakeholder 65 Multistakeholder 45 Brand Suppliers 70 November/2010 Peru November/2010 Cajamar (SP) December/2010 São Paulo (SP) December/2010 Cajamar (SP) December/2010 Mexico December/2010 Cajamar (SP) Reappraisal of the topics covered in dialogue panels in 2009; Bioqlicar assessment and discussion of future scenarios and joint opportunities Deﬁ nition of priority topics for corporate materiality matrix. Discussion about Natura’s positioning regarding the use of palm oil and building a sustainable model for the production of this input in the Amazon region Dialogue on the future and changes required for the Natura Annual Report Reappraisal of Natura’s actions on the priority topics of sustainability and redeﬁ nition of priority topics for corporate materiality matrix Deﬁ nition of priority topics for corporate materiality matrix. Dialogue with strategic partners and employees who work in the production of the main expressions of our brand (products, advertising, Natura magazine, media, events, Natura Meetings, etc.). Reﬂ ections on challenges and strategy of both short and medium terms for each of these forms of brand expression. 41 OMBUDSMAN’S OFFICE Natura’s Ombudsman’s Ofﬁ ce is a formal dialogue channel between the company and its employees, in-house outsourced workers, and suppliers (Brazil). This important function helps us to monitor compliance with our Relationship Principles commitments and whether our own actions are derived from our Essence. This resource is also available to former employees. These contacts are recorded and analyzed by the Ombudsman team and submitted to the responsible manager. The Ombudsman’s Ofﬁ ce investigates complaints and allegations of misconduct, welcomes suggestions and compliments, and receives general inquiries. Natura’s historical records do not include any cases of discrimina- tion. All contacts that may be considered misconduct are reported to the ethics committee, of which the com- pany’s CEO is also a member. When necessary, the ofﬁ ce enlists the support of internal auditors (learn more on page 18, Governance). TOTAL NUMBER OF INQUIRIES RECEIVED THROUGH THE OMBUDSMAN CHANNEL Internal stakeholders, Brazil Internal stakeholders, Latin America Suppliers, Brazil Consultants, Brazil1 Total 2008 783 26 19 52 880 2009 1,096 13 13 34 1,156 2010 1,120 18 17 8 1,163 1. Data refer to a pilot project in a sales department in the Greater São Paulo area. Natura Ombudsman’s Ofﬁ ce surveys Brazilian employees about their satisfaction with its services. In 2010, the of- ﬁ ce achieved a 97% satisfaction level, which is statistically equivalent to the ﬁ gure reported in 2009 (98%). We do not conduct surveys with employees in our international operations or with suppliers or consultants since we still don’t have a signiﬁ cant sample for this measurement. BRAZILIAN OPERATIONS’ INTERNAL STAKEHOLDERS In 2010, we recorded 1,120 inquiries from internal stakeholders in Brazil. The percentage of issues handled, 83% in 2009, decreased to 52% last year. This decrease resulted from our decision to change the criteria for use of the Ombudsman’s Ofﬁ ce in an effort to promote greater dialogue between employees and their managers. Our goal is to create a culture that encourages collaborative problem solving, reserving the Om- budsman’s Ofﬁ ce for cases where solutions are elusive. As a result, technical inquiries regarding processes, policies, procedures, and infrastructure were rerouted to appropriate managers. Other changes in channel behavior were also observed. Anonymous reports decreased, thus strengthening the consolidation of the channel as an additional tool of dialogue and relationship for employees and in-house outsourced workers in Brazil. 1. SATISFACTION WITH THE OMBUDSMAN CHANNEL (%)1 Some 53% of the inquiries handled by the Ombudsman’s Ofﬁ ce related to “people management”, primarily beneﬁ ts such as medical and dental assistance, transportation, and meals. In 2009, 73% of the inquiries ﬁ elded by the Ombudsman’s Ofﬁ ce were of this nature. 96 98 97 PROFILE OF CONTACTS BY INTERNAL STAKEHOLDERS IN BRAZIL Criticisms Compliments Queries Suggestions Complaints/ethical misconduct Total number of contacts 77% 10% 7% 4% 2% 1,120 2008 2009 2010 1. Result refers to positive responses to the question, “Are you satisﬁ ed with this dialogue channel?” 42 RELATIONSHIP PRINCIPLES In 2010, we reviewed the Natura Relationship Principles, a set of commitments that guide our day-to-day actions and attitudes, and we made changes to the content, adding more details to two principles: conﬂ icts of interest and personal favoritism. Intended speciﬁ cally for our employees and in-house outsourced work- ers, these principles include clariﬁ cations on the giving and receipt of gifts, making trips, hiring suppliers and engaging in outside activities that may be in conﬂ ict with the work performed at Natura. As a result of this initiative, we are now providing better guidance to our employees so they do not put themselves in situations that involve, or may be interpreted as involving, a potential conﬂ ict of interest or case of personal favoritism. The initiative has provoked reﬂ ection and raised awareness and respect for the topics that were addressed, reinforcing the message that knowledge and observance of the Relationship Principles is an individual responsibility. INTERNAL OMBUDSMAN’S OFFICE – LATAM In 2010, we observed an increase in the number of contacts, to 18 from 13 in 2009, with the majority origi- nating in Peru, primarily from former employees who were dismissed due to ethical issues, after an analysis and veriﬁ cation that involved various different departments of Natura. We saw a reduction in the number of anonymous comments, causing the percentage of identiﬁ ed contacts to rise sharply from 31% in 2009 to 50% in 2010. Most of the anonymous contacts are made on behalf of groups. The contacts are handled primarily by the senior management and the People and Communication Department. Finally, most of the contacts were made by Relationship Managers (44%), unlike in the Brazilian operations, where this channel is used most frequently by the operational and administrative staff. SUPPLIERS In 2010, we also registered a small increase in contacts from suppliers, to 17 from 13 the year before. The majority of this increase represents criticisms. The number of complaints fell from 50% of the contacts in 2009 to just 18% last year. Most of the contacts were made by suppliers of services (88%), while suppliers of products made 12% of the contacts. All the contacts last year were identiﬁ ed, unlike in 2009 when 38% of the contacts from service suppliers were made anonymously. CONSULTANTS The ofﬁ cial channel for our consultants to contact us is the Natura Service Center (NSC). The Ombudsman’s Ofﬁ ce only handles cases that are not solved by the NSC. We have also modiﬁ ed some criteria for registering behavioral concerns (such as, for example, problems contacting NCAs and relationship managers, incorrect orders, etc.) and guaranteeing that technical issues are dealt with by the channel. We handled 5,335 contacts from this stakeholder group in 2010. (Read more about our consultants on page 56). CONSUMERS Our consumers can use the Natura Customer Service Center (NCSC). Nevertheless, just like the service for consultants, we may also intervene in special cases that are not solved by the NCSC, such as dissatisfaction with the replacement of a product. In 2010, we also modiﬁ ed the criteria, starting to lend more support to the legal ﬁ eld and the press, which require a much faster response. In 2010, we handled 730 issues from this stakeholder group (read more about Consumers on page 59). 43 4.2 EMPLOYEES THE GOOD RE SU LTS OF THE AC TIONS TAKEN IN MORE THAN 40 YEARS WERE ONLY ACHIEVED BECAUSE OF OUR DEDICATED STAFF AN D ITS ALIGNME NT TO OUR ESSENCE. MAINTAINING THE QUALITY OF OUR RELATIONSHIP WITH EMPLOYEES IS ONE OF OUR PILLARS FOR PROMOTING SUSTAINABLE DE VELOPMENT AND VALUE GENER ATION. Because of this, Natura has made a conscious effort to improve its “people management” over the last several years. In this regard, education — a driver of sustainability — received a good deal of attention in 2010. We established education-and-development programs for employees at different levels of the company, strength- ened our organizational culture, created more efﬁ cient retention processes, and completed the training of our international staff. NUMBER OF NATURA EMPLOYEES1 Brazil Argentina2 Chile Mexico Peru Colombia France Total Other employment contracts4 Apprentices 6 Trainees Temporary staff 5 In-house outsourced workers 7 20083 4,386 306 222 277 290 135 32 5,648 12 66 445 1,787 2009 4,821 331 264 335 296 168 45 6,260 10 47 340 1,310 2010 5,509 395 293 329 293 170 48 7,037 152 68 128 2,065 1.Consolidated data as of December 31, 2010. 2.Of this total, 61 employees are part of the structure that deals with international operations, with headquarters in Argentina. 3.The operation in Venezuela was closed in 2009 and had 50 employees in 2008. 4.Includes operations in Brazil, Argentina, Chile, Colombia, Peru, and Mexico (except outsourced workers). 5.Staff hired for a ﬁ xed period under the CLT Labor Code by employment agencies and subordinated to these agencies are consid- ered temporary. 6.In 2010, Natura launched the Semear (Seed) Program in Brazil, as the focal point for development of young apprentices. 7.Suppliers that provide services to Natura and that work in or have access to company premises for a period exceeding six months are deemed to be in-house outsourced workers. This includes Cajamar, Itapecerica da Serra, Barueri, São Paulo and our international operations. The scope of the indicator was changed in 2010, but it was not possible to review the historical basis due to the change in the classiﬁ cation and deﬁ nition of the concept of outsourced workers. With Natura’s business expansion across Latin America, our staff increased by 12.4% in 2010. The commencement of international activities created challenges, making our structure more complex and more culturally diverse. We intend to extend our best practices to employees working in other countries in which we operate. Our organizational climate survey indicated a drop of one percentage point in the overall satisfaction with the workplace environment, with a 73% rate of favorable responses from our employees. This indicator was below our target of 76% . In Brazil, this ﬁ gure remained at 72%. We achieved a signiﬁ cant improvement among administrative staff and maintained a high rate among the sales force. Notwithstanding our efforts, there was a decrease in favorable responses from our operational staff. This suggests that actions such as the Renovação (Renewal) Program and its career and development initiative, Meu Caminho (My Way) (learn more on the next page, Education), are falling short of their goals. This program was implemented in the second half of 2010, and we believe that it will begin to show greater beneﬁ ts in 2011. 1. Due to a calculation error, a 77% target was included in last year’s report. 44 According to the survey of the operational staff, we made progress in factors such as Leadership, Perfor- mance Management, Development, Communication, Quality of the Decision-Making Process, as well as Re- muneration and Beneﬁ ts, the aspects of the Renovação Program where the most headway has been made. In 2011, we intend to improve the Career and Management aspects of the program. Another issue that needs to be addressed, particularly among the administrative staff, is the management of our physical facilities, which no longer meet current requirements. We will, therefore, in the ﬁ rst half of 2011, inaugurate new facilities for our operations. Satisfaction with the overall quality of the workplace also declined in our international operations. This was the result of speciﬁ c factors in countries such as Argentina, Chile, and Peru and because of events related to the implementation of our international business strategy. These events generated restructuring actions in some countries. We aim to improve the execution of strategies that we believe will strengthen the quality of our relationships with international employees. ORGANIZATIONAL CLIMATE – APPROVAL (%)1 2 Brazil Argentina Peru Chile Mexico France Colombia Natura 2008 69 80 77 83 85 60 84 72 2009 72 77 78 77 84 75 88 74 2010 72 64 71 69 82 72 84 73 1. Percentages indicated are the share of employees who rated 4 and 5 on a scale of 0–5, with 5 being the highest score. The survey considers such issues as management, workplace environment, and career development. 2. The research methodology was adapted to incorporate the assessment of our Culture Drivers. The change, however, does not affect comparability with the results of previous years. We also measured employee loyalty, which registered 30% in 2010. This indicator tracks general satisfaction, intention to continue a relationship with Natura, and whether they would recommend our brand. We also measure the loyalty of our employees, and we are now reporting these results for the ﬁ rst time. Monitored by Natura since 2009, this indicator cross-references information about overall satisfaction and the intention to continue working for Natura and to recommend the company. In 2010, we achieved a result of 30% on this indicator, one percentage point below the previous year. For 2011, we want to reach 32% loyalty in this indicator, which will now be the main gauge of the quality of our relationship with employees. EDUCATION Education was an important theme in our relationships with employees during 2010. Despite falling short of our goal to provide 100 training hours per employee in Brazil, we reached 90 hours and consider this result very signiﬁ cant. In 2011, we plan to monitor educational efforts in our international operations. AVERAGE HOURS OF TRAINING PER EMPLOYEE PER YEAR IN BRAZILIAN OPERATIONS1 Production Administrative Management Board Total² 2008 105 90 68 9 94 2009 86 79 61 78 82 2010 90 90 83 67 90 1. This indicator includes training of the sales force (sales managers and relationship managers). 2. Includes total hours of all levels divided by the total number of employees in December of the corresponding year. Delays in the implementation of training programs for our operating staff and our own overly ambitious timetable for implementation contributed to the lower-than-expected number of training hours provided. This development program is speciﬁ c for operational employees, and linked to career progress. Employees expand their knowledge and qualify to take on new positions at Natura through training programs. In 2010, about 30% of our operational staff participated. Classes take place during working hours and on weekends, and special classes are offered for the hearing impaired. We also developed an educational program speciﬁ cally for young apprentices. In addition to receiving the legally required technical training, apprentices study subjects related to living our values and career development. The program for apprentices led to the hiring of 134 youngsters in 2010, expanding the opportunities offered to young people. Despite the large number of admissions, we have still not met the legal quota established by the Young Apprentice program, although we are working towards compliance with this legislation. The pro- gram’s technical learning was structured in partnership with the National Learning Service and the National Commercial Learning Service. 45 More than 2,000 candidates participated in our selection process. The strong demand, in addition to conﬁ rm- ing the attractiveness of Natura, illustrated the need young people have for new opportunities. Accordingly, after the selection process, we invited the 500 shortlisted candidates to take part in a careers workshop to contribute to the professional development of those who were not hired. We also plan to extend the scope of the program, by helping the youngsters improve their chances of being hired in future selection processes at Natura or by other companies (read more on page 68, Surrounding Communities). INVESTMENT IN EDUCATION AND TRAINING OF EMPLOYEES (IN R$ ‘000)1 20084 14,062.0 162.5 82.7 473.8 74.9 12.8 73.4 14,942.1 Operation Brazil2 Argentina Chile Mexico3 Peru Colombia3 France Total 2009 20,221.3 103,3 164,6 526.3 222,7 21,9 51,0 21,311.1 2010 25,744.0 93.3 127.0 567.5 210.0 39.9 100.3 26.882.0 1. Data in Brazilian Reais was converted to U.S. dollars at US$ 1: 2008 - R$ 1.8346; 2009 - R$ 1.7412; 2010 - R$ 1.71. 2. The ﬁ gure for investment in Brazil incorporates investment in Corporate Education, including courses with Time Jobs, and Sales Force training (sales managers and relationship managers). For International Operations, it incorporates education courses for employees, includ- ing relationship managers and team work. 3. Historical data for Mexico and Colombia contained inconsistencies and was recalculated. 4. The operation in Venezuela was closed in 2009 and investment in education in 2008 was 98.1. In 2010, we also organized some speciﬁ c educational activities in the area of innovation, primarily for our research and development staff. We invested in the use of new formats and methodologies, staging in-person and virtual courses, as well as dialogue and discussion sessions and workshops. We also run the Natura Educa- tion Program, which grants scholarships to employees and their family members to encourage continued learning. In 2010, we invested R$862,000 in the program (see tables). IN THE BRAZILIAN OPERATION - NATURA EDUCATION PROGRAM1 Scholarships awarded Scholarships awarded/enrollment (%) Amount invested in Natura Education (R$ thousands) 2008 473 32.6 720 2009 611 48.3 841 2010 546 43.2 862 1. Includes all employees enrolled and selected during the year. NATURA EDUCATION PROGRAM - COURSES HELD BY EMPLOYEES OR FAMILY MEMBERS WHOLLY OR PARTLY SUBSIDIZED BY NATURA (BRAZIL) Technical/vocational Languages Pre-university University MBA and postgraduate 2008 48 118 11 219 77 2009 77 117 6 292 119 2010 47 134 5 259 101 All new employees in Brazil (including in-house outsourced workers) undergo integration training, where they learn about topics related to human rights, the environment and social responsibility. These issues are also addressed in lectures that are open to all our employees. In total, we offered 5,593 hours of training in these programs in 2010. Al- though we have no speciﬁ c training on issues related to corruption and human rights, all our new employees learn our Relationship Principles, which are inspired by the Declaration of Human Rights. These principles clearly demonstrate our ofﬁ cial stance against corruption – banning all forms of bribery, corruption and kickbacks. Our internal security staff at Cajamar have received special training on human rights and techniques for approach- ing and searching people before they can work on the random search system at Cajamar. Implemented as a pilot project in 2010, the searches may be conducted on employees of all levels at the company and are randomly deﬁ ned by electronic sensors installed at the parking exits and the bus terminal. The purpose of the searches is to preserve company property. 46 ORGANIZATIONAL CULTURE By developing our organizational culture, we lay the groundwork for our Vision of the Future and reinforce our Essence among our employees. These efforts align behavior, strategies, programs, processes, and relationship expectations. In 2010, we developed seven Culture Drivers (learn more on page 3), inspired by our Essence. These drivers pro- vide clear guidance for our choices and attitudes and illustrate the behaviors and values expected by the company. These drivers were the result of a collaborative process that involved the company’s founders, the Executive Board, and the leadership team. We also considered suggestions made in 2009 by nearly 150 employees in the administrative, operational, and sales areas. The drivers will be rolled out to all Natura employees in 2011, when we will also review our main practices, symbols and organization systems, and set forth the procedures to gua- rantee the ongoing promotion and reassertion of our culture. LEADERSHIP A leadership team that is committed to our Essence is fundamental to our growth. Natura has invested in the training and development of almost 600 leaders in Brazil and abroad. In 2010, we ﬁ lled 62% of our open leadership positions with internal staff. In 2011, we will establish a leadership-speciﬁ c educational program that will support our desired organizational competencies. We believe this will strengthen our organizational culture. The project will include onsite classes and distance learning; study groups formed by people with similar interests; workshops; and activities that promote the exchange of knowledge and ideas. The intent of this program is to qualify leaders and to strengthen our succession plans. We map our critical positions and, at the end of 2010, had deﬁ ned a succession plan for 40% of our short-, medium-, and long-term positions. Our leaders currently have their careers monitored by external consultants. In 2011 we will implement a pilot project for internal members of the Executive Committee and the Board of Directors to become mentors and accompany the long-term development of leaders. We have started to analyze the career development of these leaders using a 360-degree feedback assessment, which makes an appraisal of the individual based on a self-assessment and the perception of their superiors, peers, subordinates and other stakeholders such as suppliers. Far more transparent and participative, this assessment also addresses performance and adherence to Natura’s Essence. Through a process of engagement, the leaders can evaluate their life purposes inside and outside Natura and, after also considering the external evaluations, prepare a development plan for the next ﬁ ve years. In 2011, we plan to extend this assessment process to the administrative and operational staff. ATTRACTION AND ENGAGEMENT Natura relies on recruitment-and-selection processes that attract candidates who are not only technically quali- ﬁ ed but who also identify with our Essence and values. The new attraction model implemented in 2010 moves in this direction and goes beyond the traditional selec- tion model. We view the application process as an opportunity for individual personal and career development. We also seek feedback from applicants at all stages of the selection. We aim to stimulate a reﬂ ection about the process. This initiative will formally begin in 2011. This model has already been applied to our trainee program, back in 2009. Lasting two years, the 35 selected young people participated in a comprehensive selection process guided by diversity, without considering univer- sity education or ﬂ uency in languages, and with the age limit increased to 28 years. Though we have established a strong track record for ﬁ lling leadership positions with internal staff, we did not reach the target we established for ourselves in 2010. Compared with 2009, the internal ﬁ ll rate dropped by 25 percentage points, in part because of Natura’s growth and because of steps taken to incorporate strategic market competencies. To reverse this trend, we redesigned our job opportunities program, which encourages employees to seek professional growth. The job opportunities program also addresses the responsibilities of all involved in the process, including candidates, the hiring manager, and Human Resources. In 2011, this program will be extended to our international operations. We also made eligibility-for-advancement criteria more ﬂ exible and strengthened efforts to promote job openings. Outside Brazil, we offer “global opportunity allowances” that enable employees to move to other countries. This initiative will help us form a multicultural team and allow staff to share knowledge and experiences. 47 Our international operations strategy depends on the formation of mixed teams of employees who are respon- sive to our value proposition and people who are knowledgeable about these markets. Currently, most of the staff within our international operations consist of local professionals. 1. POSITIONS FILLED BY INTERNAL STAFF- PLACES OFFERED/TAKEN BY EMPLOYEES (%) TURNOVER We registered a small increase in employee turnover in Brazil in 2010 (see table). This increase is primarily due to Natura’s decision to dismiss employees with low performance or commitment. 71 61 In our international operations, Mexico registered a signiﬁ cant drop in turnover rates. This was the result of bet- ter-deﬁ ned employment proﬁ les, as well as improved recruitment, selection, and monitoring of new employees. Increased turnover in Peru resulted principally from the restructuring of the Sales Department and the resulting change in job requirements. In Chile, the increase in turnover was driven primarily by temporary outsourcing after a February 2010 earthquake. 36 2008 2009 2010 EMPLOYEE TURNOVER (%)1 Brazil Argentina Chile Mexico Peru France Colombia 2008 12.4 16.6 13.9 42.7 12.2 35.0 35.4 2009 7.5 12.5 13.6 25.3 16.6 15.5 39.7 1. Although we monitor data by age group and gender, we do not take this information into account in our business. TOTAL DEPARTURES Brazil Argentina Chile Peru Colombia Mexico France 2008 891 50 29 33 35 121 20 2009 551 38 36 49 31 81 11 2010 8.4 12.3 16.4 11.6 26.6 12.6 21.0 2010 641 40 49 75 37 38 5 Considering the members of the senior management recruited from the local community, we achieved a rate of 100% in France, 67% in Argentina, 33% in Chile and 17% in Colombia and Mexico. In Peru, we have yet to hire local staff. All our employees with less than three months service participate in our Performance Management Program and receive regular feedback during their assessment cycle, in addition to structuring their own individual de- velopment plan. In 2010, we extended the scope of the analysis, with a view to providing a clearer performance management in the assessment of our employees, and to offering more assertive and efﬁ cient feedback. VOLUNTEERING We are restructuring the initiative in 2011 to encourage more of our employees to participate in the corporate volunteering program, whose goal is to foster transformation opportunities through volunteer work. In 2010, we registered 57 participants. The staff who enrolled in the program worked on social projects during business hours and, in some cases, over the weekends. DIVERSITY Building a more equitable and sustainable society depends on respect for diversity. In Brazil, the main challenge is social inclusion, and the insertion of classiﬁ cations such as age group and gender is not, by itself, a guarantee of diversity. Education provides the best path to social inclusion. Companies’ efforts to improve the quality of education beyond their own doors can have a substantial impact on inclusion and promote the personal and professional maturity of the employees (learn more on pages 30 and92 High-High-priority Topics/Education and Generation of Social Value). 48 Our vision of diversity also consists of engaging professionals in regions where we operate. Their experience with other societies, cultures, and value systems provides us with a means for improving our relationships with our stakeholders. In our units, 23% of leaders have had professional experience in other countries. Although our vision on the theme has evolved, we know that we still have to improve our positioning regarding diversity and deploy more effective actions. MULTICULTURE 1 2 Total foreign leaders or leaders with international experience Percentage of foreign leaders or of leaders with international experience in relation to all leaders (%) 2008 2009 2010 n.d n.d 12 13 27 23.1 1. Includes process management, business and global leaders. 2. We take into consideration current or past international experience in Natura in operations with nationality different to that of the employee and with a minimum duration of two years. In 2010, we recorded an increase in the hiring of people with disabilities, although still slightly below the mini- mum quota of 5% established by law, as a result of the higher rise in the staff numbers than the growth in the hiring of these employees. We are streamlining our program to provide for the development not only of people with disabilities, but also for their managers, and we are also hiring people with different types of disabilities. We believe that in addition to simply complying with the hiring quota, we have the responsibility to promote the integration of disabled employees in the company, in society and with coworkers, which is why we are now offering more basic skills training courses, attended by 217 people in 2010, nearly three times the previous year. We also completed the training of 57 employees in sign language, to act as facilitators to improve the inclusion of the hearing impaired. DIVERSITY ¹ Total employees in Brazil Women In relation to total employees (%) In management positions compared to the total number of management positions (%) In board positions compared to the total number of board positions (%) Above 45 years In relation to total employees (%) In management positions compared to the total number of management positions (%) In board positions compared to the total number of board positions (%) 2008 4,386 2009 4,821 2010 5,509 63.7 52.3 19.2 10.5 8.2 38.5 60.5 51.9 17.6 12.2 11.3 35.3 60.7 54.2 21.7 10.6 9.2 28.3 1. In this edition, we no longer report the classiﬁ cation by race due to a different understanding about diversity, which involves broader concepts of social inclusion. HIRING AND TRAINING OF PEOPLE WITH DISABILITIES (BRAZIL) Employees with disabilities People with disabilities in relation to total employees (%) People with disabilities, trained in the Basic Professional Skills program 2008 237 5.4 39 2009 236 5.0 2010 249 4.5 67 217 COMPENSATION Our compensation practices follow the corporate policy effective in all countries. However, if inecessary, we may adjust amounts and potential earnings in accordance with each market. Salaries are established according to reference surveys, the salary structures of Brazilian or multinational companies, publicly held companies, and companies whose compensation practices are similar to ours. The comparability is based on the scope and complexity of functions. We maintain a salary average that is in line with market practices. 49 PROPORTION OF LOWEST WAGE COMPARED TO THE MINIMUM WAGE IN EACH COUNTRY 2009 1.1 2.0 1.3 1.7 4.8 1.6 1.5 2008 1.2 1.5 1.4 1.6 4.6 1.1 1.1 Brazil Argentina Chile Peru Mexico Colombia France 2010 1.4 1.7 1.3 1.0 4.6 1.1 1.1 We also offer a variable compensation model adjusted to the characteristics of each stakeholder, with speciﬁ c forms of payment, targets, and amounts. Income distributions to nonexecutive stakeholders are limited to 3% of the operating income. In 2010, our operational employees received, on average, the equivalent of three additional months’ salary in variable pay. Looking to cater to the growth and the internationalization of the company, we offer an expatriate program with a package of special services and beneﬁ ts, as well as development and career opportunities. We currently have 30 expatriate employees at our operations in Chile, Argentina, Peru, Mexico, Franca and Colombia. In 2010, collective bargaining agreements provided our employees in Brazil with a salary increase of around 7.17%. Female administrative employees who comprise the sales force – relationship managers and sales managers – re- corded a higher salary increase than the collective bargaining agreement due to the sales bonuses they obtained. Over the year, the sales bonuses earned by the female staff increased 7.8% compared to 2009. RATIO OF WOMEN’S SALARIES COMPARED TO MEN’S (BY EMPLOYEE CATEGORY) (%) Operational Administrative Managers Executives 2008 -18.34 13.56 -4.38 -19.60 SALARY PROFILE (R$) - AVERAGE MONTHLY SALARY IN OPERATION BRAZIL 1 2 3 Women - total (R$) Average monthly salaries for production jobs Average monthly salaries for administrative positions Average monthly salaries for management positions Average monthly salaries for board members Men - total (R$) Average monthly salaries for production jobs Average monthly salaries for administrative positions Average monthly salaries for management positions Average monthly salaries for board members Over 45 years (R$) Average monthly salaries for production jobs Average monthly salaries for administrative positions Average monthly salaries for management positions Average monthly salaries for board members Up to 45 years (R$) Average monthly salaries for production jobs Average monthly salaries for administrative positions Average monthly salaries for management positions Average monthly salaries for board members 2008 4,352.0 1,104.5 5,287.9 12,341.1 31,185.9 3,550.3 1,352.5 4,656.4 12,906.9 38,788.7 7,540.2 1,676.3 8,161.9 15,198.0 38,395.8 3,653.3 1,213.6 4,652.1 12,379.8 36,658.4 2009 -15.59 32.80 -5.63 -18.62 2009 4,755.1 1,150.0 6,137.4 13,105.1 34,309.8 3,574.3 1,362.3 4,621.5 13,886.2 42,162.5 8,067.5 1,712.7 8,961.0 17,437.9 38,242.9 3,850.4 1,240.7 5,266.5 13,068.4 41,570.5 2010 -15.83 30.43 -4.44 -19.00 2010 4,943.6 1,201.6 6,189.8 13,351.0 37,195.7 3,851.9 1,427.5 4,745.5 13,971.7 45,919.0 8,088.8 1,770.2 9,166.3 18,343.6 44,089.5 4,095.0 1,293.2 5,304.9 13,144.4 43,637.8 1. The calculation does not consider payment of short-term incentives (Proﬁ t Sharing). 2. Bonuses paid to sales managers and relationship managers were considered for the purpose of calculating this indicator. Sales employees, when distributed in categories, reinforce the average female wages by sales bonus, excluding production jobs. 3. In this edition, we no longer report the classiﬁ cation by race due to a different understanding of diversity, which involves broader concepts of social inclusion. 50 In all our operations, we follow the standards and limits established by local legislation concerning collective bargaining. In Brazil, for example, the collective bargaining agreements sealed with unions include all employees. We recognize and uphold the right of all employees to be represented by their respective unions, although we have no formal processes in place to identify operations in which the right to exercise freedom of association and collective bargaining may be at risk. However, our employees have the Natura Ombudsman’s Ofﬁ ce at their disposal to report any type of complaint (read more in Quality of Relationships). Natura’s relationship with unions is managed by the Human Resources Department and we organize meetings to discuss agendas that are set in advance with union representatives. 1. CONTRIBUTIONS MADE BY NATURA TO EMPLOYEE PENSION PLAN (R$ MILLION) 3,076.0 2,527.8 Even though prior notiﬁ cation of operational changes is not speciﬁ ed in the collective bargaining agreements, we always make an effort to communicate these changes in advance and, upon doing so, provide clariﬁ cations. 1,387.0 In our pension scheme, each employee can decide on the amount they wish to contribute, from a scale of 1% to 5% of their salary, and Natura will add another 60% to their contribution. The scheme is optional and avail- able to all employees in Brazil. With the exception of relationship managers and sales managers, who receive bonuses proportional to the results they achieve, all our employees receive, in addition to their annual salary, two additional month’s wages at the end of each year (known in Brazil as the 13th and 14th salaries, the 13th being required by law). Natura does not have any formal program to prepare employees for retirement, although in 2011 we are going to implement a pilot project for our relationship managers. The project consists of a series of workshops on career transition that are intended to promote reﬂ ection on the future. Individual sessions will also be organized throughout the year for the relationship managers. Among other topics, these sessions will address career plan- ning, alternative activities such as a second job or volunteer work, and saving and investing. The program is vol- untary and geared towards managers who are approaching retirement. The project will eventually be expanded to include all employees. BENEFITS Our beneﬁ ts policy is centered on the idea of offering well-being to all who work with us. Learn about the beneﬁ ts offered: Beneﬁ ts offered to employees in the Brazilian Operation: ¾ Natura Educação (Natura Education) Program: scholarships for employees and their families ¾ Construindo o Futuro (Building the Future) Program (includes savings incentives): Encourages the habit of saving among employees ¾ Nursery for employees’ children up to 2 years and 11 months of age ¾ Support for adoption processes ¾ Health care plan ¾ Dental care plan ¾ Check-up for employees from management level upwards ¾ Partial reimbursement of drug costs for cardiovascular diseases, diabetes, renal failure, cancer, liver diseases, neurological disorders, work-related musculoskeletal disorders and psychiatric disorders ¾ Telemedicine: ECG by phone in emergencies ¾ Saúde em Movimento (Health in Motion) Program: encouraging physical activity. Medical and nutri- tional evaluations and also of physical ﬁ tness before starting activities ¾ Fitness Center Grant for Relationship Managers and Sales Managers ¾ Five free products per month for employees at managerial level ¾ Health Area: Urgent and emergency medical care, physiotherapy, RPG, gynecology and obstetrics, acupuncture, orthopedics, nutrition and psychology. Also included are programs for Hearing Conser- vation and Occupational Health Medical Control with examinations for admission, periodic exams, job changes, return to work and layoffs, and activities for early detection, treatment and monitoring of cases of occupational diseases ¾ Quero Estar Bem (I Want to Be Well) Program, created in 2010, includes all the specialties and profes- sionals of the Health Area, considering the human being fully in four dimensions: physical, emotional, spiritual and social (read more in Worker’s Health and Safety). As well as these beneﬁ ts, the employee is entitled to: ¾ Ergonomics Program, which seeks a productive and comfortable adjustment of the worker to their work, promoting the changes necessary for their well being, inside and outside the company. 2008 2009 2010 1. The company’s contributions increased due to the end of the surplus situation of the pension fund 51 ¾ Social Services. Ensures employees an opportunity for discussion, understanding and resolution of issues of a social order. ¾ Workplace exercise program ¾ Purchase of ﬁ ve Natura products per month with 40% discount ¾ Vacation Project (activities in Espaço Natura, in July, aimed at employees’ children aged between 6 years and 12 years 11 months) ¾ Professional guidance ¾ Cuidando de Quem Cuida (Caring for Carers) Program: postnatal meeting, course for pregnant women ¾ Subsidized day care and special needs care (offered to employees with children with special needs), to defray the costs of education ¾ Life Insurance ¾ Payroll deduction loan ¾ Vehicles for management-level employees ¾ Family Moment: entertainment, culture and recreation for employees with children up to 9 years 11 months and distribution of toys ¾ Pharmacy Agreement ¾ Contracted transportation ¾ Runners Project, running and walking workouts monitored by specialized professionals ¾ Restaurant ¾ Christmas Basket ¾ Gifts (Mother’s Day, Father’s Day and birthday) ¾ Sale of Discounted School Materials ¾ Fitness, swimming pool and multisport court services at Natura Club (Cajamar and Itapecerica da Serra) and Well Being Area ¾ Services and facilities: seamstress, laundry, shoemaker, optician, insurance, postal services, rental of books and videos ¾ End of Year Party ¾ Celebrations for years worked Beneﬁ ts offered to resident third parties: ¾ Course for pregnant women ¾ Health Area - emergency care ¾ Runners Project ¾ Restaurant ¾ Workplace exercise ¾ Toys ¾ Christmas Basket ¾ Contracted transportation ¾ Fitness, swimming pool and multisport court services at Natura Club (Cajamar and Itapecerica da Serra) and Well Being Area ¾ Services and facilities: seamstress, laundry, shoemaker, optician, insurance, postal services, rental of books and videos ¾ Gifts - Mother’s Day and Father’s Day HEALTH AND SAFETY We continued to step up our safety efforts, investing R$882,000 in accident prevention in 2010. We main- tained throughout the year the same low level of work-related accidents as in 2009: 17 in total, of which 7 were accidents with leave and 10 were accidents without leave. A special project conducted with service suppliers cut the number of accidents suffered by outsourced workers by 25%. An analysis of the accidents indicates that workplace behavior is the main cause of injury. For 2011, we intend to concentrate on developing and implementing a system of health and safety management that focuses on avoiding risky behavior, and on providing better support and services to our units in both our Brazilian operations (distribution centers, Natura Houses, etc.) and our international operations. 52 TYPICAL INJURIES AND LOST WORKDAYS AND WORK-RELATED ABSENCES (INCLUDING OUTSOURCED EMPLOYEES) IN THE BRAZILIAN OPERATION 1 Employees - number of accidents with leave² Employees - number of accidents without leave³ Number of work accidents per employee 2008 16 5 0.005 2009 12 5 0.004 2010 7 10 0.004 Outsourced employees – number of accidents with leave4 Subcontractors - number of accidents without leave 4 Working days lost5 Frequency rate of accidents with leave 6 Frequency rate of accidents with/without leave 7 Investment in disease prevention per employee (R$) Investment in accident prevention per employee (R$)8 Number of cases of occupational diseases reported to the National Social Security Institute – Cajamar Number of occupational diseases reported to the National Social Security Institute on - Itapecerica da Serra Rate of absenteeism (%) 9 Number of deaths Occupational illness frequency rate 10 11 2 131 1.71 2.24 479.6 722.8 5 1 n/a 0 0.64 4 4 84 1.31 1.85 707.4 851.5 10 0 n/a 0 1.09 4 2 64 0.69 1.67 736.5 882.5 9 0 5.45 0 0.88 1. This includes accidents recorded in the units of Cajamar, Itapecerica da Serra, Barueri, São Paulo, Benevides and distribution centers. 2. Accidents with leave are those in which the employee does not return to their activities on the next working day. 3. Accidents without leave are those in which the employee returns to work on the same day of the accident or the next working day. 4. This includes our “resident” and “non-resident” service providers. 5. This refers to Natura employees. 6. Equal to the number of accidents with leave per million man-hours worked (HHT). 7. Equal to the number of accidents or employees involved in accidents with or without leave per million man-hours worked (HHT). 8. Includes the entire budget of the Department of Occupational Safety, expenditures and investments carried out by the Engineering and Manufacturing area to guarantee and/or improve occupational safety conditions. This does not include spending on training. 9. We began tracking the rate of absenteeism in 2010. 10. Number of cases per 106 man hours worked. Formal agreements with unions include measures to improve workplace protection, namely the use of protection equipment, procedures for the prevention of accidents with machinery and equipment, commu- nication of workplace accidents, and the installation of an Internal Accident Prevention Commission (IAPC). All our employees in Brazil are represented in formal health and safety committees and also in the different IAPCs, on which any company employee, regardless of their seniority, may serve. They observe the follow- ing structure: 50% of their representatives appointed by Natura and 50% appointed by our staff. We invested R$736 million in health management in 2010 and we prepared a diagnosis of the health of our staff. Based on this assessment, in December 2010 we launched an illnesses prevention program to encourage employees to take care of their health. One of the initiatives involves better management of more complex health issues, in which employees or their dependents who have a speciﬁ c condition will be invited to take part in programs to monitor their health problem. We shall also launch in 2011 a program to prevent hypertension. Once identiﬁ ed, cases of occupational illness are treated by a multidisciplinary team made up of occupational health doctors, an ergonomist, an orthopedist, a physiotherapist, an acupuncturist, a psychologist, Global Postural Reeducation (GPR) therapy and a social worker. Furthermore, frequent evaluations will be made of our work stations and we also offer workplace exercise classes for everyone at the company. In November 2010, 33 employees, part of a group working in special areas of the factory to rehabilitate from physical injury, were dismissed by Natura. The layoffs followed a thorough evaluation and were made exclusively due to lack of commitment and improper behavior in the workplace. Natura operates in strict compliance with legislation and we are conﬁ dent that we have always acted respectfully and transparently towards our employees. The dismissed employees who had surgeries scheduled, in accordance with prevail- ing legislation and their employee category’s collective bargaining agreement, had their health insurance ex- tended. When questioned by the Labor, Administration and Public Service Commission of the Lower House of Congress, we presented all the necessary explanations concerning the layoffs. COMMUNICATIONS WITH EMPLOYEES In 2010, we made improvements to the quality of our communication with the operational staff, including chang- es in the use of language and an expansion of the speciﬁ c means of communication for this group of employees. We also segmented the Natura TV Channel, which is broadcast at 23 points in our Brazilian operations, offering speciﬁ c programming for our operational employees. We also improved communication with the staff at the Benevides Industrial Plant. Employees can also use Natura Nós (Natura Us), an internal social network that is also available to in-house outsourced workers and relationship managers. In 2010, a review of the network was made and improvements will be introduced in 2011. 53 4.3 CONSULTANTS AND NCAs OUR SALES CONSULTANTS ARE A FUNDAMENTAL COMPONENT OF OUR BUSINESS MODEL. THEY NOT ONLY SELL OUR PRODUCTS BUT ALSO DISSEMINATE OUR ESSENCE A N D O U R VA LU E PRO POSI T IO N . In 2010, we reached an important milestone: Our sales force exceeded 1 million consultants in Brazil and 200,000 in our international operations. The number of sales consultants grew by 18% in Brazil, and by more than 20% internationally. Favorable economic conditions aside, this development is due primarily to the consolidation of our Natura Consultant Adviser (NCA) model. Natura completed its ﬁ rst operating cycle in all regions of Brazil in 2010 using the new NCA model. NCAs are a signiﬁ cant part of our commercial strategy and enable a closer re- lationship with our consultants. Within this structure, relationship managers work more closely with NCAs, each of whom, in turn, offers support to up to 150 consultants by providing guidance and assistance to their development, in addition to working as consultants themselves. In 2010, we had more than 11,000 NCAs, 24% more than in 2009. Relationship, commercial training, and sales actions focused on new consultants played an important role in promoting the growth of the sales channel. Together with the NCA platform, these activities converged to produce one of the lowest turno- ver rates ever at Natura. In our international operations, the most signiﬁ cant factors fueling the growth of our sales force were increased recognition of our brand, consultant-recruitment campaigns, management-improvement proces- ses, and better monitoring of the sales channel. NUMBER OF CONSULTANTS IN BRAZIL AND INTERNATIONAL OPERATIONS (THOUSANDS)¹ 2 Brazil Argentina Chile Mexico Peru Colombia France Total 2008 730.1 37.3 17.5 20.0 35.2 5.9 0.8 846.83 2009 879.7 46.5 24.5 31.2 42.6 13.0 1.4 1,038.9 2010 1,028.7 53.2 31.0 41.2 45.5 19.0 2.5 1,221.1 1. In Brazil, the ﬁ gure refers to the number of consultants available at the end of the year. 2. In the international operations, the data refers to the closing position of cycle 17. 3. Operations in Venezuela, with 2,800 consultants, were discontinued in 2009. Our international operations are not based on the NCA model. In 2010, however, we implemented a project in Mexico inspired by the success of this initiative in Brazil. We created the Natura Consultant Entrepreneur (NCE), whose primary function is to attract new consultants and promote entrepreneurship. This strategy is based on the characteristics of local markets and was designed to boost Natura’s direct sales in Mexico by attracting new consultants to our business and value generation model. The quality of our consultant relationships is a key driver of our success. We held six dialogue panels in 2010 to detect improvement opportunities and build collaborative solutions that may assist in the development of our activities. Some of these meetings were attended by consultants and NCAs who had been working with the company for less than a year and a half, as well as by former consultants and NCAs who worked with the company less than 18 months. The purpose was to gain a better understanding of the challenges consultants faced in the early stages of their work with Natura. 1. NUMBER OF NCAs IN BRAZIL 1 11,276 9,083 5,844 20082 20093 2010 1. Refers to the number of NCAs at year’s end. 2. Includes Midwestern, São Paulo Interior, Northeastern, Rio de Janeiro, and Minas Gerais regions. 3. The increase in the number of NCAs is related to the expansion of the model in São Paulo Capital, North, and South regions. 54 The level of satisfaction is permanently monitored, and our relationship-quality rates have remained stable over time. The loyalty of our consultants increased from 17% to 21% in 2010. The loyalty index of our NCAs has fallen. Because of the novelty of the NCA model, we still face challenges, such as our response time in meeting NCA needs. We continue to seek ways to improve this relationship. QUALITY OF RELATIONSHIPS WITH CONSULTANTS (BRAZILIAN OPERATIONS) (%)1 Satisfaction 2 Loyalty 3 Jan/08 88 16 QUALITY OF RELATIONSHIPS WITH NCAs (BRAZILIAN OPERATIONS) (%)1 Jan/08 93 31 Satisfaction 2 Loyalty 3 Jan/09 88 17 Jan/09 95 37 Jan/10 90 21 Jan/10 94 32 1. As of 2010, we have modiﬁ ed the survey criteria, no longer monitoring the relationship with consultants and with NCAs and instead adopting Satisfaction and Loyalty as indicators of the quality of the relationship. 2. Consultants and NCAs either “satisﬁ ed” or “completely satisﬁ ed.” - Top 2 Box 3. Loyalty denotes Top Box for satisfaction, intention to continue a relationship with Natura, and willingness to recommend the brand. INCOME AND PRODUCTIVITY Average annual income distributed to consultants increased, from R$3,900 in 2009 to R$4,100 last year. These data are positive in light of the signiﬁ cant increase in the numbers of new consultants joining us in recent years, and they are now quicker to reach the productivity levels of those who have been active for longer. However, there was a slight decrease in NCA per-capita income due to the business model’s rapid growth. ANNUAL AVERAGE INCOME GENERATED IN THE BRAZILIAN OPERATIONS (R$) Natura Consultant Advisers (NCAs)¹ Natura Consultants 2 2008 3,380 4,097 2009 9,841 3,987 2010 9,802 4,128 1.We consider the catalogue price (full price) and the consultant’s 30% proﬁ t. 2. NCAs are commissioned based on performance in terms of number of consultants submitting orders and volume of orders. TRAINING AND CAPACITY BUILDING The success of our business strategy also depends on the level of training and engagement of our con- sultants, so we have been investing increasing amounts of resources in training. In 2010, in Brazil 517,400 consultant trainings took place, exceeding our target of 500,000. We emphasize training opportunities for consultants with less than three years’ experience through distance learning and in-person courses; 78% of these consultants have taken advantage of this. We have also developed a speciﬁ c training model for our international operations, to be applied in 2011, with a revised approach drawing on our experience in Brazil and the content adapted to local needs. These activities are comprehensive and cover product knowledge, sales techniques, and socioenvironmental awareness. Natura Houses are used for training and for Natura meetings at the beginning of each cycle, when we present new products and developments to our consultants. In 2010, we opened two new Natura Houses in Brazil, one in the Itaquera neighborhood of São Paulo and the other in Santo André, a city inside the metropolitan region of São Paulo. The latter caters to a smaller number of consultants, enabling a closer relationship with them to achieve even greater engagement. We also opened three new units for our in- ternational operations: one in Lima, Peru, and one each in Buenos Aires and Cordoba, Argentina. In all, we have seven Natura Houses in Brazil and 15 abroad. PARTICIPATION OF CONSULTANTS IN TRAINING IN BRASIL (IN THOUSANDS) New consultants Initial training Training participations1 2008 304.0 164.9 458.2 2009 430.2 354.4 583.0 2010 457.9 360.9 592.6 1. May include more than one participation by the same Natura consultant even when repeating a training course. New consultants take part in induction training, during which they are monitored from the moment they join Natura until they receive the products from their ﬁ rst order. This allows them to familiarize themselves with the work of consultants and with our value proposition. They also have at their disposal on the internet our Portal do Conhecimento (Knowledge Portal), with exclusive content and news for consultants, information about Natura products and tips about making sales. 55 We completed the course given in partnership with the National Service for Commercial Education (Senac), in which we offered our consultants in São Paulo training in entrepreneurship and make-up techniques, and we are looking to forge new partnership to continue the project. We continue to invest in new initiatives to improve pro- fessional development, such as special training in new products that we consider strategic. For NCAs, we upgraded the initial training program, extending the course from just two days to one month, and basing it on in-person meetings, virtual tools and content, while promoting individual reﬂ ection and making available the support of relationship managers. For our managers, we offer training on the operational side of the business and to prepare them for an increasingly more autonomous role as managers of groups of consultants and NCAs. Every two years, managers are invited to participate in a workshop on our competitive advantages, during which they address topics such as: brand, products, quality of relations and sustainability. We also decided to extend this training to our NCAs, and 50% of them took the course in 2010. As a signatory to the Brazilian Direct Selling Association code of conduct for business-to-business and direct sellers, Natura develops programs to train consultants for the business and to uphold the company’s ethical standards. In 2010, as in previous years, no legal or administrative cases were ﬁ led against Natura involving any violation of privacy or consultants’ personal data. Nor was there any record of legal cases on issues such as child, hazardous, or slave labor involving consultants. QUALITY OF SERVICES In 2010, we reduced our non-service rate (NSR), reversing the upward trend of 2009. This indicator mea- sures the nonavailability of products ordered by consultants. Despite this improvement, we are still far from offering the level of service we hope to provide to our sales channel. When a nonservice cannot be avoided, we try to minimize the inconvenience caused to our consultants by offering substitute products and running promotions. We have aligned business areas for service response, logistics control and marketing planning to ensure effective communication with relationship managers, consultants, and NCAs in dealing with cases of nonservice. The changes being made to the logistics model are having a beneﬁ t on the sales channel. In 2010, to ex- panded capacity and opened new distribution centers, thus raising the quality of service provided to our consultants and cutting delivery times (Learn more on page 26, Structural Changes). The increased numbers of distribution centers will improve inventory management and help us to avoid product loss. In 2010, as part of our effort to reduce the NSR, we built up the inventories, though this results in a higher level of product loss because of label expirations or, in some cases, discontinuation of sales. In 2011, we will improve inventory management to reduce loss rates. Complaints from consultants about the services we provide have been reduced nearly 40%. Like the NSR, this indicator measures their complaints in relation to problems during the order cycle, from requests for products to their delivery to consultants. In 2010, we also improved the service through better management of commemorative dates. We surveyed consultants to anticipate demand at particular times, thus inﬂ uencing planning to cater to extra demand. COMMUNICATION CHANNELS We have several structured communication channels to support sales activities. The share of consultant orders placed over the Internet rose to 85% in Brazil in 2010. In 2009, the percentage was 70%. The rate for our international operations is 69%. In 2009, consultants only in Chile and France were able to place orders over the Internet; in 2010, Internet ordering was extended to Argentina, Peru, and Colombia. In 2011, it will be extended to Mexico (graph 1). In addition to making the order-taking process more efﬁ cient, electronic tools also enabled us to enhance and expand our interaction with consultants. To facilitate access, all Natura ofﬁ ces have computers with internet access for use by consultants, who may be assisted by NCAs to become familiarized with this channel. 1. NUMBER OF ORDERS PLACED THROUGH THE CONSULTANT SITE IN BRAZIL (IN THOUSANDS) 1 12,900.5 8,941.1 Visits to our redesigned Consultancy blog (www.blogconsultoria.natura.net) doubled during 2010, from an average of 40,000 to 80,000 per month. Visits to our Natura digital magazine (www.natura.net) increased 100%. In February 2011, we also launched a revised digital reader version for the iPad (Learn more on page 35, in Innovating Innovation). 4,277.6 The Natura Service Center (NSC) is also available to our consultants. The NSC offers a toll-free hotline for receiving product orders; answering queries about products and services; and handling compliments, com- plaints and suggestions. We continuously strive to improve this resource, and in 2010 we launched a new project to settle more queries on the ﬁ rst call. Critical issues are forwarded to the Ombudsman’s Ofﬁ ce. 2008 2009 2010 1. Orders taken by a consultant over the Internet, as billed for indicated years. 56 In 2010, the NSC received 23,700 calls a day, down from 28,000 in 2009. This reduction is a direct result of greater Internet for placing orders; only 14% of orders were made through the NSC, compared with 29% in 2009. 2. CAN - NATURA SERVICE CENTER IN BRAZIL1 RECOGNITION AND INCENTIVES We seek to strengthen relationships with our consultants by holding events in which we acknowledge and thank them. In Brazil in 2010, more than 73,000 consultants were thanked for their length of service, and more than 9,000 were recognized for outstanding performance in both sales volume and sales of reﬁ lls and products from Natura’s Crer para Ver (Believing Is Seeing) line. Consultants who have been active for 15 years are invited to visit the Natura plant in Cajamar (São Paulo), where they are welcomed at an event and honored by our directors and vice presidents. 32.8 28.0 23.7 Consultants who have been with the company for ﬁ ve and 10 years receive awards, and we also give prizes for outstanding sales performances. In 2010, we launched a recognition program for NCAs who made good progress and achieved strong results. 2008 2009 2010 We also organized incentive campaigns for the purpose of driving up sales, with messages that are aligned with our value proposal. One of the main events in 2010 was the Chronos Convention, attended by more than 300 consultants, NCAs and relationship managers. In the NCA recognition program, 2,200 NCAs were rewarded for their good progress and 3,000 for their strong results. RECOGNITION NCS Total NCs recognized for time in activity Total NCs recognized for performance Number of awards for recognition with distinction Number of events of recognition with distinction 2008 65,000 14,493 1,120 56 2009 64,030 10,572 473 43 2010 73,286 9,137 473 43 NATURA MOVEMENT The Natura Movement is intends to raise awareness of our values among our consultants and inﬂ uence positive behavioral changes in their families, customers, and surrounding communities. The Natura Move- ment involves our own projects as well as external initiatives that are focused on two main pillars: reducing environmental impacts (with a focus on Natura products) and social transformation (through social inclu- sion and human-development projects). Across Brazil, we have worked with 12 projects. Last year, 113,000 consultants were involved in these activities — more than twice the number in 2009 and exceeded our goal of engaging 100,000 consultants. To achieve this goal, we invest our efforts in raising awareness and mobilization initiatives. In 2010, we set up our Acolher (Welcome) Program, which provides technical and ﬁ nancial support for environmental projects developed by consultants across Brazil. The ﬁ rst projects to receive support from the program will be announced in April 2011. The program also seeks to promote an exchange of knowledge and to engage consultants in socially res- ponsible actions. This program’s portal, www.movimentonatura.com.br/acolher, offers a way for consultants to connect and to share experiences and provides information about other initiatives and social entrepre- neurship. Almost 3,000 consultants have registered on the portal, which received more than 100,000 visits between September and December 2010. The Natura Movement also supports Natura’s Crer para Ver (Believing Is Seeing) program by encouraging consultants to make online sales of products. In 2010, some 65,000 consultants participated in each sales cycle (learn more on page 92, Creation of Social Value). 1. NCS ENGAGED IN NATURA MOVEMENT¹1 113,118 45,467 In the Natura Product Recycling program, which encourages consultants to collect the empty product contain- ers during their visits to customers, more than 184 metric tons of packaging was gathered, compared to 120 metric tons in 2009. We made little progress, however, increasing the number of participating consultants, a ﬁ gure that stood at around 15,000 last year. We realize that the scope of this recycling is too limited, since it does not come close to the scale necessary for collecting all the post-consumption packaging. This is why we are structuring a more comprehensive waste management plan at Natura (read more on page 32 Priority Topics/ Product Impact). n.a. 2008 2009 2010 1. Equal to the absolute number of consultants average/year. This indicator has been monitored since 57 This recycling program – which was already in place at the end of 2009 in the city of São Paulo and along the São Paulo state coastline, in the Baixada Fluminense region of Rio de Janeiro, throughout the state of Espírito Santo and in the state capitals of Recife (Pernambuco) and Salvador (Bahia) – was extended to include the whole state of Rio de Janeiro in 2010. The containers are delivered to our transportation companies, which in turn deliver them to recycling cooperatives, contributing to raising the incomes of recyclable waste collectors and to the proper disposal of the containers. RECYCLING PROJECT Penetration of participating consultants¹ Total collected (metric tons)² 2008 2.3% 118.0 2009 2.4% 120.0 2010 1.2% 184.3 1. Percentage of participating consultants (delivery of box with waste) out of total consultants active in the cycle. 2. Natura packaging and products after use. OTHER PROJECTS SUPPORTED BY THE NATURA MOVEMENT ÁGUA DE VIVER Realizado em parceria com a ONG SOS Mata Atlântica, grupos formados por CNs, CNOs e gerentes de relacionamento monitoram a qualidade da água de rios e riachos das comunidades onde vivem e atuam, pro- movendo o engajamento da população local. Em 2010, foram realizados 76 monitoramentos em 37 cidades com a participação de 610 CNs. ÁGUA DE VIVER (WATER TO LIVE) Developed in partnership with SOS Mata Atlântica, an environmental NGO, groups formed by consultants, NCAs and relationship managers monitor the quality of the water in rivers and streams in the communities where they live and work, promoting the engagement of the local population. Last year, 76 monitoring exercises were conducted in 37 towns with the participation of 610 consultants. MATA ATLÂNTICA É AQUI (ATLANTIC FOREST IS HERE) Also run in partnership with SOS Mata Atlântica, a truck travels to Brazilian towns showing an exhibition on the Atlantic Forest biome and staging activities to raise awareness, mobilize and educate about the importance of preserving the forest. In 2010, the activities were held in 36 towns with the participation of 4,600 consultants, while some 114,500 people visited the exhibition. GRUPO CULTURAL AFROREGGAE (AFROREGGAE CULTURAL GROUP) The partnership with the Grupo Cultural AfroReggae completed four years in 2010. Natura provides institu- tional support for the organization in its activities that involve an exchange of knowledge and promote culture. Last year, 121 consultants participated in the actions of the group that beneﬁ ted some 2,000 people. RESPEITO SÃO PAULO (RESPECT SÃO PAULO) The program is organized by Natura and aims to raise awareness among our consultants so they can act as change agents in the region. Average participation in each cycle of the program was 3,000 consultants. OTHER ACTIONS We continue to support the Civil Police of Rio de Janeiro which, together with AfroReggae, engage in dialogue on human rights and the culture of peace in various different communities in the state, involving 12,000 people in 2010. We have also started to support the Gol de Letra Foundation in Rio de Janeiro, the Pracatum Associa- tion in Salvador (Bahia) and the Canta Brasil Socio-Cultural Group in Bento Gonçalves (Rio Grande do Sul). 58 4.4 CONSUMERS OUR CONSUMER-RELATIONS INITIATIVES ARE DRIVEN BY OUR DESIRE TO LEARN ABOUT THE HABITS AND NEEDS OF THE MILLIONS OF CONSUMERS WHO U S E O U R P R O D U C T S . W E WA N T TO OFFER THEM AN EXPERIENCE THAT STIRS THEIR SENSES AND PROMOTES WELL-BEING WELL. Over the past two years, we have signiﬁ cantly expanded our efforts to survey, listen to, and engage in dialo- gue with consumers to understand them better and to offer products that exceed their expectations. The information we get in return inﬂ uences our strategic planning and provides input for the innovation process. In 2010, Natura’s investment in market research grew 58% from the previous year. It is wor th noting that we had already taken a major step forward in 2009, setting up our Consumer Insight area to improve our knowledge of the market and to identify trends. We expanded this initiative to our international operations in 2010. In this context, we want to go beyond product-development surveys to examine and understand our consumers’ attitudes and behaviors. We want to be present in all the market segments, from the very ﬁ rst moments of a child’s life through old age. Therefore, we are studying speciﬁ c consumer segments, such as men, seniors, and preteens. We are also extending consumer behavior research to areas we consider relevant, such as beauty and conscious consumption. In 2010, we held our ﬁ rst dialogue panel exclusively for consumers. Twenty-two members of the public from several regions of Brazil and different age groups participated. At the meeting, we discussed their ideas for improving our products, services, and activities. This commitment to strengthening ties with our customers has ensured Natura’s continuing high levels of ac- ceptance, as shown by the Brand Essence/Ipsos image survey. According to this study, 81% of consumers gave top marks to our brand. In addition, 49% of cosmetics consumers selected Natura as their brand of choice. Our consumer loyalty rate, which demonstrates consumer satisfaction and their willingness to recommend and continue to buy our products, is 53% — a signiﬁ cant increase over the previous year’s rate of 46%. Through our expansion in the Brazilian market, we have reached 55% of homes in Brazil (graphs 1 and 2). QUALITY OF RELATIONSHIPS WITH CONSUMERS IN BRAZIL (%)1 2 Loyalty 3 Preference Would recommend 2008 n.a. 47 n.a. 2009 46 47 72 2010 53 49 78 1. Source: Brand Essence. 2. From 2009 onward, the survey expanded its coverage to include three more cities, totaling six areas. Last year, we did not report the three new survey areas because there was no historical comparison. In 2010, we are including this analysis, and we have revised the 2009 ﬁ gures accordingly. 3. The loyalty index is calculated based on the percentage of consumers who gave the maximum score for Satisfaction, Intention to Conti- nue Buying, and Recommendation. We maintain other channels for engaging consumers, such as our growing Internet presence through social networks and our own online communities for building relationships with customers. Examples of this prac- tice include portals called I Love Make-Up (www.adoromaquiagem.com.br), Skin Care (www.cuidedapele. com.br), and Love in Motion (www.amoremmovimento.com.br). These sites encourage visitors to exchange experiences. We also launched the Natura Musical portal (www.naturamusical.com.br), a community that offers information about the project and invites our customers to interact with sponsored artists. In 2010, these communities registered 3.3 million accesses and were visited by more than 2.7 million people. Another important factor is the growing consumer interest in gift items suggested by Natura, as sales of these products have increased twice as fast as our standard items. This can be attributed to a greater perception of the value of our brand, but also to the information garnered from surveys that led us to reformulate our strategy for commemorative dates such as Mother’s Day, Valentine’s Day and Christmas. 1. GLOBAL EVALUATION OF BRAND IMAGE SURVEY (BRAZIL) (%)¹ ² 81 81 80 2010 2009 2008 1. Source: Brand Essence. 2. The top box overall assessment metric considers respondents that gave top marks to the Natura brand on a scale from 1 to 5. 2. PENETRATION IN BRAZILIAN HOMES (%) ¹ ² 54,8 52,4 46,3 2008 2009 2010 1. Source: Kantar World Panel. 2. Penetration is the percentage of households in the population covered by the survey that have purchased the speciﬁ ed period. the brand in 59 We also encourage our consumers to play a more active role in product development, such as in the launch of the Una make-up line. The tones of classic lipstick colors (those most used by consumers), for example, were chosen based on the results of market research involving more than 2,000 women. In addition to promoting products, our advertising and publicity also makes a commitment to raising con- sumer awareness, upholding ethical principles and championing diversity. It also expresses our concern with advertising to children and with the sustainable use of biodiversity assets. Natura operates within the rules of the Advertising Self-Regulation Council and the codes of conduct of the Brazilian Association of Advertisers, the Brazilian Consumer Protection Association and the Bra- zilian Association of Direct Selling Companies. These rules are used organically as guidelines in all our communications. CUSTOMER SERVICE The main channel for consumers to contact us is the Natura Customer Service (NCS). The NCS received more than 1 million calls in Brazil in 2010, 31% fewer than the previous year. This decrease is associated with efforts to reduce false reporting of product defects. We began to analyze products returned by consumers before replacing them and improved our controls as a result. Complaints fell by 62% , a decrease we believe is associated with the reduction of false reports, and we have become more efﬁ cient at replacing products that present genuine problems. Information derived from the analysis of genuine problems contributes to innovation and the continuous improvement of our products and services. The initiative has enhanced our response and prompted an improvement in the quality of our service. With a smaller volume of calls, we have been able to improve the management of NCS services and the number of unanswered calls fell from 7% in 2009 to 4% in 2010. NCS - NATURA CUSTOMER SERVICE (CALLS IN THOUSANDS)1 Total Answered Unanswered 1 Calls relating to Brazilian operations. 2008 1,531.0 1,471.0 60.0 2009 1,484.4 1,375.3 109.1 2010 1,028.9 987.0 41.8 As we are concerned with the privacy and conﬁ dentiality of our consumers, everyone who contacts us through the internet or the NCSC is protected by policies and systems that ensure data security. In 2010, we did not record any proven complaints of privacy violation or loss of data of our consumers. HEALTH AND SAFETY In 2010, we restructured our consumer safety area. We brought all of our processes related to the safety and effectiveness of ingredients together under a single management system. This includes ﬁ nished products, regulatory issues, the cosmetic vigilance system, and clinical research. With our international expansion in 2010, we worked with our teams in Latin America to improve our understanding of regula- tory issues outside of Brazil. The health and safety of our consumers and the efﬁ cacy of our products are concerns that have been incorporated into our business process, from the development of product concepts to the ﬁ nal disposal of packaging, including research and development, certiﬁ cation, manufacturing, marketing and promo- tion, storage, distribution, supply, customer service and actual product use. In 2010, we completed product reformulations to eliminate phthalates from our production and, by June 2011, we expect to eliminate parabens from our formulas. Our target was to have both completely eliminated in 2010, but we revised our goal because of technical challenges. Although these ingredients do not pose proven risks to consumers, we decided to remove them from our formulas because there is no scientiﬁ c consensus about proper precautions. Parabens belong to a group of preservatives used in cosmetics and foods. Since Natura only uses com- pounds that pose no risk to human health, this lack of scientiﬁ c consensus on the potential harmful ef- fects of some types of parabens (the types not used by Natura) prompted us to completely eliminate the use of all parabens. Phthalates, meanwhile, are a family of compounds used for many different purposes, including as additives in the manufacture of plastics and in the cosmetic industry. Natura used to work with a compound from this family, diethyl phthalate, as a solubilizer of fragrances, a bittering agent and alcohol denaturizer. When applied in low concentrations, there are no indications that diethyl phthalate can be harmful to health. Nevertheless, since this ingredient may be mistaken for other controversial versions of phthalates, they have also been completely eliminated from our production. 60 The precautionary principle is invariably adopted by Natura before using a new ingredient or launching a new formula. In other words, if the international medical and scientiﬁ c communities have any doubts about the potential adverse health effects of a product, we choose not to use it. For raw materials that have some limitation on the permitted concentration, we always try to comply with the standards of countries with the most restrictive legislation. All our new ingredients and formulas are tested by a team of dermatologists. We also have a Cosmetic Vigilance System that monitors the potential adverse effects of our products. In addition to protecting the end consumer, this system also fuels our innovation process. All the com- munication we receive on health or safety reactions is investigated and monitored. In 2010, Natura received no legal penalties or inquiries from the National Health Surveillance Agency (Anvisa), Brazil’s health sector regulator, not any ﬁ nes resulting from the effects of our products on the health and safety of consumers. Furthermore, we did not receive any signiﬁ cant ﬁ nes related to product labeling. There were 463 complaints ﬁ led with the Brazilian Consumer Protection Agency against Natura. Most referred to requests to negotiate the debts of consultants, third party inquiries related to undue black- listing as a result of registration fraud, and complaints from dissatisﬁ ed customers who did not get a product exchange or refund. All complaints are analyzed by the relevant departments and the ﬁ ndings are used to improve our processes. 4.5 SUPPLIERS OUR PURSUIT OF CONTINUOUS IMPROVEMENT IN THE QUALITY OF OUR PARTNERSHIPS WITH SUPPLIERS PL AYS A KEY ROLE IN MAINTAINING OUR COMMITMENT TO SUSTAINABILITY. The number of supplier-par tners we work with totaled just over 4,900. Of these, about 5% work with finished goods and production inputs (biodiversity ingredients, raw materials, packaging materials). The remainder provides services or delivers ingredients and materials indirectly required for our business processes. Despite the growth of our international activities, these par tners are located mainly in Brazil In Latin America, we recently adopted the strategy of developing local production through outsourced part- ners. In 2010, we started bottling perfume in Argentina and, in 2011, we will expand production to Colombia and Mexico. This model, in addition to cutting costs and having less of an environmental impact, takes into account important concepts for Natura, such as partnership and co-construction, and it places a value on partners with local knowledge and good socio-environmental practices. (Read more on page 25, Structural Changes). We aim to continually evolve our processes in order to boost our business par tners’ levels of satis- faction. In 2010, the supplier-satisfaction index remained stable at 81%, compared with 82% in 2009. This fell shor t of our target of increasing satisfaction to 85%. Some operational issues, such as logistical bottlenecks, contributed to this. We will introduce new processes for planning and handling materials in the first quar ter of 2011. We also did not move forward as fast as we would have liked with improving the flow of contracts and payments, an issue raised by suppliers during the dialogue panels. Through our services center, we have improved monitoring of payments and have optimized the process of drafting contracts and related suppor t systems. We believe these advances, made in the second half of 2010, will be reflected in better service during 2011. 61 One positive aspect is that our suppliers’ loyalty rate rose from 25% in 2009 to 28% in 2010. This indicator, which we are reporting for the ﬁ rst time, has been monitored by Natura since 2008, and it combines ove- rall satisfaction, intention to continue a relationship with Natura, and whether a supplier would recommend Natura to other suppliers. For 2011, we hope to mantain a 28% supplier-loyalty rate, which will now be the main indicator for assessing our relationships with suppliers (graph 1). 1. OVERALL SATISFACTION – BY SUPPLIER (%)¹ 2 82 81 Since 2009, we have been active on five fronts identified for improving our supplier relationships: em- ployee awareness of critical issues affecting the supplier relationship; closer relations with strategic suppliers; improving the product innovation funnel process to include suppliers; improving the payment process; and extension of our corporate supplier development program to other categories of supplies and services. 74 2010 2009 2008 1 Percentage of suppliers satisﬁ ed or fully satisﬁ ed. 2 The indicators have a margin of error corresponding to a 95% conﬁ dence interval. To raise the awareness of new employees as to the impor tance of supplier relations, we reinforced the theme in the integration program. This is an impor tant point that should be intensified in 2011 to align new employees with the precepts that guide our quality in relations with suppliers. We held four dialogue panels with suppliers to discuss the following issues: solid waste, the relationship between suppliers and supplier communities, and sustainable supply chains. We continued to hold meetings to monitor the performance of the Qlicar (Quality, Logistics, Innovation, Competitiveness, Service, and Relationship) program, with a focus on continuous improvement, as well as the effectiveness of procedures that deﬁ ne our relationships with strategic partners. These periodic meetings — which include “Breakfast Meetings with Suppliers” and “Alliance Conferences” enable us to maintain and improve these relationships. In the product innovation process, we intensiﬁ ed the ﬂ ow of information to suppliers and established clearer rules for project management, consolidating these initiatives with the creation of a department devoted ex- clusively to innovation with suppliers. QLICAR PROGRAM In 2010, we extended the reach of Qlicar, which covered 97 partners — mainly suppliers of inputs and some of our service providers. Qlicar was extended to vendors that provide such services as marketing and com- munication campaigns and sub-brand publicity. We also reactivated BioQlicar for our supplier communities (learn more on page 64, Supplier Communities). We emphasize continuous performance improvement in our programs involving suppliers of ﬁ nished goods and among our transportation companies, call centers, and logistics vendors. In 2011, we will extend this ap- proach to in-depth awareness of environmental issues. We also reinforced the educational pillar, staging workshops on how to prepare sustainability reports and use them as a tool for evaluating and monitoring a company’s management. We also organized a training course on the production of greenhouse gas emissions inventories. In the ﬁ eld of education, we began, half way through 2010, to train suppliers how to prepare sustainability reports using the Global Reporting Initiative (GRI) model adopted by Natura. Seven suppliers from different sectors are taking a course of workshops, scheduled for completion in July 2011, intended to qualify and engage them in the use of sustainability reporting to evaluate and managetheir socio-environmental impacts. This train- ing is conducted in partnership with the Brazilian Association of Corporate Communication (Aberje). We are also training six suppliers on the subject of Climate Change, based on the guidelines of the Green- house Gas Protocol (GHG Protocol) – the methodology used by companies and governments to under- stand, measure and manage their carbon emissions. This project is run in partnership with the Getúlio Vargas Foundation and its goal is to help these partners improve their emissions monitoring. In another development that deserves attention, seven suppliers signed up to the Brazilian Business Move- ment for the Conservation and Sustainable Use of Biodiversity, led by Natura. This is a movement of compa- nies that have made a voluntary commitment to the conservation of social biodiversity. The companies that joined the initiative were: Agropalma, Beraca, Firmenich, Centroﬂ ora, IFF, Native and Solabiá. Our suppliers are required to complete self-evaluations and audits to analyze issues of quality, environment and social responsibility, and also aspects related to human rights, such as the use of child labor, forced labor or the equivalent of slave labor. In 2010, no cases of human rights violations were identiﬁ ed. All our 187 product suppliers completed the self-evaluation process and 53% submitted to periodic audits. Additionally, all the suppliers who are part of the Qlicar program were audited. 62 SUPPLIERS AUDITED OR SELF-EVALUATED ON QUALITY, ENVIRONMENT AND SOCIAL RESPONSIBILITY 1 Productive Suppliers (self-evaluated %) Productive suppliers audited (%) Suppliers Qlicar audited (%) 2008 100 48 100 2009 100 48 100 2010 100 53 100 1. The aspects of human rights covered are child labor and slave labor or labor analogous to slave labor. HUMAN RIGHTS CLAUSES IN CONTRACTS 1 2 Percentage of signiﬁ cant investment agreements that include human rights clauses Total number of signiﬁ cant investment agreements that include human rights clauses (thousands) 2008 2009 2010 100% 2.0 100% 2.5 100% 2.2 1. The deﬁ nition of signiﬁ cant investment was revised to represent the expressed number more coherently. Among the criteria to verify whether a particular investment is signiﬁ cant or not, are: value (contracts over R$ 200,000); contracts involving intellectual property; real estate acquisitions; donations and sponsorship. 2. The clauses relate to child labor and slave labor or labor analogous to slave labor. SUSTAINABLE SUPPLY CHAINS We took on a great challenge in 2010: to develop a methodology to quantify the environmental impacts that our partners’ activities may cause for society (known as socio-environmental externalities) and con- vert the data into monetary values. The new methodology will be incorporated into the process of selec- ting suppliers and is aligned with our ambition of developing sustainable supply chains. The study links the primary impacts of the supply chain with Natura’s priority sustainability issues. We applied it on a pilot basis for the selection of two suppliers in 2010: one from the services segment and the other from products. In both cases, we decided to select partners who, in addition to meeting tradi- tional technical criteria, demonstrated advantages in social and environmental indicators, such as reducing greenhouse gas emissions and investing in education. Our goal is to apply this methodology to 16 groups of materials and services (accounting for 60% of the value of our purchases) by the end of the ﬁ rst quarter of 2011, and to reach 100% of our portfolio within the next two years. This pioneer process is a result of collective construction. We held two dialogue panels gathering 70 peo- ple from 14 supplier categories, which helped us identify all the externalities to which each one is exposed. The methodology was developed in partnership with the consulting ﬁ rm A.T. Kearney, known for its work in supply chain management, and with the support of representatives from The Economics of Ecosystems and Biodiversity (TEEB), of the United Nations. 63 4.6 SUPPLIER COMMUNITIES W H EN N AT U R A CO M M I T T ED TO A TEC H NOLOGY PL ATFOR M THAT INCORPOR ATES INPUTS E X TR ACTED FROM BR A ZILIAN BIODIVERSIT Y IN A SUSTAINABLE WAY, WE INITIATED R E L AT I O N S H I P S W I T H S U P P L I E R COMMUNITIES THAT PROVIDE NOT ONLY R AW MATER IAL S BUT AL SO ACCESS TO TR ADITIONAL KNOWLEDGE . This business model produces value for Natura and helps to create wealth for communities and small farmers while driving local development. In 2010, our network of relationships involved 25 supplier com- munities comprising 2,301 families in the North, Northeast, Southeast, and South of Brazil and in Ecuador. Eleven supplier communities provide materials for our plant that makes oils and soaps in Benevides (Pará) (learn more on page 68, Surrounding Communities). The number of families involved was 14% higher than the previous year. Examples of progress in this relationship include a 57% increase in resources allocated to communities and the effective implementation of our Rural Supplier Development program, called Bio- Qlicar (Quality, Logistics, Innovation, Competitiveness, Service and Relationship). This program is growing into a robust platform for dialogue and for the development of small farmers and partner communities involved in our supply chains of biodiversity inputs (graphs 1 and 2). 1. NUMBER OF COMMUNITIES WITH WHICH NATURA DOES BUSINESS ¹ 25 25 Our relationship with supplier communities is based on the Natura Policy for the Sustainable Use of Bio- diversity and Associated Traditional Knowledge, and is aligned with the International Convention on Bio- logical Diversity. This policy, which was formulated in 2008 and disseminated to our stakeholders in 2009, regulates our processes and helps us improve the planning of demand for inputs purchased from these communities. It also sets parameters for negotiating the equitable distribution of beneﬁ ts obtained from the use of these ingredients. 22 Our policy dictates that approval to embark on a relationship with new communities or to start new research and supply projects must involve internal forums to assess all the risks and opportunities, both for the commu- nity and for Natura. The selection is made based on a diagnosis of the following characteristics of the communi- ties: supplies, relationship, plant production and marketing, and it also includes an analysis of the traceability, the administrative organization and the legal structure of the association or cooperative, engagement with partners and environmental conservation practices, among other things. In what we consider our priority communities, we are committed to the preparation of sustainable develop- ment plans, implemented through projects run in partnership with the communities and other organizations. The focus of these plans is to contribute to sustainable local development, so society as a whole can develop. The reasons for terminating a relationship may include the discontinuation of a product line or use of a speciﬁ c raw material, or failure to satisfy critical supply criteria (quality, volume, etc.). It is worth pointing out that this analysis is only made after a period in which all the conditions that allow the community to meet these require- ments have been provided (training, investments in infrastructure, management, etc.). 2010 2009 2008 1. In 2010, we revised the for quantiﬁ cation of criteria supplier communities, which now consider only traditional communities and family farmers. We revised the numbers for 2008 and 2009 accordingly. 2. BENEFITED FAMILIES 2,301 2,012 1,823 Internally, we have a multidisciplinary team that uses management systems and governance mechanisms to pro- mote a more comprehensive inclusion of these communities into our business model, and we are also streamlin- ing our procedures so we can adapt better to the local contexts of each community. In 2010, we began to assess the loyalty of supplier communities to Natura, based on a survey similar to that which is conducted with our other suppliers. These methodologies will be consolidated in 2011. The initial assessment revealed the need for improvement in some aspects of these relationships, such as communi- cation, the procurement process, and joint development opportunities in the supply chains. 2008 2009 2010 64 We also improved dialogue with supplier communities by inviting them to a three-day conference. This meeting, involving 60 people, also included representatives of processing companies (suppliers that take ingredients such as almonds, seeds, or fruit from our supplier communities and conver t them into oils or other substances that are incorporated into our products). Through dialogue, we have promoted better integration between these two impor tant groups in our supply chain. At the confe- rence, we showed how the issues discussed in 2009 had evolved and we conducted an assessment of BioQlicar. We also discussed scenarios for the coming years, the future of our relationships, and each side’s role in fostering sustainability. As a way of giving fresh impetus to the communities and making clear their importance to Natura, we staged two product launches in the communities that supply their inputs. We launched the Una make-up line at the Cooperative of Small Agroextractivist Producers in Esperantinópolis, in the state of Maranhão, which supplies ground babassu coconut. We also chose the community of Jacarequara – home to the Mixed Farmers Coopera- tive Between the Caeté and Gurupi Rivers (Coomar), in Santa Luiza do Pará, in the state of Pará – as the site of the launch of our new Ekos line of soap. This event was attended by 30 journalists from across Brazil, who not only learned more about the new product, but were also introduced to the work conducted in the com- munities. These events have also brought our consultants and supplier communities closer together, creating an environment for the exchange of cultures and world visions between the different links in Natura’s sales and production chain. We also presented the work of our supplier communities at the 10th Conference of the Parties to the Conven- tion on Biodiversity (COP-10), in Nagoya, Japan. Furthermore, the Ekos Portal (www.naturaekos.com.br), which promotes the range of products from the Ekos line, also contains information on the work in these communities, such as the model of sustainable extraction and the socio-environmental concerns. We organized anthropological studies in 2010 on the involvement of children and adolescents, members of the supplier communities’ families, in the production chain. The studies reveal that this involvement is not limited to the economic or legal dimension, but also considerssocial and cultural issues. The social division of labor in the extractivist communities observes a characteristic vision of the world that belongs to their own cultural system. As a result, we did not identify any practices justifying corrective action. We will continue to monitor the issue in 2011 to make sure that no children or adolescents are being exposed to risk. It is worth noting that in 2010 we did not register any incidents involving indigenous populations in the locations were we operate. RESOURCES FOR COMMUNITIES In 2010, our transfer of resources to supplier communities rose 57% over 2009 levels, to R$8.7 million. This amount refers to payments for the supply of inputs; contracts for sharing beneﬁ ts; for access to genetic he- ritage or associated traditional knowledge; for use of images; and for direct investments in local sustainable development. RESOURCES ALLOCATED (R$ THOUSANDS)1 Supply Sharing beneﬁ ts from access to genetic heritage or associated traditional knowledge 2 Funds and support 3 Use of image 4 Training 5 Certiﬁ cation and stewardship 6 Studies and advisory services 7 Total 2008 2,283.9 1,435.7 631.2 15.4 56.4 23.4 555.5 5,001.5 2009 2,767.2 1,056.3 1.087.7 14.5 151.8 27.8 435.1 5,540.4 2010 4,373.6 1,480.1 1.551.7 76.5 184.6 212.2 827.7 8,706.4 1. Data for 2008 and 2009 have been revised due to the reallocation and reclassiﬁ cation of project expenses in supplier communities and the exclusion of amounts associated with one community that is no longer part of this group. 2. Sharing of beneﬁ ts with the communities enabling access to Genetic Heritage and/or Associated Traditional Knowledge. 3. Corresponds to Funds and Sustainable Development Agreements voluntarily supported by Natura, for which disbursement has always been contingent on projects or sponsorship for infrastructure improvements. 4. Amounts paid by Natura for the use of images of community members in institutional publicity pieces or in marketing. 5. Includes Natura’s payments to hold workshops and courses for communities to improve their sustainable production techniques. 6. Amounts invested in certiﬁ cation and stewardship plans in cultivation areas within supplier communities. 7. Includes reports and consulting services provided by specialists and NGOs contracted by Natura to work with supplier communities. Growth in the amount of resources resulted from higher demand - driven by new product launches - but also by more beneﬁ t-sharing payment contracts coming due in 2010 than in previous years. For 2011, we expect total distribution to grow 25%, a lower percentage than last year. In 2011, we intend to streamline our information system on the various different divisions of Natura that are part of this relationship, extending our control over this and other indicators associated with supplier communities. 65 RESOURCES ALLOCATED PER FAMILY (R$ THOUSANDS) Direct resources1 Supply 2 2008 2.4 1.4 2009 2.5 1.5 2010 3.1 2.0 1. Includes resources actually received by the communities: supply of inputs, beneﬁ t sharing, use of image, funding and support. 2. Sub-item of direct resources, highlighting the funding received for supply. BIOQLICAR PROGRAM Our supplier communities take par t in the BioQlicar Program, an initiative similar to the development program applied to the other suppliers. Five years ago, we began to develop a program to monitor and improve the supply chain that provides us with ingredients from biodiversity. After a period of conceptual and methodological evaluation, by 2010 we had a more robust model consisting of two indicator categories: BIO (economic, physical, en- vironmental, social and human resources); and Qlicar (monitoring the production performance of rural suppliers). We hope to use this program to promote an objective dialogue, streamline our par tnerships and strengthen our business model. BioQlicar helps communities organize in different ways, stimulating their development and guiding their relations with the market as a whole. It also guides our procedures and relationship strategies to make supply chains more sustainable. This model considers two indicator categories: bio (economic, physical, environmental, social, and human resources) and Qlicar (monitoring the production performance of rural suppliers). In 2011, we will assess the program together with the communities, and our goal is to reach a score of 3.7 on a scale of 0 to 5. We also conducted, for the first time, a complete survey of data from the communities for the program. This involved meetings in 23 of the 25 supplier communities and with 7 processing companies. The re- sults were discussed with these two groups, enabling us to prepare joint action plans and improve the supply chains. The construction of BioQlicar observed the seven principles of the BioTrade Program of the United Nations Conference on Trade and Development (UNCTAD), which addresses, among other things, the conservation of biodiversity, fair and equitable sharing of benefits, compliance with national and interna- tional regulations, and respect for the rights of all the actors involved. SHARING BENEFITS AND CULTURAL HERITAGE We signed four new beneﬁ t sharing contracts in 2010, which were negotiated based on the principles of the Natura Policy for the Sustainable Use of Biodiversity and Associated Traditional Knowledge. In general, the amount of resources shared depends on the number of raw materials produced from the plant, and on the commercial success of the products c The ﬁ rst contract was signed with the Ver as Ervas Association, from Belém in the state of Pará, for the tradi- tional knowledge associated with the use of the ingredient pataqueira (Conobea scoparioides). According to the terms of the contract, the resources will be used in projects for the community, such as the renovation of the association’s facilities. We also signed a beneﬁ t sharing contract for genetic access to the species aperta-ruão (Piper aduncum) with the group Consórcio Terra Medicidinal, from Barra do Turvo in the state of São Paulo, and the NGO Programa da Terra. The resources will be invested in improving the quality of life of family farmers involved in the process and to develop the production chain. The third contract involved access to yellow passion fruit (Passiﬂ ora edulis ﬂ avicarpa Degener) and was signed with the Agroindustrial Cooperative of Farmers from Corumbataí do Sul and Region (Coaprocor), in the state of Paraná. The community has used the beneﬁ t sharing resources to make improvements to the production chains, such as purchasing land for its new facilities, training and mobilization events for farmers. The ﬁ nal contract involves macela-do-campo (Achyradine satureoides), signed with the Bernado Hakvoort Agroforestry Institute, located in the town of Turvo, also in the state of Paraná. The resources will be spent on the institutional strengthening of the organization and the local cooperative, through technical training and increasing the number of farmers associated with the projects of Natura. 66 LOCAL DEVELOPMENT Natura’s relationship with the supplier communities is not restricted to commercial relations and production. The relationship also involves the promotion of actions geared towards sustainable local development. We try to invest in projects that strengthen the social fabric of the communities and help in matters such as environ- mental conservation, cultural promotion and the improvement of local infrastructure. One example is the partnership with the Federation of Agencies for Social Welfare and Education (FASE) and Labor, in Benevides, which has generated a series of training courses for local producers (read more on page 68, Surrounding Communities). Projects that contribute to the local development of supplier communities: MIXED COOPERATIVE OF EXTRACTIVIST PRODUCERS FROM THE SUSTAINABLE DEVELOPMENT RESERVE OF THE IRATAPURU RIVER – COMARU (AMAZONAS) Offers scholarships for technical and higher education courses with funding from the Iratapuru Fund. COOPERATIVE OF AGROECOLOGICAL, ARTISANAL AND FORESTRY PRODUCERS OF TURVO – COOPAFLORA (PARANÁ) We organized a training course on managing cooperatives and a meeting of youngsters from the region of Turvo, attended by more than 300 people. The purpose of the event was to encourage the young people to remain in the countryside, strengthening family farming and curbing rural migration. The funds for these actions are provided by Natura’s local development program. PARTNERSHIP FOR ECONOMIC REFORESTATION – RECA (RORAIMA AND ACRE) We supported, with funding from the local development program, the construction of an agricultural school to provide a vocational education in the communities. The school currently has more than 70 students. COOPERATIVE OF AGROEXTRACTIVIST DEVELOPMENT AND ENERGY OF MÉDIO JURUÁ - CO- DAEMJ (AMAZONAS) In partnership with the Small Business Support Agency (Sebrae) and the Chico Mendes Institute for the Conservation of Biodiversity, we supported a training course on how to run a cooperative for 40 people. BURITI PALM OIL PRODUCERS FROM THE MUNICIPALITY OF PALMEIRA DO PIAUÍ (PIAUÍ) We staged training courses in citizenship, associativism and cooperativism, and agroforestry systems for 50 people, organized with the non-monetary shared beneﬁ ts resulting from our access to the traditional knowl- edge and genetic heritage of the Buriti Palm. WOMEN’S MOVEMENT OF THE ISLANDS OF BELÉM (MMIB), COTIJUBA (PARÁ) Using its own resources, Natura supported the ﬁ nal stages of construction of the MMIB’s handicrafts facility, used to produce biojewelry, beneﬁ tting the 13 families that are members of the association. ASSOCIATION OF PRODUCERS OF BOA VISTA DO ACARÁ – (AMAZONAS) We held a workshop to teach the skills needed for organizational management for the 23 families in the com- munity. The initiative was organized with our own resources. VER AS ERVAS ASSOCIATION, BELÉM (PARÁ) We organized training for 100 people in how to develop projects to support the association and raise money. Although the community does not supply Natura, the relationship involves the sharing of traditional knowl- edge. The initiative was organized with Natura’s own resources. 67 4.7 SURROUNDING COMMUNITIES WE KNOW THAT OUR OPERATIONS BRING ABOUT CHANGE IN THE LOCATIONS WHERE WE OPER ATE, SO WE HAVE INVESTED IN CLOSE RELATIONS WITH THE COMMUNITIES AROUND OUR UNITS IN CAJAMAR (SÃO PAULO), ITAPECERICA DA SERRA (SÃO PAULO), AND BENEVIDES (PARÁ). However, we recognize that we must develop new strategies for ensuring smooth transitions in other com- munities as our operations grow in Brazil and abroad. For example, our relationship strategy should include places where we have distribution centers: Jundiaí (São Paulo), Matias Barbosa (Minas Gerais), Jaboatão dos Guararapes (Pernambuco), Canoas (Rio Grande do Sul), Simões Filho (Bahia), Uberlândia (Minas Gerais), and Castanhal (Pará). The same should apply to our international operations. Outsourced manufacturing in Argentina started at the end of 2010 and will be extended to Mexico and Colombia. Our aim is to contribute to the development of these regions through partnerships with the community, authorities and representa- tives of civil society. In an effort to understand the needs of the communities surrounding our operations at Cajamar and Itapecerica da Serra, we held ﬁ ve dialogue panels involving representatives of civil society, government, associations, and nongovernmental organizations in 2010. At these events, we sought to learn the issues and challenges these communities face, understand how these groups interact with one another in the community, exchange experi- ences, and ﬁ nd joint solutions. Investments in projects at Cajamar and Itapecerica da Serra totaled R$438,700 in 2010, of which R$408,700 were corporate-funded and R$30,000 were revenues from the Natura Crer para Ver program. Natura also al- locates 1% of its income tax to Municipal Councils for the Rights of Children and Adolescents, and we intend to build relationships with these bodies to monitor the use of these funds more closely (learn more on page 93, Creation of Social Value). INVESTMENT IN INFRASTRUCTURE AND SERVICES FOR PUBLIC BENEFIT (R$ THOUSANDS) 1 2009 2008 Investment in communities around Natura units – Natura funds Investment in communities around Natura units – Crer para Ver program² Total 342.8 249.2 592.0 407.9 2.5 410.4 2010 408.7 30.0 438.7 1. Investments in the municipalities of Itapecerica da Serra and Cajamar. 2. This amount does not include funds intended for the Trilhas (Trails) project at Cajamar or the Encontros de Leitura (Reading) project at Itapecerica, both related to the Crer para Ver program. In 2010, the number of employees living in Cajamar rose from 565 to 659. This increase was slightly below the rate of growth of Natura’s staff as a whole. We have noted in past years that many people from our surrounding com- munities have sought employment with us but do not have the qualiﬁ cations we require. This reﬂ ects shortcomings in educational and training facilities, which is a challenge not only in these locations but also in Brazil as a whole. In general, youngsters who applied to join Natura through our Young Apprentice program also demonstrated this lack of qualiﬁ cation. We believe there is an opportunity for us to take action in this respect, and in 2011 we will develop training programs for these groups to increase their own marketability, whether for positions at Natura or other companies in the community (learn more on page 31, High-priority Topics/Education). EMPLOYEES FROM THE SURROUNDING COMMUNITIES (%)1 Cajamar Benevides2 2008 18.2 96.0 2009 17.4 98.0 2010 16.6 94.5 1. Itapecerica da Serra does not have employees from the surrounding communities. 2. The municipalities near Benevides are also considered as surrounding communities. 68 Natura does not have any speciﬁ c procurement policy for surrounding communities, although the new methodol- ogy for selecting suppliers to be used in 2011 considers location together with other technical and socio-environ- mental criteria (read more on page XX, Suppliers). In 2010, we recorded an increase in the volume of business with partners in the communities surrounding Natura’s three main units, which is the result of maintaining partnerships with the current suppliers. PURCHASES FROM SUPPLIERS FROM THE COMMUNITIES SURROUNDING THE UNITS 1 (R$ MILLION) Cajamar2 Itapecerica da Serra2 Benevides3 Total 2008 52.0 1.2 34.4 87.6 2009 69.9 1.2 44.6 115.7 2010 73.6 1.3 46.5 121.4 1. The values include taxes. 2. Purchases from suppliers located in the municipalities of Cajamar and Itapecerica da Serra, metropolitan region of São Paulo, Brazil. 3. Purchases from suppliers in the state of Pará exclusively the industrial unit of oils and soap mass located in Benevides, in northern Brazil. CAJAMAR One of the highlights of Natura’s performance at Cajamar in 2010 was the revision of the Municipal Education Plan. In 2003, we supported the local government’s ﬁ rst plan, and once again we are part of this initiative. In 2003, community involvement was low, whereas now 300 representatives of civil society are involved — evidence that this group is more cohesive and participatory. Last year, in conjunction with Cajamar’s municipal government, we engaged a higher-education institution (Funda- ção Escola de Sociologia e Política de São Paulo) to help us to revise the plan. We covered 70% of the cost of the contract, and the municipal government paid the remainder. The project was planned jointly with the community through meetings held in all districts. The new plan covers education for municipal schools for the next 10 years — setting targets, strategies, and action plans. We also used funds from the Natura Crer para Ver (Believing is Seeing) program to produce a booklet to be distributed to the community, providing details on how the plan will work. We have a partnership with the NGO Mata Nativa. In 2010, we commissioned the Institute of Socio-Environmen- tal Research and Projects to advise on the process of improving and streamlining the NGO’s management. Mata Nativa is a benchmark institution in the town, and it has been contacted by several industries seeking assistance with socio-environmental issues. Also in partnership with Mata Nativa, in 2010 we completed a project to map the potential areas for reforestation in Cajamar. The study consisted of a general inventory of the local ﬂ ora and an identiﬁ cation of protected areas (known as “Permanent Preservation Areas” and “Legal Reserves”), degraded areas and riparian forests. Technical reports and georeferenced maps were drawn up of the potential areas for reforestation found in the region. This project was widely publicized in the municipality and it can provide valuable insight for the creation of the mu- nicipality’s Master Plan and Agenda 21. The initiative also received the support of the National Biomass Reference Center and the Advanced Studies Center in Applied Economics, both part of the University of São Paulo. For the past four years, we have sponsored the publication “Cajamar em Verso e Prosa” (Cajamar in Verse and Prose), a project that encourages an appreciation for the written word and celebrates the memory of the town, organized by the Municipal Board of Education. We also sponsor the printing of newspapers for schools in the municipality. Cajamar was included in the Trilhas (Trails) project of Natura’s Crer para Ver (Believing is Seeing) program, which is organized in all the municipality’s public schools catering to children from 4 to 6 years old in primary or pre-school. The project lasted two years and involved 16 municipal schools, 125 teachers and 2,863 pupils in 2009 and 2010 (read more on the Trilhas project on page 92, Creation of Social Value/Crer para Ver). ITAPECERICA DA SERRA Our main activity in Itapecerica da Serra revolves around expanding the selective garbage collection program. Therefore, we support the Municipal Environment Department (Green Division) and the local recycling coop- erative. The medium-term goal is for selective collection to cover the entire municipality through a mixed system involving motorized transport, collectors, and voluntary points of delivery. In 2011 we will transfer our operations in Itapecerica da Serra to the city of São Paulo. We have outgrown our current facilities in Itapecerica da Serra, which no longer offer ideal working conditions (learn more on page 26, Structural Changes). We are aware that this decision will affect the community, and we are carrying out a transi- tion process to minimize these impacts. We have maintained social investment in 2011 and are preparing the cooperative and the municipal government to independently manage the selective collection service. This has been the objective of this project since its outset; throughout the partnership, we have supported the reorgani- zation of the cooperative, the structuring of its processes, the professionalization of the cooperative members, and the increase in the volume collected. 69 Natura lent its support by commissioning the Institute of Socio-Environmental Research and Projects to advise the cooperative and train its members. As a result, the cooperative has received more funding to expand its premises, structure its accounting and ﬁ nancial practices and understand the importance of the professionaliza- tion of its membership. The cooperative currently has 25 members and, in 2010, they all started to pay into the Brazilian Social Security System (INSS). The average monthly volume of recyclables handled by the cooperative increased from 50 metric tons in 2009 to 69 metric tons last year, and it also reported record earnings. In 2010, the municipality of Itapecerica da Serra also participated in the Encontros de Leitura (Reading Meetings) project of the Crer para Ver (Believing is Seeing) program. The project trains teachers who work with children of 4 and 5 years old in reading and writing activities. It was attended by 50 teachers from 29 schools and 37 technical professionals and school principles, beneﬁ ting 1,461 pupils. BENEVIDES The Benevides plant has been in operation since 2006. It has the responsibility for training, negotiating, and main- taining relationships with farmers that supply some of the biodiversity ingredients it uses. These agroextractivist producers and communities (mostly grouped into cooperatives) are called “community enterprises” and are also part of our supplier communities (learn more on page 64, Supplier Communities). They are located in various towns and cities in the state of Pará, well beyond the municipality of Benevides. In 2010, we worked with 11 associations and cooperatives comprising 1,100 families — 80% more than the 610 families in 2009. There was also growth in the amount of raw materials purchased, from 394 tons in 2009 to 500 tons in 2010. Our operations in Benevides will be expanded in 2011 with the construction of a new soap plant, which is expected to increase the production capacity of our local operations. To achieve the signiﬁ cant growth that we report each year, we make an effort to improve the production systems of these associations and to promote the diversiﬁ cation of their products. For example, we organize development activities for these producers in partnership with the organizations Labor and the Federation of Agencies for So- cial Welfare and Education (FASE). These include the Workshop on Almond Quality, the Murumuru Stewardship Course, Health Workshops, the Course on Security and Environment for Extractivists, the Cooperativism Training Program and the Training Program in Cooperative Management. In addition, we stage technical consulting activities, lasting two days each, in which Natura visits the partners and gives lectures on production quality, environment, security and social organization. In 2010, we launched a pilot project with the Coofruta cooperative, located in Abaetetuba, in the state of Pará, to decentralize the production of the oils we use in our products. Currently, the communities supply the inputs (such as seeds, almonds, etc.) to processing companies that produce the oil and deliver it to Natura. Our goal is to help the communities to produce the oil themselves, thereby increasing their earnings and diversifying their business, in addition to improving the logistics of the production process. To assess the results of this project, we are develop- ing indicators to measure not only rising incomes, but also the social beneﬁ ts associated with the new production opportunities (read more about the communities around Benevides on page 64, Supplier Communities). 70 4.8 SHAREHOLDERS SINCE NATURA WENT PUBLIC IN 2004, WE HAVE SOUGHT TO BUILD A TRANSPARENT AND HIGH- QUALITY RELATIONSHIP WITH OUR SHAREHOLDERS, INVESTORS, AND CAPITAL MARKET ANALYSTS BY KEEPING THEM WELL INFORMED. We follow the recommendations of Brazil’s Securities and Exchange Commission and the rules of the BM&FBovespa, where Natura shares are listed on the New Market segment. Our Annual Shareholders’ Meeting, in April 2010 at our Cajamar facility, brought together more than 200 share- holders. These individuals had an opportunity to develop closer contact with our company, our controlling sha- reholders, and our executives (learn more on page 17, Governance). This year, we also held the second Natura’s Day, a meeting with 80 Brazilian and international capital market analysts and professionals. To maintain close relations with this group during 2010, we conducted quarterly conference calls and took part in conferences and individual meetings in Brazil and abroad. We held 600 meetings with investors. We also redesigned our website (www.natura.net/investidor), our main communication channel. The site’s functionality has improved, facilitating better access to information and providing greater interactivity, such as an investment simulator and the section Fale com RI (Talk to IR). Since its launch in June, we have recorded an average of 16,000 visits per month. PROFILE OF SHAREHOLDERS Individuals Brazilian legal entities Foreign legal entities Total 2008 9,993 396 538 10,927 2009 7,699 560 668 8,927 2010 7,838 560 850 9,248 At the end of 2010, foreign corporate investors held 88% of outstanding shares. Brazilian corporate investors held 7% and individual investors held 5% of these shares. CAPITAL STRUCTURE SHAREHOLDERS Majority shareholders Treasury shares Management shares Outstanding shares Total shares INTEREST 59.88% 0.00% 0.57% 39.55% 100.00% NUMBER OF SHARES 258,017,219 655 2,458,016 170,405,526 430,881,416 MAJORITY SHAREHOLDERS The capital stock of Natura consists exclusively of common shares. The table below shows the percentage of shares held in 2010 by shareholders that own 5% or more of the capital stock and by the Board. SHAREHOLDER ____________ Lisis Participações S.A. Controlled by Antonio Luiz da Cunha Seabra Utopia Participações S.A. Controlled by Guilherme Peirão Leal Passos Participações S.A. Controlled by Pedro Luiz Barreiros Passos NUMBER OF COMMON SHARES % _________ 95,946,968 91,557,964 22,606,809 22.27 21.25 5.25 71 SHAREHOLDER ____________ ANP Participações S.A. Controlled by Anizio Pinotti RM Futura Participações S.A. Controlled by Ronuel Macedo de Mattos Antonio Luiz da Cunha Seabra Guilherme Peirão Leal Pedro Luiz Barreiro Passos Anizio Pinotti Ronuel Macedo de Mattos NUMBER OF COMMON SHARES % _________ 22,583,608 15,918,754 3,628,920 3,462,917 855,038 854,160 602,081 5.24 3.69 0.84 0.80 0.20 0.20 0.14 NATURA SHARE PERFORMANCE The price of Natura shares rose 37% in 2010, while Brazil’s main stock market index (Ibovespa) ended the year just 1.3% higher. Trading volume also rose 30% from the previous year. Since 2004, when we went public, Natura shares have risen 754.7%, while the Ibovespa gained 267.9% in the same period. Natu3 Ibovespa Base 100 = 05/25/2004 NATU 3 05/25/2004 R$ 5.61 FOLLOW ON 07/31/2009 755% NATU 3 12/30/2010 R$ 47.70 268% 2004 NATU3: +87.2% Ibov: +33.0% 2005 NATU3: +37.9% Ibov: +28.3% 2006 NATU3: +51.1% Ibov: +29.1% 2007 NATU3: – 41.4% Ibov: +47.4% 2008 NATU3: +18.0% Ibov: – 41.4% 2009 NATU3: +101.6% Ibov: +82.7% 2010 NATU3: +37.0% Ibov: +1.3% We continue to be part of the leading Brazilian stock market indexes - Ibovespa, IBrX-50 (which lists the 50 most liquid shares on the exchange), the Tag Along Stock Index, the Corporate Governance Index, and the Corporate Sustainability Index, the latter of which uses sustainability criteria to select shares of companies. We are also listed on the Morgan Stanley Composite Index, a benchmark for foreign investors. Particularly noteworthy last year was the inclusion of our shares on the BM&FBovespa’s Carbon Efﬁ cient Index, which considers each company’s greenhouse gas emissions. Created with the aim of encouraging com- panies to measure, monitor, and disclose their carbon emissions,the index incorporates indicators related to climate change issues. Consisting of companies that were already listed on the IBrX-50 and that voluntarily accepted these emissions standards, the new index requires companies to run periodic emission inventories to remain in the portfolio. Natura has been conducting emission inventories since 2007 (for more details, see page 62 in Creation of Environmental Value). 1. AVERAGE DAILY SHARE VOLUME TRADED (R$ MILLIONS) 1 33,182 25,983 18,098 PAYMENT OF DIVIDENDS On February 23, 2011, Natura’s Board of Directors approved a proposal for the payment of R$659.6 million in dividends and R$59.9 million in interest on capital (R$50.9 million net of withholding tax) for the 2010 ﬁ nancial year. This proposal was to be shared at the Annual Shareholders’ Meeting on April 8, 2011. On August 12, 2010, Natura paid dividends amounting to R$253.9 million and interest on capital of R$30.1 million (net of withholding tax). The remaining balance, to be paid on April 14, 2011, following ratiﬁ cation by the Annual Shareholders’ Meeting, will be R$405.6 million in dividends and R$20.7 million in interest on capital (net of withholding tax). These dividends and interest on capital referring to earnings for 2009 will represent net earnings per share of R$1.65 (R$1.37 per share in 2009), corresponding to 99% of free cash generation1 and 95% of net income2 for 2010. 1. (Internal cash generation) +/- (changes in working capital and long-term liabilities) – (acquisitions of property, plant and equipment). 2. Net income as deﬁ ned by Law 6404/76. 2008 2009 2010 1.Source: Economática. 72 4.9 GOVERNMENT NATUR A’S RELATIONSHIP WITH THE GOV ER N M EN T I S G U I D E D BY OPE N , T R A N S P A R E N T, A N D U N B I A S E D DIALOGUE. WE WANT TO BE RECOGNIZED AS AN IMPORTANT CONTRIBUTOR TO THE PROCESS OF FORMULATING PUBLIC POLICY, PL AYING A LE ADING ROLE IN SOCIAL TRANSFORMATION ON ISSUES RELATED TO OUR BUSINESS AND OUR WORLD VISION. The year 2010 was marked by two major events: the International Year of Biodiversity and the Brazilian presidential elections. These issues occupied our Agenda of Priority Topics for Government Relations, which also included the optimization of the tax burden, the regulation of solid waste and the development of strategic regional plans. The agenda lists the issues in which the Brazilian government’s political and ins- titutional sphere of inﬂ uence affects Natura’s Strategic Planning. Once again, our main efforts were aimed at introducing a new legal framework for access to biodiversity and associated traditional knowledge, ensuring the conditions for sustainable use of the nation’s genetic heritage and the traditions associated with it. This matter has been on our agenda for 10 years. We believe that if Brazil is to create wealth from the sus- tainable use of its biodiversity, consolidating its global leadership in this area, legislation is required to pro- vide guidance and protection to companies and researchers. Today, the issue is regulated by an incomplete and inconsistent Provisional Measure that does not guarantee institutional stability for the development of science and technology. We believe that building a model that brings together production, consumption, and conservation is the only way to contain loss of biological diversity. Establishing alternatives depends on the government resolving the current standoff. Our action plan for moving this issue forward is focused on three priorities: communication, which can improve societal understanding and unite the community to demand action; engagement with communities to seek support for this effort; and inﬂ uencing decision makers to move forward with the legal framework. We believe that the bill, which has been stalled with the chief of staff of the President of the Republic since 2007, should be sent to Congress. Throughout 2010, we reafﬁ rmed this belief. In the legislature, the bill will be discussed, negotiated, and adapted to provide an appropriate legal framework. We staged hearings with federal congressmen and senators, and meetings with representatives of the Ministry of the Environment, the Ministry of Development, Trade and Industry, the Ministry of Science and Technology and the Ofﬁ ce of the Chief of Staff. We were also one of the founding members of the Business Movement for the Conservation and Sustainable Use of Biodiversity, an initiative expressing the commitment of Brazilian companies to conserve biodiversity that has been signed up to by more than 60 companies and a number of civil society organizations. (Read more on the topic on page 29 and 79, Priority Topics/Biodiversity and Creation of Environmental Value). As a result of Brazil’s imperfect regulatory framework, in 2010 we received infraction notices from the Brazilian Institute for the Environment and Renewable Natural Resources (Ibama). We disagree with these ﬁ ndings and have formally challenged them (read more on page 64, Creation of Environmental Value). Another topic on our agenda was the participation of Guilherme Leal, then co-chairman of the Board of Directors, in the 2010 presidential elections. (read more on page 18, Governance). In relation to taxation, we worked with the Brazilian Association of Cosmetic, Toiletry and Fragrance Indus- try (Abihpec), to raise awareness in Congress about the effects of Provisional Measure 497 of July 2010. This measure would dramatically increase the tax burden on cosmetics companies. Taxation is already very high, and further increases would also have a signiﬁ cant impact on consumers. Concerning state taxation, we support the efforts of the Brazilian Association of Direct Selling Companies (ABEVD) in the working group set up by the National Public Finance Policy Council (Confaz) to establish a common methodology for calculating Value Added Margin (VAM) in all Brazilian states. This would be a major breakthrough both for our process system and for the states, since it would reduce the likelihood of an inter- state tax war. Since no progress has been made on this issue, we continue to negotiate directly with state go- vernments and we still have cases pending in court in the states of Paraná, Mato Grosso do Sul and the Federal District, where it has not been possible to reach an agreement on the method of calculating VAM. 73 On the matter of waste treatment, the publication of the National Policy on Solid Waste, following the approval of Law 12,305 of 2010, was a major breakthrough. The new policy paves the way for the conso- lidation of a system that involves the entire solid waste process, including manufacturers, government and consumers. However, there is still a great deal of work to be done to regulate the law, such as deﬁ ning clear responsibilities and goals. In 2010, we met with industry representatives to forge a common understanding on the regulation of the National Policy. We shall continue, through Abihpec, to negotiate a sector-wide agreement to share the responsibilities for the treatment of waste. (read more on page 32, Priority Topics/ Product Impact). Among the challenges for 2011, Natura’s expanding international business will require a more robust go- vernance system for our relations with government, in order to guide our corporate and local relationships in environments with different political contexts and varying degrees of representativeness. One of our planned strategies is to regionalize our Priority Agenda, targeting our regional ofﬁ ces in Brazil and also our international operations. As a result, we shall remain closer to the issues that can impact our business. We obtained ﬁ nancing from government agencies through tax incentives that reached just over R$34 million in 2010. Tax beneﬁ ts for our research and innovation projects represented the largest share of this funding. Law 11,196 of 2005, known locally as Lei do Bem (Law of the Good), provides incentives for companies developing technological innovations. GOVERNMENT FUNDS (R$ MILLIONS) Tax incentives for support and sponsorship 1 Lei do Bem (income tax and social contribution tax deductions on up to twice the amount spent on research and technological innovation) 2 Subsidy for ICMS (state VAT) in Itapecerica da Serra Incentive for extension of maternity leave 3 Total 2008 5.2 2009 6.1 2010 8.5 15.6 1.8 0.0 22.6 12.4 3.1 0.0 21.6 19.0 6.0 0.6 34.1 1. In 2010, Natura sponsored projects eligible for tax deduction under the Rouanet Law (Articles 18 and 26) and the Ancine pro- gram. Tax incentives were also received for Natura Musical – ICMS in the state of Minas Gerais. 2. Tax beneﬁ t related to the 2009 Lei do Bem was amended by the projects’ review / audit process. 3. Created by Decree 7052/2009, this expense is not deductible from the calculation of taxable income or from CSLL social contri- bution tax, but it is fully deductible from corporate income tax (IRPJ). LOBBYING AND SOCIAL INFLUENCE We favor the practice of political lobbying when it is done transparently and ethically. We support regula- tion of this activity, which is lawful and legitimate but lacks rules and limits. In attempting to ﬁ ll this regula- tory vacuum, we follow our own guidelines for government relations. Lobbying on behalf of our company is conducted by Daniel Serra, Elizabete Vicentini, Kassia Reis, Rodolfo Guttilla, and Thais Chueiri, who are all Natura employees. In addition, we publish other documents outlining our positions and our conduct. We distribute these do- cuments at our meetings with government representatives. These documents are: the Integrity Policy against Corruption and Bribery, in which we condemn all illicit prac- tices, and the Campaign Donation Policy, which clariﬁ es our decision not to make donations to political parties or candidates, whether inside or outside election periods. For 2011, we are going to publish our policy on hiring lobbyists, since we believe that this is another good practice in transparency with our stakeholders. To join forces and move forward on collective demands for our industry, Natura is a member of Abihpec and the Brazilian Direct Selling Association (ABEVD). Through these associations, we and our market com- petitors present a uniﬁ ed voice on issues related to our business and the competitiveness of our industry. Natura is also a member of the World Federation of Direct Selling Associations. In 2010, this organization continued to implement its long-term strategic plan that was approved in 2009. Our membership secures Natura an important foothold in the international market, giving us the opportunity to learn in different countries and allowing us to broaden our global relationship network. We are also working to increase our role and inﬂ uence in sector associations in Latin America, in virtue of our expansion in the region. Continuing in our efforts to positively inﬂ uence our stakeholders through open and transparent dialogue, we actively take part in networking opportunities, discussions and collaboration events both in Brazil and abroad. 74 In 2010, we were formally represented in 54 industry associations, entities, and organizations. REPRESENTATION IN CLASS ENTITIES AND ASSOCIATIONS Entity/Association ABA – Associação Brasileira de Anunciantes (Brazilian Association of Advertisers) ABERJE – Associação Brasileira de Comunicação Empresarial (Brazilian Association of Corporate Communication) (www.aberje.com.br) ABEVD – Associação Brasileira de Empresas de Vendas Diretas (Brazilian Association of Direct Selling Companies) (www.abevd.org.br) ABIA – Associação Brasileira das Indústrias da Alimentação (Brazilian Association of Food Industries) ABIFRA – Associação Brasileira das Indústrias de Óleos Essenciais, Produtos Químicos Aromáticos, Fragrâncias, Aromas e Aﬁ ns (Brazilian Association of Essential Oils, Aromatic Chemical Products, Fragrances, Aromas and Similar Industries) ABIHPEC – Associação Brasileira da Indústria de Higiene Pessoal, Perfumarias e Cosméticos (Brazilian Association of the Personal Hygiene, Perfume and Cosmetic Industries) (www.abihpec.org.br) Natura Representative Type of Representation 1. José Vicente Marino 1. Member of the National Executive Board 2. Vanessa Giannotti 2. Representative of the Committee of Good Communication Practices Rodolfo Guttilla Chairman of the Decision-Making Council 1. Vice 1. Rodolfo Guttilla Chairman 2. Lucilene Prado 3. Daniel Serra 2. Coordinator of the Committee of Legal Affairs and Government Relations 3. Vice Chairman of the Ethics Committee Rodolfo Guttilla Director Sérgio Gallucci Representative 1. Rodolfo Guttilla 1. Vice Chairman 2. Lucilene Prado 2. Director 3. Elizabete Vicentini 4. Thais Chueiri 5. Luiz Felipe 3. Representative of the Technical and Regulatory Committee 4. Representative of the Environment Committee 5. Representative to the Labor Relations GroupRelações com Trabalho ABNT – Associação Brasileira de Normas Técnicas (Brazilian Association of Technical Standards) (www.abnt.org.br) ABPI – Associação Brasileira da Propriedade Intelectual (Brazilian Association of Intellectual Property) (www.abpi.org.br) ABRASCA – Associação Brasileira das Companhias Abertas (Brazilian Association of Listed Companies) (www.abrasca.org.br) ABRH – Associação Brasileira de Recursos Humanos (Brazilian Association of Human Resources) AIPPI – Association Internationale pour la Protéction de la Propriété Intellectuelle (International Association for the Protection of Intellectual Property) (www.aippi.org) AMVD – Associación Mexicana de Ventas Directas (Mexican Direct Selling Association) ANPEI – Associação Nacional de Pequisa, Desenvolvimento e Engenharia das Empresas Inovadoras (Brazilian Association of Research, Development and Engineering of Innovative Companies) (www.anpei.org.br) ASIPI – Associación Interamericana de la Propriedad Industrial (Interamerican Association of Industrial Property) (www.asipi.org) Asociación Civil Argentina de Empresas Brasileñas (Argentine Civil Association of Brazilian Companies) (www.grupobrasil.com.ar) Elizabete Vicentini Representative Lucilene Prado Representative Helmut Bossert Representative Denise Asnis Representative Lucilene Prado Representative Cecilia Riviello Representative Luciana Hashiba Director Lucilene Prado Representative Heriovaldo Silva Deputy Treasurer 75 ASPI – Associação Paulista de Propriedade Intelectual (São Paulo Association of Intellectual Property) (www.aspi.org.br) Lucilene Prado Representative Cámara de Comercio de Lima (Chamber of Commerce of Lima) Daniel Gonzaga Representative Cámara Peruana de Venta Directa (Peruvian Chamber of Direct Selling) Daniel Gonzaga Representative Cámara de Venta Directa do Chile (Direct Selling Chamber of Chile Hans Werner Representative CAMBRAS – Cámara de Comercio Argentino Brasileña (Argentine Brazilian Chamber of Commerce) (www.cambras.org.ar) CANIPEC – Cámara Nacional de la Industria de Permumeria, Cosmetica y Articulos de Tocador e Higiene (México) (Mexican National Chamber of the Perfumery, Cosmetics and Beauty and Personal Care Products Industry) Heriovaldo Silva Representative 1. Carolina Muñoz 1.Representative 2. Javier Herrero 2. Representative CAPA – Cámara Argentina de la Indústria de Cosmética y Perfumeria (Argentine Chamber of the Cosmetics and Perfumery Industry) Heriovaldo Silva Deputy Member of the Accounts Review Commission CASIC - Consejo de Asociaciones de la Industria de Cosmeticos Latinoamericana (Council of the Latin America Cosmetics Industry Association) CAVEDI – Cámara de Venta Directa de Argentina (Direct Selling Chamber of Argentina) Rodolfo Guttilla Representative Pedro Gonzalez Representative CEMEFI –Centro Mexicano para la Filantropia ( Mexican Center for Philanthropy) 1. Javier Herrero 1. Representative 2. Rosana Bertozzi 2. Representative CIESP – Centro das Indústrias do Estado de São Paulo (Center of Industries of the State of São Paulo) (www.ciesp.org.br) CONAR – Conselho Regional de Autoregulamentação Publicitária (Regional Council for Advertising Self-regulation) CONSOCIAL – Conselho Superior de Responsabilidade Social (Higher Board of Social Responsibility) (FIESP) Rodolfo Guttilla Director José Vicente Marino Member of the Higher Board Maria Lucia Guardia Council Member ETHOS – Institutos Ethos de Empresas e Responsabilidade Social (Ethos Institute of Companies and Social Responsibility) (www.ethos.org.br) In deﬁ nition 2. Marcelo Cardoso FNQ – Fundação Nacional da Qualidade (Brazilian National Foundation on Quality) (www.fnq.org.br) Pedro Luiz Passos FUNBIO – Fundo Brasileiro para a Biodiversidade (Brazilian Fund for Biodiversity) (www.funbio.org.br)* In deﬁ nition 2. Member of Ethos Steering Group 10 Years Vice Chairman of the Board of Trustees Fundação SOS Mata Atlântica (SOS Atlantic Forest Foundation) Pedro Luiz Passos Member of the Board GIFE – Grupo de Institutos, Fundações e Empresas (Group of Institutions, Foundations and Companies) Maria Lucia Guardia Representative Global Compact - Caring for Climate Marcos Vaz Member of Steering Committee GRI - Global Reporting Initiative (www.globalreporting.org) Rodolfo Guttilla Member of the Stakeholder Council and Co-chair of the Brazilian National Annex IBGC – Instituto Brasileiro de Governança Corporativa (Brazilian Institute of Corporate Governance) (www.ibgc.org.br) IBRI – Instituto Brasileiro de Relações com Investidores (Brazilian Institute of Investor Relations) (www.ibri.org.br) IEDI – Instituto de Estudos para o Desenvolvimento Industrial (Institute of Studies for Industrial Development) (www.iedi.org.br) Moacir Salztein Representative Helmut Bossert Representative Pedro Luiz Passos Chairman of the Board IIRC - International Integrated Reporting Committee Roberto Pedote Member of Steering Committee Instituto Empreender Endeavor Brasil (Endeavor Brazil Entrepreneur Institute) (www.endeavor.org.br) Pedro Luiz Passos Member of the Board Instituto São Paulo Contra a Violência (São Paulo Institute Against Violence) (www.spcv.org.br) Rodolfo Guttilla Representative 76 INTA - International Trademark Association Lucilene Prado Representative IPT – Instituto de Pesquisas Tecnológicas (Institute of Technological Research) (www.ipt.br) Pedro Luiz Passos Member of the Board LIDE – Grupo de Líderes Empresariais (Business Leaders Group) MBC – Movimento Brasil Competitivo (Competitive Brazil Movement) (www.mbc.org.br) Movimento Nossa São Paulo (Our São Paulo Movement) (www.nossasaopaulo.org.br) PCPC Council - Personal Care Products Council (www.personalcarecouncil.org) 1. Alessandro Carlucci 1. Representative 2. Rodolfo Guttilla 2. Representative Pedro Luiz Passos Member of the Board In deﬁ nition Elizabete Vicentini Representative Rede Social São Paulo (São Paulo Social Network) Maria Lucia Guardia Member of the Management Committee SIPATESP – Sindicato da Indústrtia de Perfumaria e ARtigos de Toucador do Estado de São Paulo ( Perfume and Beauty Products Industry Union in the State of São Paulo) 1. Rodolfo Guttilla 1. Vice Chairman 2. Lucilene Prado 2. Deputy Director The Arthur W. Page Society (www.awpagesociety.com) UEBT - Union For Ethical Biotrade Rodolfo Guttilla Marcos Vaz Representative Vice-Chairman WBCSD - World Business Council for Sustainable Development (www.wbcsd.org) WFDSA - World Federation of Direct Selling Associations Alessandro Carlucci Conselheiro 1. Alessandro Carlucci 1. Treasurer 2. Rodolfo Guttilla 2. Counselor WWF Brasil (www.wwf.org.br)* In deﬁ nition 77 5. WHAT FOOTPRINT WE LEAVE W E WA N T TO CREATE VALUE FOR ALL THOSE DIRECTLY OR INDIRECTLY INVOLVED W I T H O U R C O M PA N Y B Y REDUCING OUR ENVIRONMENTAL I M P A C T W H I L E G E N E R A T I N G E C O N O M I C A N D S O C I A L B E N E F I T S 78 5.1NATURA VALUE CHAIN NATURA’S MAIN PERFORMANCE INDICATORS IN 2010 RELATED TO THE STAGES OF OUR VALUE CHAIN. 1. EXTRACTION AND TRANSPORTATION OF RAW MATERIALS AND PACKAGING (DIRECT AND INDIRECT SUPPLIERS) R$ 3.7 BILLION distributed to suppliers for the purchase of ingredients, raw materials, and services 81% of suppliers were satisﬁ ed 36 CERTIFIED INGREDIENTS used 106,144 METRIC TONS of greenhouse gases emitted related to the extraction and transportation of raw materials and packaging 24,775 METRIC TONS of greenhouse gases emitted by our direct suppliers (process and transportation to Natura) 4. USE OF PRODUCTS AND DISPOSAL OF PACKAGING. 16.9% of reﬁ lls on items billed in Brazil 65.4 millipoints/kg is the environmental impact of packaging per quantity of products1 58,509 metric tons of greenhouse gas emissions related to the ﬁ nal disposal of products and packaging 1. This includes the impact of extraction and manufacturing of packaging. 2. INDUSTRIAL AND INTERNAL PROCESSES. R$ 769.2 MILLION distributed to employees as beneﬁ ts and salaries R$ 139.7 MILLION invested in innovation 0.47 LITER of water consumed per unit billed 443.8 KILOJOULES of energy consumed per unit billed 25.7 GRAMS of waste generated per unit billed 25,611 METRIC TONS of greenhouse gases emitted in internal processes 3. PRODUCT SALES (TRANSPORTATION AND DISTRIBUTION). R$ 2.7 BILLION distributed to consultants as sales-related earnings 1.2 MILLION consultants in all operations 21% consultant loyalty index 168 new products launched 38,275 METRIC TONS of greenhouse gases emitted transporting products to consultants and consumers CROSS-SECTIONAL INDICATORS R$744.1 MILLION in net income R$5.1 BILLION in net revenues EBITDA of R$1.2 BILLION EBITDA margin of 24.5% R$80 MILLION invested in corporate responsibility R$1.4 BILLION paid to the government in direct and indirect taxes R$646.9 MILLION distributed to shareholders as dividends and interest on capital 79 5.2 CREATION OF ENVIRONMENTAL VALUE O U R M A I N C H A L L E N G E I S TO BA L A N C E TH E G ROW TH O F OUR BUSINESS WITH OUR USE OF N AT U R A L R E SO U RCE S L E A D I N G US TO DEVELOP INNOVATIVE TO O L S A N D PR AC T I C E S TO REDUCE THE IMPACT OF OUR O P E R AT I O N S A N D P R O D U C T S . We continue to build on our intiatives related to waste generation and efﬁ cient uses of water and energy. In 2009, we made a decision to be mindful not only of our own impacts on the environment, but to consider the environmental performance when evaluating potential supply chain partners. As such, our calculation of our key indicators – water and electricity consumption and waste generation – included data from con- tracted suppliers. In 2010, we began to include the performance of our distribution centers and other Natura facilities in these indicators. Our challenge now is to include the results of our international operations in these data. Through these initiatives, we can glean a more accurate portrayal of the impact generated by our business, devise more comprehensive action plans, and inﬂ uence our suppliers to take measures to ensure environmentally balanced production. 1. TOTAL CO2e EMISSIONS1 2 (IN METRIC TONS) 253,312 232,827 201,493 CARBON NEUTRAL In 2007, we started our Carbon-Neutral Program to signiﬁ cantly reduce our emissions of greenhouse gases (GHGs). This initiative compels us to ﬁ nd alternatives for improving our efﬁ ciency and ensures our success by mitigating the environmental impacts of our rapid growth. 2008 2009 2010 Starting the program was the ﬁ rst step of a commitment we made to society: to reduce the company’s GHG emissions by 33% within ﬁ ve years, using our 2006 emissions as a baseline. Since than, we reached a 21% reduction and induced a profound transformation in the processes of our business, besides we neutral- ized our emissions by supporting social-environmental projects. Through a diagnosis, in 2010 we reviewed the program deadline for achieving the goal of 2011 to 2013 (read more on next page). 2. RELATIVE EMISSIONS (KG OF CO2E/KG PRODUCTS INVOICED)1 2 3.82 Last year, Natura’s absolute emissions totaled 253,312 metric tons of CO2e, continuing the trend we set in recent years for emissions to grow at a slower pace than our business output. In relative terms, there was a 7.3% decline in GHG emissions, due primarily to signiﬁ cant process improvements in our order cycle (which involves product distribution), international operations, and business management. 3.55 3.30 Three core components form the heart of the Carbon-Neutral Program: expanding the scope of our in- ventory; reducing GHG emissions; and offsetting those that cannot be avoided (graphs 1 and 2). TOTAL EMISSIONS CO2e (METRIC TONS) 1 2 3 Direct GHG emissions (Scope 1) Indirect GHG emissions from energy (Scope 2) Other indirect GHG emissions (Scope 3) Total 2008 5,469 1,692 194,332 201,493 2009 6,104 1,135 225,587 232,827 2010 7,969 2,249 253,094 253,312 1 CO2e (or CO2 equivalen)t, a measure used to express GHG emissions, based on their global warming potential. 2 The inventory calculation model was upgraded in 2010. The 2009 base has been recalculated to ensure comparability, and the 2008 base has been maintained because the variation did not exceed the 5% recalculation threshold deﬁ ned by the GHG protocol. 3. The scope of Natura’s inventory has a life cycle view, and it includes all direct and indirect emissions, considering the entire value chain, from extraction of raw materials to ﬁ nal product disposal. 2008 2009 2010 1. CO2e (or CO2 equivalent): mea- sure used to express greenhouse gas emissions, based on the global warming potential of each one. 2 The inventory calculation model was enhanced in 2010 to ensure more ac- curate methods, particularly emission factors used in calculations. The 2009 base has been recalculated to enable accurate assessment of performance in 2010. The 2008 base has been maintained because the improvement made in 2010 did not exceed the re- calculation threshold of 5% variation deﬁ ned by the GHG protocol. 80 EMISSIONS INVENTORY To calculate our inventory, we take into account the total volume of our emissions related to scope 1, 2 and 3 – in other words, the survey covers the extraction of raw materials in nature to the ﬁ nal disposal of the product. Our inventory follows the standards of the Greenhouse Gas Protocol Initiative and ABNT stan- dard NBR ISO 14064-1, which set out the rules for conceiving, developing, managing and preparing them. PwC, an independent auditing and consulting ﬁ rm, conducts speciﬁ c veriﬁ cation (limited assurance) of the data in the 2010 Natura Consolidated GHG Inventory Report. Periodically, we make improvements to streamline the process of calculating the inventory and speed up the access to the information. In 2010, the analysis started to be made on a quarterly basis, instead of the previous practice of every four months. This shorter cycle allows for the identiﬁ cation of improvement opportunities throughout the inventory process, making it possible to correct distortions throughout the year to achieve the targeted results. Since last year, we have been using a new methodology thatallows an evaluation of the impacts of each Natura product. Our operations do not emit or use substances that damage the ozone layer. Emissions of particulate matter and NOx and SOx gases are monitored and are not signiﬁ cant. REDUCTION Only carbon-emissions cuts will contain climate change and its impacts. That is why reducing our GHG emissions is central to the Carbon Neutral Program. The complexity of the actions, which involve a deep transformation of how we do business, partly explain the revised deadline for attaining the target reduction of 33%. Several forecasts made at the outset of the program in 2007 turned out to be incorrect or were overly ambitious to achieve the goal in ﬁ ve years. We also found ourselves behind schedule in implementing some of our projects, partly because of a slower-than-expected technological evolution of the market. Among the difﬁ culties we currently face is a low supply of raw materials from plant origin, like biopolymers used in manufacturing lower-impact plastic packaging, and a shortage of com- mercially viable recycled materials with traceable chains for use in the manufacturing of packaging. To accelerate carbon-emission reductions in the years ahead, we launched the Less Carbon, More Pro- ductivity program in 2010. This initiative is structured on ﬁ ve action fronts: staff engagement, education, and training, identiﬁ cation of projects, improvements in processes, and connecting with the business. In the last three pillars, signiﬁ cant advances have been made in incorporating the carbon impact into business decisions by creating policies for prioritizing materials and new measurement tools. We also now generate detailed analyses of the emissions from Natura’s major processes. We have a tool capable of estimating gas emissions from each process, which enables managers to understand the impact of their activities on the company’s emission inventory and to make more conscientious decisions as a re- sult. In the new product development area, we have created a tool for estimating emissions from products and packaging beginning with their conception. In other words, based on speciﬁ c data, this tool can forecast a potential product’s future environmental impact in addition to making comparisons with items of the same category and Business Unit. On another front of the Less Carbon More Productivity program, we identiﬁ ed 10 projects with new reduc- tion opportunities and we created eight rules for the development of new products. One of these rules, for example, establishes that the launch of new items or modiﬁ cations to existing ones must have GHG emissions that are equal or lower than the product they are replacing or the average of the category the item belongs to. If emissions are higher, it must be submitted to analysis by the Product Committee, which reports to Natura’s Executive Committee. The program also encompasses education and engagement, seeking to disseminate knowledge on climate change among employees from different levels and departments of Natura. These efforts have resulted in the formation of a portfolio of projects with the potential for us to achieve our target to cut GHG emissions by 33% by 2013. They have also prompted a shift in our management, which now incorporates carbon reduction criteria into our business processes. Moreover, carbon has also been incorpo- rated into Natura’s key processes, such as the strategic growth plan for product categories and the Natura Project Management Methodology. We have already begun to reap the fruit of this process by exceeding the relative emissions reduction target, having achieved 7.3% in 2010 compared to a projected target of 4.4% . The decline is primarily due to signiﬁ cant reductions in several processes like the Order Cycle (which involves the distribution of our products), international operations and Business Management. 81 ¾ Consolidation of the regional distribution centers (we have opened three new centers since 2009) and greater incentives for these centers to use maritime transport. These logistical changes have brought us closer to our consultants and cut diesel and gasoline consumption by transportation com- panies delivering orders. ¾ Use of smaller boxes in product distribution, permitting more efﬁ cient loading of cars and trucks. ¾ In our international operations, the sharp rise in product billings (nearly 60%), driven primarily by the operations in Argentina and Colombia, contributed to the reduction of relative emissions, since carbon emissions did not rise proportionally. ¾ Advances in the sale of products with a lower carbon index than the average of Natura products in the skin/body care category: soaps and oils, in addition to the launch of the new reﬁ ll. We also face the additional challenge of reducing absolute GHG emissions by 10% between 2008 and 2012. This target refers to direct emissions and electricity consumption (the so-called scopes 1 and 2 of our Brazilian operations). We are sticking to our commitment, although we have not yet reached the expected results given the delay in implementing projects, in addition to external factors. Because of the delay in release of the environmental license, we postponed by almost a year the installation of a ﬂ ex boiler, which began operating at the end of 2010. Another postponed initiative was the adoption of ethanol-powered vehicles for the sales force, implemented beginning March 2011, eight months after the initial period. These two initiatives will produce results this year and represent over 60% of the emis- sions to be cut. A further difﬁ culty involves the increased use of coal-ﬁ red thermal power plants in Brazil. With a more polluting energy matrix, the emission factor of the electricity grid was increased by over 100% in the com- position of total GHG emissions. OFFSETTING Emissions that cannot be avoided are offset through projects that focus on energy efﬁ ciency, the exchange of fossil fuels for renewable energy, and the reforestation of degraded areas. Methods are selected using a biannual public tender available throughout Brazil. In the process for the 2009–2010 two-year period, six projects were selected in Brazil, from among the 82 submitted, which were expected to neutralize 465,237 metric tons of CO2e emissions in 2009 and 2010. Part of these emissions were offset by purchasing credits and others will be offset with future credits. In 2011, a new contract is expected to be concluded that will include a project to offset emissions in Latin America. GHG emission offset projects supported by Natura – 2009/2010 series ENERGY PROJECTS USE OF RENEWABLE BIOMASS SUSTAINABLE CARBON CONSULTING The project promotes the use of sawdust, woodchips and sugarcane bagasse to replace native ﬁ rewood taken from Brazil’s cerrado savannah region for the furnaces of the ceramic roof tile company Cerâmica Santorini in Ituiutaba, in the state of Minas Gerais. We have purchased 35,634 metric tons of CO2 already generated and sealed a partnership to offset another 102,200 metric tons in seven years. USE OF RENEWABLE BIOMASS SUSTAINABLE CARBON CONSULTING The project intends to replace native wood used in furnaces, which has added to the deforestation of Bra- zil’s caatinga thorn forest, with inputs such as coconut shells, pruned branches of cashew trees, sugarcane bagasse and sawdust. The project is developed at ceramics company Cerâmica JL Silva, in Lajedo, in the state of Pernambuco. It has offset 74,880 metric tons of CO2e in four years. ENERGY EFFICIENT STOVES IN THE RECÔNCAVO BAIANO II PERENE INSTITUTE The project expands the 2009 initiative to replace rudimentary wood-burning stoves for more efﬁ cient versions in rural households in Bahia. The initiative will install 5,000 new stoves in the region. Rudimentary stoves consume more wood, emit more greenhouse gases and add to the degradation of the Atlantic For- est, and they are also a health hazard due to the smoke they release. The project will offset 94,000 metric tons of CO2e in eight years. REPLACING FUEL OIL WITH SEBUM EQAO CONSULTING The reduction in emissions results from the partial replacement of fossil fuels (oil) with renewable fuel (se- bum) used in the boilers of the textile company Companhia de Fiação e Tecidos Santo Antônio, in Pirapora, in the state of Minas Gerais. The project has offset 13,523 metric tons of CO2e in one year. 82 FORESTRY PROJECTS EMAS-TAQUARI BIODIVERSITY CORRIDOR CARBON PROJECT ORÉADES GEOPROCESSING CENTER The project will restore 200 hectares of degraded forest – of a total area of 600 hectares – with native species around the Emas National Park and the River Taquari Springs State Park (in the states of Goiás and Mato Grosso do Sul). The forecast is for the project to offset 70,000 metric tons of CO2e in 30 years. XINGU SOCIO-ENVIRONMENTAL CARBON SUSTAINABLE XINGU ASSOCIATION, SOCIOAMBIENTAL INSTITUTE (ISA) AND CENTRO DE VIDA INSTITUTE (ICV) The objective of this project is to restore 220 hectares of degraded land earmarked for preservation around the source of the Xingu River in the state of Mato Grosso. The project will offset 75,000 metric tons of CO2 in 30 years. GHG emission offset projects in progress – 2007/2008 series FORESTRY PROJECTS CARBON, BIODIVERSITY AND COMMUNITY IN THE PAU-BRASIL ECOLOGICAL CORRIDOR (2008 SERIES) BIOATLÂNTICA INSTITUTE (IBIO) Reforestation project in the Pau-Brasil National Park and the Monte Pascoal National Park, in Porto Seguro, in the state of Bahia. It will offset 79,050 metric tons of CO2 for Natura in 30 years. Status in 2010 – The project should be fully implemented in 2011 and the ﬁ rst carbon credits are forecast for 2015. XINGU SOCIO-ENVIRONMENTAL CARBON (2008 SERIES) SOCIOAMBIENTAL INSTITUTE (ISA) AND CENTRO DE VIDA INSTITUTE (ICV) Recovery of 116 hectares of degraded riparian forest and springs at the source of the Xingu River in the state of Mato Grosso. It will offset 40,000 metric tons of CO2 in 30 years. Status in 2010 – The project should be fully implemented in 2011 and the ﬁ rst carbon credits are forecast for 2014. FOREST CARBON – RECOVERY AND PRESERVATION OF NATURAL RESOURCES (2007 SERIES) ECOLÓGICA INSTITUTE The project is working to recover nearly 150 hectares of degraded land, by planting native species of trees in the protected areas (“Permanent Preservation Areas” and “Legal Reserves”) of two rural settlements in the region of Cantão, in the state of Tocantins. When complete, the project will have offset 60,000 metric tons of CO2e in 20 years. Status in 2010 – The project has been implemented and the ﬁ rst carbon credits are forecast for 2013. LANDSCAPE RESTORATION AND AGROFORESTRY SYSTEMS (2007 SERIES) ECOLOGICAL RESEARCH INSTITUTE (IPÊ) Restoring the vegetation and protecting the diversity of species in an area of 55 hectares, in addition to implementing 129 hectares of agroforestry systems for the production of coffee. The project will commer- cially beneﬁ t the rural producers in Pontal do Paranapanema, in the state of São Paulo. The ﬁ nal offset will be 60,000 metric tons of CO2e in 30 years. Status in 2010 – The project has been fully implemented and the ﬁ rst carbon credits are forecast for 2011. ENERGY PROJECTS ENERGY EFFICIENT STOVES IN THE RECÔNCAVO BAIANO (2008 SERIES) PERENE INSTITUTE The project provides for the replacement of rudimentary wood-burning stoves for families living in the rural communities of the Recôncavo Baiano region of the state of Bahia with more efﬁ cient stoves. The target is to offset 18,880 metric tons of CO2e in eight years. Status in 2010 – The project should be fully implemented in 2011 and the ﬁ rst carbon credits are forecast for 2014. Completed projects ENERGY USE OF RENEWABLE BIOMASS (2007 SERIES): ECOLÓGICA ASSESSORIA Use of renewable biomas for ﬁ ring ceramics at four companies in the states of Pará and Tocantins (60,000 metric tons of CO2e offset) 83 SMALL HYDROELECTRIC POWER PLANT COOPERATIVES (2007 SERIES): Generation of renewable energy by the cooperatives Creral, Cooperluz and Ceriluz in the state of Rio Grande do Sul (which resulted in the offsetting of 14,000 metric tons of CO2e). REPLACING FUEL OIL WITH CERTIFIED BIOMASS (2007 SERIES): Replacing oil-based fossil fuel for renewable fuel from woodchips certiﬁ ed by the Forest Stewardship Council (FSC) at AMC Têxtil in the state of Santa Catarina (30,000 metric tons of CO2e offset). USE OF RENEWABLE BIOMASS (2008 SERIES): SUSTAINABLE CARBON Use of renewable biomass for ﬁ ring ceramics in the state of Alagoas (60,000 metric tons of CO2e offset). BIODIVERSITY The United Nations declared 2010 as the International Year of Biodiversity. We strengthened our actions in support of a policy that leads to sustainable development through the use of biodiversity assets and the creation of a new Brazilian legal framework for access to genetic heritage and its associated traditional knowledge. Since 2008, we have relied on the Natura Policy for the Sustainable Use of Biodiversity and Traditional Knowledge. This policy establishes directives for the use of raw materials and the sharing of beneﬁ ts, such as raw material extraction with the mandatory use of sustainable stewardship through extractivist fam- ily agriculture-based systems. It is the fruit of the experience acquired as part of a group that plunged into little-explored complex topics and followed the principles of the Convention on Biological Diversity established by the United Nations. It presents action guidelines for all internal departments involved in product research and development on the basis of genetic resources and/or their associated traditional knowledge. In the case of our relationship network, it serves, among other purposes, as an instrument to support decision making by upholding our values and the manner in which we work (learn more on page 30, High-Priority Topics/Biodiversity). SANCTIONS APPLIED BY IBAMA In November and December 2010, Natura received 68 infraction notices from the Brazilian Institute of the Environment and Renewable Natural Resources (Ibama) with ﬁ nes of R$22 million for allegedly irregular access to biodiversity for research and product development. Other local and foreign companies, scientists, and public research institutions also received notices. Natura does not agree with these actions and has formally challenged them. We believe that the need for authorization from the government to start research is a barrier to the development of science and does not uphold the rights of traditional communities nor does itguarantee protection of biomes. In addition, the time taken to analyze an application, usually about two years, would mean that pure or applied research by business would not be feasible. We believe that our activity complies with the principles of the Convention on Biological Diversity (CBD), the United Nations treaty on which Natura bases its policy for the sustainable use of biodiversity and tra- ditional knowledge. Natura has prior approval from all suppliers of biological materials, has signed contracts with them, and shares beneﬁ ts from the commercial exploitation of species, and does so fairly and equitably. In 2010, we received important endorsements, particularly from abroad, that attest to our commitment. The World Business Council for Sustainable Development selected, from among 2,000 companies around the world, 24 case studies in the responsible use of biodiversity. Natura was identiﬁ ed by the study as the only company that manages to comply with the three principles of the Convention on Biological Diversity (CBD): prior consent, sharing of beneﬁ ts and environmental conservation. We were also mentioned in The Economics of Ecosystems and Biodiversity, published by the United Nations Environment Program, currently the most important study on the economics of ecosystems and biodiversity. We view the notiﬁ cations as a positive opportunity, however, to discuss the urgency of developing a legal framework for biodiversity. CERTIFICATION OF INGREDIENTS We certiﬁ ed six more ingredients in 2010 used in perfumes and cosmetics and in our Frutífera line of fruit teas. They include Cinnamon, Cloves and Dog Rose. We also modiﬁ ed the status of one ingredient to uncertiﬁ ed in virtue of the changes in the renewal process for organic certiﬁ cation. We ended the year with 36 certiﬁ ed species, which means that more than 60% of the biodiversity assets used by Natura have certiﬁ ed production and origin. 84 This process is part of our Program for the Certiﬁ cation of Ingredients, which is a statement of our commitment to respecting the ecological limits to the production of ingredients we acquire from supplier communities. This program guarantees that production remains within the levels the environment is capable of supporting. NUMBER OF ASSETS LICENSED 1 Total assets licensed (units) Percentage of total licenses2 (%) 2008 26 54 2009 31 58 2010 36 61 1. Includes vegetable inputs in the form of waxes, oils, extracts, essential or fresh oils (cosmetics and teas). The certiﬁ cations include family farmers and the traditional communities whose production is certiﬁ ed by three different protocols: organic agriculture (the Biodynamics Institute, Ecocert, the International Agricul- tural Organization, and the Ecological Market Institute); sustainable agriculture (the Sustainable Agriculture Network); and forestry (the Forest Stewardship Council). Natura does not use invasive species or engage in habitat conversion, which involves transforming a natural environment to cater to production interests. We look for raw materials in places where they occur naturally, we avoid monoculture and we give preference to products that are pesticide-free, in accordance with organic production models. One of the prerequisites of certiﬁ cation is production traceability, a process in which producers document and provide information on the origin of all their production. STATUS OF THE NATURA INGREDIENT CERTIFICATION PROGRAM 2010 Ingredient/Ekos (State) Start End Start End Start End Production System Andiroba Carapa guianensis (Amazonas) Açaí Berry Euterpe precatoria (Rondônia) Lemongrass (F) Cymbopogon citratus (Paraná and São Paulo) Brazil Nut Bertholletia excelsa (Amapá) Cacau Theobroma cacao (Bahia) White Pitch Protium pallidum (Amapá) Cupuaçu Theobroma grandiﬂ orum (Rondônia) Passion Fruit Passiﬂ ora edulis (Minas Gerais) Yerba Mate Ilex paraguaiensis (Rio Grande do Sul) Murumuru Palm Astrocaryum murumuru (Amazonas) Pitanga Eugenia uniﬂ ora (São Paulo and Paraná) Priprioca Cyperus articulatus (Pará) X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X Manejo tradicional X Agroforestry system SAN X Cultivation ECOCERT X X X X Traditional stewardship Imaﬂ ora Agroforestry system IBD Traditional stewardship Imaﬂ ora Agroforestry system SAN Cultivation X X X Traditional stewardship Imaﬂ ora Traditional stewardship Cultivation and organic stewardship X ECOCERT X Cultivation IBD X X X X 85 Ingredient/Other Start End Start End Start End Notes STAGE I STAGE II STAGE III Arabica Coffee Coffea arabica (Minas Gerais) Fragrant Granadilla Passiﬂ ora alata (São Paulo) Paramela Adesmia buronioides (Patagônia, Argentina) Poejo Cunilla gallioides (Rio Grande do Sul) Carnaúba Palm Copernicia cerifera (Rio Grande do Norte) Palo Santo Bursera graveolens (Ecuador) Copaíba Copaifera spp (Amazonas) Green Tea (F) Camelia sinensis (Paraná) Candeia Eremanthus erythropappus (Minas Gerais) Lemon Balm (F) Melissa ofﬁ cinalis (Paraná) Carqueja (F) Bacharis genisteloides D.C. (Paraná) Peppermint (F) Mentha piperita L. (Paraná) Chamomile (F) Chamomilla recutita (Paraná) Fennel (F) Foeniculum vulgare Miller (Paraná) Cinnamon (F) Cinnamomum zeylanicum Ness (Alemanha) Cloves (F) Caryophyllus aromaticus L. (Bahia and Germany) Dog Rose (F) Rosa canina L. (Germany) Paracress Spilanthes oleracea (São Paulo) Lemon Brazil Ocimum americanum (Pará) X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X Cultivation SAN X Cultivation IBD X Stewardship OIA X Cultivation ECOCERT X Stewardship IBD X Stewardship ECOCERT X Cultivation ECOCERT X Stewardship ECOCERT X Stewardship Imaﬂ ora X Organic cultivation ECOCERT X X X X X X X X X Cultivo orgânico Organic cultivation Organic cultivation Organic cultivation ECOCERT ECOCERT ECOCERT ECOCERT Organic cultivation IMO Organic cultivation Organic cultivation Organic cultivation Organic cultivation IMO IMO IBD IBD 1. We have nine certiﬁ ed ingredients that are part of the portfolio of products that have not yet been launched on the market. They are not, therefore, listed in this table. 2. The raw materials marked with an (F) are part of the Frutífera organic fruit tea line. 3. Stage I: Internal process of identiﬁ cation and selection of a potential supplier area. This phase is characterized by the typology of produc- ers, the organization of the community and the existing type of stewardship (agricultural or forestry). 4. Stage II: Preparation of certiﬁ cation strategies, involving discussion of the processes with plant product suppliers, choice of the certiﬁ ca- tion agency and preliminary analysis of the supplier area by this agency (when necessary). 5. Stage III: Inspection of certiﬁ cation in the supplier areas, implementation of the action plan to meet the compliance requirements of the certiﬁ cation agencies and opinion of the certiﬁ cation agency to obtain the seal. * Forest Certiﬁ cation, Forest Stewardship Council (FSC) seal (partner certiﬁ cation agency - IMAFLORA) Sustainable Agriculture Certiﬁ cation, Sustainable Agriculture Network (SAN) seal (partner certiﬁ cation agency - IMAFLORA) Organic Certiﬁ cation, Biodynamics Institute (IBD) seal (partner certiﬁ cation agency - IBD) Organic Certiﬁ cation, Ecocert seal (partner certiﬁ cation agency - ECOCERT) Organic Certiﬁ cation, International Agricultural Organization (OIA) seal (partner certiﬁ cation agency in Argentina) Organic Certiﬁ cation, Ecological Market Institute (IMO) seal (partner certiﬁ cation agency - IMO) 86 Of all the inputs used by Natura, two are developed from species on the endangered list compiled by the Bra- zilian Institute for the Environment and Renewable Natural Resources (Ibama) and the International Union for the Conservation of Nature and Natural Resources (IUCN). These are Brazil Nut (Bertholletia excelsa) and Yerba Mate (Ilex paraguariensis). For this reason, we have funded studies in partnership with Embrapa Genetic Resources and Biotechnology to preserve these species. Furthermore, we only purchase these raw materials from areas certiﬁ ed by the FSC. AREAS OF OPERATION Natura works with suppliers of species of Brazilian biodiversity from across the country. Some of them are situated in areas protected by the National System of Preservation Units, such as the Médio Juruá Extractivist Reserve, in the state of Amazonas, and the São Francisco Community, located in the Iratapuru Sustainable De- velopment Reserve, in the state of Amapá. In the Médio Juruá Extractivist Reserve, which comprises 253,000 hectares of protected land, Andiroba and Murumuru Palm stewardship occurs in an area smaller than 1% of the total reserve. The sustainable stewardship of Brazil Nuts, Copaiba and White Pitch, meanwhile, occurs in an area of approxi- mately 4,000 hectares, less than 0.5% the 842,000 hectares of the Médio Juruá Extractivist Reserve. All produc- tion has the approval of these Preservation Units. Natura’s head ofﬁ ce is located in an area of 646,000 square meters inside an Environmental Protection Area off the Anhanguera Highway, in the municipality of Cajamar, in Greater São Paulo. A stewardship plan developed by Natura has been removing exotic species, restoring the native forest and increasing the local biodiversity. In 2010, some 3,500 trees of 90 species native to the Atlantic Forest were planted. The project also controls and monitors the species of ﬂ ora and fauna. Our facility in the municipality of Itapecerica da Serra, in the state of São Paulo, alongside the Régis Bittencourt Highway, stands on an area of 96,543 square meters inside the Protection and Recovery Area of the Springs of the Guarapiranga Water Basin. In 2008, we completed a project to restore riparian forest and, since 2009, we have been handling the maintenance of the area. The restoration projects developed at Cajamar and Itapecerica da Serra are monitored by the São Paulo State Natural Resources Protection Department, the government agency responsible for this issue. Both units have permanent preservation reserves. Although administrative activities are conducted at both units, production oc- curs in Cajamar. All these operations are in full compliance with applicable legal requirements. PRODUCT IMPACT We monitor the impact of our product packaging using the Life Cycle Assessment (LCA) tool, in addi- tion to carbon emissions. This tool enables us to quantify and monitor the ecological impact of packaging materials from the extraction of the raw materials through production, use, and disposal (graphs 1 and 2) To reduce this impact, Natura invests in innovative technologies and employs the concepts of ecological design, which includes reducing the mass of packaging and using recycled and recyclable materials. (Read more on our position on page 32, Priority Topics/Product Impact). 1. ENVIRONMENTAL IMPACT OF PACKAGING BY QUANTITY OF PRODUCT (MPT/KG) 71.3 69.5 65.4 TOTAL MATERIAL USED BY TYPE (EXCEPT WATER) IN THOUSANDS ¹ Kilograms Liters 2008 22,434.4 8,792.0 2009 27,991.3 10,813.9 2010 22,475.3 11,016.7 2008 2009 2010 1. Refers to the Cajamar site. Consumables reported are inputs (raw materials and packaging) for processing of ﬁ nished and semi- ﬁ nished products. In 2010, we launched in Brazil the ﬁ rst cosmetic product with green polyethylene packaging: reﬁ lls for Natura Erva Doce hand soap. Manufactured from sugar cane, a renewable source, green polyethylene is 100% recyclable and reduces (GHG) emissions by 58% compared with conventional plastic, according to Natura internal studies. We also launched a new reﬁ ll for the Todo Dia (Everyday) moisturizer. Internal studies showed 66% less environmental impact in comparison with the previous reﬁ ll, 83% less plastic than in regular packaging, and a 97% reduction in waste generated. In spite of these advances, we saw a decline in the use of reﬁ lls in comparison with all items billed by Na- tura. We sought to achieve a target an 18.5% of the total of these items; our rate in 2010 was 16.9% . This development was due in part to greater representativeness of sales of items in special or seasonal kits that cannot be reﬁ lled. The potential for increasing reﬁ lls is signiﬁ cant. While 40% of our products have a reﬁ ll option, they represent 55% of our billed products. In our international operations, use of reﬁ lls is increasing in most countries except Mexico, with a consistent recovery in Argentina and Chile. For 2011, our challenge is to increase the awareness of reﬁ ll options for our consumers outside Brazil. 2. RECYCLED MATERIALS USED (%)1 13.0 10.4 10.4 2008 2009 2010 1. The indicator considers packaging materials and distribution materials (magazines, distribution boxes, and bags) recycled after use. 87 REFILLS PERCENTAGE OF ITEMS BILLED (%)¹ Brazil Argentina Chile Colombia France Mexico Peru 2008 19.9 20.7 16.1 12.1 9.3 11.6 21.4 2009 18.4 15.9 11.7 12.2 8.5 11.5 18.6 2010 16.9 18.3 13.9 13.2 9.8 11.3 18.9 1. Corresponds to total reﬁ lls billed divided by total items billed. Since 2007, we have been compiling an environmental table for our products, raising the awareness of our con- sumers by providing information on the origin, the manufacturing process and the percentage of certiﬁ ed raw materials, in addition to the use of recycled and recyclable materials and the number of reﬁ lls. PRODUCT % material of renewable plant origin % material of natural plant origin % material with certiﬁ cate of origin Packaging % recycled material after use % recyclable material 2008 77.4 8.0 20.3 0.7 85.8 2009 79.2 5.2 16.1 0.7 85.9 2010 81.5 6.6 16 0.8 85.7 1. More information on the environmental table at http://www2.natura.net/Web/Br/Inst/src/TabMeioAmbiente.asp 2. Certiﬁ cate of origin 99% organic farming and 1% forest stewardship We comply with all legal requirements on the provision of information on product ingredients, instructions for use, declared beneﬁ ts and outsourced production. Our labels observe all applicable legislation and respect all the cosmetics-related regulations issued by Anvisa in Brazil, as well as the regulatory agencies of other countries where we operate. We also compile an environmental table for our products, which provides information on their environmental impact. WASTE MANAGEMENT Solid waste management at Natura includes separation, classiﬁ cation, conditioning, collection, transporta- tion, and ﬁ nal disposal, with the aim of reducing volume, expanding recycling, and being particularly careful with hazardous waste. In 2010, we began to develop an extensive solid waste management project cover- ing the entire life cycle of our products, from the extraction of raw materials to the disposal of packaging and the reuse of materials (learn more on page 33, High-Priority Topics/Product Impact). We recorded an increase of 19.8% in total waste generated last year and 8.2% in the relative index, which compares the quantity of waste per product unit billed. This increase can be attributed to the inclusion of data in the indicator from four distribution centers and the Natura Houses in Brazil. Had these areas not been included, the index would have remained at the same level as the previous year. Our increase in pro- duction and the higher disposal of obsolete products also affected waste generation. These developments present a glimpse of the challenge we face in improving our waste management processes (graph 1). 1. TOTAL QUANTITY OF WASTE PER UNIT BILLED (GRAMS/UNIT)1 25.8 23.8 25.7 We also recorded an increase in the generation of hazardous waste, due primarily to the amount of discontinued or expired cosmetics products in stock. This was prompted by our efforts to improve the quality of service. We increased our inventories in 2009 in an attempt to avoid product shortages for our consultants, causing us to register a higher loss index in 2010. We have reviewed this practice to avoid such high losses again. To reverse this situation, we have established an action plan that includes alternatives that minimize the environmental impact of the primary waste-generating processes, periodic veriﬁ cation of the indicator, and a review of items currently incinerated or sent to landﬁ lls so as to deﬁ ne alternative recycling methods. We also plan to standardize data collection at Natura and third-party units. The goal of this is to improve the quality of the information collected and initiate waste monitoring in our international operations. Our target for 2011 is to reduce the total weight of waste per unit billed by 3% . With new alternatives for disposing of materials that were previously incinerated, and through a partner- ship with our cardboard supplier to recycle 100% of this material in Cajamar, we increased the percentage of recycled waste by 8.3% . Today, 92.1% of all waste produced at Natura is recycled. 2008 2009 2010 1. Before 2008, the indicator was calculated considering only the waste generated at Natura units. In 2010, we included main contractors and improved the calculation basis to match the indicators of water and energy. For this reason, the historical record was recalculated. 88 We have been running a pilot recycling project in Colombia since 2009, in which our consultants assist by collecting recyclable material. In 2010, we more than doubled the amount of material collected, reaching 97,285 metric tons. This increase can be attributed to the introduction of the Natura Changemaker Con- sultant program, which encourages consultants to get involved in their communities (housing complexes, department stores, etc.) to install recycling banks for these materials. We also seal partnerships with local companies to support the project with logistical and administrative assistance. TOTAL AMOUNT OF WASTE BY TYPE (mt) AND LOCATION GENERATED 1 2 2008 1,348.3 4,330.7 1,444.6 7,123.6 224.5 1,286.8 8,634.9 Class I3 Class II-A Class II-B Waste at the Cajamar and Itapecerica da Serra sites Waste at other Natura sites4 Waste at Natura contracted manufacturers5 Total weight of waste disposed of 2009 1,436.6 4,817.8 1,390.5 7,618.9 251.4 1,241.6 9,111.9 2010 2,128.2 4,717.5 1,308.0 8,153.7 1,412.1 1,346.5 10,912.3 1. According to NBR 10.004/2004: Class I Waste: hazardous waste (outdated cosmetics, clinical and laboratory waste and alcohol); Waste Class II-A, non-inert waste (physico-chemical and biological efﬂ uent treatment plant sludge, paper, cardboard); Waste Class II-B: inert waste (metals, plastics). 2. Natura does not include in this indicator waste generated in construction works (debris) carried out on its sites. 3. Refers to Class I waste, deemed hazardous under the Basel Convention, transported and treated. We do not import, export or transport such waste internationally. 4. Refers to the generation of waste from the industrial unit at Benevides - Pará, opened in May 2007, and the Administrative Unit of Barueri (Alphaville), in the distribution centers of Matias Barbosa (MG), Recife (PE), Salvador (BA), Canoas (RS), the outpost of Uberlândia (MG), the hub at Jundiaí (SP), and in Natura houses. 5. Contracted manufacturers are companies that make (or are involved in the ﬁ nal stage of production of) ﬁ nished products with the Natura brand. We monitor the 10 main contracted parties responsible for approximately 90% of the units produced outside Cajamar. WASTE DISPOSAL 1 Incinerated (%) (mt) Dumped in landﬁ ll (%) (mt) Recycled (%) (mt) 1. Waste at the Cajamar, Itapecerica da Serra and Alphaville sites RECYCLING OF WASTE BY DISPOSAL METHOD (mt) 1 Composting Co-processing Transformation 1. Waste at the Cajamar, Itapecerica da Serra and Alphaville sites WATER AND EFFLUENTS 2008 2009 2010 2.5 176.3 8.8 627.8 88.7 6,319.5 2008 942.5 727.8 4,649.2 1.9 142.4 6.6 510.3 91.5 6,958.3 1.2 101.0 6.7 546.5 92.1 7,535.7 2009 1,284.8 1,288.1 4,385.4 2010 1,112.7 1,635.8 4,787.3 2. WATER CONSUMPTION PER UNIT BILLED (LITERS/ UNIT BILLED)1 0.52 Following the implementation of efﬁ ciency projects, awareness programs and water consumption control, we achieved a 10% reduction in relative consumption per unit billed. Our absolute consumption of water remained stable, even as our production rose. The improvements implemented in waste management also resulted in gains in water reuse and recycling in 2010. Knowing that sustainable use of water is a major global challenge, we have made progress in analyzing our water footprint (learn more on page 33, High- priority Topics/Product Impact). 0.48 0.47 The reduction in relative water consumption was motivated by reductions at Cajamar and Itapecerica da Serra, which reduced consumption by 5% . However, there was a 17% increase in water use in other Natura areas, the result of having incorporated the Simões Filho Distribution Center, in the state of Bahia, into the indicator. We also recorded an increase of 3.5% in absolute consumption at outsourced companies, stem- ming from an increase in units purchased (graph 2). 2008 2009 2010 1. The indicator takes into account the volume of water used by Natu- ra and the major contracted parties 89 WATER CONSUMPTION BY SOURCE AT THE MAIN NATURA SITES Cajamar and Itapecerica da Serra sites m3) 1 Other Natura sites in Brazil (m3) 2 Contracted Natura manufacturers (m³) 3 Total water consumption (m3) 2008 112,342 11,894 37,090 161,326 2009 123,012 27,813 49,783 200,608 2010 116,883 32,600 51,507 200,991 4. WATER CONSUMPTION PER UNIT BILLED (LITERS/UNIT BILLED)1 0.52 1. Consumption in the two units includes all administrative and production activities and events at the sites. 2. Water consumption at other Natura Brasil sites refers to the units of Alphaville, Benevides, Natura Houses, Distribution Centers (DCs) and Outposts. For the 2010 calculation, one more DC was included. 3. Contracted manufacturers are companies that manufacture ﬁ nished products on behalf of Natura; the indicator covers 95% of all units purchased by Natura. 0.48 0.47 The percentage of reused water increased from 35% to 38% of the total amount used in our operations. The volume of recycled and reused water in 2010 was 49,700 cubic meters, nearly 40% more than in 2009. This increase occurred in virtue of Natura’s decision to reuse residual water from the treatment system, redirecting it to supply the site in observance of all standards and controls required by law. PERCENTAGE AND TOTAL VOLUME OF WATER RECYCLED AND REUSED Recycled and reused water (m³)1 Percentage of reused water of total treated water at efﬂ uent treatment plant (%) 2 Percentage of reuse over total water drawn (%) 2008 35,824.0 38.0 32 2009 35,838.0 35.0 29 2010 49,734.0 38.0 43 1. Recycled water is water extracted from waste water generated at the Cajamar site that, after physiochemical and biological treatment at the Efﬂ uent Treatment Plant, is used for irrigation, urinals, ﬂ oor cleaning and ponds. Reused water is water that returns from the process with sufﬁ cient quality to be used in the supply process. 2. This percentage refers to the volume of reused water from the treatment plant compared to the total volume of water treated at the Cajamar and Itapecerica da Serra treatment plants. SIGNIFICANT DISCHARGES TO WATER (m³) 1 Total volume of treated efﬂ uent 1. Refers to the Cajamar and Itapecerica da Serra sites. 2. The information was revised because of a calculation error. 20082 100,979.0 2009 101,672.0 2010 102,903.0 For our everyday consumption, given the absence of a public supply system, the water used at our facilities in Cajamar and Itapecerica da Serra is drawn from two artesian wells. Our underground water source is a crystalline aquifer, and the water extraction meets the regulations of the São Paulo State Water and Electrical Energy Department (DAEE). In 2010, following a risk analysis conducted by Natura, we applied for a permit to build a third well as a contingency to support the growth of production. We have a permit to draw water from our artesian wells up to the following limits: 8m3/h in Itapecerica, 12m3/h at the ﬁ rst well in Cajamar and 15m3/h at the second well in Cajamar. A study completed in 2010 identiﬁ ed that the region possesses water in sufﬁ cient quantities to supply our cur- rent demand without running the risk of compromising our activities or those of the surrounding area. New studies will be conducted based on the company’s forecast growth for the next few years. In Benevides, water is obtained from artesian wells and captured rainwater. At our other facilities, such as Natura Houses and Distribution Centers, it is provided by the public water supply system. In 2010, we registered no incidents of signiﬁ cant spills or accidents involving products or substances causing an environmental impact as a result of our operations. Before being discharged, all our efﬂ uents pass through the Efﬂ uent Treatment Station (ETE). The quality fully meets the applicable legal requirements, respecting all discharge conditions and standards provided for in Brazil- ian legislation. In the town of Cajamar, the treated efﬂ uent is discharged into the Juqueri River, which is consid- ered a class 3 river, meaning its water may be used in household supply after conventional treatment. In 2010, the Cajamar ETE was modernized, improving even further the quality of the operation’s efﬂ uent treatment system. The Itapecerica da Serra ETE, meanwhile, is located in a spring water preservation area, and after conventional treatment the efﬂ uents ﬁ lter through the soil. The efﬁ ciency of the organic matter removal is, on average, 96.9%. At the Benevides Industrial Plant, we have a system to capture industrial wastewater, which is treated exter- nally by a contracted company. After treatment, domestic efﬂ uent is channeled to a septic tank. We intend to install an ETE in Benevides in 2011, but this depends on the Municipal Environment Department releasing the necessary licenses. 2010 2009 2008 1. The indicator takes into account the volume of water used by Natura and the major contracted parties 90 CAJAMAR PERMEATE BOD (mg/L) COD (mg/L) Oils and greases (mg/L) Legal parameter 60 150 120 TREATED EFFLUENT ITAPECERICA DA SERRA BOD (mg/L) COD (mg/L) Oils and greases (mg/L) Legal parameter 60 150 120 ENERGY 2008 5.5 43.6 7.8 2008 19.6 73.2 8.1 2009 6.0 43.0 7.1 2009 20.2 69.0 7.5 2010 7.4 45.0 15.4 2010 25.4 65.2 14.8 In 2010, we reduced relative energy consumption (consumption per unit billed) by 0.8% . To achieve this result, we implemented several improvements, primarily at Cajamar, in addition to efﬁ ciency gains from better energy resource management. In absolute terms, the Cajamar and Itapecerica da Serra units reg- istered a 2.8% combined increase in consumption, owing to the installation of new manufacturing equip- ment. The 22.1% increase in other Natura areas was the result of having incorporated the Simões Filho Distribution Center, in Bahia, in this indicator, as well as the modernization of three other distribution centers. Total consumption by major subcontractors parties rose by 30.8% because of the greater number of units acquired (graph 1). 1. ENERGY CONSUMPTION PER UNIT BILLED (KILOJOULES) 1 552.1 447.3 443.8 We registered a 74% decline in diesel oil consumption in our generators, due to fewer power outages at our head ofﬁ ce. This means there was less demand for generators. 2010 ENERGY MATRIX (CAJAMAR AND ITAPECERICA) (%) Electricity LPG Diesel Solar energy 2008 75.9 22.0 2.1 0.01 2009 75.9 23.1 1.0 0.01 2010 77.3 22.4 0.3 0.02 2008 2009 2010 1. The indicator takes into account the energy used by Natura and major con- tracted parties. We encourage the use of energy generated from renewable and alternative sources. In 2010, we introduced the Encouraged Energy Sales Contract, which stipulates that electrical energy supplied to our facilities in Cajamar and Itapecerica come from the primary encouraged sources (wind, biomass, solar and small hydroelectric power stations). In previous years, electrical energy was purchased from the Brazilian energy grid, which is generated from both renewable and non-renewable sources. In Cajamar, we also use a system of solar energy that now provides lighting for the parking lot and heats water in the changing rooms and in the kitchen. The solar energy represents 0.03% of our energy matrix. In December 2010, we substituted 80% of the LP gas used in our boilers in Cajamar for alcohol, which will result in an emis- sions reduction of around 1,360 metric tons of CO2 per year, starting in 2011. DIRECT ENERGY USE, SEGMENTED BY PRIMARY SOURCES (JOULES X 1012) 2008 95.9 0.03 2.7 27.8 126.4 Primary source of electricity Self-generated electricity (diesel generator) Diesel fuel used in generators Consumption of LPG TOTAL DIRECT ENERGY CONSUMPTION (JOULES X 1012) Renewable sources Non-renewable sources 2008 0.03 30.50 2009 94.0 0.03 1.6 28.9 124.5 2009 0.03 30.50 2010 98.9 0.03 0.41 28.6 127.9 2010 0.03 29.01 INDIRECT ENERGY CONSUMPTION (JOULES X1012) Primary electricity source 2008 95.9 2009 94.0 2010 98.9 91 ENERGY SAVED BY USING SOLAR ENERGY (JOULESX109) Consumption of solar energy (joules) 2008 19.96 2009 19.96 2010 19.96 ENERGY SAVED BY ENERGY EFFICIENCY PROJECTS (JOULESX109) 1 1. Projects intended to reduce the consumption of electrical energy, diesel oil or LPG 2008 n.a 2009 1.95 2010 2.55 IMPACTS FROM MAIN SUPPLIERS We are also analyzing the impacts of our suppliers, with the intention of stepping up the monitoring of our value chain for water and energy consumption and waste generation. (Learn more on this issue at www.natura.net/ relatorio). In 2010, we analyzed 58 partners and we can assert that their investments have improved their energy efﬁ ciency and kept the indicator almost stable in spite of the increased demand for production. An improvement was observed in the water indicator after one supplier installed a water reuse system. The same performance was not seen in the generation of waste, however, which rose 28%, the result of the increase in production and the lack of efﬁ ciency gains. We withdrew the data from our distribution centers that were previously included in this indicator: Matias Bar- bosa, Jaboatão and Canoas. The change is due to our decision to incorporate consumption by the distribution centers into Natura’s own performance indicators. This process is part of the adjustments we have made to provide a more accurate diagnosis of the impact of our operations. The information on our main outsourced suppliers that produce some of our products is also excluded from this analysis, since their data are also included in the performance indicators of Natura. LEADING NATURA SUPPLIERS OF PACKAGING AND RAW MATERIALS 1 2 2008 46 2009 58 2010 58 Number of suppliers evaluated Energy Consumption (joules x 10) Primary source of electricity - electricity consumption Self-generated electricity - diesel generator Consumption of LPG Other - natural gas Total energy consumed Water consumption (m3) Total water consumption (thousand) 127.0 4.6 1.8 113.8 247.2 118.1 Waste generation by leading Natura suppliers (tonnes) Total waste generated 1,752 210.6 4.2 4.7 140.3 359.8 155.4 2,669 146.2 0.1 4.9 207.1 358.3 135.5 3,419 1. Leading input suppliers of the following categories: accessories, packaging, graphics, fragrances, raw materials, printing services and Na- tura boxes. The numbers are estimated: suppliers are requested to allocate their energy, water consumption and waste generation, taking into account the percentage production for Natura. 2. In 2010, the numbers for three distribution centers (Matias Barbosa, Jaboatão and Canoas) were redirected to Natura internal indica- tors. To ensure comparability of indicators, we reviewed the numbers for 2008 and 2009, excluding those DCs. 92 5.3 CREATION OF SOCIAL VALUE O U R G O A L I S T O C R E A T E SOCIAL BENEFITS BY INVESTING I N E D U C AT I O N , S H A R I N G T H E G E N E R AT E D R E S O U R C E S A N D S U P P O R T I N G P E O P L E A N D INSTITUTIONS THAT ARE COMMITTED TO T H E CON S T RU C T I O N O F A SUSTAINABLE SOCIET Y. NATURA INSTITUTE We have made systematic private social investments since the 1990s because we believe this is a way to express our Essence: that the value and longevity of a company are related to its ability to contribute to the evolution of society and its sustainable development. In 2010, we took an important step forward by founding the Natura Institute, an independent nonproﬁ t orga- nization, to extend and strengthen our initiatives, and improve internal management and governance processes and practices for our social initiatives. Fostering education - a priority for sustainability in Natura’s view - is also the pillar that supports all the activities of the new organization. The Institute was founded with the participation of members of our Board of Directors and executives. In 2011, we will make progress in its administrative organization and set up an audit committee and an advisory board, as well as deﬁ ne a strategic plan for the institution. The institute is given 0.5% of Natura’s annual net income in addition to funds from Natura’s Crer para Ver (Believing is Seeing) program. CRER PARA VER (BELIEVING IS SEEING) PROGRAM The highlight of our societal activity in 2010 was the record amount of funds raised by the Natura Crer para Ver program. We had committed to reaching R$6 million, but by the end of the year we had reached R$10 million, the largest amount raised by the program since its inception in 1995. In 2010, the program invested more than R$3.9 million in projects. This amount is the result of a R$2.1 million savings from the year’s investment plan, es- timated at R$6 million, through partnerships and exchanges. Therefore, the difference of more than R$5 million between the amount we collected and what we spent in the year is available in cash holdings for use in 2011 and will help us expand the current projects. The goal of Crer para Ver is to improve the quality of public schooling. The program funds literacy initiatives in preschools and elementary schools, as well as for young adults. Our consultants actively participate in the program by selling the exclusive Crer para Ver product line, receiving no commission for doing so. The Natura Institute has assumed the administration of our investments in educational initiatives. INVESTMENT IN EDUCATION FOR PUBLIC BENEFIT IN BRAZIL (R$ THOUSANDS) Net funds raised by the Crer para Ver program1 Total amount of projects developed and supported2 2008 3,767.0 3,381.0 2009 3,768.2 4,075.6 2010 10,098.5 3,876.4 1. Refers to income before income tax (IR) deduction for the Crer para Ver program’s fund. Until 2009, net funds raised by the program had referred to net proﬁ t after IR tax. 2. Refers to the total actually contributed in the year (from the fund and directed to projects and their implementation). 1 PENETRATION - CRER PARA VER (% CYCLE) 1 9.9 9.9 7.1 The strong growth in the funds allocated to the program was prompted by a review of our operational strategy. We have upgraded our portfolio, launched new products with a stronger sales appeal and conducted a diagnosis to identify new sub-brand visibility opportunities. In 2010, participation in the program by our consultants in Brazil reached 9.9%, higher than the ﬁ gure in 2009 but still lower than our expectations to engage 12% of consultants. For 2011, we intend to further increase this participation. We realize that this is a major challenge and, to overcome it, we shall continue to step up our awareness-raising actions with consultants. 2008 2009 2010 1. This percentage is based on the number of consultants that purchased at least one item of the Crer para Ver line within a cycle divided by the total number of consultants that placed or- ders during the same cycle. 93 Using funds raised by the Natura Crer para Ver program, we extended its reach to 100 new municipalities. The program now invests in 350 municipalities across Brazil and beneﬁ ts nearly 450,000 people, namely students, teachers, coordinators, and principals in 5,690 public schools. Our international operations implemented this program in 2009. Net revenues reached R$1.3 million in 2010, compared with R$430,000 in the previous year. Funds in these countries are invested in teacher training and beneﬁ t vulnerable populations. In Chile, for instance, some of these funds are helping to rebuild schools destroyed by the February 2010 earthquake. The main initiative of the Crer para Ver program in Brazil is the Trilhas (Trails) Project. This project beneﬁ ts 310,000 children and 15,000 educators in 4,300 schools. The Trilhas Project is designed for children ages 4–6 and provides instructional materials and support for teachers and school principals to help students develop reading, writing, and speaking skills. In 2010, we signed a technical cooperation agreement with the Ministry of Education, enabling the ministry to share this methodology with other municipalities and institutions — transforming the project into a public initiative. In 2010, we questioned 60% of the principals and teachers from the schools involved, in all regions of the country, to evaluate the project. The principals and teachers gave an average score of 9.46 and 9.19, respectively, when asked about the contribution of Trilhas to improving education. More than 80% of the educators considered the teaching activities to be adequate for children and almost half of them conﬁ rmed that they started to read more to their pupils after the project started. OTHER CRER PARA VER PROJECTS In 2010, we invested in projects such as Encontros de Leitura (Reading Meetings), Formar em Rede (Network- ing) and the Chapada Project. Since we believe that the ﬁ rst two projects have achieved their goals, they have been withdrawn from the program, which will invest in new initiatives in 2011. We also support the improve- ments being made to the Municipal Education Plan in Cajamar, where our head ofﬁ ce is located. ENCONTROS DE LEITURA (READING MEETINGS) The project is run in partnership with the Education and Documentation Center for Community Action, and last year it continued to operate in the same 226 schools that were involved in 2009. It beneﬁ tted 1,200 teachers and 14,000 pupils in 10 municipalities in the following states: Goiás, Rio Grande do Norte, Bahia, Amazonas, São Paulo, Santa Catarina, Sergipe, Acre and Espírito Santo. The project consists of meetings between education spe- cialists, school principals, supervisors and teachers to discuss and develop actions to encourage reading among children from 4 to 6 years old. FORMAR EM REDE (NETWORKING) Developed by the Avisa Lá Institute and the Razão Social Institute, this project is supported by Natura in 6 municipalities. The initiative establishes virtual communities formed by education specialists and teachers from the public school system, with the objective to improve the quality of pre-school education for children up to 6 years old. These communities organize in-person and distance actions to improve, develop and disseminate practices in the ﬁ eld of reading, caring and playing. CHAPADA PROJECT This initiative has received technical and ﬁ nancial support from the Natura Crer Para Ver program since 1997. Run by the Chapada Institute of Research and Education, the project aims to improve the quality of public pri- mary education in 24 municipalities in the Chapada Diamantina region of Bahia. To achieve this, it stages ongoing training for educational directors, supervisors and other teaching professionals. In 2010, the project worked with 600 schools, nearly 5,300 educators and more than 92,000 pupils. We also conducted the second overall evaluation of the project, listening to the opinions of nearly 4,200 pupils and more than 500 educators. This process identiﬁ ed progress in important areas of education, namely how well the children are learning and the deﬁ nition of the role of educational directors, supervisors and local coordina- tors in training actions. 94 CRER PARA VER ACTIONS IN 2010 Action Front/ Project Name of partner organization Centro de Educação e Documentação para Ação Comunitária (Education and Docu- mentation Center for Community Action) Education and Docu- mentation Center for Community Action Projects Developed EI - Reading Meetings Project Projects supported EI - Trilhas Project EF - Chapada Project EF - Training Network Cajamar Municipal Education Plan Update Munici- palities served Number of schools served 10 226 No. of partici- pating teachers, coordinators and principals 1,201 Investment R$ No. of students beneﬁ ted 14,236 972,661.05 310 4,378 15,245 309,684 2,297,120.16 600 486 - 5,339 1,076 - 92,973 483,626.07 10,792 85,279.98 - 37,784.87 Chapada Institute 24 6 - Avisa Lá Instituto and Razão Social Institute CENPEC – Centro de Estudos e Pesquisas em Educação, Cultura e Ação Comunitária (Center for Studies and Research in Education, Culture and Community Action) FESPSP – Fundação Escola de Sociologia e Política de São Paulo (School of Sociology and Politics Foundation of São Paulo) Total 1.EI – Pre-School 2. EF – Primary School 350 5,609 22,861 427,685 3,876,472.13 Our business expansion has allowed us, for another year running, to increase the generation and distribution of wealth to our main audiences. DISTRIBUTION OF WEALTH Our growing business has enabled us to generate wealth and distribute it to our main stakeholders again this year. This is the result of Natura’s growth and the expanding market in which we operate. Revenues to suppliers in particular increased, thanks to the growth of output in 2010. DISTRIBUTION OF WEALTH (R$ MILLIONS)1 Shareholders2 Consultants Employees Suppliers3 Government3 2008 425.9 2,023.8 556.4 2,357.2 1,276.7 2009 551.9 2,302.5 643.0 3,087.5 1,147.4 2010 646.9 2,738.2 769.2 3,707.4 1,476.5 1. More details of value-added statements may be found in the Accounting Statements (page 75, 78, 79 and 103). 2. The amount of wealth distributed to shareholders refers to dividends and interest on capital for the period. 3. Data have been revised from last year’s report because we identiﬁ ed an inconsistency in the classiﬁ cation criteria used. In relation to government, transfers were higher due to the growth of Natura’s gross revenue in the period, which is the calculation base for sales taxes, and there was also a larger taxable income base for income tax (IR) and social contribution tax (CSLL). INVESTMENT MATRIX In 2010, we maintained our level of investment in corporate responsibility at 1.3% of net revenues. These in- vestments include increased spending on the education and training of our consultants and employees, in line with our educational strategy (learn more on page 26 in High-Priority Topics, Education). We also increased our investments to support civil society organizations (learn more below). Total investments with respect to the environment were lower because negotiations on carbon emissions-offsetting projects have yet to be ﬁ nalized. We concluded negotiations for ﬁ ve environmental projects for the 2009/2010 season, and negotia- tions for ﬁ ve others are expected to be concluded in the ﬁ rst quarter of 2011. 95 MATRIX FOR INVESTMENT IN CORPORATE RESPONSIBILITY1 (R$ THOUSANDS) Employees, family members, and others Consultants Consumers Suppliers Supplier communities Surrounding communities Society2 Environment TOTAL invested in stakeholders Management expenses TOTAL Natura funds Percentage of net revenue Net amount raised by consultants for the Crer para Ver (Believing Is Seeing) program Tax-deductible investments under Roaunet Law Audiovisual Law / ANCINE State VAT tax (ICMS) in Minas Gerais State VAT tax (ICMS) in São Paulo3 1% Income Tax to CMDCA4 1% Income Tax to Condeca5 GRAND TOTAL 2008 18,729.3 2,566.8 270.9 212.8 647.0 342.8 8,827.4 5,467.2 37,064.2 7,148.3 44,162.5 1.2% 2009 17,251.3 3,563.4 480.3 243.8 1,424.6 407.9 15,772.0 8,073.6 47,217.0 4,045.7 51,162.7 1.2% 3,767.0 2,852.8 400.0 2,000.0 622.1 0 3,768.2 2,422.2 920.0 645.0 0 0 1,015.0 938.00 54,869.4 59,956.0 2010 20,159.9 4,800.0 600.0 329.8 1,805.7 408.7 23,387.0 6,638.7 58,130.2 4,972.0 63,032.2 1.3% 10,098.5 3,095.1 1,100.0 823.4 0 319.0 1,682.0 80,220.1 1. Amounts invested in support and sponsorship are included in this matrix, but are shown as they were divided among beneﬁ ciaries. The matrix includes investments in projects or actions that are not intrinsic to Natura’s business and go beyond legal requirements. 2. The data on society were revised since we added one resource that was not previously considered. 3. Due to an error reported last year, the 2008 data was revised. 4. CMDCA = Municipal Council for Rights of Children and Adolescents. Since 2008, 1% of income tax (IR) has been allocated to the CMDCA. 5. Condeca = Council for Rights of Children and Adolescents. SUPPORT AND SPONSORSHIPS Our social investments not only express our well-being well concept, but also reiterate the underlying driv- ers of our corporate behavior. In 2010, we allocated R$24.3 million to intiatives that fall under three broad themes: strengthening civil society organizations, supporting sustainable development, and promoting Bra- zilian culture with a focus on music. Our business model entails the expansion of relationships with organizations that are committed to building a sustainable society, which is why we invest in organizations that share our vision for the world and that support causes that are signiﬁ cant to our industry. For instance, we sponsored several programs of the Ethos Institute for Business and Social Responsibility. These Ethos programs included the Sustainable Amazon Forum, Sustainable Connections, Corporate Responsibility in the Media, and Promotion of Integrity and Fighting Corruption. In 2010, we participated once again in the Global Entrepreneurship Week, coordinated by the Endeavor Institute, which is located in Brazil. As the largest global movement focused on entrepreneurship, the event took place simultaneously in 102 countries for seven days of talks, competitions, workshops, games, fairs, and awareness-building activities. We continued to support the Global Reporting Initiative (GRI), which develops international guidelines and standards for compiling sustainability reports. We sponsored GRI’s Amsterdam Global Conference on Sustainability and Transparency (May 26–28, 2010), at which our stakeholders met to discuss sustainability and transparency-related issues. We enjoy a partnership with Associação Brasileira de Comunicação Empresarial (Brazilian Association of Corporate Communication – Aberje). This organization presented an event designed to help Brazilian com- panies develop guiding principles for communicating with the news media and key opinion leaders. Natura sponsored this event and presented its connection with biodiversity, focusing on its relationship with sup- plier communities. We also sealed a partnership with the United Nations Conference on Trade and Development (UNCTAD) to disseminate good business practices related to social biodiversity. We supported the organization’s schedule of events for the International Year of Biodiversity, attending the Global Expo, in Shanghai, and the Global Business of Biodiversity Symposium, in London, and also participating in the 10th Conference of the Parties (COP-10) to the Convention on Biological Diversity (CBD), held in Nagoya, Japan. 96 See below other highlights of 2010: HUMAN RIGHTS We support the Human Rights Fund, an institution that promotes the defense of human rights in Brazil, by creat- ing sustainable grant mechanisms. Each year, the institution stages a selection process to give ﬁ nancial support to a regionally diverse range of projects, preferably beneﬁ ting those with less access to traditional funding sources. Natura supported four of these projects, in the Amazon region, with the intention of strengthening local move- ments and offering social development opportunities. CONSERVATION OF BRAZILIAN FLORA The project “Plants of Brazil: An Historic Recovery and Virtual Herbarium for the Knowledge and Conservation of Brazilian Flora”, coordinated by the National Council of Scientiﬁ c and Technological Development (CNPq), retrieves images and information on samples of Brazilian ﬂ ora that were collected up until the 20th century by foreign missions and taken to museums and herbariums around the world. The repatriated digital ﬁ les will form the database of the Authenticated Virtual Herbarium of Species of Brazilian Flora (Reﬂ ora). HISTORICAL HERITAGE We have donated funds for the reconstruction of the Artistic Culture Theater, which began in March 2010 and should be complete by 2012. This historical theater, located in downtown São Paulo, was inaugurated in 1950 and was partially destroyed by a ﬁ re in 2008. This investment by Natura is intended to help preserve Brazilian culture, represented by this important building. We continue to underwrite initiatives that increase societal awareness about sustainable development. One such example is our support of the documentary Tudo mudo pode mudar o mundo (Everyone Can Change the World). This ﬁ lm, by Mara Mourão, presents stories of societal leaders and the Afro-Reggae cultural group. See below some highlights of 2010: SOCIAL ACTIONS We continued to sponsor the AfroReggae group, from Rio de Janeiro. Among the projects supported by the group is the television program Conexões Urbanas (Urban Connections), aired on the Multishow channel, which addresses violence, citizenship and sustainability. The NGO also runs more than 70 social projects that impact the lives of more than 10,000 residents in communities in the city. We also kept up our support for the Pamáali Indian Municipal School – run by the Baniwa and Coripaco in- digenous peoples and attended by native Brazilian groups from the region of Alto Rio Negro in São Gabriel da Cachoeira, in the state of Amazonas. The school caters to some 3,000 people from the community. The funding pays for research by the students, the publication of teaching and outreach material, network meetings, training workshops for teachers and sustainability activities in the ﬁ eld of food security. DESIGN The 3rd Brazilian Design Biennial was held from September 14 to October 31, at different venues in the Paraná state capital of Curitiba, under the theme “Design, Innovation and Sustainability”. During this exhibition, the city’s streets and parks were transformed into a stage for the event, interacting with residents and visitors. FILMMAKING “Everyone can change the world” is a Brazilian documentary that tells the story of social leaders around the planet, showing the social impacts of their work, the obstacles they encounter and the gratiﬁ cation they derive from their work. The Natura Musical (Musical Natura) program continues as our primary expression of support for Brazilian culture. A national call for projects and another regional call in the state of Minas Gerais allowed us to choose projects from different artistic areas, as well as those selected directly by the program. In 2010, we supported 17 projects. Since Natura Musical began in 2005, we have supported more than 140 such initiatives. The components of the program include: support for music, sponsorship of national tours, the Natura Musi- cal (Musical Natura) portal (www.naturamusical.com.br), an on-line radio, a radio show broadcast across the country and the Natura Nós (Natura Us) Festival. The funding comes from incentive laws and contributions by Natura. 97 See more details about the projects: FILMS AND DVDS The ﬁ lm “Music according to Tom Jobim” celebrates the work of the singer and songwriter, interpreted by vari- ous Brazilian and foreign artists, as a project to document and preserve the memory of the songwriter. We also supported the recording on DVD of the concert “Pra Nhá Terra”, by the musical groups Ponto de Partida and Meninos de Araçuari, and the feature length documentary “Iê Iê Iê”, made from a four-part television series with music by Arnaldo Antunes. INTERNET In the project “Mestres Navegantes” (Master Mariners), we recorded the work of regional musicians who pre- serve the customs, folklore and cultural traditions in the Vale do Paraíba region of São Paulo. The project has released CDs, photos, videos and personal pages on each musical act on the internet, in addition to organizing free workshops on the musicians for young people in the historical town of São Luiz do Paraitinga, in São Paulo. CONCERTS AND TOURS Natura supported the recording and the tour of the singers Vanessa da Mata and Carlinhos Brown, and seven free performances by the São Paulo State Symphony Orchestra Choir (OSESP) in the city of São Paulo. To raise awareness about the topic of sustainability through art and culture, we organize the Natura Nós (Na- tura Us) Festival. In 2010, it was held in October, in the city of São Paulo, and featured acts such as Air, Snow Patrol, Jamiroquai and the Brazilians Vanessa da Matta, Céu, Karina Buhr, Cidadão Instigado, Móveis Coloniais de Acaju and Marcelo Jeneci. The ﬁ rst day of the festival was dedicated to children, with performances by Adriana Partimpim, Pequeno Cidadão, Palavra Cantada and Pato Fu. SUPPORT AND SPONSORSHIPS – INVESTMENTS BY TOPIC (R$ THOUSANDS) 1 Sustainable development 2 Promoting Brazilian culture with a focus on music 3 Civil society and governmental organizations Sustainable Development Total funds invested by Natura Total funds from incentives Federal Cultural Incentive Law (Rouanet Law) Law on investment in production and co-production of cinematographic and audiovisual projects, and in infrastructure for production and exhibition (Audiovisual Law/Ancine) Promoting Culture Total funds from Natura Total funds from incentives Federal Cultural Incentive Law (Rouanet Law) State Cultural Incentive Law, Minas Gerais State Cultural Incentive Law, São Paulo 4 Law on investment in production and co-production of cinematographic and audiovisual projects, and in infrastructure for production and exhibition (Audiovisual Law/Ancine) Strengthening Civil Society Organizations Total funds from Natura Total funds from incentives Federal Cultural Incentive Law (Rouanet Law) 2008 3,382.0 6,077.0 2,247.1 1702.4 550 450.00 2009 2,174.0 7,833.0 2,725.6 1600 574 474.00 2010 2,052.4 15,442.5 6,809.9 2832 350 250.00 100.00 100.00 100.00 1327.403 4749.6158 2227.542 1600 622.07 4844 2989 1524 645 0.0 10720.6 4721.9 2898.5 823.4 0.0 300.00 820.00 1.000.00 1771.879 475.2655 475.27 2102.066 623.5 623.50 6279.93 530 530.00 1 Includes funds invested by Natura and funds from incentive legislation. 2 Funds related to sustainable development have been revised from previous reports, given that we included a sponsorship that was not previously included in ﬁ gures reported. 3 Data on promoting Brazilian culture has been revised from previous reports due to a reporting error. 4. The amount of funds resulting from the São Paulo State Cultural Incentive Law in 2008 was revised, since we identiﬁ ed an error in the reported ﬁ gure. 98 5.4 CREATION OF ECONOMIC VALUE NATURA’S STRONG PERFORMANCE, CO U PL ED W I T H T H E G ROW TH OF THE COSMETIC, TOILETRY, AND FR AGR ANCE MARKET RESULTED IN POSITIVE ECONOMIC AND F I N A N C I A L I N D I C A T O R S . Consolidated net revenue in 2010 was R$5.136 billion, an increase of 21.1% over 2009. EBITDA (earnings before interest, taxes, depreciation, and amortization) was R$1.256 billion with an EBITDA margin of 24.5%. Net income was R$744.1 million. This performance reﬂ ects the strength of our marketing strategy, the launch of new products, and an 18% increase in the number of consultants — who now total more than 1,221,000 in our operations in Brazil and overseas. COSTS AND EXPENSES We reduced the costs of goods sold (COGS) from 30.5% in 2009 to 30.3% in 2010. Inﬂ ationary pressure remained under control, the exchange rate was favorable during this period, and our strategy for increasing prices proved to be efﬁ cient, with less dispersion among the categories. These positive effects, however, were partly offset by higher product losses in Brazil — the result of additional inventories generated in the ﬁ nal quarter of 2009. For 2011, the loss-prevention process is being strengthened, and we expect a signiﬁ cant improvement in this indicator. We also recorded a reduction in sales expenses, accounting for 33.2% of net revenues in 2010 (35.3% in 2009). We made greater investments in marketing, which provides vigorous support for product launches, as well as training and events for the sales force. This increase was mitigated by greater logistical efﬁ ciency and the dilution of sales force costs. The highlight was the percentage of orders placed over the Internet in Brazil, which stood at 86% in 2010 (71.2% in 2009). Administration and general expenses accounted for 11.8% in 2010 (10.6% in 2009). The increase in the year- over-year comparison, which was in line with our forecasts, is due to higher expenditures for research and development (rising from 2.5% of net revenues in 2009 to 2.8% in 2010); higher investments in projects that enable the company to grow, primarily in the areas of information technology, logistics, and leadership devel- opment; a higher head count to support the advance of the model of Management by Process, Business Units, and Regional Units; and the cost of maintaining investments made in information technology. EBITDA AND NET INCOME In 2010 our consolidated net income stood at R$744.1 million, which represents growth of 8.8% compared with the previous year. In 2009, we recorded a lower effective IR/CSLL rate as a result of having accelerated the ﬁ scal amortization of goodwill in the period. This ﬁ scal beneﬁ t ended last year. This year, the effective tax rate was 33.5%. 1. CONSOLIDATED NET REVENUE (R$ MILLIONS) 5,136.7 4,242.1 3,576.2 2008 2009 2010 2. CONSOLIDATED EBITDA (R$ MILLIONS) 1,256.8 1,008.5 860.1 Consolidated EBITDA stood at R$1.256 billion in 2010, up 24.6% over 2009. The margin rose from 23.8% to 24.5% in 2010 (graph 2). 2008 2009 2010 99 SUMMARY OF CASH FLOW Free cash generation for the year was R$716.3 million versus R$418.6 million in 2009. This 71.1% increase resulted from more efﬁ cient working capital management by extending payment terms for suppliers; reducing inventory coverage; reducing the balance of recoverable taxes; and making the change from annual to quarterly income tax assessments and payments. We are reﬁ ning cash ﬂ ow management processes, which should result in even more efﬁ ciency in 2011. Internal cash generation was R$832.9 million for the year. This growth of 7.3% over the previous year is in line with the growth of 8.8% recorded in net income for the period. SUMMARY OF CONSOLIDATED CASH FLOWS (R$ MILLIONS) Net income for ﬁ nancial year (+) Depreciation and amortization Internal cash generation (Increase)/decrease in Working Capital Non-cash items (exchange variation) Operational cash generation Additions of intangible assets Free cash generation¹ 2009 683.9 92.4 776.3 (189.9) (27.5) 558.9 (140.4) 418.6 2010 744.1 88.8 832.9 99,6 20.7 953.2 (236.9) 716.3 Var. % 8.8 (3.9) 7.3 (152.4) (175.3) 70.5 68.7 71.1 1 (Internal cash generation) +/- (changes in working capital and long-term liabilities) – (acquisitions of property, plant and equipment). Investments in property, plant, and equipment in 2010 totaled R$236.9 million and were concentrated in informa- tion technology, manufacturing capacity, and logistics infrastructure. Investments in property, plant and equipment in 2011 are estimated at R$300 million and will concentrate on the ongoing development of our information tech- nology platform, including a sound base for the international area, in addition to continuing our project to improve logistics and increase our industrial capacity. PRO FORMA RESULTS PER OPERATION BLOCK The proﬁ t margin achieved on exports from Brazil to international operations was deducted from the COGS of the respective operations, revealing the real impact of these subsidiaries on the company’s consolidated results. Accordingly, the Pro Forma Statement of Results for Brazil shows only sales in the domestic market. The performance of our operation in Brazil remained strong, with growth of 20.6% in net revenues, reaching R$4.764 billion. The EBITDA in Brazil was R$1.335 billion compared to R$1.085 billion in 2009, representing growth of 23%. Margins were 28% in 2010 and 27.5% in 2009. PRO FORMA FINANCIAL HIGHLIGHTS, BRAZIL (R$ MILLION) 2009 2010 Var % Total number of consultants - end of period (thousands) Product units for resale (millions) Gross revenue Net revenue Gross proﬁ t Gross margin (%) Selling expenses General and administrative expenses Employee proﬁ t sharing Management compensation Other operating income / (expenses), net Financial income / (expenses), net Earnings before taxes Net income EBITDA EBITDA Margin (%) 875.2 348.1 5,418.5 3,949.5 2,761.4 69.9 (1,300.5) (376.5) (55.8) (14.1) (15.8) (40.9) 957.8 778.6 1,085.9 27.5 1,028.7 378.7 6,489.6 4,764.6 3,356.4 70.4 (1,487.4) (516.2) (70.4) (14.4) (15.7) (47.9) 1,204.4 836.0 1,335.2 28 17.5 8.8 19.8 20.6 21.5 0.5pp 14.4 37.1 26.1 2.5 (1.0) 17.1 25.7 7.4 23.0 0.5pp 1. Number of consultants by the end of the 18th cycle of sales. The year 2010 was positive for our international operations and marked a new phase in business expansion. International operations represented 7.2% of Natura’s consolidated net revenues last year. Net revenues from these operations grew by 37.3% in local currency (27.2% in Brazilian reais). The sales channel expanded by 20.8%, enabling us to achieve the ﬁ gure of 192,000 consultants in the region. 100 PRO FORMA EBITDA PER OPERATION BLOCK (R$ MILLIONS) Brazil Argentina, Chile and Peru Mexico and Colombia Other investments Total 2009 1,085.9 8.9 (42.3) (44.1) 1,008.5 2010 1,335.2 13.1 (32.5) (59.1) 1,256.8 Var % 23.0 47.8 (23.2) 34.1 24.6 The operations under consolidation (Argentina, Chile, and Peru) showed growth of 27.4% in local currency (17% in Brazilian reais) in net revenue. The result was inﬂ uenced by several negative factors, such as the earth- quake in Chile in February of 2010, which partially destroyed our facilities and interrupted billings for 22 days. The pro forma EBITDA of this group of operations showed positive consolidation at R$13.1 million for the year, a growth of 47.8% over 2009. This reﬂ ected a dilution in sales and administrative expenses in spite of the increasing investment in our brand in these countries. Operations under implementation (Mexico and Colombia) showed high growth rates of 69.2% in local cur- rency (64.5% in Brazilian reais), disregarding the revenue from the operation in Venezuela, which was closed in 2009. Pro forma EBITDA showed a loss of R$32.5 million (versus R$42.3 million in 2009), reﬂ ecting recent and continuing investments to expand these operations. PRO FORMA FINANCIAL HIGHLIGHTS - OPERATIONS UNDER CONSOLIDATION (ARGENTINA, CHILE, PERU) - (R$ MILLIONS) Total consultants - end of period 1 (thousands) Product units for resale (millions) Gross revenue Net revenue Gross proﬁ t Gross margin (%) Selling expenses General and administrative expenses Other operating income / (expenses), net Financial income / (expenses), net Earnings before taxes Net income / (loss) EBITDA Ebitda margin (%) PRO FORMA FINANCIAL HIGHLIGHTS - OPERATIONS UNDER IMPLEMENTATION (MEXICO AND COLOMBIA)1 (R$ MILLIONS) Total consultants - end of period 1 (thousands) Product units for resale (millions) Gross revenue Net revenue Gross proﬁ t Gross margin (%) Selling expenses General and administrative expenses Other operating revenues / (expenses), net Financial income / (expenses), net Earnings before taxes Net income / (loss) Ebtida Ebitda margin (%) 1. Number of consultants by the end of the 18th cycle of sales. 2009 113.6 22.5 285.4 218.5 138.1 63.2% (109.3) (23.4) 1.4 0.3 7.1 (1.1) 8.9 4.1 2009 44.2 7.1 76.3 66.5 41.8 62.8 (69.7) (16.1) (0.2) (1.3) (45.5) (48.0) (42.3) (63.6) 2010 129.6 28.4 335.9 255.7 157.3 61.5 (124.4) (21.5) (1.7) (0.8) 8.9 3.7 13.1 5.1 2010 60.2 13.1 114.0 98.3 56.3 57.3 (76.0) (14.8) (0.1) (1.0) (35.6) (36.0) (32.5) (33.1) Var % 14.1 26.2 17.7 17.0 13.9 -1.7pp 13.8 (8.1) na na 25.6 na 47.8 1.1pp Var % 36.3 83.6 49.4 47.8 34.8 -5.5pp 9.0 (7.9) (54.3) na (21.8) (25.0) (23.2) 30.5pp 101 6. ATTACHMENTS ATTACHMENTS Financial Statements DNV Statement About This Report Global Compact Principles GRI Index FINANCIAL STATEMENTS NATURA COSMÉTICOS S.A. Financial statements related to ﬁ scal year ended at December 31, 2010 and auditors’ report. In accordance with the legal and statutory rules we submit, to the appreciation of your honour, the balance sheet and the ﬁ nancial statements related to the ﬁ scal year ended at December 31, 2010. Together with the information included in the footnotes here in, the Company’s Management is entirely available to the shareholders to any other clariﬁ cation. 102 Balance Sheets As of december 31, 2010 (In thousands of Brazilian reais - R$) ASSETS CURRENT ASSETS Cash and cash equivalents Trade accounts receivable Inventories Recoverable taxes Related parties Other receivables Total current assets NONCURRENT ASSETS Long-term assets: Recoverable taxes Deferred income tax and social contribution Escrow deposits Other noncurrent assets Investments Property, plant and equipment Intangible assets Total noncurrent assets TOTAL ASSETS LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES Borrowings and ﬁ nancing Trade and other payables Suppliers - related parties Payroll, proﬁ t sharing and related taxes Taxes payable Provision for tax, civil and labor risks Derivatives Other payables Total current liabilities NONCURRENT LIABILITIES Borrowings and ﬁ nancing Taxes payable Provision for tax, civil and labor risks Allowance for investment losses Provision for healthcare plan Total noncurrent liabilities SHAREHOLDERS’ EQUITY Capital Capital reserves Earnings reserves Treasury shares Proposed additional dividend Other comprehensive losses Total equity attributable to owners of the Company Noncontrolling interests Total shareholders’ equity TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY The accompanying notes are an integral part of these ﬁ nancial statements. Company (BRGAAP) Consolidated (BRGAAP e IFRS) 2009 2009 2010 2010 Note 5 6 7 8 28.1. 8 9.a) 10 11 12 13 13 206,125 493,692 185,092 34,799 25,361 52.470 997,539 254,463 414,645 94,338 93,760 26,757 27,620 911,583 560,229 570,280 571,525 101,464 - 66,399 1,869,897 500,294 452,868 509,551 191,195 - 62,454 1,716,362 4,921 87,491 289,070 20,052 1,099,188 92,175 18,586 1,611,483 2,609,022 33,697 82,952 187,656 90 1,000,600 50,375 11,527 1,366,897 2,278,480 109,264 180,259 337,007 44,904 - 560,467 120,073 1,351,974 3,221,871 63,931 146,146 232,354 7,429 - 492,256 82,740 1,024,856 2,741,218 Company (BRGAAP) Consolidated (BRGAAP e IFRS) 2009 2009 2010 2010 Note 15 16 28.1 17 18 4.2 15 17 18 12 24.2. 19.a) 19.c) 19.b) 60,086 113,232 246,589 63,769 205,361 - 3,340 54,471 746,848 469,590 84,471 211,591 56,750 85,161 1,465 6,869 26,339 942,236 226,595 366,494 - 162,747 371,815 - 4,061 64,747 1,196,459 569,366 255,282 - 130,792 239,574 1,465 8,652 30,219 1,235,350 368,356 169,912 53,282 - 13,123 604,673 25,707 113,383 54,384 565 2,384 196,423 465,068 209,316 73,784 - 19,742 767,910 134,992 150,280 71,432 - 9,342 366,046 418,061 149,627 282,944 (14) 430,079 (23,196) 1,257,501 - 1,257,501 2,609,022 404,261 142,993 253,693 (14) 357,611 (18,723) 1,139,821 - 1,139,821 2,278,480 418,061 149,627 282,944 (14) 430,079 (23,196) 1,257,501 1 1,257,502 3,221,871 404,261 142,993 253,693 (14) 357,611 (18,723) 1,139,821 1 1,139,822 2,741,218 103 Statement of Income For the year ended December 31, 2010 (In thousands of Brazilian reais - R$, except earnings per share) NET REVENUE Cost of sales GROSS PROFIT OPERATING (EXPENSES) INCOME Selling Administrative and general Employee proﬁ t sharing Management compensation Equity in subsidiaries Other operating (expenses) income, net INCOME FROM OPERATIONS BEFORE FINANCIAL (EXPENSES) INCOME Financial income Financial expenses INCOME BEFORE INCOME TAX AND SOCIAL CONTRIBUTION Income tax and social contribution NET INCOME ATTRIBUTABLE TO: Owners of the Company Noncontrolling interests EARNINGS PER SHARE - R$ Basic Diluted Note 21 22 22 22 28 12 26 25 25 9.b) Company (BRGAAP) Consolidated (BRGAAP e IFRS) 2009 2009 2010 2010 5,514,315 (2,283,926) 3,230,389 4,593,165 (1,956,558) 2,636,607 5,136,712 (1,556,806) 3,579,906 4,242,057 (1,294,565) 2,947,492 (1,292,365) (837,808) (18,174) (14,417) 25,764 456 - 1,093,845 17,515 (58,237) (1,062,579) (698,241) (21,049) (13,139) (2,830) 961 - 839,730 56,794 (83,805) (1,704,322) (605,442) (70,351) (14,417) - (17,468) - 1,167,905 53,639 (103,375) (1,496,125) (450,868) (55,784) (14,063) - (14,624) - 916,028 84,176 (126,050) 1,053,123 (309,073) 744,050 812,719 (128,795) 683,924 1,118,169 (374,120) 744,050 874,154 (190,230) 683,924 744,050 - 683,924 - 744,050 - 683,924 - 27.1. 27.2. 1,7281 1,7219 1,5926 1,5880 1,7281 1,7219 1,5926 1,5880 The accompanying notes are an integral part of these consolidated ﬁ nancial statements. Statement of Comprehensive Income For the year ended December 31, 2010 (In thousands of Brazilian reais - R$) NET INCOME Other comprehensive losses- Losses from translation of ﬁ nancial statements of foreign subsidiaries TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO Owners of the Company Noncontrolling interests Company (BRGAAP) Consolidated (BRGAAP e IFRS) Note 2010 2009 2010 2009 744,050 683,924 744,050 683,924 12 (4,473) (23,884) (4,473) (23,884) 739,577 660,040 739,577 660,040 739,577 660,040 739,577 660,040 - - - - The accompanying notes are an integral part of these consolidated ﬁ nancial statements. 104 , 0 1 1 4 1 0 1 , 4 2 9 3 8 6 , ) 4 8 8 3 2 ( , 0 4 0 0 6 6 , ) 0 8 6 1 1 3 ( , - 5 5 3 8 3 8 2 1 , 9 3 3 4 , - - - - - ) 2 5 1 5 1 2 ( , ) 8 2 0 5 2 ( , , 2 2 8 9 3 1 1 , 0 5 0 4 4 7 , ) 3 7 4 4 ( , , 7 7 5 9 3 7 0 0 8 3 1 , , ) 1 1 6 7 5 3 ( 8 8 2 1 1 , - - - - - ) 4 7 3 9 8 2 ( , , 2 0 5 7 5 2 1 , l a t o T y t i u q e l ’ s r e d o h e r a h s 1 - - - - - - - - - - - - - - - 1 - - - - - - - - - - - - 1 g n i l l o r t n o c n o N y t i u q E o t l e b a t u b i r t t a e h t f o s r e n w o r e h t O e v i s n e h e r p m o c d e t a l u m u c c A t s e r e t n i y n a p m o C ) s e s s o l ( e m o c n i s e s s o l , 9 0 1 4 1 0 1 , 4 2 9 3 8 6 , ) 4 8 8 3 2 ( , 0 4 0 0 6 6 , , ) 0 8 6 1 1 3 ( - 5 5 3 8 3 8 2 1 , 9 3 3 4 , - - - - - ) 2 5 1 5 1 2 ( , ) 8 2 0 5 2 ( , - - - - - - - - - - - - - 1 6 1 5 , ) 4 8 8 3 2 ( , ) 4 8 8 3 2 ( , ) 4 2 9 7 ( , , 4 2 9 3 8 6 - , 4 2 9 3 8 6 - 4 2 9 7 , - - - - ) 5 4 1 3 ( , , ) 2 5 1 5 1 2 ( ) 8 2 0 5 2 ( , , ) 5 8 3 9 3 3 ( ) 6 2 2 8 1 ( , ) 8 8 9 2 8 ( , - - - d e s o p o r P l a n o i t i d d a d n e d i v i d 0 8 6 1 1 3 , ) 0 8 6 1 1 3 ( , - - - - - - - - - 6 2 2 8 1 , 5 8 3 9 3 3 , - - - - - 5 5 3 - - - - - - - - - - - - - ) 4 2 9 7 ( , - - - - - - - - - 8 8 9 2 8 , - - - - - - - - - - - - - - 5 4 1 3 , - - - - - - - - - - - - - - - - - - - - - - - - - - - - 9 3 3 4 , ) 7 6 7 1 ( , - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 7 6 7 1 , - - - - - - 8 3 8 2 1 , - - - - - - - - ) 9 6 3 ( y r u s a e r T s e r a h s 8 1 0 5 5 1 , d e n i a t e R i s g n n r a e e v r e s e r t ﬁ o r P 6 1 8 1 , x a T s e v i t n e c n i 0 5 6 8 1 , l a g e L 3 2 4 9 1 , l a n o i t i d d A n i - d i a p l a t i p a c 8 7 3 7 1 , e v r e s e r l a t i p a C e v i t n e c n i x a T e v r e s e r t n e m t s e v n I s t n a r g e r a h S i m u m e r p 3 5 8 1 0 1 , l a t i p a C 3 2 4 1 9 3 , e t o N 8 0 0 2 , 0 5 0 4 4 7 ) 3 7 4 4 ( , 7 7 5 9 3 7 , - ) 3 7 4 4 ( , ) 3 7 4 4 ( , 0 5 0 4 4 7 , - 0 5 0 4 4 7 , - - - 0 0 8 3 1 , ) 1 1 6 7 5 3 ( , 8 8 2 1 1 , - - - - - ) 4 7 3 9 8 2 ( , - - - - - - - - - - - - - ) 3 7 9 5 ( , ) 4 7 3 9 8 2 ( , ) 3 2 6 5 0 4 ( , ) 6 5 4 4 2 ( , ) 4 2 6 8 1 ( , - - - - - - 6 5 4 4 2 , 3 2 6 5 0 4 , , ) 1 1 6 7 5 3 ( - - - - - - - - - - - - - - - - - - 4 5 6 4 , - - - - 4 2 6 8 1 , - - - - - - - - - - - 3 7 9 5 , - - - - - - - - - - - - - - - - - - - - - - 8 8 2 1 1 , ) 4 5 6 4 ( , - - - - - - - - - - - - - - - - - - - - - - - - - - - - 0 0 8 3 1 , - - - - - - - , 1 2 8 9 3 1 1 , ) 3 2 7 8 1 ( , - 1 1 6 7 5 3 , ) 4 1 ( 2 8 0 0 3 2 , 1 6 9 4 , 0 5 6 8 1 , 5 9 9 1 2 , 8 7 3 7 1 , 0 2 6 3 0 1 , 1 6 2 4 0 4 , 2 1 . b 9 1 . a 9 1 . 2 3 2 . 2 3 2 t ﬁ o r p h t i w s e s s o l l d e t a u m u c c a f o n o i t p r o s b A 9 0 0 2 , 3 2 h c r a M f o g n i t e e M e v r e s e r n o i t n e t e r s e r a h s f o n o i t p i r c s b u s h g u o r h t e s a e r c n i l a t i p a C e s i c r e x e o t e u d s e r a h s y r u s a e r t f o l e a S s n o i t p o k c o t s f o e v r e s e r e v i t n e c n i x a t f o n o i t i n g o c e R : s n a p l n o i t p o k c o t s n i s e g n a h C s n o i t p o k c o t s f o e s i c r e x E s n o i t p o k c o t s f o t n a r G : e m o c n i t e n f o n o i t a c o l l A ’ l s r e d o h e r a h S l a u n n A e h t t a d e v o r p p a l a t i p a c n o t s e r e t n i d n a s d n e d v d i i 8 0 0 2 , 1 3 R E B M E C E D F O S A S E C N A L A B e m o c n i e v i s n e h e r p m o c r e h t O e m o c n i e v i s n e h e r p m o c l a t o T e m o c n i t e N . b 9 1 e r a h s i g n d n a t s t u o r e p , 0 5 0 $ R - s d n e d v d m i i i r e t n I . b 9 1 . b 9 1 . b 9 1 f . 9 1 2 1 . a 9 1 . 2 3 2 . 2 3 2 . b 9 1 . b 9 1 . b 9 1 f . 9 1 0 1 0 2 , 4 2 y r a u r b e F n o l a t i p a c n o t s e r e t n i 0 1 0 2 , 4 2 y r a u r b e F n o s d n e d v d i i d e s o p o r P d e s o p o r P - l a t i p a c n o t s e r e t n i d e s o p o r P e r a h s i g n d n a t s t u o r e p , 6 0 0 $ R 9 0 0 2 , 1 3 R E B M E C E D F O S A S E C N A L A B e m o c n i e v i s n e h e r p m o c r e h t O e m o c n i e v i s n e h e r p m o c l a t o T e m o c n i t e N e v r e s e r i s g n n r a e i d e n a t e R l a t i p a c n o t s e r e t n i d n a s d n e d v d i i 9 0 0 2 ’ l s r e d o h e r a h S l a u n n A e h t t a d e v o r p p a 0 1 0 2 , 6 l i r p A f o g n i t e e M s e r a h s f o n o i t p i r c s b u s h g u o r h t e s a e r c n i l a t i p a C e v r e s e r e v i t n e c n i x a t f o n o i t i n g o c e R : s n a p l n o i t p o k c o t s n i s e g n a h C s n o i t p o k c o t s f o e s i c r e x E s n o i t p o k c o t s f o t n a r G : e m o c n i t e n f o n o i t a c o l l A l a t i p a c n o t s e r e t n i d n a s d n e d v d m i i i r e t n I 1 1 0 2 , 3 2 y r a u r b e F n o s d n e d v d i i d e s o p o r P 1 1 0 2 , 3 2 y r a u r b e F n o l a t i p a c n o t s e r e t n i d e s o p o r P e v r e s e r i s g n n r a e i d e n a t e R , 1 0 5 7 5 2 1 , ) 6 9 1 3 2 ( , - , 9 7 0 0 3 4 ) 4 1 ( 0 6 3 3 5 2 , 4 3 9 0 1 , 0 5 6 8 1 , 9 2 6 8 2 , 8 7 3 7 1 , 0 2 6 3 0 1 , 1 6 0 8 1 4 , 0 1 0 2 , 1 3 R E B M E C E D F O S A S E C N A L A B . s t n e m e t a t s l i a c n a n ﬁ d e t a d i l o s n o c e s e h t f o t r a p l a r g e t n i n a e r a s e t o n i g n y n a p m o c c a e h T 105 y t i u q E l ’ s r e d o h e r a h S n i s e g n a h C f o t n e m e t a t S ) e r a h s r e p s d n e d v d i i r o f t p e c x e , $ R - s i a e r n a i l i z a r B f o s d n a s u o h t n I ( 0 1 0 2 , 1 3 r e b m e c e D d e d n e r a e y e h t r o F Statement of Cash Flows For the year ended December 31, 2010 (In thousands of Brazilian reais - R$) Company (BRGAAP) Consolidated (BRGAAP e IFRS) 2009 2009 2010 2010 Note CASH FLOW FROM OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Provision for losses on swap and forward contracts Provision for tax, civil and labor contingencies Interest and inﬂ ation adjustment of escrow deposits Income tax and social contribution (Gain) Loss on sale on property, plant and equipment and intangible assets Equity in subsidiaries Interest and exchange rate change on borrowings and ﬁ nancing and other liabilities Stock options plans expenses Provision for discount on sale of ICMS credits Allowance for doubtful accounts Allowance for inventory losses Provision for healthcare plan 13 18 9.a 26 25 6 7 24.2 (INCREASE) DECREASE IN ASSETS Current: Trade accounts receivable Inventories Recoverable taxes Other receivables Noncurrent: Recoverable taxes Other receivables Subtotal INCREASE (DECREASE) IN LIABILITIES Current: Domestic and foreign suppliers Payroll, proﬁ t sharing and related taxes, net Taxes payable Other payables Noncurrent: Taxes payable Provision for tax, civil and labor contingencies Other payables Subtotal OTHER CASH FLOWS FROM OPERATING ACTIVITIES Payments of income tax and social contribution Payments of derivatives Payment of interest on borrowings and ﬁ nancing 744,050 683,924 744,050 683,924 15,305 5,477 106 (15,318) 309,073 (468) (25,764) 11,918 (4,539) 12,188 (10,266) 128,795 (702) 2,830 88,848 8,787 3,545 (18,129) 374,120 32,620 - 92,426 (4,004) 9,090 (13,240) 190,230 19,834 - (4,668) 4,081 - 9,005 3,981 10,739 1,055,598 33,662 4,339 - 8,211 3,635 2,384 876,379 (5,137) 11,288 465 9,149 30,132 10,400 1,290,137 10,825 8,573 2,414 10,051 9,650 9,342 1,029,115 (88,052) (77,360) 58,961 (23,433) 5,565 (56,996) (60,485) 4,081 (126,561) (92,106) 89,731 (3,945) 7,482 (185,569) (83,912) 8,734 38,703 (19,962) (111,143) (13,509) (45) (121,389) (44,597) (37,475) (214,953) (30,441) (108) (283,814) 28,761 7,019 18,197 63,130 (29,302) 1,688 (70,140) 1,433 111,212 31,955 (8,192) 34,528 45,499 86 (94,059) (1,005) 56,529 (2,673) (565) 170,398 113,383 (22,184) (14,439) (19,561) 59,036 (2,658) - 225,881 150,280 (22,216) (10,652) 67,933 (221,535) (9,006) (35,405) (128,758) (13,924) (4,574) (269,001) (13,378) (44,902) (184,365) (16,255) (19,919) NET CASH PROVIDED BY OPERATING ACTIVITIES 848,906 588,173 973,784 592,695 CASH FLOW FROM INVESTING ACTIVITIES Acquisition of property, plant and equipment and intangible assets Proceeds from sale of property, plant and equipment and intangible assets Escrow deposits Dividends received from subsidiaries Investments in subsidiaries 13 12 (66,870) (30,568) (236,876) (140,632) 3,174 (86,096) 30,000 (117,486) 4,323 (55,272) - (154,720) 9,864 (86,524) - - 6,066 (55,858) - - NET CASH USED IN INVESTING ACTIVITIES (237,278) (236,237) (313,536) (190,424) CASH FLOW FROM FINANCING ACTIVITIES Payments of borrowings and ﬁ nancing - principal Proceeds from borrowings and ﬁ nancing Payment of dividends and interest on capital Capital increase through subscription of shares 19.b 19.a (592,075) 565,293 (646,985) 13,800 (634,274) 988,310 (551,860) 12,838 (781,931) 819,275 (646,985) 13,800 (827,121) 1,109,497 (551,860) 12,838 continue... 106 Statement of Cash Flows For the year ended December 31, 2010 (In thousands of Brazilian reais - R$) ...continuation Company (BRGAAP) Consolidated (BRGAAP e IFRS) 2009 2009 2010 2010 Note NET CASH USED IN FINANCING ACTIVITIES (659,967) (184,986) (595,840) (256,646) Gains (losses) on translation of foreign-currency cash and cash equivalents - - (4,473) 4,172 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (48,338) 166,950 59,935 149,797 Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 254,463 206,125 87,513 254,463 500,294 560,229 350,497 500,294 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Additional statements of cash ﬂ ows information: Restricted cash Bank overdrafts - unused 11 The accompanying notes are an integral part of these consolidated ﬁ nancial statements. (48,338) 166,950 59,935 149,797 - 147,900 - 197,720 6,155 265,500 5,769 242,145 Statement of Value Added For the year ended December 31, 2010 (In thousands of Brazilian reais - R$) Note 13 12 REVENUES Sales of products and services Other operating (expenses) income, net Allowance for doubtful accounts INPUTS PURCHASED FROM THIRD PARTIES Cost of sales and services Materials, electricity, services and others GROSS VALUE ADDED RETENTIONS Depreciation and amortization VALUE ADDED GENERATED BY THE COMPANY TRANSFERRED VALUE ADDED Equity in subsidiaries Financial income - includes inﬂ ation and exchange rate variations TOTAL VALUE ADDED TO BE DISTRIBUTED DISTRIBUTION OF VALUE ADDED: Employees and social charges Taxes and contributions Financial expenses and rentals Dividends Interest on capital Retained earnings Supplemental statement of value added information Company (BRGAAP) Consolidated (BRGAAP) 2009 2010 2009 2010 6,394,783 6,477,739 456 (83,412) (4,278,970) (2,488,991) (1,789,979) 2,115,813 5,333,613 5,402,269 961 (69,617) (3,590,406) (2,133,895) (1,456,511) 1,743,207 6,850,225 6,951,106 (17,468) (83,412) (3,707,385) (2,355,631) (1,351,754) 3,142,841 5,705,072 5,789,313 (14,624) (69,617) (3,087,532) (1,957,104) (1,130,427) 2,617,540 (15,305) (15,305) (11,918) (11,918) (88,848) (88,848) (92,426) (92,426) 2,100,508 1,731,289 3,053,993 2,525,114 66,933 25,764 41,169 2,167,440 53,964 (2,830) 56,794 1,785,253 53,639 - 53,639 3,107,632 84,176 - 84,176 2,609,290 (2,167,440) 100% (1,785,253) 100% (3,107,632) 100% (2,609,290) 100% (191,654) 11% (642,954) 21% (769,245) 25% (818,464) 46% (1,476,512) 47% (1,147,364) 52% (130,187) 4% (554,537) 7% 1% (43,254) (90,995) 15% (222,957) 10% (1,111,331) 51% 4% (659,570) 31% 3% 1% 5% (554,537) 11% 2% (43,254) (90,995) 25% (117,825) 4% (659,570) 21% 2% 1% (59,883) (24,597) (59,883) (24,597) (86,349) (89,102) R$454,114 and R$424,222 are included in caption ‘Taxes and contribution’ in 2010 and 2009, respectively, and refer to reverse charge State VAT (ICMS) levied on the estimated proﬁ t margin set by the State Departments of Finance based on sales made by Natura consultants to ﬁ nal customer. For the analysis of this tax impact on the statement of value added, these amounts should be deducted from those recorded in ‘Sales of products and services’ and ‘Taxes and contributions’, since sales revenue does not include the estimated proﬁ t attributable to Natura consultants on the sale of products, in the amounts of R$2,738,227 and R$2,302,549 in 2010 and 2009, respectively, considering an estimated proﬁ t margin of 30%. 107 The accompanying notes are an integral part of these ﬁ nancial statements. Notes to the Financial Statements For the year ended December 31, 2010 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) 1. GENERAL INFORMATION Natura Cosméticos S.A. (the “Company”) is a publicly-traded company, headquartered in Itapecerica da Serra, State of São Paulo, registered in the São Paulo Stock Exchange (BM&FBOVESPA), under the ticker “NATU3”. The Company’s and its subsidiaries’ activities (“Natura’s Group” or the “Group”) include the development, production, distribution and sale, substantially through direct sales by Natura Beauty Consultants, of cosmetics, fragrances, and hygiene products. The Company also holds equity interests in other companies in Brazil and abroad. 2. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES issued by Interpretations 2.1. Statement of compliance and basis of presentation The Company’s ﬁ nancial statements include: • The consolidated ﬁ nancial statements prepared in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board - IASB and the accounting practices adopted in Brazil, identiﬁ ed as Consolidated – IFRS and BR GAAP. • The Parent’s individual ﬁ nancial statements prepared in accordance with the accounting practices adopted in Brazil, identiﬁ ed as Company – BR GAAP. The accounting practices adopted in Brazil include those established in the Brazilian Corporate Law as well as the Pronouncements, Instructions and the Accounting Pronouncements Committee (CPC) and approved by the Brazilian Securities and Exchange Commission (CVM). The individual ﬁ nancial statements include investments in subsidiaries, joint ventures and associates which are measured under the equity method, as required by the legislation prevailing in Brazil. Therefore, these individual ﬁ nancial statements are not fully compliant with IFRS, which requires that these investments be stated at fair value or acquisition cost. Since there is no difference between the consolidated shareholders’ equity and the consolidated net income attributable to the Company’s shareholders recorded in the consolidated ﬁ nancial statements prepared under IFRS and the accounting practices adopted in Brazil, the Company elected to present the individual and the consolidated ﬁ nancial statements as a single set in the side-by-side comparison format. The ﬁ nancial statements have been prepared on the historical cost basis except for certain ﬁ nancial instruments that are measured at fair values, as explained in the accounting policies below. Historical cost is generally based on the fair value of the consideration given in exchange for assets. The main accounting practices adopted in preparing these consolidated ﬁ nancial statements are summarized below. These practices are consistent with those adopted in the prior reporting period, except otherwise indicated. 2.2. Consolidation a) Subsidiaries and joint-controlled entities Subsidiaries are all the entities in which the Company has the power to govern ﬁ nancial and operating policies of an entity so as to obtain beneﬁ ts from its activities and that the Company owns half or more of the interest. In the applicable cases, the existence and the effect of potential voting right, currently exercisable or convertible, are taken into consideration to determine if the Company controls or not another entity. Subsidiaries are fully consolidated from the date when control is transferred to the Company and cease to be consolidated, when applicable, when control no longer exists. In the cases control is jointly held, the consolidation of the ﬁ nancial statements is made proportionally to the interest percentage. b) Consolidation criteria and subsidiaries included in the consolidated ﬁ nancial statements Interest holding - % 2009 2010 Direct interest: Indústria e Comércio de Cosméticos Natura Ltda. Natura Cosméticos S.A. - Chile Natura Cosméticos S.A. - Peru Natura Cosméticos S.A. - Argentina Natura Brasil Cosmética Ltda. - Portugal Natura Inovação e Tecnologia de Produtos Ltda. Natura Cosméticos y Servicios de Mexico. S.A. de C.V. Natura Cosméticos de Mexico, S.A. de C.V. Natura Distribuidora de Mexico, S.A. de C.V. Natura Cosméticos C.A. - Venezuela Natura Cosméticos Ltda. - Colômbia Flora Medicinal J. Monteiro da Silva Ltda. – under dissolution Natura Cosméticos España S.L. - Espanha Natura (Brasil) International B.V. - Holanda Natura Cosméticos y Vestimentas S.A. - Uruguai 99.99 99.99 99.94 99.97 - 99.99 99.99 99.99 99.99 - 99.99 99.99 99.99 99.94 99.97 98.00 99.99 99.99 99.99 99.99 99.99 99.99 - 100.00 100.00 - 99.99 100.00 100.00 99.99 Indirect interest: Through Indústria e Comércio de Cosméticos Natura Ltda.: Natura Logística e Serviços Ltda. Through Natura Inovação e Tecnologia de Produtos Ltda.: Ybios S.A. (proportional consolidation - joint control) Natura Innovation et Technologie de Produits SAS - France Through Natura (Brasil) International B.V. - The Netherlands: Natura Brasil Inc. - EUA - Delaware Natura International Inc. - EUA - Nova York Natura Worldwide Trading Company - Costa Rica Natura Brasil SAS - França Natura Brasil Inc. - EUA - Nevada Natura Europa SAS - França 99.99 99.99 42.11 33.33 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 The consolidated ﬁ nancial statements have been prepared based on the ﬁ nancial statements as of the same date and consistent with the Company’s accounting practices. Investments in subsidiaries were proportionally eliminated against shareholders’ equity and net income of the respective subsidiaries. Intercompany balances and transactions and unrealized proﬁ ts, net of taxes, were also eliminated. The operations of the direct and indirect subsidiaries are as follows: • Indústria e Comércio de Cosméticos Natura Ltda.: engaged principally in the production and sale of Natura products to Natura Cosméticos S.A. - Brazil, Natura Cosméticos S.A. - Chile, Natura Cosméticos S.A. - Peru, Natura Cosméticos S.A. - Argentina, Natura Cosméticos Ltda. - Colombia, Natura Europa SAS - France, Natura Cosméticos de Mexico, S.A. de C.V., and Natura Cosméticos C.A. - Venezuela. • Natura Cosméticos S.A. - Chile, Natura Cosméticos S.A. - Peru, Natura Cosméticos S.A. - Argentina, Natura Cosméticos C.A. - Venezuela, Natura Cosméticos Ltda. - Colombia and Natura Distribuidora de Mexico, S.A. de C.V.: their activities are an extension of the activities conducted by the parent company Natura Cosméticos S.A. - Brazil. • Natura Inovação e Tecnologia de Produtos Ltda.: its activities consist of product and technology development and market research. It is the only owner of Natura Innovation et Technologie de Products SAS - France, a research and technology satellite center opened in 2007 in Paris. • Natura Europa SAS - France and Natura Brasil SAS - France: engaged in the purchase, sale, import, export and distribution of cosmetics, fragrances in general, and hygiene products. • Natura Cosméticos de Mexico, S.A. de C.V.: imports and sells cosmetics, fragrances in general and hygiene products to Natura Distribuidora de Mexico, S.A. de C.V. • Natura Cosméticos y Servicios de Mexico, S.A. de C.V.: provides administrative and logistics services to Natura Cosméticos de Mexico, S.A. de C.V. and Natura Distribuidora de Mexico, S.A. de C.V. 108 • Natura Cosméticos España S.L. - Spain: company in start-up stage and its activities will be an extension of the activities developed by the parent company Natura Cosméticos S.A. - Brazil. • Flora Medicinal J. Monteiro da Silva Ltda. – under dissolution: used to be engaged in the sale of phytotherapic and phytocosmetic products of its own brand. Since 2005 this company has had no activities. On March 31, 2008, after the merger of Nova Flora Participações Ltda., Flora Medicinal J. Monteiro da Silva Ltda. became a direct subsidiary of Natura Cosméticos S.A. - Brazil. In December 2010, the company has obtained approval for dissolution and its net assets were absorbed by Natura Cosméticos S.A. • Natura Logística e Serviços Ltda.: engaged in the provision of administrative and logistics services to Natura Group companies based in Brazil. • Natura Innovation et Technologie de Produits SAS - France: engaged mainly in research activities developed for in vitro tests, an alternative to tests in animals, for safety and efﬁ cacy testing of active compounds, skin care and new packaging materials. • Ybios S.A.: engaged in research, management and development of projects, products and services in the biotechnology area, and may also enter into agreements and/or partnerships with universities, foundations, companies, cooperatives, associations and other public and private entities, provision of services in the biotechnology area, and holding of equity interest in other companies. As Ybios S.A. is a jointly-owned subsidiary whose ﬁ nancial statements were proportionally included in the Company’s consolidated ﬁ nancial statements, the main assets, liabilities and statement of income accounts, which were included in the consolidated ﬁ nancial statements at the ratio of 42.11% of interest (33.33% in December 31, 2009) after ownership elimination adjustments, are stated below: Current assets Property, plant and equipment Current liabilities Net losses 2010 630 98 87 (682) 2009 409 197 282 (630) • Natura Europa SAS - France and Natura Cosmetics USA Co.: in January 2009, the shares in these subsidiaries’ capital stock were assigned as a capital contribution to the holding company Natura (Brasil) International B.V. - The Netherlands, and the Company became the indirect holder of such interests through this holding company in The Netherlands. c) Discontinuation of subsidiaries’ operations The Board of Directors’ Meetings held in July and October 2009 approved the discontinuation of the operations of subsidiaries Natura Cosméticos C.A. - Venezuela, Natura Brasil Cosmética Ltda. - Portugal and Natura Cosméticos y Vestimentas S.A. - Uruguay. As of December 31, 2009, these companies’ winding up is in progress, except for the subsidiaries in Uruguay and Portugal, which were still in start-up stage when the discontinuation of their operations was decided. The operations of the subsidiary in Venezuela were discontinued in the third quarter of 2009, and thus the recognition of an allowance for impairment losses was required. On December 31, 2010, the net assets balance of Natura Cosméticos C.A. - Venezuela, recorded in the Company’s consolidated ﬁ nancial statements, less allowances for asset impairment losses and collection of liabilities during the operation termination process, was R$273. 2.3. Business segment report Reporting on operating segments is consistent with the internal report provided to the chief operating decision maker. The chief operating decision maker, responsible for allocating resources to the operating segments and assessing their performance, is represented by the Company’s Executive Committee. 2.4. Translation into foreign currency a) Functional and reporting currency Items included in ﬁ nancial statements of the Company and each one of the subsidiaries included in the consolidated ﬁ nancial statements are measured using the currency of the main economic environment in which the companies operate (“functional currency”). b) Foreign currency transactions and balances The ﬁ nancial statements are presented in Reais (R$), which corresponds to the Group’s presentation currency. Foreign currency-denominated the Company’s functional currency - Brazilian reais - at exchange rates prevailing on the dates of the transactions. Balance sheet accounts are translated at the exchange rates prevailing at the balance sheet dates. Foreign exchange gains and losses resulting from the settlement of such transactions and the translation of monetary assets and monetary liabilities denominated in foreign currency are recognized through the statement of income, under the captions “Financial income” and “Financial expenses”. c) Translation In preparing the consolidated ﬁ nancial statements, the statements of income transactions are translated into and cash ﬂ ows, and all other changes in assets and liabilities are translated into Brazilian reais at the average monthly exchange rate, which approximates the exchange rate prevailing at the date of the underlying transactions. Balance sheets are translated into Brazilian reais at the exchange rates prevailing at year end. The effects of the exchange differences resulting from these translations are presented in line item ‘Other comprehensive income’, in shareholders’ equity. In case of disposal or partial disposal of interest in a Group company, through sale or as a result of capital payment, the cumulative exchange difference is recognized in the statement of income as part of the gain or loss on the disposal of the investment. 2.5. Cash and cash equivalents Include cash, demand deposits and short-term investments redeemable in up to 90 days from the investment date, highly liquid or convertible to a known cash amount and subject to immaterial change in value, which are recorded at cost plus income earned through the balance sheet dates and do not exceed their market or realization value. 2.6. Financial instruments 2.6.1. Categories The category depends on the purpose for which the ﬁ nancial assets and liabilities were acquired or contracted and is determined upon initial recognition of the ﬁ nancial instruments. The Company classiﬁ es its ﬁ nancial assets under the following categories: Financial assets measured at fair value through proﬁ t or loss The ﬁ nancial assets are measured at fair value through proﬁ t or loss when they are acquired for such purpose, principally in the short term. Derivative ﬁ nancial instruments are also classiﬁ ed as held for trading. Assets in this category are classiﬁ ed as current assets. In the case of the Company, this category encompasses only derivative ﬁ nancial instruments. The balances related to gains or losses on unsettled transactions are classiﬁ ed in current assets or current liabilities, and gains or losses arising from changes in fair value are recorded under “Financial income” or “Financial expenses”. Financial assets held-to-maturity Comprise investments in certain ﬁ nancial assets classiﬁ ed by treasury at their inception as held-to-maturity, which are measured at acquisition cost plus income earned according to contractual terms and conditions. Available-for-sale ﬁ nancial assets When applicable, available-for-sale ﬁ nancial assets include non-derivative ﬁ nancial assets, which are designated as available-for-sale or are not classiﬁ ed as (a) loans and receivables, (b) held for trading or (c) ﬁ nancial assets at fair value through proﬁ t or loss. As of December 31, 2010 and 2009, the Company did not have assets recorded in the ﬁ nancial statements under this classiﬁ cation. Loans and receivables Includes non-derivative ﬁ nancial assets with ﬁ xed or determinable receipts that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date, which are classiﬁ ed as noncurrent assets. As of December 31, 2010 and 2009, include cash and cash equivalents (note 5) and trade accounts receivable (note 6). Financial liabilities held by the Company are classiﬁ ed into the following categories: Financial liabilities measured at fair value through proﬁ t or loss Financial liabilities are classiﬁ ed as measured at fair value through proﬁ t or loss when they are held for trading or designated as fair value through proﬁ t or loss. Other ﬁ nancial liabilities Other ﬁ nancial liabilities are measured at the amortized cost using the effective interest method. As of December 31, 2010 and 2009 other ﬁ nancial liabilities comprised borrowings and ﬁ nancing (note 15) and trade and other payables. 2.6.2. Measurement Regular purchases and sales of ﬁ nancial assets are recognized upon the date transactions occur, i.e., on the date the Company agrees to buy or sell the asset. Financial assets at fair value through proﬁ t or loss are initially recognized at their fair value, and transaction costs are recognized through the statement of income. Loans and receivables are accounted for at the amortized cost. Gains or losses resulting from changes in the fair value of ﬁ nancial assets measured at fair value through proﬁ t or loss are recognized in the statement of income in caption “Financial income” or “Finance expenses”, respectively, in the period in which they occur. As regards ﬁ nancial assets classiﬁ ed as “Available for sale”, if applicable, these changes are recorded in caption “Other comprehensive income”, within equity, until they are settled, when they are reclassiﬁ ed to the statement of income. 2.6.3. Offsetting ﬁ nancial instruments Financial assets and ﬁ nancial liabilities are offset and the net amount is presented in the balance sheet when there is a legally enforceable right to 109 set off recognized amounts and the intent to either settle them on a net basis, or to recover the asset and settle the liability simultaneously. 2.6.4. Derivative ﬁ nancial instruments and hedge accounting Derivative transactions contracted by the Company and its subsidiaries are limited to swaps and currency Non Deliverable Forwards (NDFs) intended exclusively to hedge against the currency risks related to the positions in the balance sheet plus projected cash outﬂ ows in foreign currency for capital increases in foreign subsidiaries They are measured at fair value, and changes in fair value are recognized through proﬁ t or loss, except when they are designated as cash ﬂ ow hedges, to which changes in fair value are recorded in ‘Other comprehensive income’ within shareholders’ equity. The fair value of derivatives is measured by the Company’s treasury department based on the information on each contracted transaction and the related market information at the balance sheet dates, such as interest rate and foreign exchange coupon. When applicable, such information is compared with the positions reported by the trading desks of each involved ﬁ nancial institution. Even though the Group uses derivatives for hedging purposes, it does not apply hedge accounting. The fair values of derivatives are disclosed in note 4. 2.7. Trade accounts receivable and allowance for doubtful accounts Trade accounts receivable are stated at their nominal value, less the allowance for doubtful accounts, which is recognized based on an analysis of past experience with losses, in an amount considered sufﬁ cient to cover possible losses, as described in note 6. 2.8. Inventories Stated at the lower of average cost of acquisition or production and net realizable value. The details are shown in note 7. 2.9. Investments in subsidiaries, associates and joint-controlled entities The Group holds interest in subsidiaries, associates and joint-controlled entities. Subsidiaries are entities that are controlled by the Company. Control is the power to govern the ﬁ nancing and operating policies so as to obtain beneﬁ ts from its activities, what usually means .the capacity to exercise the majority of voting rights. The potential voting rights are considered in the evaluation of control exercised by the Group in another entity, when they are exercisable at the time of such evaluation Associates are entities over which the Company has signiﬁ cant inﬂ uence and that is neither a subsidiary nor a joint venture. Signiﬁ cant inﬂ uence is the power to participate in the ﬁ nancial and operating policies of the investee without exercising individual or joint control on these policies. Joint-controlled entities are entities where the venturers have a contractual agreement which establishes joint control on its economic activities. Investments in subsidiaries, associates and joint-controlled entities are accounted for using the equity method. The ﬁ nancial statements of subsidiaries, associates and joint-controlled entities are prepared on the same date as the Company’s ﬁ nancial statements. Adjustments are made, if necessary, to comply their accounting policies with the ones adopted by the Company. Under the equity method the Group’s interest on the investee’s net income or loss is recorded in the statement of income under the caption “Equity in subsidiaries”. Unrealized gains and losses resulting from transactions between the Company and its investees are eliminated based on its interest on each investee. Investee’s other comprehensive income are recorded directly in the Company’s equity under the caption “Other comprehensive income”. 2.10. Property, plant and equipment Stated at acquisition cost and/or construction, plus interest capitalized during construction period, when applicable, for the case of eligible assets and reduced by accumulated depreciation and by impairment losses, if applicable. Depending on the nature of the asset and the time it was purchased, cost refers to the historic cost of purchase or the historic cost of purchase adjusted for the effects of hyperinﬂ ation until December 31, 1997, when the Brazilian economy was considered hyperinﬂ ationary for IFRS purposes. Rights in tangible assets that are maintained or used in the operations of the Company and its subsidiaries, originated from ﬁ nance leases, are recorded as purchase ﬁ nancing, and a ﬁ xed asset and a ﬁ nancing liability are recognized at the beginning of each transaction, where assets are also submitted to depreciation calculated based on the estimated useful lives of the assets. Land is not depreciated. Depreciation of the other assets is calculated under the straight-line method to distribute their cost over their useful lives, as follows: Buildings Machinery and equipment Molds Facilities and leasehold improvements Furniture and ﬁ xtures Vehicles Years 25 13 3 5 - 13 14 3 Useful lives are revised annually. Gains and losses on disposals are calculated by comparing the proceeds from the sale with the carrying amount, and are recognized in the statement of income. 2.11. Intangible assets Software and ERP systems licenses purchased are also capitalized and amortized at the rates also described in note 13, and expenses on the software maintenance are recognized as expenses when incurred. Expenses ERP systems purchase and implementation are capitalized as intangible assets when there is evidence that future economic beneﬁ ts will ﬂ ow through the Company, taking into consideration their economic and technologic viability. Expenses on software development recognized as assets are amortized under the straight-line method over its estimated useful life. The expenses related to software maintenance are expensed when incurred. Separately purchased trademarks and patents are stated at their historic cost. Trademarks and patents acquired in a business combination are recognized at fair value on the acquisition date.. Amortization is calculated under the straight-line method at the annual rates described in note 13. 2.12. Expenses on product research and development In view of the high level of innovation and the turnover rate of the products in the Company’s sales portfolio, the Company adopts the accounting policy of recognizing product research and development expenditure as expenses for the year, when incurred. Details are disclosed in note 22. 2.13. Leases Lease classiﬁ cation is made at the inception of the lease. Leases where the lessor retains substantially all the risks and rewards incidental to ownership are classiﬁ ed as operating leases. Lease payments under an operating lease are recognized as an expense on a straight-line basis over the lease term. Leases where the Company and its subsidiaries retain substantially all the risks and rewards incidental to ownership are classiﬁ ed as ﬁ nance leases. These leases are capitalized in balance sheet at the commencement of the lease term at the lower fair value of the leased asset and the minimum lease payments. Each lease payment is apportioned between liabilities and the ﬁ nance charge so as to permit obtaining a constant rate on the outstanding liability. The corresponding obligations, less ﬁ nance charge, are classiﬁ ed in current liabilities and noncurrent liabilities, according to the lease term. Property, plant and equipment items purchased through ﬁ nance leases are depreciated over the shorter of their economic useful lives, as described in item 2.10 or the lease term. 2.14. Impairment assessment Property, plant and equipment, intangible assets and, when applicable, other noncurrent assets are annually tested to identify evidences of impairment, or also signiﬁ cant events or changes in circumstances that indicate that their carrying amounts will not be recovered. When applicable, when there is a loss, arising from situations where the carrying amount of an asset exceeds its recoverable amount, deﬁ ned as the higher of its value in use and its fair value less costs to sell, this loss is recognized in the statement of income. Assets are grouped in their lowest levels for which there are separately identiﬁ able cash ﬂ ows - Cash Generating Units (CGUs) - for recoverable amount evaluation purposes. 2.15. Trade payables They are recognized initially at its nominal amounts. They are subsequently carried at amortized cost, i.e., plus interest, monetary and exchange variations incurred through the balance sheet dates. 2.16. Loans and ﬁ nancings Initially recognized at fair value of proceeds received less transaction costs. They are subsequently carried at amortized cost, i.e., plus charges, interest, inﬂ ation and exchange rate changes incurred through the balance sheet dates, as shown in note 15. 2.17. Provisions for tax, civil and labor contingencies The provisions for contingent liabilities are recognized when the Company and its subsidiaries have a legal or constructive obligation as a result of past events, where it is probable that disbursements will be required to settle the obligation, and its present value can be reliably estimated. Provisions are quantiﬁ ed at the present value of the expected disbursement to settle the obligation using the appropriate discount rate, according to related risks. Adjusted for inﬂ ation through the balance sheet dates to cover probable losses, based on the nature of contingencies and the opinion of the Company’s legal counsel. The basis and nature of the reserves for tax, civil and labor contingencies are described in note 18. 2.18. Income tax and social contribution - current and deferred Current and deferred income tax and social contribution are recognized in the statement of income, except, when applicable, in the proportion related to items recognized directly in shareholders’ equity. In this case, taxes are recognized directly in shareholders’ equity, in “Other comprehensive income”. Except for the subsidiaries located abroad, which apply the tax rates prevailing in the country where they are based, income tax and social contribution of 110 the Company and its subsidiaries in Brazil are calculated at the tax rates of 25% and 9%, respectively, to income tax and social contribution. Current income tax and social contribution expense is calculated using the law enacted at the balance sheet date, pursuant to Brazilian tax regulations. Management periodically measures the positions assumed in the income tax return regarding the situations where applicable tax regulations are subject to possibly different interpretation and, when appropriate, recognizes provisions based on the amounts it expects to pay tax authorities. Deferred income tax and social contribution are calculated based on deductible temporary differences between tax and ﬁ nancial reporting basis of assets and liabilities. Deferred income tax and social contribution are calculated using the tax rates enacted on the balance sheet date and that must be applied when the corresponding deferred income tax and social contribution assets are realized or deferred income tax and social contribution liabilities are settled. Deferred income tax assets are recognized only to the extent that there is a reasonable certainty that future taxable income will be available and against which temporary differences can be offset. The amounts of deferred income tax and social contribution assets and liabilities are only offset when there is a legally enforceable right to offset tax assets against tax liabilities and/or when deferred income tax and social contribution assets and liabilities are related to the income tax and social contribution levied by the same tax authorities on the taxable entity or different taxable entities, where there is intention to settle the net balances. Details are disclosed in note 9. 2.19. Stock option plans The Company offers equity-settled share-based compensation plans to its employees and executives based on the Company’s shares. The fair value of the options granted is recognized as an expense in the statement of income during the vesting period, and options are vested after certain speciﬁ c conditions are fulﬁ lled. At the balance sheet dates, the Company’s Management reviews its estimates on the number of options vested based on the conditions fulﬁ lled and, when applicable, recognizes in the statement of income as a contra entry to shareholders’ equity the effect arising from the revision of the initial estimates. 2.20. Proﬁ t sharing The Company recognizes a proﬁ t-sharing liability and expense based on a formula that takes into consideration the taxable income attributable to the owner of the Company after certain adjustments, which is linked to the achievement of operational goals and speciﬁ c objectives, established and approved at the beginning of each year. 2.21. Dividends and interest on capital The proposed dividends and interest on capital made by the Company’s Management included in the portion equivalent to minimum dividends is recorded in caption “Other payables” in current liabilities, as it is considered as a legal liability provided for by the Company’s bylaws. However, the portion of dividends exceeding minimum dividends declared by Management after the reporting period but before the authorization date for issuance of these ﬁ nancial statements is recorded in caption “Proposed additional dividend” within equity, and its effects are presented in note 19.b). For corporate and accounting purposes, interest on capital is stated as allocation of income directly in shareholders’ equity. 2.22. Actuarial gains and losses of healthcare plan and other costs related to employees’ beneﬁ t plans The costs related to the contributions made by the Company and its subsidiaries to deﬁ ned contribution retirement plans are recognized on the accrual basis. Actuarial gains and losses recorded in the retirees’ healthcare expansion plan are recorded in the statement of income in accordance with IAS 19 and CPC 33, based on the actuarial calculation prepared by an independent actuary, as detailed in note 24.2. 2.23. Results of operation and revenue recognition Income and expenses are recorded on the accrual basis. Revenue from sales is recognized in income when all risks and rewards incidental to product ownership are transferred to the customer. Income from tax incentives, received in the form of a monetary asset, is recognized in the statement of income when received as a contra account to costs and investment already incurred by the Company in the jurisdiction where the tax incentive is granted. There are no established conditions to be met by the Company that might affect the recognition of tax incentives. 2.24. Effective interest method Effective interest method is used to calculate the amortized cost of a debt instrument and allocate its interest income over the related period. The effective interest rate is the rate that discounts exactly the estimated future cash receipts (including fees paid or received that are an integral part of the effective interest rate, transaction costs and other premiums or discounts) throughout the estimated useful life of the debt instrument or, when applicable, by a shorter period, for the net carrying amount on the date of initial recognition. Income is recognized based on the effective interest of debt instruments not classiﬁ ed as ﬁ nancial assets at fair value through proﬁ t or loss. 2.25. Statement of value added The purpose of this statement is to disclose the wealth created by the Company and its distribution during a certain reporting period, and is presented by the Company, as required by the Brazilian Corporate Law, as an integral part of its individual ﬁ nancial statements, and as additional disclosure of the consolidated ﬁ nancial statements, since this statement is not required by IFRSs. The statement of value added was prepared using information obtained in the same accounting records used to prepare the ﬁ nancial statements and pursuant to the provisions of CPC 09 Statement of Value Added. The ﬁ rst part of this statement includes the wealth created by the Company, represented by revenue (gross sales revenue, including taxes levied thereon, other income, and the effects of the allowance for doubtful accounts), inputs acquired from third parties (cost of sales and purchase of materials, electricity, and services from third parties, including taxes levied at the time of the acquisition, the effects of impairment losses, and depreciation and amortization), and the value added received from third parties (equity in subsidiaries, ﬁ nancial income, and other income). The second part of the statement of value added presents the distribution of wealth among personnel, taxes, fees and contributions, remuneration of third parties capital and shareholders’ equity. 2.26. New standards, changes and interpretation of standards a) Standards, interpretations and revised standards effective on December 31, 2010 which did not have a material impact on the Company’s ﬁ nancial statements. The following interpretations and revised standards were issued and were effective on December 31, 2010. However, they did not have a material impact on the Company’s ﬁ nancial statements: Standards Improvements to IFRSs - 2009 Main requirements Amendment of several standards Amendments to IFRS 1 Limited exemption from comparative IFRS 7 disclosures for ﬁ rst -time adopters Effective date Effective for annual periods beginning on or after January 1, 2010 Effective for annual periods beginning on or after July 1, 2010 Amendments Additional exemptions for Effective for annual periods to IFRS 1 ﬁ rst-time adopters Amendments to IAS 32 Classiﬁ cation of issue rights beginning on or after January 1, 2010 Effective for annual periods beginning on or after February 1, 2010 Amendments to IFRS 2 Intragroup share-based payments settled in cash Effective for annual periods beginning on or after January 1, 2010 IFRIC 19 Extinguishing liabilities by issues of equity instruments Effective for annual periods beginning on or after January 1, 2010 issued Resolution 636/10, which approves In August 2010, CVM pronouncement CPC 41 - Earnings per Share, issued based on IAS 33 - Earnings per Share. CPC 41 provides for the disclosure of earnings per share, without impact on recognition, measurement and presentation of individual ﬁ nancial statements. The Company adopted CPC 41 in its individual and consolidated ﬁ nancial statements for the year ended December 31, 2010. b) Standards, interpretations and revised standards not yet effective and which were not early adopted by the Company. The following standards and revised standards have been issued and are mandatory for reporting periods beginning on or after January 1, 2011. However, the Company did not early adopt these standards and revised standards. 111 Standards Main requirements Effective date Improvements to IFRSs - 2010 Amendment of several standards IFRS 9 (as changed in 2010) Financial instruments Amendments to IAS 24 Related-party disclosures Amendments to IFRS 1 Removal of ﬁ xed dates for ﬁ rst- time adopters Amendments to IFRS 7 Disclosures - transfers of ﬁ nancial assets Effective for annual periods beginning on or after January 1, 2011 Effective for annual periods beginning on or after January 1, 2013 Effective for annual periods beginning on or after January 1, 2011 Effective for annual periods beginning on or after July 1, 2011 Effective for annual periods beginning on or after July 1, 2011 Amendments Deferred taxes - recovery Effective for annual periods to IAS 12 of the underlying assets when an asset is measured using the fair value model in IAS 40 beginning on or after January 1, 2012 Amendments to IFRIC 14 Prepayments of minimum Effective for annual periods funding requirements beginning on or after January 1, 2011 IFRS 9 Financial Instruments (effective beginning January 1, 2013). The publication is part of the improvement project of IASB on the measurement, classiﬁ cation and recognition of ﬁ nancial instruments issued in November 2009 and replaces the part of IAS 39 related to the measurement and classiﬁ cation of ﬁ nancial assets. This standard prescribes the classiﬁ cation of ﬁ nancial assets into two categories: assets measured at fair value and assets at amortized cost, where the classiﬁ cation is determined at the time of recognition of the asset and in accordance with the entity’s business model and features of the contracted ﬁ nancial instrument. Due to the features of the ﬁ nancial instruments currently contracted by the Company, no signiﬁ cant effects are expected at the time of adoption of this standard beginning January 1, 2013. Considering the current operations of the Company and its subsidiaries, management does not expect that the adoption of these new rules, interpretations and changes will have a relevant effect on the ﬁ nancial statements. The Accounting Pronouncements Committee - CPC has not yet issued the pronouncements and amendments related to the new and revised IFRSs above. Because of the CPC’s and the Comissão de Valores Mobiliários - CVM’s commitment to keep the set of standards issued updated according to the changes made by the International Accounting Standards Board - IASB, we expect that such pronouncements and amendments be issued by the CPC and approved by the CVM by the date they become effective. 3. CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS The preparation of ﬁ nancial statements requires Management to use certain signiﬁ cant accounting estimates and judgment in applying the accounting policies. Accounting estimates and assumptions, reviewed on an ongoing basis, are based on historical experience and other factors, including expectations of future events that are considered to be reasonable in the circumstances. These estimates and assumptions could differ from actual results. The effects of the accounting estimates revisions are recognized in the period in which they occur. These signiﬁ cant assumptions and accounting estimates are follows: a) Income tax, social contribution and other taxes The Company recognizes deferred tax assets and liabilities based on differences between the carrying amount stated in the ﬁ nancial statements and the tax base assets and liabilities using statutory tax rates. The Company reviews regularly deferred tax assets in terms of possible recovery, considering historical proﬁ t generated and projected future taxable income, based on a technical feasibility study. b) Provision for tax, civil and labor contingencies The Company is a party to several lawsuits and administrative proceedings, as described in note 18. Provisions are recognized for all contingencies arising from lawsuits that represent probable losses and that can be reasonably estimated. The probability assessment includes assessing available evidences, the hierarchy of the laws, available previous decisions, most recent court decisions and their relevance within the legal system, and the assessment of the outside legal counsel. Management believes that these provisions for tax, civil and labor contingencies are fairly presented in the ﬁ nancial statements. c) Healthcare plan The current amount of the healthcare plan is contingent to a series of factors determined based on actuarial calculations that update a series of assumptions, for example, the discount and other rates, which are disclosed in note 24.2. The change in one of these estimates could impact the results presented. 4. FINANCIAL RISK MANAGEMENT 4.1. General considerations and policies The Company and its subsidiaries enter into transactions involving ﬁ nancial instruments, all of which are recorded in balance sheet accounts, for the purpose of reducing its exposure to currency and interest risks, as well as maintaining their investment capacity and growth strategy. The Company contracts short-term investments, loans and ﬁ nancing, as well as derivatives. Risks and the ﬁ nancial instruments are managed through the deﬁ nition of policies and strategies and implementation of control systems, deﬁ ned by the Company’s Finance Committee and approved by the Board of Directors, which establish foreign exchange exposure limits and allocate funds in ﬁ nancial institutions. The compliance of the treasury area’s positions in ﬁ nancial instruments, including derivatives, in relation to these policies, is presented and assessed on a monthly basis by the Finance Committee and subsequently submitted to the analysis of the Audit Committee, the Executive Committee and the Board of Directors. The treasury area’s procedures deﬁ ned by the current policy include monthly projection and assessment of the Company’s consolidated foreign exchange exposure, on which Management’s decision-making is based. The Short-term Investments Policy established by the Company’s Management elects the ﬁ nancial institutions with which contracts can be entered into and sets limits for the amounts to be invested in each ﬁ nancial institution. Almost in their entirety (98.7% on December 31, 2010 and 99.9% on December 31, 2009), foreign-currency denominated loans and ﬁ nancing have been hedged against foreign exchange ﬂ uctuations by contracting swap derivatives to hedge the related transactions. 4.2. Financial risk factors The Group and its subsidiaries’ activities expose the companies to several ﬁ nancial risks: market risk (including currency and interest risks), credit risk and liquidity risk. The Company’s overall risk management program is focused on the unpredictability of ﬁ nancial markets and seeks to minimize potential adverse effects on the ﬁ nancial performance, using derivatives to protect certain risk exposures. Risk management is carried out by the Company’s central treasury, and policies must be approved by Internal Committees and the Board of Directors. The treasury identiﬁ es, assesses and hedges the Company against possible ﬁ nancial risks, mainly arising from interest and foreign exchange rates. a) Market risk The Company is exposed to market risks arising from its business activities. These market risks mainly comprise possible changes in exchange and interest rates. i) Currency risk Due to different types of trade receivables and ﬁ nancial liabilities assumed by the Company in foreign currencies, an Exchange Rate Hedging Policy was implemented, establishing exposure limits linked to these risks. foreign currency-denominated amounts from The Policy considers receivables and payables related to commitments already assumed and recorded in the ﬁ nancial statements based on the Company’s operations, as well as future cash ﬂ ows, with average maturity of six-month period, not yet recorded in the balance sheet arising from: (i) purchase of inputs for manufacturing products; (ii) machinery and equipment import; and (iii) investments in foreign subsidiaries in their related currencies. For exchange rate exposure, the Company and its subsidiaries contract derivative (swaps) and Non Deliverable Forward (NDFs) transactions. The exchange rate hedging policy establishes that the hedge contracted by the Company should limit loss due to exchange rate depreciation related to the net income estimated for the current year considering the expected depreciation of the Reais against the U.S. dollar. This limit deﬁ nes the ceiling, or maximum exchange rate the Company may be exposed. As of December 31, 2010 and 2009, the consolidated exchange rate exposure, excluding investments in foreign subsidiaries exposure, is as follows: Consolidated 2009 2010 Assets position Trade accounts receivable (1) Derivative instruments (2) Total assets Liabilities position: Loans and ﬁ nancing (3) Trade accounts payable (4) Total liabilities Total exposure 3,386 5,239 94,358 186,654 99,598 190,040 (58,675) (142,649) (4,964) (4,409) (63,639) (147,058) 35,959 42,982 112 (1)Trade accounts receivable: correspond to receivables related to the Company and its Brazilian subsidiaries’ exports, excluding the balances of foreign subsidiaries, maintained in their functional currencies. (2) Derivative instruments: swap and forward outstanding contracts, stated below, with maturities between January 2011 and February 2017, were signed by the counterparts represented by the Banks Bradesco (54%), Brasil (2%), HSBC (6%), ItauBBA (19%) and Citibank (19%) as follows: Consolidated Notional amount Assets (liabilities) at fair value 2009 (8,430) (8) (214) (8,652) Type of operation Financial Swaps (2.1) Financial Forwards (2.1) Operating forwards (2.2) 2009 133,033 187 53,464 186,684 2010 (2,830) - (1,231) (4,061) 2010 59,817 - 34,542 94,359 As of December 31, 2010, the notional amount, totaling R$94,359 (R$186,684 as of December 31, 2009) represents the assets of derivative ﬁ nancial instruments contracted to hedge the exposure of Company and its subsidiaries liabilities to foreign exchange risks. The assets (liabilities) balances refer to the net adjustment receivable and payable, respectively, calculated at fair value as of December 31, 2010 and 2009 of outstanding derivatives contracted by the Company and its subsidiaries effective at year-end. (2.1) For ﬁ nancial exchange rate exposures, generated by trade accounts receivable, accounts payable and loans and ﬁ nancing denominated in foreign currency, the Company and its subsidiaries have contracted swap and forward transactions aiming to mitigate exchange rate risks to which these loans and ﬁ nancing are subject. Swap transactions consist of swapping the exchange rate changes by a percentage of CDI – Interbank Deposit Rate - ﬂ oating rate. Forward transactions establish a future parity between the Brazilian real and foreign currency based on their equivalence when contracted, adjusted by a ﬁ xed interest rate. (2.2) For operating forwards, which are related to cash ﬂ ows from future capital increases in foreign subsidiaries, forward transactions are contracted. (3) Loans and ﬁ nancing: refer to loans and ﬁ nancing payables denominated in foreign currency. As of December 31, 2010, the equivalent amount in U.S. dollar was US$35,215 million. (4) Trade accounts payable: refer to payable balances in foreign currency due to trade accounts payable. As of December 31, 2010 and 2009, the company exchange rate exposure is shown as follows: Assets position: Derivative instruments (1) Total assets Liabilities position: Loans and ﬁ nancing (2) Trade accounts payable (3) Total liabilities Total exposure Company 2009 2010 86,676 86,676 168,505 168,505 (52,567) (842) (53,409) 33,267 (114,712) (497) (115,209) 53,296 (1) Derivative instruments: swap and forward outstanding contracts, stated below, with maturities between January 2011 and July 2014, were signed by the counterparts represented by the Banks Bradesco (57%), Brasil (1%), HSBC (2%), ItauBBA (20%) and Citibank (20%) as follows: Type of operation Financial Swaps (1.1) Financial Forwards (1.1) Operating forwards (1.2) Company Assets (liabilities) at fair value 2009 (6,647) (8) (214) (6,869) Notional amount 2009 2010 94,231 53,534 187 - 53,464 34,542 147,882 88,076 2010 (2,109) - (1,231) (3,340) As of December 31, 2010, the notional amount, totaling R$88,076 (R$147,882 as of December 31, 2009) represents the assets of derivative ﬁ nancial instruments contracted to hedge the exposure of Company and its subsidiaries’ liabilities to foreign exchange risks. The assets (liabilities) balances refer to the net adjustment receivable and payable, respectively, calculated at fair value as of December 31, 2010 and 2009 of outstanding derivatives contracted by the Company and its subsidiaries, effective at year-end. (1.1) For ﬁ nancial exchange rate exposures, generated by loans and ﬁ nancing denominated in foreign currency, the Company and its subsidiaries have contracted swap and forward transactions aiming to mitigate exchange rate risks to which these loans and ﬁ nancing are subject. Swap transactions consist of swapping the exchange rate change by a percentage of changes of CDI ﬂ oating rate. Forward transactions establish a future parity between the Brazilian real and foreign currency based on their equivalence when contracted, adjusted by a ﬁ xed interest rate. (1.2) For operating forwards, related to future cash ﬂ ows, forward transactions are contracted. (2) Loans and ﬁ nancing: refer to loans and ﬁ nancing payables denominated in foreign currency. As of December 31, 2010, the equivalent amount in U.S. dollar was US$31,550. (3) Trade accounts payable: refer to balances payable in foreign currency due to trade accounts payable. ii) Interest rate risk As the Company has no signiﬁ cant assets exposed to interest rates, its net income and operating cash ﬂ ows are not materially impacted by changes in market interest rate. The Company’s interest rate risk arises on short-term investments and short- and long-term loans and ﬁ nancing. The Company’s Management has the policy of maintaining its indices of exposure to asset and liability interest rates linked to ﬂ oating rates. Short-term investments and loans and ﬁ nancing, except when contracted as long-term interest rate (TJLP), are adjusted by Interbank Deposit Rate - CDI ﬂ oating rate, pursuant to contracts entered into with ﬁ nancial institutions and by trading securities with stock exchange investors. The Company contracts swaps to mitigate the risks of loan and ﬁ nancing transactions with indices different from the CDI ﬂ oating rate. iii) Sensitivity analysis Foreign exchange risk For the sensitivity analysis of ﬁ nancial derivatives, the Company’s Management understands it is necessary to take into consideration corresponding liabilities recorded in the balance sheet as linked operations, as follows: Consolidated 58,675 Total loans and ﬁ nancing in foreign currency (59,817) Notional amounts of ﬁ nancial derivatives (1,142) Net exposure Similarly, the Company considers that part of operating derivatives in the amount of R$34,542 should not be included in the sensitivity analysis as they were settled on January 3, 2011 to which was recorded a loss of R$1,231. Thus, the sensitivity analysis will be applied only to the amount of R$59,817 as a result of the aforementioned considerations. Exposure Financial Company’s Scenario risk Probable Depreciation of U.S. dollar 23 Scenario Scenario Remote Possible (571) (286) The probable scenario reﬂ ects BM&FBOVESPA – São Paulo’s Stock Exchange quotation as of January 12, 2011 (R$1.70/US$). Considering asset exposures in U.S. dollar (risk of depreciation of this currency), the possible scenario takes into consideration a 25% depreciation as of December 31, 2010 (R$1.25/US$) and a 50% depreciation (R$0.83/US$) for the remote scenario. Total loans and ﬁ nancing in foreign currency Notional amount of ﬁ nancial derivatives Net exposure Company 52,567 (53,534) (967) Similarly, the Company considers that part of operating derivatives in the amount of R$34,542 should not be included in the sensitivity analysis as they were settled on January 3, 2011 to which was recorded a loss of R$1.231. Thus, the sensitivity analysis will be applied only to the amount of R$53,534 as a result of the aforementioned considerations Exposure Financial Company’s Scenario risk Probable Depreciation of U.S. dollar 20 Scenario Scenario Remote Possible (483) (242) The probable scenario reﬂ ects BMF&BOVESPA quotation as of January 12, 2011 (R$1.70/US$). Considering asset exposures in U.S. dollar (risk of depreciation of this currency), the possible scenario takes into consideration a 25% depreciation as of December 31, 2010 (R$1.25/US$) and a 50% depreciation (R$0.83/US$) for the remote scenario. The Company and its subsidiaries do not use derivatives for speculative purposes. Interest rate risk As described in the previous item 2.1., as of December 31, 2010 almost all the foreign currency-denominated loans and ﬁ nancing were hedged by foreign currency ﬂ uctuation to CDI ﬂ uctuation swaps, in light of the Company’s hedging policy, which exposes the Company to CDI ﬂ uctuation risks. The table below presents the interest rate exposure of transactions linked to the variation of CDI and TJLP (“Long Term Interest Rate”): 113 Total loans and ﬁ nancing Short-term investments Net exposure Company Consolidated (569,073) 521,915 (47,158) (428,442) 196,437 (232,005) Concerning the net exposure of loans and ﬁ nancing linked to the interest rates CDI and TJLP, from which the Company has deducted the balances of short-term investments, also linked to CDI (note 5), the Company’s Management understands that, in view of the low risk of major ﬂ uctuations in CDI in 2010 because of the stability policy implemented by the Federal Government and the history of increases of the basic interest rate of the Brazilian economy in recent years, the sensitivity analysis of the risk of increase in CDI and TJLP that would impact the Company’s ﬁ nancial expenses should consider a maximum increase of 25% in CDI (representing an increase of approximately 2.5 percentage points), which should impact ﬁ nancial expenses by approximately R$1,179. b) Credit risk Credit risk refers to the risk that the counterparty will not fulﬁ ll its contractual obligations, which may cause ﬁ nancial losses to the Group. Company’s sales are made to a great number of Beauty Consultants and this risk is managed through a strict credit granting process. The result of this management is reﬂ ected in “Allowance for doubtful accounts”, as explained in note 6. The Group is also subject to credit risks related to ﬁ nancial instruments contracted for the management of its business. The Company believes that credit risk in operations that it holds with ﬁ nancial institutions is low, as these are considered by the market as prime banks. c) Liquidity risk Effectively managing liquidity risk implies to maintain enough cash and marketable securities, funds available through credit facilities used and the ability to settle market positions. Management monitors the Company’s consolidated liquidity level considering the expected cash ﬂ ow against unused credit facilities. d) Financial liabilities Carrying amounts of consolidated ﬁ nancial liabilities measured at amortized cost and its corresponding maturities are as follows: Consolidated Less than Between one and Between three and More than ﬁ ve Fair value As of December 31, 2010 one year two years ﬁ ve years years 2010 Current assets: Loans and ﬁ nancing Trade accounts payable Noncurrent: Loans and ﬁ nancing 226,595 331,909 226,595 331,909 421,403 465,068 39,425 4,240 - - - - - - - Discount effect - - - Carrying amount 2010 226,595 331,909 465,068 4,3, Capital management The Group’s intention in managing its capital is to safeguard its capacity to continuously provide return to the Company’s shareholders and beneﬁ ts to other stakeholders and to maintain an ideal capital structure to reduce this cost. As other companies in its industry, the Company monitors its capital based on ﬁ nancial leverage indices, This index corresponds to the net debt divided by total equity, The net debt corresponds to total loans (including short- and long-term loans, as shown in the consolidated balance sheet), deducted from cash and cash equivalents. The ﬁ nancial leverage indices as of December 31, 2010 and 2009 can be summarized as follows: Company Consolidated 2009 2009 2010 2010 428,442 495,297 691,663 704,358 (560,229) (500,294) (206,125) 131,434 204,064 222,317 1,257,501 1,139,821 1,257,501 1,139,821 (254,463) 240,834 4,4 Financial derivatives Regarding swap and forward transactions outstanding as of December 31, 2010 and 2009, gains and losses at fair value, are as follows: Company Consolidated Gains (losses) on changes in fair values on swap and forward transactions 2010 2009 2010 2009 Financial “Swaps” (2,109) (6,647) (2,830) (8,430) Financial “Forwards” - (8) - (8) Operating forwards (1,231) (214) (1,231) (214) (3,340) (6,869) (4,061) (8,652) a) Details on derivative transactions i) Financial derivatives Information on ﬁ nancial derivatives as of December 31, 2010 and 2009, contracted by the Company and its subsidiaries, arising from loans and 17,7% 21,1% 10,5% 17,9% ﬁ nancing denominated in foreign currency, is as follows: Notional amount Accumulated effect through December 31, 2010 - at fair value Fair value 2010 2009 2010 2009 53,534 - 53,534 53,534 - 53,534 4,231 90,000 94,231 4,231 90,000 94,231 52,121 - 52,121 2,997 111,192 114,189 (2,109) - (2,109) 54,231 - 54,231 4,027 116,809 120,836 - - - - 187 - 192 - - 187 - 200 - 114 Short- and long-term loans and ﬁ nancing (-) Cash and cash equivalents Net debt Shareholders’ equity Financial leverage index Company Description Swap contracts: Asset position: Long position - U.S. dollar Long position - yen Liability position: CDI ﬂ oating rate: Long position - U.S. dollar Long position - yen Forward contracts: Long position - U.S. dollar Liability position: Fixed rate Consolidated Description Swap contracts- Asset position: Long position - U.S. dollar Long position - yen Liability position- CDI ﬂ oating rate: Long position - U.S. dollar Long position - yen Forward contracts- Long position - U.S. dollar Liability position- Fixed rate Notional amount Accumulated effect through December 31, 2010 - at fair value Fair value 2010 2009 2010 2009 59,817 - 59,817 59,817 - 59,817 43,003 90,000 133,003 43,003 90,000 133,003 57,367 - 57,367 28,138 111,192 139,330 (2,830) - (2,830) 60,197 - 60,197 30,951 116,809 147,760 - - - - 187 - 192 - - 187 - 200 - ii) Operating derivatives Information on operating derivatives as of December 31, 2010 and 2009, contracted by the Company and its subsidiaries for hedging the exposure arising from future cash ﬂ ows, is as follows: Company and Consolidated Description Forward contracts: Long position - U,S, dollar Liability position- Fixed rate: Long position - U,S, dollar Accumulated effect through December 31, 2010 - at fair value Fair value Notional amount 2009 2010 2010 2009 34,542 34,542 53,464 53,464 34,555 34,555 54,124 54,124 (1,231) (1,231) 34,542 34,542 53,464 53,464 35,786 35,786 54,338 54,338 - - For derivatives maintained by the Company as of December 31, 2010, due to the fact contracts are directly entered into with the ﬁ nancial institutions and not through a Mercantile and Futures Exchange, there are no margins deposited as guarantee of the related operations. 4.5. Fair value estimate The fair value of ﬁ nancial instruments not traded in active markets (for example, over-the-counter derivatives) is determined using valuation techniques. The Company uses several methods and sets assumptions that are based on existing market conditions at the balance sheet date. The fair value of forward exchange contracts is determined based on forwards exchange rates quoted at the balance sheet date. The amounts of trade receivables and trade payables recognized at their carrying amounts approximate their fair value in view of the short term of the transactions conducted. The Company and its subsidiaries use hierarchy rules to measure the fair value of its ﬁ nancial instruments, as set out in CPC 40 - Financial Instruments: Disclosure, for ﬁ nancial instruments measured in the balance sheet, which requires the disclosure of fair value measurements at the following hierarchy level: • Prices quoted (unadjusted) in active markets for identical assets and liabilities (Level 1). • In addition to the quoted prices, included in Level 1, inputs used by the market for assets or liabilities, whether directly (e.g., prices) or indirectly (e.g., derived from prices) (Level 2). • Inputs for assets or liabilities that are not based on the data adopted by the market (i.e., unobservable inputs) (Level 3). The table below shows the consolidated assets and liabilities measured at fair value as of December 31, 2010: Financial assets at fair value - Derivatives Total assets Level 1 Level 2 Total Level 3 balance - - 90,298 90,298 - - 90,298 90,298 The fair value of the ﬁ nancial instruments traded in active markets (such as held-for-trading and available-for-sale securities) is based on market prices at the balance sheet date. A market is considered active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s-length basis. The quoted market price used for the ﬁ nancial assets held by the Group is the price of current competitors. These instruments are included in Level 1. The fair value of ﬁ nancial instruments not traded in active markets (for example, over-the-counter derivatives) is determined using valuation techniques. These valuation techniques make maximum use of market inputs, where available and rely as little as possible on entity speciﬁ c inputs. If all material inputs required for the fair value measurement of an instrument are adopted by the market, the instrument is included in Level 2. If one or more than one material inputs are not based on market inputs, the instrument is included in Level 3. Under Level 2 rules, speciﬁ c valuation techniques used to measure ﬁ nancial instruments include: • Quoted market prices or quotations of ﬁ nancial institutions or brokers for similar instruments. • The fair value of interest rate swaps is measured as the present value of future cash ﬂ ows estimated based on the yield curves adopted by the market. • The fair value of foreign exchange futures contracts is determined using future exchange rates at the balance sheet date, using the amount resulting from the discount to present value. 115 • Other techniques, such as the analysis of discounted cash ﬂ ows, are used to determine the fair value of the remaining ﬁ nancial instruments. The Group does not have ﬁ nancial instruments measured at fair value under Level 3 for the year ended December 31, 2010. Fair value of ﬁ nancial instruments stated at amortized cost Short-term investments The amounts of short-term investments recorded in the ﬁ nancial statements approximate their realizable values as they refer to ﬂ oating rate transactions and are highly liquid. Loans and ﬁ nancing The amounts of loans and ﬁ nancing recorded in the ﬁ nancial statements, except loans and ﬁ nancing indexed to TJLP, approximate their collectible amounts as they are indexed to CDI ﬂ uctuation. Financing indexed to TJLP approximates the collectible amount recorded in the ﬁ nancial statements as TJLP is also correlated to CDI and is a ﬂ oating rate. Trade accounts receivable and trade accounts payable Additionally, the amounts of trade accounts receivable and trade accounts payable recognized at their carrying amounts approximate their fair value in view of the short term of the transactions conducted. 5. CASH AND CASH EQUIVALENTS Company Consolidated 2009 61,242 2010 38,314 2009 12,010 2010 9,688 Company Balance at Balance at 2009 Additions (a) Reversals (b) 2010 (47,658) (92,417) 83,412 (56,663) Consolidated Balance at Balance at 2009 Additions (a) Reversals (b) 2010 (56,515) (99,679) 90,530 (65,664) (a) Allowance recognized according to note 2.7. (b) Refers to accounts that are over 180 days past due, which were written off due to uncollectible amounts and due to receipts of balances that were previously written off. The expense on the recognition of the allowance for doubtful accounts was recorded in “Selling expenses” in the statement of income. When recovery of additional cash is less than probable, the amounts debited from the allowance for doubtful accounts are reversed against the deﬁ nite write-off of the receivable against income. Maximum exposure to credit risk at the reporting date is the carrying amount of each aging range, as shown in the aging list above. The Company and its subsidiaries do not have any guarantee for past-due receivables. Cash and banks Bank certiﬁ cates of deposit (CDB) - ﬂ oating rate Current Noncurrent - short-term investments (note 17.(c) - tax contingencies) 196,437 206,125 206,125 242,453 254,463 254,463 528,070 566,384 560,229 444,821 506,063 500,294 7. INVENTORIES - 206,125 - 254,463 5,769 6,155 566,384 506,.063 As of December 31, 2010, CDBs carry interest at rates ranging from 100.0% to 101.5% (100.0% to 103.1% as of December 31, 2009) of the Interbank Deposit Rate (CDI). CDBs are classiﬁ ed by Management of the Company and its subsidiaries as “Cash and cash equivalents” as they are considered ﬁ nancial assets that may be redeemed immediately and subject to insigniﬁ cant risk of changes in its value. 6. TRADE ACCOUNTS RECEIVABLE Trade accounts receivable Allowance for doubtful accounts Company Consolidated 2009 635,944 509,383 2009 462,303 2010 2010 550,355 (56,663) (47,658) 493,692 414,645 (65,664) (56,515) 570,280 452,868 Finished products Raw materials and packaging Promotional material Work in process Allowance for losses Company Consolidated 2010 2009 465,027 397,783 127,305 126,479 37,576 16,503 17,290 14,327 (45,541) (75,673) 571,525 509,551 2009 95,202 - 5,634 - (6,498) 94,338 2010 181,188 - 14,383 - (10,479) 185,092 The increase recorded in the finished product balance in 2010 is chiefly due to the expansion of the logistics capacity of the Company’s several distribution centers, as well as the resizing of the production capacity of subsidiary Indústria e Comércio de Cosméticos Natura Ltda., based on demand planning in order to monitor the growth of the Company’s operations observed in recent years and also in 2010, as well as the decline in the indices of failure to meet point-of-sale orders. The changes in the allowance for inventory losses for the year ended December 31, 2010 are as follows: The aging list of trade accounts receivable is as follows: Balance at Balance at Company Current Up to 30 days past due 31 to 60 days past due 61 to 90 days past due 91 to 180 days past due Company Consolidated 2009 402,482 73,330 9,757 6,655 17,159 509,383 2009 355,402 73,330 9,757 6,655 17,159 462,303 2010 492,947 93,967 16,777 9,406 22,847 635,944 2010 432,703 79,136 10,897 8,072 19,547 550,355 2009 Additions (a) Reversals (b) (14,880) 10,899 (6,498) 2010 (10,479) Consolidated Balance at Balance at 2009 Additions (a) Reversals (b) (159,227) 129,095 (45,541) 2010 (75,673) The balance of trade accounts receivable in consolidated is basically denominated in Brazilian reais, and approximately 91% of the outstanding balance as of December 31, 2010 refers to real-denominated transactions (95% as of December 31, 2009). The remaining balance is denominated in several currencies and refers to sales of foreign subsidiaries. The changes in the allowance for doubtful accounts for the year ended December 31, 2010 are as follows: (a) Refers mainly to the recognition of the reserve for discontinuance, expiration and quality losses, according to actual need to cover expected losses on the realization of inventories and the policy established by the Company and its subsidiaries. (b) Refers to write-offs of products discarded by the Company and its subsidiaries. 116 8. RECOVERABLE TAXES Company Consolidated 2009 2010 2009 2010 ICMS on purchases of goods Refundable ICMS - ST on interstate sales – RS Refundable ICMS - ST on interstate sales - SP (a) ICMS (state VAT) - ST (reverse charge) - Santa Catarina State Refundable ICMS - ST - voluntary reporting proceeding - SP (b) Taxes - foreign subsidiaries ICMS on purchases of ﬁ xed assets COFINS on purchases of ﬁ xed assets PIS on purchases of ﬁ xed assets PIS and COFINS on purchase of goods IRPJ (withholding income tax) and CSLL (social contribution tax) PIS/COFINS/CSLL - withheld at source Other (-) Provision for discount on sale of ICMS credits Current Noncurrent - - 97,888 68,556 3,022 7,120 - - - 6,825 20,967 3,022 20,967 89,767 7,120 89,767 3,335 - 3,335 - - 16,421 21,567 15,200 17,070 3,836 16,136 11,891 - - - - 9,589 2,237 10,983 2,562 19,743 8,448 20,025 8,448 10 - 1,746 2,176 - 3,000 - 39,720 34,799 4,921 - 1,104 5,574 12,282 3,436 3,149 - 127,457 93,760 33,697 (2,879) (2,414) 255,126 210,728 191,195 101,464 63,931 109,264 (a) Refers to the State Reverse Charge System VAT (ICMS - ST) amount that has been separately disclosed and withheld on a monthly basis on the Company’s and its subsidiary Indústria e Comércio de Cosméticos Natura Ltda.’s products sold and shipped to customers located in the Federal District and States other than the São Paulo State, pursuant to São Paulo State tax legislation in effect since February 2008. Under the Special Regime granted to the Company by São Paulo State Department of Finance (SeFaz - SP) in January 2009, when determining monthly Company’s ICMS, since February 2008, it was allowed to offset an amount equivalent to 75% of the ICMS - ST, arising from subsequent transactions not carried out in the State of São Paulo. The remaining recoverable ICMS - ST balance, equivalent to 25%, was utilized by the Company after an administrative inspection by tax authorities. This Special Regime is suspended since April 2009 so that the Company ﬁ les with tax authorities its accessory obligations in the format required by the Special Regime and Tax Administration Coordinator (CAT) Administrative Rule 17/99 and was rectiﬁ ed during the second half of 2010, once the Company had complied with all the requirements related to the documentation requested by tax authorities. The amounts related to the 25% of the credits of ICMS - ST that were recorded previously in noncurrent assets were reclassiﬁ ed to current assets for the quarter ended September 30, 2010 due to a special regime called “Fast Track” that was approved by SeFaz, which allows the Company to offset the credits as of the date of the ﬁ nancial statements through a bank guarantee in the minimum amount of the credits that were offset through the date of the ﬁ nancial statements. As of December 31, 2010 the Company has offset the amount of R$76.9 million which was supported by a bank guarantee. The tax credits recorded under the self-assessment process, totaling R$16,953 as of December 31, 2009, were offset in the ﬁ rst half of 2010 based on authorization granted by tax authorities, as the Company amended its tax books for the period from February to May 2008. (b) On September 24, 2008, the Tax Administration Coordinator of the SeFaz - SP accepted the voluntary reporting request ﬁ led by the subsidiary Indústria e Comércio de Cosméticos Natura Ltda. where, after internal veriﬁ cations made by its management, this company evidenced undue withholdings of ICMS - ST in the period February-May 2008 due to a different interpretation of the provisions of article 264, IV, 313-E and 313-G of ICMS Regulation (RICMS/2000). The said voluntary reporting request is also intended to clarify and permit the application of the procedures necessary to regularize the transactions carried out by this subsidiary during the referred period. As a result of this regularization, ICMS - ST credits were calculated at R$16,421 as of December 31, 2010 and R$15,200 as of December 31, 2009. The credit will be offset by the subsidiary after veriﬁ cation by tax authorities; however, based on the subsidiary’s legal counsel’s and management’s assessment, the risk of not offsetting the amounts recognized as of December 31, 2010 is remote. 9. INCOME TAX AND SOCIAL CONTRIBUTION a) Deferred Deferred income tax (IRPJ) and social contribution (CSLL) result from Company and its subsidiaries’ temporary differences. These credits are recorded in noncurrent assets, in accordance with CPC 26. The amounts are as follows: Company Consolidated 2010 2009 2010 2009 Temporary differences Allowance for doubtful accounts (note 6)) Allowance for losses on inventories realization (note 7) 19,266 16,204 19,266 16,204 3,563 2,209 21,725 12,591 Reserve for tax, civil and labor contingencies (note 18) 18,884 20,224 40,375 38,940 Non-inclusion of ICMS in the PIS and COFINS basis (note 17) Actuarial liability - healthcare plan (note 24.2.) Allowance for losses on swap and forward contracts (note 25) Provision for ICMS - ST - Paraná State, Federal District and Mato Grosso do Sul (note 17) Allowances for losses on advances to suppliers Accrued contractual obligations Provision for Proﬁ t sharing Provision for discount on assignment of ICMS credits Accrued beneﬁ ts sharing and partnerships Provision for international operations Other temporary differences 573 534 28,869 19,668 4,462 811 6,702 3,176 1,136 2,335 1,381 2,941 13,672 10,970 13,672 10,970 3,879 4,483 4,432 4,997 1,947 - - 733 1,761 2,777 - 1,419 4,139 - 979 821 6,874 4,553 6,874 4,553 - - 6,562 4,420 13,235 18,135 26,645 21,307 87,491 82,952 180,259 146,146 Changes in deferred income tax and social contribution assets in Company for the annual reporting periods are stated as follows: 117 Company 2009 of income 2010 (Charged) credited to the statement Temporary differences Allowance for doubtful accounts Allowance for losses on inventories realization Reserve for tax, civil and labor contingencies Non-inclusion of ICMS in the PIS and COFINS basis Allowance for losses on swap and forward contracts Provision for ICMS - ST - Paraná State, Federal District and Mato Grosso do Sul State Allowances for losses on advances to suppliers Accrued beneﬁ ts sharing and partnerships Actuarial liability - healthcare plan Accrued contractual obligations Provision for Proﬁ t sharing Other temporary differences 16,204 3,062 19,266 2,209 1,354 3,563 20,224 (1,340) 18,884 534 39 573 2,335 (1,199) 1,136 10,970 2,702 13,672 4,483 (604) 3,879 4,553 811 733 1,761 18,135 82,952 2,321 3,651 1,214 (1,761) (4,900) 4,539 6,874 4,462 1,947 - 13,235 87,491 Changes in deferred income tax and social contribution assets on a consolidated basis for the years presented are stated as follows: Consolidated 2009 of income 2010 (Charged) credited to the statement Temporary differences Allowance for doubtful accounts Allowance for losses on inventories realization Reserve for tax, civil and labor contingencies Non-inclusion of ICMS in the PIS and COFINS basis Allowance for losses on swap and forward contracts Provision for ICMS - ST - Paraná State, Federal District and Mato Grosso do Sul Statel Allowances for losses on advances to suppliers Accrued beneﬁ ts sharing and partnerships Temporary differences of international operations Actuarial liability - healthcare plan Accrued contractual obligations Provision for Proﬁ t sharing Provision for discount on assignment of ICMS credits Other temporary differences 16,204 3,062 19,266 12,591 9,134 21,725 38,940 1,435 40,375 19,668 9,201 28,869 2,941 (1,560) 1,381 10,970 2,702 13,672 4,997 (565) 4,432 4,553 2,321 6,874 4,420 3,176 1,419 4,139 2,142 3,526 1,358 (4,139) 6,562 6,702 2,777 - 821 21,307 146,146 979 158 5,338 26,645 34,113 180,259 Management, based on projections of future taxable income, estimates that the recorded tax credits will be fully realized within ﬁ ve years. The amounts recorded as deferred income tax and social contribution will be realized as follows: 2011 2012 2013 2014 and thereafter Company Consolidated 86,263 11,977 36,993 45,026 180,259 45,607 10,254 5,416 26,214 87,491 In addition, as of December 31, 2010, the Company had unrecognized tax loss carryforwards and temporary differences from foreign subsidiaries not recorded in the ﬁ nancial statements of the foreign subsidiaries due to the lack of a history of taxable income and taxable income projections for coming years, as shown below. Tax credits, calculated at the prevailing tax rates in the related countries where the subsidiaries are located, are stated as follows: Total temporary differences Tax loss carryforwards: Argentina Chile Mexico Colombia France 13,594 75,926 79,156 48,072 45,761 The tax credits on tax loss carryforwards generated by the subsidiaries do not have an expiry date for offset, except for the subsidiaries in Argentina and Mexico, which expire as follows: 2011 2012 2013 2014 2015 2016 and thereafter Argentina 3,203 2,944 4,390 - 2,518 539 13,594 Mexico - - - 11 6,869 72,276 79,156 a) Reconciliation of income tax and social contribution Company Consolidated 2010 2009 2009 2010 Income before income tax and social contribution Income tax and social contribution at the rate of 34% Technological research and innovation beneﬁ t - Law 11196/05 (*) Tax incentives - donations Equity in subsidiaries (note 12) Unrecognized deferred taxes on tax losses generated by foreign subsidiariesor Interest on capital tax beneﬁ t Other adjustments due to Law 11638/07 and Provisional Act 449/08 Write-off of goodwill – liquidation of Flora Medicinal Tax utilization of goodwill (note 14) Other permanent differences Income tax and social contribution expenses Income tax and social contribution - current Income tax and social contribution - deferred Effective rate - % 1,053,122 812,719 1,118,169 874,154 (358,062) (276,324) (380,178) (297,212) 19,035 5,820 8,760 9,956 2,868 (962) 19,035 8,296 - 9,956 5,278 - - 18,242 - 28,048 (31,459) (37,739) 28,048 18,242 649 (1,037) (1,623) (2,035) 8,332 - 8,332 - - (11,849) 108,189 467 - 108,189 (14,765) (4,715) (309,073) (128,795) (374,120) (190,230) (313,612) (144,403) (408,233) (224,457) 4,539 29.3 15,608 15.8 34,113 33.5 34,227 21.8 (*) Refers to the tax beneﬁ t established by Law 11196/05, which allows for the direct deduction from the calculation of taxable income and the social contribution tax basis of the amount corresponding to 60% of the total expenses on technological research and innovation, observing the rules established in said Law. 10. ESCROW DEPOSITS Represent Group’s restricted assets related to amounts deposited and held 118 by the courts until the litigation to which they are linked is resolved. The Company and its subsidiaries’ escrow deposits as of December 31, 2010 and December 31, 2009 are as follows: Company Consolidated 2009 2010 2009 2010 53,809 167,019 ICMS - ST (*) - unaccrued (note 18 (a)) ICMS - ST suspended collection (*) (note 17.(b)) Other accrued tax obligations 2,893 (note 17.(d) and (g)) Unaccrued tax lawsuits 41,102 Accrued tax lawsuits (note 18)) 15,263 938 Unaccrued civil lawsuits 1,874 Accrued civil lawsuits (note 18) Unaccrued labor lawsuits 4,410 Accrued labor lawsuits (note 18) 1,762 289,070 29,162 53,809 29,162 110,640 167,019 110,640 2,743 25,581 14,296 313 231 2,994 42,297 46,460 16,563 1,343 1,976 5,130 39,640 29,103 15,721 636 1,878 3,381 11. OTHER NONCURRENT ASSETS Company Consolidated 2009 2009 2010 2010 Advances to advertisement services Asset held for sale Advance for future capital increase Restricted cash - CDBs (*) (note 18.(f) - “Tax risks”) 20,052 - - - 20,052 - - 90 20,997 17,752 - 1,660 - - - 90 6,155 44,904 5,769 7,429 (*) Refers to amounts pledged as collateral by restricted temporary investments of the subsidiary Natura Inovação e Tecnologia de Produtos Ltda., related to the court collection of Federal VAT (IPI) for July 1989, when wholesale units were held equivalent to manufacturing establishments by Law 7798/89. 1,696 187,656 2,410 2,193 337,007 232,354 12. INVESTMENTS (*) Refers to the ICMS - ST declaratory action ﬁ led by Paraná State, the Federal District and Mato Grosso do Sul State, as discussed in notes 17.(b) and 18 - “Contingent tax liabilities - possible risk”, item (a). Investments in subsidiaries Company 2009 1,000,600 2010 1,099,188 Information on and changes for period ended December 31, 2010 Indústria e Natura Natura Flora Natura Cosméticos Cosméticos Medicinal Comércio de Natura Cosméticos Cosméticos Cosméticos Cosméticos B.V. - Natura Ltda. S.A. - Chile Colombia Holanda (*) España S.L. 526,155 9 99,175 66,744 41,782 99.99% 99.99% 99.94% 99.97% 99.99% 99.99% 99.99% 99.99% 99.99% 100.00% 100.00% J. Monteiro de Produtos de México S.A. Ltda. 5,008 126,550 S.A. - Peru Argentina Venezuela da Silva Ltda. - 5,116 96,143 5,872 Ltda. - C.A. - S.A. - (*) Total 972,554 - Natura Inovação e Tecnologia Cosméticos Cosméticos International Natura Natura (Brazil) Natura Natura Capital Interest - % Subsidiary’s shareholders’ equity (deﬁ cit) Interest in shareholders’ equity Subsidiaries net income (loss) for the year of subsidiaries, net of translation effects Carrying amount of investments Balances as of December 31, 2009 Equity in subsidiaries Exchange rate change and other adjustments in the translation of investments in foreign subsidiaries Company’s contribution to the stock options plan of subsidiaries’ executives and other reserves Reclassiﬁ cation of proﬁ ts on inventories not eliminated Earnings distribution Capital increases Balances as of December 31, 2010 Allowance for losses Balances as of December 31, 2009 Merger of advance for future capital increase (AFAC) Allowance for losses Merger of Flora Medicinal Balances as of December 31, 2010 947,995 947,900 23,249 23,247 (892) 56,919 (891) 56,902 273 273 (514) (514) 45,026 45,021 26,953 26,950 8,783 8,782 8,207 8,207 83 1,116,082 83 1,115,960 105,630 (5,827) (2,613) (11,381) (629) (514) 12,575 (27,811) (17,552) (26,116) - 25,762 836,851 105,625 24,074 (5,827) 3,769 30,908 (2,612) (11,378) 511 (629) - - 10,864 61,713 12,575 (27,808) (17,550) (26,120) 25,315 6,535 60 1,000,600 26,276 - - 1,907 (2,048) (3,699) 215 - (428) (666) (240) 486 - (4,473) 5,513 - - - - - 1,161 - - - - 6,674 (17,375) - - - - 3,092 - - - - - 41,071 - - 176 - - - (30,000) - - - - 30,109 - - 20,037 - - 22,978 - - 23 (17,375) (30,000) 117,486 930,614 23,246 (891) 56,902 273 - 45,021 26,950 8,782 8,208 83 1,099,188 - - - - - (564) - - - - - (564) - - - - - - - - - - - - - - - 120 (514) 958 - - - - - - - - - - - - - - - 120 (514) 958 - - - - - - - - - - - - (*) Consolidated information of the following companies: Natura Cosméticos - Mexico: Natura Cosméticos y Servicios de Mexico, S.A. de C.V.; Natura Cosméticos de Mexico, S.A. de C.V.; and Natura Distribuidora de Mexico, S.A. de C.V. Natura Europa SAS: Natura (Brazil) International B.V. (The Netherlands), Natura Brasil Inc. (USA - Delaware), Natura International Inc. (USA - New York), Natura International Inc. (USA - Nevada), Natura Worldwide Trading Company (Costa Rica), Natura Europa SAS (France) and Natura Brasil SAS (France). 119 13. PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS Company PROPERTY, PLANT AND EQUIPMENT Vehicles Leasehold improvements (b) Machinery and equipment Furniture and ﬁ xtures IT equipment Projects in progress Advances to suppliers Weighted average annual depreciation rate - % 2010 2009 Adjusted Accumulated Net book Adjusted Accumulated Net book cost depreciation value depreciation value cost 21 15 4 7 18 - - 34,234 23,486 27,668 6,264 6,614 11,699 15,159 125,124 (14,491) (9,053) (3,018) (2,584) (3,803) - - (32,949) 19,743 14,433 24,650 3,680 2,811 11,699 15,159 92,175 31,358 19,246 13,478 5,676 6,507 1,212 639 78,116 (13,259) (5,627) (2,039) (2,479) (4,337) - - (27,741) 18,099 13,619 11,439 3,197 2,170 1,212 639 50,375 Company INTANGIBLE ASSETS Software Weighted average annual amortization rate - % 2010 2009 Adjusted Accumulated Net book Adjusted Accumulated Net book cost amortization value amortization value cost 17 29.190 (10.604) 18.586 19.441 (7.914) 11.527 Consolidated PROPERTY, PLANT AND EQUIPMENT Weighted average annual depreciation rate - % 2010 2009 Adjusted Accumulated Net book Adjusted Accumulated Net book cost depreciation value depreciation value cost Machinery and equipment Buildings Installations Land Molds Vehicles IT equipment Furniture and ﬁ xtures Leasehold improvements (b) Projects in progress Advances to suppliers Other 6 4 9 - 30 21 19 11 15 - - 3 308,262 151,161 120,440 27,180 105,362 56,361 75,749 27,164 44,273 35,489 28,648 3,897 983,986 (124,315) (54,305) (65,066) - (79,921) (21,181) (45,969) (11,926) (18,725) - - (2,111) (423,519) 183,947 96,856 55,374 27,180 25,441 35,180 29,780 15,238 25,548 35,489 28,648 1,786 560,467 278,805 151,142 110,476 33,662 85,698 48,312 65,469 27,732 36,106 16,269 25,213 6,660 885,544 (122,623) (48,210) (59,339) - (68,283) (18,581) (44,714) (12,557) (14,363) - - (4,618) (393,288) 156,182 102,932 51,137 33,662 17,415 29,731 20,755 15,175 21,743 16,269 25,213 2,042 492,256 Consolidated INTANGIBLE ASSETS Business lease - Natura Europa SAS - France (a) Software Trademarks and patents Weighted average annual amortization rate - % 2010 2009 Adjusted Accumulated Net book Adjusted Accumulated Net book cost amortization value amortization value cost - 18 10 4,629 188,660 1,573 194,862 - (73,376) (1,413) (74,789) 4,629 115,284 160 120,073 5,250 131,429 1,951 138,630 - (54,546) (1,344) (55,890) 5,250 76,883 607 82,740 (a) The business lease generated on the purchase of a commercial location where Natura Europa SAS - France operates is supported by an appraisal report issued by independent appraisers, attributable to the fact that it is an intangible, marketable asset, which does not suffer any decrease in value over time. The change in the balance between December 31, 2010 and December 31, 2009 is basically due to the effects of the exchange variation for the period. (b)The depreciation rates consider the terms of the property lease agreements. The Company conducted an analysis of the useful economic life of the remaining property, plant and equipment items and intangible assets, with effects being recorded beginning January 1, 2010. As a result of the review of the accounting estimate, which was intended to realign the remaining useful life of assets, and, consequently, the depreciation over the remaining life of assets, a positive impact was recorded in depreciation for year of 2010, compared to the prior period, in the amount of R$14,634. Additional information on property, plant and equipment a) Assets pledged as collateral As of December 31, 2010, the Company and its subsidiaries have property, plant and equipment items pledged as collateral in bank ﬁ nancing and loan transactions, as well as items attached to the defense of lawsuits, as shown below: 120 Company Machinery and equipment Land IT equipment Vehicles Balances at end of year b) Expenses on operating leases Consolidated 3,171 - 3,506 4,730 11,407 3,171 700 4,092 7,730 15,693 Vehicles Molds Facilities IT equipment Furniture and ﬁ xtures Other Leases Company Consolidated 2009 8,960 2009 1,217 2010 6,539 2010 1,217 c) Balance of capitalized interest Buildings Consolidated 2010 1,479 2009 1,531 14. INTANGIBLE ASSETS - GOODWILL ON INVESTMENTS On March 5, 2004, Natura Participações S.A. was merged into the Company. Natura Participações S.A. had recorded goodwill on the investment in Natura Empreendimentos S.A., amounting to R$1,028,041, and a corresponding provision for maintenance of future dividend payment capacity in the same amount. This goodwill arose from the merger of the shares of Natura Empreendimentos S.A. into Natura Participações S.A. on December 27, 2000. This merger was approved by the Extraordinary Shareholders’ Meeting held on that date, and the amounts are supported by a valuation report issued by independent appraisers. The amounts are as follows: Company 2009 318,203 2010 318,203 Goodwill on investments Provision for maintenance of future dividend payment capacitys (318,203) - (318,203) - The provision for maintenance of future dividend payment capacity, as it is in the full amount, will result in the recognition of the goodwill amor tization tax benefits for all of the Company’s shareholders. As mentioned in note 3, considering the changes in accounting practices introduced by Law 11638/07 and Provisional Act 449/08, conver ted into Law 11941/09, since January 1, 2009 the existing goodwill balance as of December 31, 2008 has no longer been amor tized, and the provision for future dividends, covering the full dividend amount, has no longer been reversed. Accordingly, as of January 1, 2009, the goodwill tax benefit has been used in monthly calculations of income tax and social contribution based on the Transitional Tax Regime (RTT), in accordance with the provisions of Provisional Act 449/08 and the effects mentioned in note 9.b). Consolidated amortization expenses of intangible assets estimated for the next years 2011 2012 2013 2014 and thereafter Changes in property, plant and equipment Company Consolidated 19.436 19.436 19.436 61.765 120.073 2.690 2.690 2.690 10.516 18.586 Company Consolidated 2009 2009 2010 2010 50,75 37,865 492,256 477.661 Balances at the beginning of the year Additions (less transfers from projects in progress - when terminated): Machinery and equipment Projects in progress/advances to suppliers 13,498 - - 769 545 1,036 57,121 (2,706) (12,615) 92,175 11,094 - - 980 432 627 25,981 (3,552) (9,919) 50,375 24,193 18,099 8,787 16,986 3,414 7,208 5,825 7,304 1,578 1,618 3,696 2,896 175,228 111,125 (37,605) (20,984) (69,412) (75,546) 560,467 492,256 Company Consolidated 2009 2009 2010 2010 11,527 9,008 82,740 75,029 9,749 - (2,690) 18,586 4.587 (69) (1,999) 11,527 29,507 61,648 (4,879) (4,916) (19,436) (16,880) 82,740 120,073 (-) Write-offs, net (-) Depreciation Balances at the end of the year Changes in intangible assets Balances at the beginning of the year Additions: Software (including implementation costs) (-) Write-offs and others, net (-) Amortization Balances at the end of the year 15. LOANS AND FINANCINGS Local currency BNDES - EXIM (a) FINEP (Financing Agency for Studies and Projects) Promissory notes Debentures BNDES (a) Guaranteed account BNDES - FINAME Banco do Brasil - FAT Fomentar (Workers’ Assistance Fund) Capital lease - ﬁ nancing FINEP - grant Total local currency Foreign currency BNDES - EXIM (a) BNDES (a) Export ﬁ nancing - ACC/ACE (a) Resolution 2770 (a) Resolution 4131 (a) International operation - Peru Total foreign currency Grand total Company Consolidated 2010 - 2009 2010 - 116,388 2009 Reference 41,707 A - - - 350,856 27,633 - 352,669 39,985 - 350,856 - 29,549 110,996 100,949 355 2,001 6,168 6,506 180 - 352,669 23,206 - - - - 4,970 - 1,660 - - - 2,086 1,211 375,875 380,585 623,127 547,861 3,908 940 B C D E F G H I J Company Consolidated 2010 - 2,479 2009 - 2,921 2010 1,229 7,358 2009 Reference 10,427 9,984 A E - - - 111,791 - 50,088 - 10,447 - 111,791 - 50,088 - - 9,861 13,848 52,567 114,712 68,536 156,497 428,442 495,297 691,663 704,358 K L M N 121 8,884 5,061 29,669 21.468 32,389 7,787 84,555 49,058 Current Noncurrent 60,086 469,590 226,595 569,366 368,356 25,707 465,068 134,992 Reference Currency A Real Maturity February and December 2011 Charges 6.7% of the debt with interest of 8.3% p.a. Guarantee of Natura Cosméticos S.A. + exchange ﬂ uctuation (dollar) for 20% of the debt maturing in February 2011 and 93.3% of the debt with ﬁ xed interest of 7% p.a. maturing in December 2011. Collaterals B C D E F G H I J K L M N Real Real Real Real Real Real Real Real Real US dollar US dollar March 2013 TJLP (b) Guarantee of Natura Cosméticos S.A. and bank guarantee June 2010 Interest of 106% CDI (c) May 2013 Interest of 108 % do CDI (c) N/A N/A April 2010 and February 2017 For the installment maturing in April 2010: Mortgages (f) interest of 4.5% p.a. + TJLP (b) + UMBNDES (e) For the installment maturing in February 2017: (i) TJLP (b) + interest of 2.8% p.a. for 85% of the debt; (ii) exchange ﬂ uctuation (dollar) + interest of 8.54% p.a. or 9% of the debt; and (iii) TJLP (b) + interest of 2.3% p.a. for 6% of the debt Bank guarantee April 2011 November 2015 123.9% of CDI (c) p.a. + IOF (d) Interest of 4.5% p.a. + TJLP (b) February 2014 Interest of 4.4% p.a. + TJLP (b) Guarantee of Natura Cosméticos S.A. Chattel mortgage, guarantee of Natura Cosméticos S.A. and promissory notes Chattel mortgage, guarantee of Natura Cosméticos S.A. and promissory notes Through September 2012 Interest of 99.5% to 102.99% of DI - CETIP (g) Leases are collateralized by the underlying assets January 2011 March 2010 January 2011 N/A N/A Exchange ﬂ uctuation + 0.52% p.a. Guarantee of Natura Cosméticos S.A. Exchange ﬂ uctuation + 2.11% p.a. US dollar February 2011 Exchange ﬂ uctuation + 1.22% p.a. Novo sol December 2011 Interest of 4.15% p.a. Guarantee of subsidiary Indústria e Comércio de Cosméticos Ltda. Guarantee of subsidiary Indústria e Comércio de Cosméticos Ltda. Bank guarantee (a) Loans and ﬁ nancing for which swap contracts (CDI) were entered into. (b) TJLP - Long-term Interest Rate. (c) CDI - Interbank Deposit Rate. (d) IOF - Tax on Financial Transactions. (e) UMBNDES - Monetary Unit of National Bank for Economic and Social Development (BNDES). Local currency ﬁ nancing from the BNDES is collateralized by the Cajamar unit of subsidiary Indústria e Comércio de Cosméticos Natura Ltda. (f) Mortgages - relate to real estate of the Cajamar unit of the subsidiary Indústria e Comércio de Cosméticos Natura Ltda. (g) DI - CETIP - daily index calculated based on the average DI, disclosed by the Clearinghouse for the Custody and Financial Settlement of Securities (CETIP). Maturities of noncurrent liabilities are as follows: 2011 2012 2013 2014 2015 2016 and thereafter Total Company Consolidated 2009 2010 42,695 - 33,799 39,425 23,728 379,440 16,991 22,963 17,779 19,001 4,239 - 465,068 134,992 2009 6,556 6,556 6,556 4,470 1,569 - 25,707 2010 - 6,530 355,820 4,450 1,539 17 368,356 a) Description of the main current bank loan and ﬁ nancing agreements: 1. BNDES - EXIM Pré-Embarque and BNDES - EXIM Pré-Embarque Especial Programs The subsidiary Indústria e Comércio de Cosméticos Natura Ltda. beneﬁ ts from the ﬁ nancing programs of the BNDES in the pre-shipment stage for the export of goods and services. As a rule, the requirements for participation in said programs are: (i) to have credit approved by the ﬁ nancial institution that will enter into the ﬁ nancing agreement; and (ii) to manufacture products with a using at least 60% locally. 2. Financing agreements with the BNDES The Company and its subsidiaries Indústria e Comércio de Cosméticos Natura Ltda. and Natura Inovação e Tecnologia de Produtos Ltda. have credit facility agreements with the BNDES to facilitate direct investments in the Company and its subsidiaries in order to improve certain product lines, train research and development employees, optimize operation product separation lines in the Cajamar - SP industrial facilities, set up of a vertical warehouse also in the Cajamar - SP industrial facilities, hire consultancy ﬁ rms for the new distribution centers, build two new distribution centers, one in Matias Barbosa - MG and another in Jaboatão dos Guararapes - PE, as well as restructure the administration of the Itapecerica da Serra - SP unit and purchase the equipment necessary for these purposes. 3. Financing agreement with the FINEP The subsidiary Natura Inovação e Tecnologia de Produtos Ltda. has innovation programs aimed at the development and acquisition of new technologies by means of partnerships with universities and research centers in Brazil and abroad. These innovation programs have the support of research and technological development incentive programs of the FINEP, which facilitates and/or co-ﬁ nances equipment, scientiﬁ c grants and research material for the participating universities. 122 These funds were used to partially ﬁ nance investments incurred in the drafting of the “Technology Platforms for New Cosmetics and Nutritional Supplements” project. 4. Machinery and Equipment Financing - FINAME The Company beneﬁ ts from a credit facility with the BNDES, related to FINAME onlendings, intended to ﬁ nance the purchase of new machinery and equipment manufactured in Brazil. Said onlending is carried out by granting credit to Indústria e Comércio de Cosméticos Natura Ltda., granting rights to receivables to the ﬁ nancial institution accredited as a ﬁ nancing agent, usually Banco Votorantim S.A., Banco Itaú Unibanco S.A., Banco do Brasil S.A., HSBC Bank Brasil S.A. and Banco Santander Brasil S.A., which enter into such said ﬁ nancing with Indústria e Comércio de Cosméticos Natura Ltda. These agreements are collateralized by the ﬁ nanced assets. Indústria e Comércio de Cosméticos Natura Ltda. is the trustee and the Company is the guarantor of these assets. In addition, the Company and its subsidiaries are obliged to meet the Provisions Applicable to BNDES Agreements and General Regulatory Conditions of FINAME-related Transactions. 5. Resolution nº 4131/62 Bank Credit Note - Onlending of Funds Raised Abroad - Resolution 4131/62, raised with Banco Bradesco on November 10, 2010 and maturing on February 10, 2011, whose principal totals US$ 30,0000. 6. Promissory notes First issue of promissory notes totaling R$350,000, single series, unguaranteed, with nominal unit value of R$1,000, issued under Brazilian Securities and Exchange Commission (CVM) Instruction 476, on December 17, 2009. The promissory notes were settled in June 2010, with the debenture issuance. 7. Debentures First issuance of simple debentures, nonconvertible into shares, totaling R$350,000, in single series, without guarantee and without ﬁ nancial covenants, with face value of R$1,000, in conformity with CVM Instruction 476/09, issued on May 26, 2010 and subscribed and paid in May 28, with the payment of semiannual interest in May and November, and principal maturing on May 26, 2013. b) Finance lease transactions Lease obligations are effectively guaranteed, since the leased asset is reversed to the lessor in case of default. Financial obligations are broken down as follows: Gross ﬁ nance lease obligations - minimum lease payments: Less than one year More than one year and less than ﬁ ve years Future ﬁ nancing charges on ﬁ nance leases Financial lease obligations - accounting balance 2010 2009 642 377 1,019 (79) 940 844 950 1,794 (134) 1,660 c) Contract covenants As of December 31, 2010 and 2009, ﬁ nancing and loan agreements entered into by the Company and its subsidiaries do not contain restrictive clauses that establish obligations regarding the maintenance of ﬁ nancial indices by the Company and its subsidiaries. The Company were in compliance with all the restrictive clauses. 16. TRADE AND OTHER PAYABLES Domestic and foreign suppliers Freight payable Company Consolidated 2009 2009 2010 60,876 331,909 231,687 23,595 34,585 23,595 366,494 255,282 84,471 2010 78,647 34,585 113,232 The Company and consolidated balances payable to foreign suppliers as of December 31, 2010 is R$4,964 e R$842, respectively (R$4,409 e R$497, respectively, as of December 31, 2009), and mostly refers to U.S. dollar- denominated amounts. 17. TAXES PAYABLE Company Consolidated 2009 2009 2010 2010 ICMS Company and reverse charge payable (b) PIS/COFINS payable (injunction) (a) 217,826 150,095 242,676 213,860 1,686 1,570 84,908 57,848 IRPJ and CSLL payable IRPJ and CSLL (injunction) (c) IRPJ and CSLL (injunction - PAT) IRRF IPI – exempt and zero-taxed products (d) UFIR adjustment on federal taxes (e) IPI credit on purchase of property, plant and equipment and supplies for own use and consumption (f) Action for the annulment of a tax liability – INSS (g) PIS/COFINS/CSLL PIS/COFINS payable Taxes - foreign subsidiaries ISS payable 99,347 33,472 - 7,901 15,520 13,624 - 5,436 125,816 33,472 2,261 13,203 25,786 13,624 965 9,574 - - 39,404 36,897 6,216 5,181 6,360 5,313 - - 3,768 3,595 2,893 5,319 - - 613 375,273 2,743 4,100 - - 275 198,544 2,893 7,554 6,663 9,354 2,743 5,557 5,284 7,220 2,799 1,588 581,131 389,854 Escrow deposits ((b), (d) and (g) )(note 10) Current Noncurrent (169,912) 205,361 169,912 (113,383) 85,161 113,383 (209,316) (150,280) 371,815 239,574 209,316 150,280 (a) The Company and its subsidiary Indústria e Comércio de Cosméticos Natura Ltda. are challenging in court the inclusion of ICMS in the tax basis of PIS and COFINS (taxes on revenue). In June 2007, the Company and its subsidiary were authorized by the court to pay PIS and COFINS without the inclusion of ICMS in the tax basis, starting April 2007. The balance recognized as of December 31, 2010 refers to the unpaid amounts of PIS and COFINS, from April 2007 to December 2010 adjusted based on the SELIC (Central Bank overnight rate), and to which the obligation is on hold. Part of the balance, in the adjusted amount of R$2,606, is deposited in escrow. (b) As of December 31, 2010, R$119,371, R$34,969 and R$12,679 of the total amount recognized refer to the ICMS - ST of State of Paraná, Federal District and State of Mato Grosso do Sul, respectively (R$95,834 for State of Paraná and R$14,806 for Federal District as of December 31, 2009), which is being challenged in court, as also mentioned in note 18 - “Contingent tax liabilities - possible risk”, (a). The Company has made monthly escrow deposits for the unpaid amounts. (c) On February 4, 2009, the Company was granted an injunction, subsequently conﬁ rmed by court decision, that suspended the collection of income tax and social contribution on any amounts received as arrears interest, paid on late payment of contractual obligations receivables to the Natura Beauty Consultants. The appeal ﬁ led by the Federal Government is awaiting judgment. (d) Refers to Federal VAT (IPI) on zero-taxed, untaxed or exempt raw materials and packaging materials. Subsidiary Indústria e Comércio de Cosméticos Natura Ltda. ﬁ led a writ of mandamus and obtained an injunction granting the right to the credit. On September 25, 2006, the injunction was revoked by a decision that considered the request invalid. The Company ﬁ led an appeal for reconsideration of merits and reinstatement of the injunction. To suspend the payment of tax, in October 2006, the Company made an escrow deposit in the amount offset under the injunction, whose adjusted balance totals R$39,404 as of December 31, 2010 (R$36,897 as of December 31, 2009). In the fourth quarter of 2009, in order to utilize the beneﬁ ts granted under Provisional Act 470/09, which creates a program for the payment and payment in installments of tax debts, the subsidiary ﬁ led a motion partially withdrawing the claims made in the injunction ﬁ led that maintains only the claim of tax credits on tax-exempt products, thus dropping the lawsuits claiming IPI credits of zero-taxed and untaxed products (see details in note 18, in topic ‘Tax installment plans created under Provisional Act 470/09). On this date, after having met the requirements to join the tax installment plan introduced by Provisional Act 470/09, the subsidiary awaits the tax authorities’ approval to write off the suspended collection amounts and the corresponding escrow deposits. (e) Refers to the inﬂ ation adjustment of 1991 federal taxes on income (IRPJ/ CSLL/ILL) based on the UFIR (ﬁ scal reference unit), discussed in a writ of mandamus. The amount involved is deposited in escrow. On February 26, 2010, the Company ﬁ led a motion for the withdrawal of this lawsuit to be able to utilize the beneﬁ ts granted under Law 11941/09, which creates a program for the payment and payment in installments of tax debts. (f) Subsidiary Indústria e Comércio de Cosméticos Natura Ltda. discusses, through writs of mandamus, the right to IPI credit on the purchase of property, plant and equipment items and consumables. On February 26, 2010, this subsidiary ﬁ led a motion for the withdrawal of this lawsuit to be able to utilize the beneﬁ ts granted under Law 11941/09, which creates a program for the payment and payment in installments of tax debts. 123 (g) Refers to the social security contribution required by tax assessments issued by the National Institute of Social Security as a result of an inspection, which claims that the Company, as a taxpayer having joint liability for tax payment, is required to pay INSS on services provided by third parties. The amounts are being challenged in court through a tax debt annulment action and are deposited in escrow. The amounts required in the tax assessment notice comprise the period from January 1990 to October 1999. In 2007, the Company reversed the amount of R$1,903, relating to the expiration of part of the amount involved in the lawsuit for the period from January 1990 to October 1994, as recently instructed under Case Law Decision 8 of the Federal Supreme Court (STF). On March 1, 2010, the Company ﬁ led a request that withdraws part of the claims made and partially waiving its right to utilize the beneﬁ ts granted under Law 11941/09 regarding the social security contributions due by the companies that provided services to the Company during the period from November 1994 to December 1998. Tax installment plans created by Law 11941/09 On May 27, 2009, Federal Government enacted Law 11941, as a result of the conversion of Provisional Act 449/08, which, among other changes to tax law, established the possibility of a tax debt installment plan managed by the Federal Revenue Service, the National Social Security Institute and the National Treasury Attorney General (PGFN), including the remaining balance of consolidated debts in the REFIS (Law 9964/00), Special Installment Plan (PAES) (Law 10684/03) and the Exceptional Installment Plan (PAEX) (Provisional Act 303/06), in addition to the regular payments in installments provided for by article 38 of Law 8212/91 and article 10 of Law 10522/02. The entities that opted for paying or dividing into installments the debts under this Law, in the applicable cases, may settle the amounts corresponding to default and automatic ﬁ nes and late-payment interest, including those related to legally enforceable debts to the Government, using tax loss carryforwards, and will beneﬁ t from reduced ﬁ nes, interest and legal charges whose reduction percentage depends on the installment plan chosen. Pursuant to the established rules, for compliance with the ﬁ rst stage of installment payments, the Company and its subsidiaries, after having ﬁ led motions at Court formalizing the withdrawal of lawsuits whose taxes would be paid in installments, applied for installment payments, choosing installment plans and indicating the generic nature of tax debts, paying the respective initial installments, pursuant to the provisions of Federal Revenue Service (SRF) and National Treasury Attorney General (PGFN) Joint Administrative Rule. The tax debts recorded for payment in installments by the Company and its subsidiaries, pursuant to Law 11941/09, are as follows: Company INSS tax liability - tax notiﬁ cation (a) IRPJ/CSLL/ILL (b) Others INSS tax liability - tax notiﬁ cation (a) IRPJ/CSLL/ILL (b) IPI on the acquisition of property, plant and equipment and materials for own use and consumption (c) Others Interest and inﬂ ation Reversals adjustment 2010 - - - - 2,893 150 6,216 1,034 100 1,539 1,284 10,648 2009 2,743 5,182 1,439 9,364 Consolidated Interest and inﬂ ation Reversals adjustment 2010 - - 150 1,048 2,893 6,361 2009 2,743 5,313 3,595 2,280 13,931 - (368) (368) 3,768 173 123 2,035 1,494 15,057 (a) The details of this lawsuit are mentioned in note 17 (g) of item “Tax contingencies”. Due to the withdrawal from this lawsuit, as the Company opted to pay all its debt at sight, it reversed to income R$1,586 on the fourth quarter of 2009, corresponding to 100% of the late-payment ﬁ ne and 45% of the interest. (b) The details of this lawsuit are mentioned in note 17 (e) of item “Tax contingencies”. Since the Company has an escrow deposit for this lawsuit, no reversal of late-payment ﬁ nes and interest was made by the Company upon its withdrawal. (c) The details of this lawsuit are mentioned in note 17 (f) of item “Tax contingencies”. Due to the withdrawal from this lawsuit, as the Company opted to pay all its debt at sight, it reversed to income R$1,375 on the fourth quarter of 2009, corresponding to 100% of the late-payment ﬁ ne and 45% of the interest. Due to the lack of tax loss carryforwards, the Company and its subsidiaries will not offset them against the remaining balance of the interest on installments. The following steps of the tax debt installment plan include the consolidation of tax debts by the PGFN and the Federal Revenue Service; in this step the Companies will indicate the debts to be paid in installments and the number of installments. This consolidation stage of tax debts is estimated to occur by the end of the ﬁ rst semester of 2011. Tax installment plans created under Provisional Act 470/09 As of October 13, 2009, Provisional Act 470 was enacted, introducing the tax debt payment and installment plans arising from the undue use of sector tax incentive, introduced by article 1 of Decree Law 491, of March 5, 1969, as well as those arising from the undue use of IPI credits, in the scope of the PGFN and the Federal Revenue Service. On November 3, 2009, the PGFN and the Federal Revenue Service published in the Federal Ofﬁ cial Gazette (DOU) the Joint Administrative Rule 9, which establishes the debt payment and installment plan addressed in article 3 of Provisional Act 470/09. The debts arising from the undue utilization of industry tax incentives introduced by article 1 of Decree Law 491/69, and those arising from the undue utilization of IPI credits challenged by the PGFN and Federal Revenue Service may be exceptionally paid at sight or in installments to each agency by November 30, 2009. As mentioned in note 17, item (d), the subsidiary Indústria e Comércio de Cosméticos Natura Ltda. ﬁ led a motion partially withdrawing from the injunction ﬁ led related to IPI credits arising from the products purchased at zero tax rate or tax exempt, which amounted to R$24,071 as of December 31, 2010. As of December 31, 2010, the Company awaits the position of the PGFN to complete the stage related to the consolidation of tax debts and to write off the balances of suspended liabilities against escrow deposits made until this date at the inﬂ ation adjusted amounts. As there are escrow deposits made in the past and due to the option made by the Company, which opted for payment at sight, no gain was recognized in income from the reversal of ﬁ ne and late interest. 18. PROVISION FOR TAX, CIVIL AND LABOR CONTINGENCIES The Company and its subsidiaries are parties to tax, labor and civil lawsuits and administrative tax proceedings. Management believes, supported by the opinion and estimates of its legal counsel, that the reserves for tax, civil and labor contingencies are sufﬁ cient to cover possible losses. These reserves, net of escrow deposits, are as follows: Tax Civil Labor Current Noncurrent Company Consolidated 2010 2009 42,970 45,076 14,137 10,750 17,071 16,677 72,897 73,784 1,465 - 71,432 73,784 2009 33,932 8,469 13,448 55,849 1,465 54,384 2010 29,867 9,284 14,131 53,282 - 53,282 124 Tax contingencies (a) Refers to ﬁ ne for late payment of Federal taxes. The provisions for tax contingencies are shown below: Changes for the years ended December 31, 2009 and 2010 Company Inﬂ ation 2009 Additions Reversals adjustment 2010 Late payment ﬁ nes on Federal taxes paid in arrears (a) Deductibility of CSLL (Law 9316/96) (b) Federal VAT (IPI) - tax collection lawsuit (c) IRPJ and CSLL tax assessment - legal fees (d) Tax notiﬁ cation - IRPJ 1990 (e) Legal fees and other (h) Total reserve for tax contingencies Escrow deposits (note 10) 1,024 7,295 - - (70) 46 999 - 267 7,562 4,952 - (4,970) 18 - 5,799 - (1,709) 362 4,452 3,198 11,664 - 3,299 - (2,195) 3,342 144 744 13,512 33,932 3,299 (8,944) 1,581 29,867 (14,296) - - (967) (15,263) Consolidated Inﬂ ation 2009 Additions Reversals adjustment 2010 5,776 1,511 7,295 Late payment ﬁ nes on Federal taxes paid in arrears (a) Deductibility of CSLL (Law 9316/96) (b) Federal VAT (IPI) - tax collection lawsuit (c) 4,952 IRPJ and CSLL tax assessment - legal fees (d) Tax notiﬁ cation - IRPJ 1990 (e) Failure to include ICMS in tax bases for PIS and COFINS - legal fees (f) Semiannual PIS - Decree Laws 2445/88 and 2449/88 (g) 2,085 Legal fees and other (h) 17,626 Total reserve for tax contingencies Escrow deposits (note 10) (15,721) 45,076 2,633 3,198 - - (71) 65 1,505 - 267 7,562 - (4,970) 18 - - (1,710) 386 4,452 - - - - 144 3,342 147 2,780 - 4,165 - (3,211) 106 2,191 2,558 21,138 4,165 (9,962) 3,691 42,970 - - (842) (16,563) (b) Refers to CSLL that was addressed by an injunction that questions the constitutionality of Law 9316/96, which prohibited the deduction of CSLL from its own tax basis and the IRPJ basis. A portion of this reserve, in the amount of R$5,559 (R$5,272 as of December 31, 2009), is deposited in escrow. (c) Refers to a tax collection lawsuit intended to collect IPI for July 1989, when wholesale establishments began to be considered equivalent to industrial establishments under Law 7798/89. The lawsuit is in the 3rd Region Federal Court (São Paulo) for judgment of the appeal ﬁ led by the debtor. The amounts involved in this tax collection lawsuit are collateralized by restricted investment held by the subsidiary Natura Inovação e Tecnologia de Produtos Ltda., in the amount of R$6,155 as of December 31, 2010 (R$5,769 as of December 31, 2009). The balance of the reserve for this lawsuit was reversed in the ﬁ rst quarter of 2010 because of the change in the likelihood of loss from probable to remote based on the analysis carried out by the Company’s legal counsel. (d) Refers to attorneys’ fees for the defense in the tax assessment notices issued against the Company in December 2006 and December 2007 by the Federal Revenue Service, claiming the payment of income tax and social contribution on the deductibility of the yield of debentures issued by the Company for ﬁ scal years 2001 and 2002, respectively. The legal counsel’s opinion is that the likelihood of unfavorable outcome in these tax assessment notices is remote. A ﬁ nal and unappealable administrative decision on the tax assessment notice issued against the Company in August 2003 challenging the deductibility, in ﬁ scal year 1999, was issued on January 2010 that maintains part of the income tax assessed and the whole of the social contribution. After this decision, on April 7, 2010, the Company ﬁ led a lawsuit to cancel the remaining installment of IRPJ and CSLL. The legal counsel considers that the likelihood of an unfavorable outcome is remote. e) Refers to a tax assessment notice issued by the Federal Revenue Service claiming the payment of income tax on the earnings obtained on exports entitled to tax beneﬁ ts carried out in ﬁ scal year 1989, at the rate of 18% (Law 7988, of December 29, 1989) and not 3%, as set out in article 1 of Decree Law 2413/88, used by the Company at the time to pay its taxes. (f) Refers to legal fees for ﬁ ling and dealing with the administrative proceeding for requesting a refund of the ICMS included in the PIS and COFINS tax basis in the period from April 2002 to March 2007. The legal counsel assessed the risk of loss as remote. (g) Refers to the offset of PIS paid as per Decree Laws 2445/88 and 2449/88, in the period from 1988 to 1995, against Federal taxes due in 2003 and 2004. The reversal made by the Company in 2007 in the amount of R$14,910 is due to the ﬁ nal decision favorable to the Company, rendered in August 2007. The remaining reserve refers to the subsidiary Indústria e Comércio de Cosméticos Natura Ltda., which is awaiting the appreciation of the lawsuit by the Board of Tax Appeals. (h) The balance refers to lawyers’ fees to defend the Company’s and its subsidiaries’ interests in tax lawsuits. The amount of R$4,000, accrued in 2009, refers to lawyers’ fees to prepare the defense against an IRPJ and CSLL infringement notiﬁ cation against the Company, issued on June 30, 2009, which challenges the tax deductibility of goodwill amortization carried out resulting from the merger of Natura Participações S.A. It is the opinion of the Company’s legal counsel that, as structured, the transaction and its tax effects can be upheld in a court of law and thus the risk of loss is classiﬁ ed as remote. 125 Civil contingencies Changes for the years ended December 31, 2009 and 2010 Sundry civil lawsuits (a) Legal fees - environmental civil lawsuit (b) Company Interest and inﬂ ation 2009 Additions Reversals Payments adjustmen 2010 5,111 1,363 5,265 (4,658) (1,177) - - - 287 149 4,828 1,512 Civil lawsuits and legal fees - Nova Flora Participações Ltda. 1,995 2,346 - (1,466) 69 2,944 Total reserve for civil lawsuits Escrow deposits (note 10) Current Noncurrent Sundry civil lawsuits (a) Legal fees - environmental civil lawsuit (b) Legal fees - IBAMA lawsuit (c) 8,469 7,611 (4,658) (2,644) 506 9,284 (231) (1,643) - - - (1,874) 1,465 - - - - - 7,004 - - - - 9,284 Consolidated Interest and inﬂ ation 2009 Additions Reversals Payments adjustmen 2010 5,353 5.892 (4,822) (1,192) 1,363 - - 3,965 - - - - 486 149 - 5,717 1,512 3,965 Civil lawsuits and legal fees - Nova Flora Participações Ltda. 4,034 135 - (1,466) 240 2,943 Total reserve for civil lawsuits Escrow deposits (note 10) Current Noncurrent 10,750 9,992 (4,822) (2,658) 875 14,137 (1,878) - - - (98) (1,976) 1,465 - - - - - 9,285 - - - - 14,137 (a) As of December 31, 2010, the Company and its subsidiaries are parties to 1,211 civil lawsuits and administrative proceedings (1,578 as of December 31, 2009), of which 1,127 were ﬁ led with civil courts, special civil courts and the consumer protection agency (PROCON) by Natura Beauty Consultants, consumers, suppliers and former employees, most of which claiming compensation for damages. (b) Refers to legal fees for the defense of the Company’s interests in the public lawsuit ﬁ led by the Federal Public Prosecution Ofﬁ ce of Acre against the Company and other institutions for alleged access to the traditional knowledge associated to the asset (“murumuru”).. (c) Refers to attorney’s fees for the defense in the tax assessment notice issued by Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis (IBAMA) against the Company in November 2010 for alleged irregular access to biodiversity. The Company’s management and its legal counsel consider the risk of loss in these tax assessment notices as remote due to full compliance with all the principles established in the Biological Diversity Convention (“CDB”), an international treaty signed during Rio-92 and of illegality and unconstitutionality of legal mark which has incorporated CDB in the Brazilian legal system. Except for inputs from Federal Government land—which refuses to negotiate—the Company shares beneﬁ ts in 100% of the accesses in the use of biodiversity; it is the ﬁ rst to share beneﬁ ts with traditional communities and detains approximately 68% of the requests with the Regulatory Body for authorization to have access to biodiversity. Labor risk As of December 31, 2010, the Company and its subsidiaries are parties to 766 labor lawsuits ﬁ led by former employees and third parties (641 as of December 31, 2009), claiming the payment of severance amounts, salary premiums, overtime and other amounts due, as a result of joint liability. Reserves are periodically reviewed based on the progress of lawsuits and history of losses on labor claims to reﬂ ect the best current estimate. Changes for the years ended December 31, 2009 and 2010 Company Inﬂ ation 2009 Additions Reversals adjustment 2010 Total provision for labor risk 13,448 1,308 (2,216) 1,591 14,131 Escrow deposits (note 10) (1,696) (66) - - (1,762) 126 Total provision for labor risk Escrow deposits (note 10) Consolidated Inﬂ ation 2009 Additions Reversals adjustment 2010 17,071 1,842 (4,278) 2,042 16,677 (2,193) (217) - - (2,410) Contingent liabilities - possible risk The Company and its subsidiaries are parties to tax, civil and labor lawsuits, for which there is no reserve for losses recorded, because the risk of loss is considered possible by management and its legal counsel. These lawsuits are as follows: Company Consolidated 2009 2009 2010 2010 Tax: Declaratory action - ICMS - ST (a) Offset of 1/3 of COFINS - Law 9718/98 (b) Tax notiﬁ cation - INSS (c) IPI tax assessment notice (d) Administrative proceeding – tax assessment notice ICMS – ST – DF (e) Administrative proceeding – tax debt – ICMS – ST – RS (f) Tax assessment notice – São Paulo State Department of Finance – ICMS inspection (g) Tax assessment - transfer pricing on loan agreements with foreign related company (h) Tax debt notiﬁ cation - GFIP (i) ICMS - ST deﬁ ciency notice (j) Request for offset of taxes of the same type - IRPJ and IRRF (k) Other Civil Labor 53,809 29,162 53,809 29,162 5,121 4,567 5,178 4,925 4,456 - 5,121 4,567 5,178 4,925 4,456 - 25,077 7,720 25,077 7,720 15,919 7,255 15,919 7,255 9,837 - 9,837 - 1,779 974 440 1,716 902 529 1,779 974 440 1,716 902 529 568 44,051 167,320 3,315 61,547 232,182 532 23,619 80,816 16,858 48,986 146,660 568 532 52,373 28,849 175,642 86,047 18,024 85,899 74,710 265,674 178,781 4,133 (a) As of December 31, 2010, the balance recorded is as follows: 1. ICMS - ST - Paraná State - R$46,768 (R$28,186 as of December 31, 2009) - lawsuit ﬁ led by the Company challenging the changes in ICMS - ST tax basis introduced by Paraná Decree 7018/06. The amount discussed in the lawsuit, related to the period from January 2007 to December 2010, is fully deposited in escrow, as mentioned in notes 10 and 17, and its collection is suspended 2. ICMS - ST - Federal District - R$5,574 (R$976 as of December 31, 2009) - declaratory action ﬁ led by the Company to challenge its liability for the payment of ICMS - ST due to the lack of a statute on and statutory criteria for the determination of the tax base of this tax or, subsequently, the need to enter into an Agreement to set out the ICMS - ST tax basis. The amount under litigation, related to the period from February 2009 to December 2010, is fully deposited in escrow, as referred to in notes 10 and 17, and its collection is suspended. 3. ICMS ST MS - R$1.467 - declaratory action ﬁ led by the Company to challenge its liability for the payment of ICMS - ST to the State of Mato Grosso do Sul due to the lack of a statute on and statutory criteria for the determination of the tax base of this tax or, subsequently, the need to enter into an Agreement to set out the ICMS - ST tax basis. The amount under litigation, related to the period from February 2009 to December 2010, is fully deposited in escrow, as referred to in notes 10 and 17, and its collection is suspended. (b) Law 9718/98 increased the COFINS rate from 2% to 3%, and allowed this 1% difference to be offset in 1999 against the social contribution tax paid in the same year. However, in 1999, the Company and its subsidiaries ﬁ led for an injunction and obtained authorization to suspend the payment of the tax credit (1% rate difference) and to pay COFINS based on Supplementary Law 70/91, prevailing at that time. In December 2000, considering former unfavorable court decisions, the Company and its subsidiaries enrolled in the Tax Debt Reﬁ nancing Program (REFIS), for payment in installments of the debt related to the COFINS not paid in the period. With the payment of the tax, the Company and its subsidiaries gained the right to offset 1% of COFINS against social contribution tax, which was made in the ﬁ rst half of 2001. However, the Federal Revenue Service understands that the period for offset was restricted to base year 1999. On September 11, 2006, the Company was notiﬁ ed that the offsets made were not approved, and timely ﬁ led the applicable appeal. This proceeding is awaiting ruling at the lower administrative court. (c) Lawsuit ﬁ led by the Company seeking the annulment of the tax demanded by the INSS through a tax assessment notice issued for purposes of collecting the social security contribution on the allowance for vehicle maintenance paid to sales promoters. The amounts are being challenged in court through a tax debt annulment action and are deposited in escrow. The amounts required in the tax assessment notice cover the period from January 1994 to October 1999. (d) Refers to a tax collection lawsuit intended to collect IPI due to the lack of payment e inappropriate classiﬁ cation of products. The Company has ﬁ led a defense in the court and is awaiting for deﬁ nitive ruling (e) Refers to a tax assessment notice related to ICMS – ST, issued by the State of Federal District, regarding a supposed underpayment related to the difference in the payment of Company’s own ICMS and ICMS – ST. Company has ﬁ led a defense in the administrative level and is awaiting for deﬁ nitive ruling.. (f) Refers to a tax assessment notice by Rio Grande do Sul State Department of Finance against the Company due to its condition of tax substitute, in order to charge ICMS that is supposedly due, related to subsequent operations applied by its Sales representatives which live in the State of Rio Grande do Sul Company has proposed annulment to cancel this requirement, which is awaiting ﬁ nal trial. (g) Refers to a tax assessment notice by São Paulo Department of Finance with respect to a supposed offset of ICMS related to the acquisition of property, plant and equipment which were transferred to other facility on the acquisition date, as well as assets acquired that are not related to the production and trading activities. (h) Refers to a tax assessment notice whereby the Federal Revenue Service is demanding the payment of IRPJ and CSLL on the difference of interest on loan agreements with a foreign related party. On July 12, 2004, an administrative defense was ﬁ led and is still being judged. In June 2008, the Company ﬁ led an appeal against the unfavorable decision with the Board of Tax Appeals, which is awaiting judgment. (i) Demand of ﬁ ne for failure to complete the GFIP (FGTS Payment and Social Security Information Form), an accessory social security obligation, for independent contractors’ social security contributions and indemnities. The Company is challenging the collection at the judicial level. (j) Tax assessment notice for ICMS - ST, collected by Goiás State, due to alleged underpayment by the Company. The Company has ﬁ led its defense at the administrative level and is awaiting the ﬁ nal judgment. (k) Refers to the non-approval of the offset of IRRF (Withholding Income Tax) credits related to the second quarter of 2000 against IRPJ debts for the fourth quarter of 1999. The Company has ﬁ led its defense at the administrative level, for which a partially favorable judgment has been rendered. On July 12, 2006, an annulment action was ﬁ led, and an escrow deposit was made, to challenge collection of the balance of offset not approved by the Federal Revenue Service. Contingent assets The Company and its subsidiaries handle the following material contingent assets: a) The Company and its subsidiary Indústria e Comércio de Cosméticos Natura Ltda. are challenging in court the unconstitutionality and illegality of the increase in the tax basis for PIS and COFINS established by article 3, paragraph 1, of Law 9718/98. The amounts involved in the lawsuits, updated as of December 31, 2010, total R$20,920 (R$20,078 as of December 31, 2009). Even though said article 3, paragraph 1, of Law 9718/98 was declared unconstitutional by the Federal Supreme Court in 2009, consistent with the claim ﬁ led by the Company and its subsidiary, there is no ﬁ nal and unappealable decision on the lawsuits ﬁ led by the Companies, which await the judgment by the 3rd Region Federal Court (TRF). The legal counsel’s opinion is that the likelihood of favorable outcome is probable. b) The Company and its subsidiaries Indústria e Comércio de Cosméticos Natura Ltda., Natura Inovação e Tecnologia de Produtos Ltda. and Natura Logística e Serviços Ltda. are requesting at administrative level the refund of the ICMS and ISS (Service Tax) included in the PIS and COFINS tax basis and paid in the period from April 1999 to March 2007. The amounts of the refund request as of December 31, 2010 are R$288,584 (R$265,277 as of December 31, 2009). The legal counsel believes that the chance of a favorable outcome is probable. The Company and its subsidiaries have the accounting policy of recognizing contingent assets only after there is a ﬁ nal and unappealable decision on the lawsuits. Since no unappealable decisions have been issued on said lawsuits favorable to the Company and its subsidiaries, they did not recognize credits related to contingent assets. 127 19. SHAREHOLDERS’ EQUITY a) Capital As of December 31, 2009, the Company’s capital was R$404,261. In March 2010, 181,212 common shares without par value were subscribed at the average price of R$15.53, totaling R$2,826, and, therefore, the Company’s capital is represented by 430,455,773 subscribed and paid-in registered common shares without par value, totaling R$407,087. Authorized capital decreased from 11,035,564 to 10,854,352 registered common shares. In June 2010, 101,439 common shares without par value were subscribed at the average price of R$26.57, totaling R$2,696, and, therefore, the Company’s capital is represented by 430,557,212 subscribed and paid-in registered common shares without par value, totaling R$409,783. Authorized capital decreased from 10,854,352 to 10,752,913 registered common shares. In September 2010, 242,098 common shares without par value were subscribed at the average price of R$25.50, totaling R$6,172, and, therefore, as of September 30, 2010 the Company’s capital increased to 430,799,310 subscribed and paid-in registered common shares without par value, totaling R$415,955. Authorized capital increased from 10,752,913 to 10,510,815 registered common shares. In December 2010, 82,106 common shares without par value were subscribed at the average price of R$25.65, totaling R$2,106, and, therefore, as of December 31, 2010 the Company’s capital increased to 430,881,416 subscribed and paid-in registered common shares without par value, totaling R$418,061. Authorized capital increased from 10,510,815 to 10,428,709 registered common shares. b) Dividend and interest on capital payment policy The shareholders are entitled to receive every year a mandatory minimum dividend of 30% of net income, considering principally the following adjustments: • Increase in the amounts resulting from the reversal of previously recognized reserves for contingencies. • Decrease in the amounts intended for the recognition of the legal reserve and reserve for contingencies. The bylaws allow the Company to prepare semiannual and interim balance sheets and, based on these balance sheets, authorize the payment of dividends upon approval by the Board of Directors. On April 8, 2010, the Company paid dividends totaling R$339,385 (R$0.79 per share) and interest on capital in the total gross amount of R$18,226 (R$0.042 gross per share), pursuant to payment approved by the Board of Directors on February 24, 2010 and ratiﬁ ed at the Annual Shareholders’ Meeting held on April 6, 2010, related to net income of 2009. On July 21, 2010, the Board of Directors approved, for conﬁ rmation at the Annual Shareholders’ Meeting that will resolve on the approval of the ﬁ nancial statements for the year ending December 31, 2010, a proposal for the payment of interim dividends and interest on capital on income recorded in the ﬁ rst half of 2010, in the amount of R$253,947 (R$0.59 per share) and R$35,427, gross of withholding income tax (R$0.082 per share), respectively. The total amount of interim dividends and interest on capital corresponds to 86.9% of net income recorded in the ﬁ rst half of 2010 and was paid on August 12, 2010. In addition, on February 23, 2011, the Board of Directors appreciated a proposal to be submitted to the Annual Shareholders’ Meeting to be held on April 8, 2011, for the payment of dividends and interest on capital (gross), in the total amounts of R$405,623 and R$24,456 (R$20,788, net of IRRF), respectively, related to income for 2010, which, together with the R$253,947 - dividends and R$35,427 - interest on capital (gross) paid in August 2010, correspond to 95% of net income for 2010. Dividends were calculated as follows: Net income for the year Tax incentive reserve - investment grant Calculation basis for minimum dividends Mandatory minimum dividends Annual minimum dividend Proposed dividends Interest on capital IRRF (Withholding tax) on interest on capital Total dividends and interest on capital, net of IRRF Amount exceeding the mandatory minimum dividend Dividends per share Interest on capital per share Total dividends and interest on capital per share Company 2009 683,924 (3,145) 680,779 30% 204,234 554,537 43,254 (6,488) 2010 744,050 (5.973) 738,077 30% 221,423 659,570 59,883 (8,983) 710,470 591,303 489,047 1,5312 0,1182 387,069 1,2888 0,0854 1,6494 1,3742 As mentioned in note 2.21, the portion of dividends exceeding minimum dividends, declared by Management after the reporting period but before the authorization date for issuance of these ﬁ nancial statements, should not be recorded as liability in the respective ﬁ nancial statements and the effects of such additional dividends should be disclosed in a note. As a result, as of December 31, 2010 and 2009, the following portions of dividends exceeding minimum dividends were recorded in shareholders’ equity as “Proposed additional dividend” at the date of the ﬁ nancial statements: Dividends Interest on capital 2010 405,623 24,456 430,079 Company 2009 339,385 18,226 357,611 c) Treasury shares As of December 31, 2010, the caption “Treasury shares” was as follows: Stock R$ 655 14 R$ 21.37 Average cost - R$ d) Share premium Refers to the premium generated on the issuance of 3,299 common shares resulting from the capitalization of debentures totaling R$100,000, occurred on March 2, 2004. e) Legal reserve Since the balance of legal reserve plus capital reserves, addressed by article 182, paragraph 1, of Law 6404/76, exceeded 30% of the capital, the Company decided, in accordance with article 193 of the same Law, not to recognize a legal reserve on net income earned in ﬁ scal years 2006, 2007, 2008, 2009 and 2010. f) Reserve for retained earnings As of December 31, 2010, the reserve for retained earnings was recognized pursuant to article 196 of Law 6404/76 for use in future investments, in the amount of R$23,421 (R$82,988 as of December 31, 2009). The retention for 2010, prepared by Management and approved by the Board of Directors on February 23, 2011, will be submitted to the approval of the Annual Shareholders’ Meeting to be held on April 8, 2011. g) Other comprehensive income (loss) The Company records in this line the effects of exchange variation through its foreign investments. The accumulated effect will be reverted to income as a gain or loss only at the time of the sale or write-off of the investment. 20. BUSINESS SEGMENT REPORTING Segment reporting is consistent with the management reports provided by the main operating decision-maker to assess the performance of each segment and the allocation of funds. Although the main decision-maker analyzes the information on revenue at its different levels, according to the reports used by management to make decisions, the Company’s business is mainly segmented based on the sales of cosmetics by geographic regions, which are as follows: Brazil, Latin America (“LATAM”) and other countries. In addition, LATAM is divided in two groups for analysis: (i) Argentina, Chile and Peru; and (ii) Mexico, Venezuela and Colombia. The segments’ business features are similar and each segment offers similar products through the same consumer access method. Net revenue by region is presented as follows in 2010: • Brazil: 92.8% • Mexico, Venezuela and Colombia: 1.9% • Argentina, Chile and Peru: 5.0% • Other: 0.3% 128 Although international segments do not represent more than 10% of the information required to aggregate a segment, as established by the aggregation criteria described in IFRS 8 - Operating Segments, management has substantial evidence that its foreign business share will increase considerably against consolidated ﬁ nancial balances and, thus, management opted to report them separately. The accounting policies of each segment are the same as applied by the Company. The performance of the Company’s segments was assessed based on the net operating income, net income and noncurrent assets. This measurement basis excludes the effects of interest, income tax and social contribution, depreciation and amortization. The ﬁ nancial information related to the segments as of December 31, 2010 and 2009 is summarized in the tables below. The amounts provided to the Executive Committee related to net income and total assets are consistent with the balances recorded in the ﬁ nancial statements and with the accounting policies applied. 2010 Net income revenue (loss) Net Brazil Argentina, Chile and Peru Mexico, Venezuela and Colombia Other (*) Consolidated 4.767,741 255,702 98,275 14,994 5,136,712 835,484 (19,822) (45,992) (25,620) 744,050 Net income revenue (loss) Net Brazil Argentina, Chile and Peru Mexico, Venezuela and Colombia Other (*) Consolidated 3,946,421 218,541 66,473 10,622 4,242,057 842,214 (14,357) (52,519) (91,414) 683,924 (*) Includes operations France and expenses in the United States in 2009. Noncurre nt Depreciation and Financial expenses, Income amortization net tax assets assets 2,970,381 (374,412) 156,666 (1,027) 69,041 1,319 25,783 3,221,871 1,258,950 19,489 10,858 16,177 1,305,474 (82,692) (3,405) (2,104) (647) (88,848) - - (49,736) (47,918) (842) (976) (374,120) Total 2009 Noncurre nt Depreciation and Financial expenses, Income amortization net tax assets assets 2,533,261 (188,559) 123,891 (1,441) 50,337 (230) 33,729 - 2,741,218 (190,230) 984,566 14,108 5,532 20,650 1,024,856 (40,912) 317 (1,279) - (41,874) (86,863) (2,128) (1,945) (1,490) (92,426) Total Current liabilities 1,236,800 76,802 33,009 6,738 1,353,349 Current liabilities 1,244,953 64,749 17,972 9,408 1,337,082 The Company has only on class of products that is sold to Natura Beauty Consultants which is classiﬁ ed as “Cosmetics”. As such, disclosure of information by products and services is not applicable. The Company has a dispersed customer portfolio, with no concentration of revenue. The revenue from foreign related parties informed to the Executive Committee was measured in accordance with that stated in the statement of income. 21. NET OPERATING REVENUE Company Consolidated 2009 2009 2010 2010 Gross revenue: Domestic market Foreign market Other sales Taxes on sales Returns and cancellations Net revenue 471,185 - - - - 6,486,421 5,410,052 6,487,124 5,410,545 377,445 1,479 1,323 6,486,421 5,410,052 6,959,788 5,789,313 (7,782) (963,424) (809,105) (1,814,394) (1,539,474) 5,514,315 4,593,165 5,136,712 4,242,057 (8,682) (8,682) (7,782) 22. OPERATING EXPENSES AND COST OF SALES a) Breakdown of operating expenses and cost of sales by function: Company Consolidated 2010 2009 2,283,926 1,956,558 1,556,806 1,294,565 2009 2010 b) Breakdown of operating expenses and cost of sales by nature: Company Consolidated 2010 2009 2010 2009 Variable costs and indirect costs of resale materials and productsa 2,283,926 1,956,558 1,319.106 1,093,965 Marketing and selling expenses 846,913 661,316 910,489 716,420 Freight expenses 223,236 200,922 234,066 216,259 Research and product development expenses (note 2.12.) Project expenses Services expenses Employee beneﬁ t 299 - 51,958 111,794 33,601 37,804 101,587 90,418 65,227 57,739 171,970 133,470 expenses (note 23) 261,441 253,456 628,078 521,938 Compensation of key management personnel (note 28.2) Depreciation and 14,417 13,139 14,417 14,063 amortization charges 15,305 11,918 88,848 92,426 Others expenses 107,183 86,345 430,819 320,652 Cost of sales Marketing and selling expenses General and administrative expenses Management compensation Compensation of key management personnel (note 28.2) Total 1,292,365 1,062,579 1,704,322 1,496,125 Provision of administrative 837,808 18,174 698,241 21,049 605,442 70,351 450,868 55,784 services (note 28.1) 328,183 252,015 - - Provision of research and development services 14,417 13,139 14,063 4,446,690 3.751,566 3,951,338 3,311,405 14,417 (note 28.1) Total 266,959 220,354 - - 4,446,690 3,751,566 3,951,338 3,311,405 129 23. EMPLOYEE BENEFIT EXPENSES Remaining Payroll and bonuses Management compensation (note 23.1.) Pension plan (note 24.1.) Executives’ compensation Taxes payable Company Consolidated 2009 354,037 2010 177,326 2009 174,908 2010 414,167 18,174 2,167 4,081 59,693 261,441 21,049 961 4,826 51,711 253,456 70,351 2,528 11,288 129,744 628,078 55,784 1,387 8,573 102,157 521,938 23.1. Management and employee proﬁ t sharing The Company and its subsidiaries pay proﬁ t sharing to their employees and ofﬁ cers, tied to the achievement of operational targets and speciﬁ c objectives, established and approved at the beginning of each year. As of December 31, 2010 and 2009, the amounts below were recorded as proﬁ t sharing: Employee Management (*) Company Consolidated 2009 55,784 5,749 61,533 2010 18,174 6,018 24,192 2009 21,049 5,424 26,473 2010 70,351 6,018 76,369 (*)Included in caption “Management compensation”. 23.2. Stock option plan Once a year the Board of Directors meets in order to choose the directors and managers who will receive the options and the total number to be distributed. Under the format prevailing until 2008, the programs had a four-year vesting period, after which 50% of the options could be exercised at the end of the third year and 50% at the end of the fourth year, and a maximum term of two years for the exercise of options after the end of the fourth year of the vesting period. In 2009, the plan was revised to establish the end of the fourth year as the vesting date of all the options granted, with the possibility of reducing the vesting period to three years through the cancelation of 50% of the options granted and setting the four years as the maximum term for the exercise of the options. On March 19, 2010, 2,175,646 options were granted under this new plan format, with the exercise price of R$34.17. The changes in the number of outstanding stock options and their related weighted-average prices are as follows: 2010 2009 Average Average exercise price Options exercise price Options per share - R$ (thousands) per share - R$ (thousands) Balance at beginning of year Granted Cancelled Exercised Balance at end of year 19.24 22.44 23.96 10.78 4,733 2,583 (568) (1,210) 23.22 34.17 22.80 5,538 2,176 (268) 22.74 (607) 6,839 28.10 23.22 5,538 Out of the 6,839,000 outstanding options as of December 31, 2010 (5,538,000 outstanding options as of December 31, 2009), 822,000 outstanding options are vested (685,000 outstanding options as of December 31, 2009). The options exercised by employees of the Company and/or its subsidiaries as of December 31, 2010 resulted in the issuance of 607,000 shares (1,210,000 shares as of December 31, 2009). The expense related to the fair value of the options granted during the period ended December 31, 2010, according to the elapsed vesting period, was R$4,081 and R$11,288, Company and on a consolidated basis, respectively (R$4,339 and R$8,573 Company and on a consolidated basis, respectively, as of December 31, 2009). The outstanding stock options at the end of the quarter/year have the following vesting dates and exercise prices December 31, 2010: Date of grant March 16, 2005 March 29, 2006 April 24, 2007 April 22, 2008 April 22, 2009 March 19, 2010 December 31, 2009: Date of grant April 10, 2004 March 16, 2005 March 29, 2006 April 24, 2007 April 22, 2008 April 22, 2009 options live (years) options Exercise Outstanding contractual Exercisable price - R$ 20.25 30.17 28.53 22.16 24.17 35.46 0.21 1.23 2.35 3.36 6.40 7.32 82,981 414,120 650,333 1,128,902 2,436,105 2,126,372 6,838,813 82,981 414,120 325,167 - - - 822,268 Remaining options live (years) options Exercise Outstanding contractual Exercisable price - R$ 8.92 19.12 28.49 26.94 20.92 22.82 0.28 1.22 2.24 3.36 4.37 7.41 93,622 281,911 623,221 807,511 1,210,647 2,520,690 5,537,602 93,622 281,911 309,906 - - - 685,439 As of December 31, 2010, market price per share was R$47.69 (R$36.31 as of December 31, 2009). Signiﬁ cant data included in the fair value pricing model of the options granted in 2010: • Fair value of stock option of R$10.82 (R$7.83 in 2009) on grant date. • Volatility of 37% (39% in 2009). • Dividend yield of 5.3% (5.3% in 2009). • Expected option life of three and four years. • Risk-free annual interest rate of 10.8% (9.6% in 2009). Below is a simulation of the effects from: (a) the exercise of options granted through December 31, 2010; and (b) the exercise of all options liable to being granted under the Stock Option Plan. For both scenarios, we assumed that all options were exercisable as of December 31, 2010, based on the Company’s shareholders’ equity on that date: Average exercise price per share - R$ Number of common shares Number of shares to be issued with the exercise of the options Book value per share as of December 31, 2010 - R$ Book value per share as of December 31, 2010, considering the exercise of all options granted under each plan - R$ Dilution of book value per share considering the exercise of all options granted in each plan - R$ Dilution in percentage considering the exercise of all options granted in each plan Scenario I Granted options 28.10 430,881,416 Scenario II Total plan 28.10 430,881,416 6,838,813 17,953,392 2.90 2.85 0.05 2.90 2.78 0.12 1.72% 4.00% 24. EMPLOYEE BENEFITS 24.1. Pension plan The Company and its subsidiaries sponsor two employees’ beneﬁ t plans: a pension plan, through a private pension fund managed by Brasilprev Seguros e Previdência S.A., and an extension of healthcare plans to retired employees. The deﬁ ned contribution pension plan was created on August 1, 2004 and all employees hired from that date are eligible to it. Under this plan, the cost is shared between the employer and the employees, so that the Company’s share is equivalent to 60% of the employee’s contribution according to a contribution scale based on salary ranges from 1% to 5% of the employee’s monthly compensation. On December 31, 2010, the Company and its subsidiaries did not have actuarial liabilities arising from the former employees’ pension plan. The contributions made by the Company and its subsidiaries totaled R$2,167 (Company) and R$2,528 (Consolidated) in the period ended December 31, 2010 (R$961, Company and R$1,387, Consolidated in the period ended December 31, 2009) and were recorded as expenses in the period. 130 24.2. Healthcare plan The Company and its subsidiaries maintain a postemployment healthcare plan for a group of former employees and their spouses that is governed by speciﬁ c rules. As of December 31, 2010, the plan had 304 (Company) and 2,165 (Consolidated) participants. As of December 31, 2010, the Company and its subsidiaries had a reserve for the actuarial liability arising from this plan totaling R$13,123 (Company) and R$19,742 (Consolidated), (R$2,384, Company and R$9,342, Consolidated as of December 31, 2009), which was calculated by an independent actuary considering the following main assumptions: Annual percentage (in nominal terms) Financial discount rate Increase in medical expenses (reduced by 0.5% per year) Long-term inﬂ ation General mortality table 2010 11.2 10.5 a 5.5 4.5 RP 2000 25. FINANCIAL INCOME (EXPENSES), NET Company Consolidated 2009 2010 2009 2010 Financial income: Interest on short-term investments Inﬂ ation adjustment and foreign exchange gains (a) Gains on swap and forward transactions Other ﬁ nancial income Financial expenses: Interest on ﬁ nancing Inﬂ ation adjustment and foreign exchange losses (a) Losses on swap and forward transactions Other ﬁ nancial expenses Financial expenses, net 13,171 6,378 35,809 28.610 - 44,414 34 45.745 2,403 1,941 17,515 1,379 4,623 56,794 3,901 13,895 53,639 3,459 6,362 84,176 (39,896) (20,274) (58,457) (38,466) (3,757) (43) (7,130) (7,980) (9,075) (5,509) (58,237) (40,772) (57,660) (12,076) (5,828) (25,712) (83,805) (103,375) (49,736) (27,011) (67,418) (12,186) (126,050) (41,874) 27. EARNINGS PER SHARE 27.1. Basic Diluted earnings per share is calculated by adjusting the weighted average outstanding common shares supposing that all potential common shares that would cause dilution are converted. The Company has only one category of common shares that would potentially cause dilution: the stock options. 2009 2010 Net income attributable to the Company’s shareholders Weighted average of common shares issued Weighted average of treasury shares Weighted average of outstanding common shares Basic earnings per share - R$ 744,050 683,924 430,548,910 (655) 429,461,590 (10,208) 430,548,255 1,7281 429,451,382 1,5926 27.2. Diluted Diluted earnings per share is calculated by adjusting the weighted average outstanding common shares supposing that all potential common shares that would cause dilution are converted. The Company has only one category of common shares that would potentially cause dilution: the stock options. Net income attributable to the owners of the Company Weighted average of number of common shares issued Weighted average of treasury shares Weighted average of number of outstanding common shares issued Basic earnings per share - R$ 2010 2009 744,050 683,924 430,548,255 1,564,844 429,451,382 1,017,758 432,113,098 1.7219 430,469,140 1.5888 The objective of the breakdowns below is to explain more clearly the foreign exchange hedging transactions contracted by the Company and their contra entries in the statement of income shown in the previous table: Consolidated 2009 2010 28. RELATED-PARTY TRANSACTIONS 28.1. Intragroup transactions Receivables from and payables to related parties are as follows: (a) Inﬂ ation and exchange gains Inﬂ ation and exchange losses (a) Breakdown Exchange rate changes on loans and ﬁ nancing Adjustment for inﬂ ation on ﬁ nancing Exchange rate changes on imports Exchange rate changes on accounts payable in foreign subsidiaries Exchange rate changes on export receivables 34 (7,130) (7,096) 45.745 (7,980) 37,765 (2,781) 34 (1,089) 51,587 (2,925) 619 (1,399) (823) (1,861) (7,096) (10,693) 37,765 26. OTHER OPERATING INCOME (EXPENSES), NET Gain on sale of property, plant and equipment Actuarial liability - healthcare plan (note 24.2) Others Other operating income (expenses), net Controladora Consolidado 2010 2009 2010 2009 387 702 (9,044) (9,265) (1,378) (1,447) (2,384) 2,643 (5,400) (3,024) (9,342) 3,983 465 961 (17,468) (14,624) Current assets: Natura Inovação e Tecnologia de Produtos Ltda. (a) Natura Logística e Serviços Ltda. (b) Advance for future capital increase- Flora Medicinal J. Monteiro da Silva Ltda. (c) Current liabilities- Suppliers: Indústria e Comércio de Cosméticos Natura Ltda. (d) Natura Logística e Serviços Ltda. (e) Natura Inovação e Tecnologia de Produtos Ltda. (f) Dividends and interest on capital payable Company 2009 2010 13,143 12,218 25,361 12,171 14,586 26,757 - - 90 90 153,597 47,356 153,509 27,627 45,636 246,589 163 30,455 211,591 174 Transactions with related parties are as follows: 131 Company Product sales Product purchases 2009 2009 2010 2010 Indústria e Comércio de Cosméticos Natura Ltda. Natura Cosméticos S.A.-Brasil Natura Cosméticos S.A.-Peru Natura Cosméticos S.A. -Argentina Natura Cosméticos S.A.-Chile Natura Cosméticos S.A.-México Natura Cosméticos Ltda. -Colômbia Natura Cosméticos C.A. -Venezuela Natura Europa SAS-França Natura Inovação e Tecnologia de Produtos Ltda. Natura Logística e Serviços Ltda. Natura Cosmetics USA Co. 3,006,596 2,611,231 - - - - - - - - - - - 2,837,687 2,465,453 34,151 - 34,104 - - - - - - 42,693 32,971 35,533 46,970 25,300 22,353 18,514 10,846 - 4,672 1,417 3,885 - - 799 - 56 - - - - 1 3,006,596 2,611,231 3,006,596 2,611,231 388 34 Service sales Services purchases 2009 2009 2010 2010 Administrative structure: (g) Natura Logística e Serviços Ltda. Natura Cosméticos S.A. - Brasil Indústria e Comércio de Cosméticos Natura Ltda. Natura Inovação e Tecnologia de Produtos Ltda. 438,095 - 333,652 - - 328,183 - 252,015 - - 67,810 52,176 - - 438,095 333,652 Product and technology research and development: (h) Natura Inovação e Tecnologia de Produtos Ltda. 220,354 Natura Cosméticos S.A. - Brasil - - 220,354 266,959 266,959 42,102 438,095 29,461 333,652 - 266,959 266,959 - 220,354 220,354 The main intercompany balances as of December 31, 2010 and 2009, as well as the intercompany transactions that affected the years then ended, refer to transactions between the Company and its subsidiaries. Because of the Company’s and subsidiaries’ operational model, as well as the channel chosen to distribute products, direct sales via Natura Beauty Consultants, a substantial portion of sales is made by the subsidiary Indústria e Comércio de Cosméticos Natura Ltda. to the parent company Natura Cosméticos S.A. in Brazil and to its foreign subsidiaries. Sales to unrelated parties amounted to R$7,620 for the year ended December 31, 2010 (R$6,628 for the year ended December 31, 2009). There is no allowance for doubtful accounts recognized for intercompany receivables on December 31, 2010 and 2009 since there are no past-due receivables with risk of default. According to note 15, the Group companies usually grant each other pledges and collaterals to guarantee bank loans and ﬁ nancing. 2010 Stock option grant Stock option Compensation Variável Fixed (a) Total Average exercise balance 3,348 1,985 5,333 - - 5,051 8,399 4,033 6,018 9,084 14,417 1,512,568 1,512,568 28,10 2009 Stock option grant Stock option Compensation Variável Fixed (a) Total Average exercise balance 3,562 1,713 5,275 - 4,828 8,390 3,960 5,673 8,788 14,063 977,338 977,338 - 23,22 Board of Directors Ofﬁ cers (statutory) Board of Directors Ofﬁ cers (statutory) The compensation of the Company’s executives is as follows: 2010 Stock option grant Stock option Compensation Variável Fixed (a) Total Average exercise balance 3,538 3,066 - - - - 3,538 3,066 3,538 3,538 3,066 3,066 Executives (not statutory) 25,194 14,917 40,111 2,961,042 28,10 6,728 - 6,632 - - 3,899 - 3,843 2009 Stock option grant Stock option Compensation Variável Fixed (a) Total Average exercise balance - - 1,567 1,544 Executives (not statutory) 18,539 10,813 29,352 2,498,686 23,22 “In vitro” research and tests: (i) Natura Innovation et Technologie de Produits SAS - França Natura Inovação e Tecnologia de Produtos Ltda. Lease of properties and common charges: (j) Indústria e Comércio de Cosméticos Natura Ltda. Natura Logística e Serviços Ltda. Natura Inovação e Tecnologia de Produtos Ltda. Natura Cosméticos S.A. - Brasil - - 6,632 6,728 1,263 6,728 1,245 6,632 Total of sales or purchases and services 3,721,916 3,174,935 3,721,916 3,174,935 (a) Refers to advances granted for provision of product and technology development and market research services. (b) Refers to advances granted for provision of logistics and general administrative services. (c) Refers to remittances to Flora Medicinal J. Monteiro da Silva Ltda. (d) Payables for the purchase of products. (e) Payables for services described in item (g). (f) Payables for services described in item (h). (g) Logistics and general administrative services. (h) Product and technology development and market research services. (i) Provision of “in vitro” research and tests. (j) Refers to the lease of part of the industrial complex located in Cajamar - SP and buildings located in the municipality of Itapecerica da Serra - SP. (a) Refers to the proﬁ t sharing recorded in the statement of income. The amounts include any additions and/or reversals to the provision recorded in the previous year in view of the ﬁ nal assessment of the targets established for directors, ofﬁ cers and executives. (b) Refers to the balance of unexercised vested and unvested options as of the balance sheet date. (c) Refers to the weighted-average exercise price of the option at the time of the stock option plans, adjusted for inﬂ ation based on the Extended Consumer Price Index (IPCA) through the balance sheet date. 29. COMMITMENTS 29.1. Inputs supply contracts The subsidiary Indústria e Comércio de Cosméticos Natura Ltda. entered into a contract for the supply of electric power to its manufacturing activities, in effect through 2015, which provides for the purchase of a minimum monthly volume of 3.6 Megawatts, equivalent to R$363. As of December 31, 2010, the subsidiary was compliant to the contract’s commitment. 132 The amounts are recognized as electric power is consumed over the contract term; prices are based on volumes and also estimated assuming the continuity of the subsidiary’s operations. Total minimum supply payments, measured at present value, according to the contract, are: Less than one year More than one year and less than ﬁ ve years Over ﬁ ve years 2010 3,899 9,591 2,578 16,068 2009 3,941 12,525 2,462 18,928 29.2. Operating lease transactions The Company and its subsidiaries have commitments arising from operating leases of properties where some of its foreign subsidiaries, the head ofﬁ ce in Brazil and “Casas Natura” in Brazil and abroad are located. Contracts have lease terms of one to ten years and no purchase option clause when terminated; however, renewal is permitted under the market conditions where they are entered into, for an average of two years. As of December 31, 2010, the commitment made for future payments of these operating leases had the following maturities: 2011 2012 2013 and thereafter Company 1,217 1,217 3,806 6,240 Consolidated 5,332 3,426 7,221 15,979 30. INSURANCE (UNAUDITED INFORMATION) The Company and its subsidiaries contract insurance based principally on risk concentration and signiﬁ cance, at amounts considered by Management to be sufﬁ cient, taking into consideration the nature of its activities and the opinion of its insurance advisors. As of December 31, 2010, the insurance coverage was as follows: Item Industrial complex/ inventories Insured Type amount Any material damages to 829,987 buildings, facilities and machinery and equipment Vehicles Loss of proﬁ ts Fire, theft and collision for 1,480 vehicles Normalization of proﬁ ts arising from material damages to facilities, buildings and production machinery and equipment 57,357 1,372,097 31. APPROVAL OF FINANCIAL STATEMENTS FOR ISSUANCE These individual and consolidated ﬁ nancial statements were approved for issuance by the Board of Directors at the meeting held on February 23, 2011. 133 REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENTS To Management and Shareholders of Natura Cosméticos S.A. Itapecerica da Serra - SP We have audited the accompanying individual and consolidated ﬁ nancial statements of Natura Cosméticos S.A. (the “Company”), identiﬁ ed as Parent and Consolidated, respectively, which comprise the balance sheet as of December 31, 2010, and the statements of income, comprehensive income, changes in stockholders’ equity and cash ﬂ ows for the year then ended, and a summary of signiﬁ cant accounting policies and other explanatory information. Management’s responsibility for the ﬁ nancial statements Company’s Management is responsible for the preparation and fair presentation of the individual ﬁ nancial statements in accordance with Brazilian accounting practices and the consolidated ﬁ nancial statements in accordance with International Financial Reporting Standards - IFRS, as issued by International Accounting Standards Board - IASB, and in accordance with Brazilian accounting practices and for such internal controls as Management determines it is necessary to enable the preparation of ﬁ nancial statements that are free from material misstatement, whether due to fraud or error. Auditors’ responsibility Our responsibility is to express an opinion on these ﬁ nancial statements based on our audit, which was conducted in accordance with Brazilian and international standards on auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the ﬁ nancial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the ﬁ nancial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the ﬁ nancial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the preparation and fair presentation of the Company’s ﬁ nancial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by Management, as well as evaluating the overall presentation of the ﬁ nancial statements. We believe that the audit evidence we have obtained is sufﬁ cient and appropriate to provide a basis for our audit opinion. Opinion on individual ﬁ nancial statements In our opinion, the individual ﬁ nancial statements present fairly, in all material respects, the ﬁ nancial position of Natura Cosméticos S.A. as of December 31, 2010 and of its ﬁ nancial performance and its cash ﬂ ows for the year then ended in accordance with Brazilian accounting practices. Opinion on consolidated ﬁ nancial statements In our opinion, the consolidated ﬁ nancial statements present fairly, in all material respects, the ﬁ nancial position of Natura Cosméticos S.A. as of December 31, 2010 and of their consolidated ﬁ nancial performance and their consolidated cash ﬂ ows for the year then ended in accordance with IFRS, as issued by the IASB, and Brazilian accounting practices. Emphasis of matter As described in note 2.1., the individual ﬁ nancial statements were prepared in accordance with Brazilian accounting practices. For Natura Cosméticos S.A. these practices differ from IFRS, applicable to separate ﬁ nancial statements, only in relation to measurement of equity method investments in subsidiaries, associates and joint-controlled entities, which are measured based on cost or fair value in accordance with IFRS. Other matters Statements of value added We have also audited individual and consolidated statements of value added (DVA) for the year ended December 31, 2010, whose presentation is required by Brazilian corporate law for public companies, and as supplementary information under IFRS which do not require the presentation of DVA. These statements were subject to the same audit procedures previously described and, in our opinion, are appropriately presented, in all material respects, in relation to the overall ﬁ nancial statements presentation. Convenience translation The accompanying ﬁ nancial statements have been translated into English for the convenience of readers outside Brazil. São Paulo, February 23, 2011 Edimar Facco Auditores Independentes Engagement Partner CRC nº 2 SP 011609/O-8 CRC nº 1 SP 138635/O-2 134 DNV ASSURANCE STATEMENT SUMMARY NATURA SUSTAINABILITY REPORT 2010 1. Context and responsibilities Det Norske Veritas (DNV) has been commissioned by Natura Cosméticos SA (‘Natura’) to provide assurance services in connection with the Portuguese version of Natura’s Sustainability Report 2010 (‘the Report’). The Board of Natura is responsible for all information provided in the Report as well as the processes for collecting, analysing and reporting that information. DNV’s responsibility regarding this veriﬁ cation is to Natura only, in accordance with the scope of work commissioned. The stakeholders of Natura are the intended users of this Assurance Statement. DNV disclaims any liability or responsibility to a third party for decisions, whether investment or otherwise, based upon this Assurance Statement summary, or its full version available in Portuguese at www.natura.net/relatorio. Our conclusions are based on the assumption that the data and information provided to DNV is complete and true. 2. Independence DNV states its independence and impartiality with regard to this commission. DNV was not involved in the preparation of any text or data included in the Report, except for this Assurance Statement summary and its full version available in Portuguese at www.natura.net/relatorio. Moreover, in 2010, DNV did not provide any services to Natura that could compromise the independence or impartiality of our ﬁ ndings, conclusions or recommendations. 3. Scope and limitations DNV’s assurance engagement consisted of the veriﬁ cation of information provided in the Report, as well as the assessment of the underlying data management and reporting processes, for the period of 12 months ending on 31 December 2010. Based on the scope of work commissioned by Natura, the main objectives of this engagement were to assess and verify: (cid:129) Processes and activities carried out by Natura in order to identify, assess and prioritise material sustainability issues; (cid:129) Processes and activities carried out by Natura in order to identify, analyse and respond to stakeholders’ interests and concerns in relation to the company’ sustainability strategy, management and performance, and the content of the Report; (cid:129) Systems, processes and tools to collect, aggregate, control and assure the quality of data and report on sustainability-related information; (cid:129) The description of sustainability related policies, strategies, objectives, initiatives, achievements and performance in 2010, as described in the Report; (cid:129) Adherence of reported information to the principles of materiality, reliability, balance, clarity and comparability set out in the Global Reporting Initiative Sustainability Reporting Guidelines, 2006 and AccountAbility’s AA1000 Assurance Principles Standard, 2008 (AA 1000 APS); (cid:129) Veriﬁ cation and endorsement of the GRI (2006) application level declared by Natura. This statement does not cover the veriﬁ cation of information or processes related to greenhouse gas emissions, which were subject to assessment and assurance by another third party. This assurance engagement focused primarily on the quality of the sustainability information and data presented in the Report and the underlying reporting systems. DNV’s scope of work did not include an assessment of the adequacy, effectiveness or efﬁ ciency of Natura’s sustainability strategy or management practices. It also excluded the assessment or veriﬁ cation of sustainability management, performance or reporting practices by Natura’s suppliers or any other third parties mentioned in the Report. 4. Approach This assurance engagement was carried out between January and April 2011 by suitably qualiﬁ ed and experienced professionals, following DNV’s Protocol for Veriﬁ cation of Sustainability Reports. DNV’s Veriﬁ cation Protocol has been developed in accordance with the most widely accepted reporting and assurance standards, including AA1000 APS (2008) and the GRI Sustainability Reporting Guidelines, 2006 (GRI G3). 135 The methods used in this engagement included: (cid:129) Interviews with 32 directors, managers and staff responsible for processes related to the management of material issues at Natura’s headquarters and production units in Cajamar and Benevides (Brazil); (cid:129) Participation (as an observer) in a multi-stakeholder engagement event organized in Belém, State of Pará (Brazil) to discuss the material issues related to sourcing in the Amazon region; (cid:129) Interviews with 4 selected external stakeholders representing supplier communities of the company and a local regulatory agency; (cid:129) Review of documentation and other evidence of developments in the company’s sustainability objectives, resources and activities; (cid:129) Review of sustainability performance-related reports, performance records and samples of data at source; (cid:129) Assessment of the quality and effectiveness of data management systems and tools for collection, aggregation quality control, and reporting of sustainability information. This also involved testing selected data samples; (cid:129) Review of the outputs of materiality assessment and external stakeholder engagement initiatives carried out by Natura, as well as internal and external communications regarding Natura’s commitment, approach and performance on sustainability; (cid:129) Assessment of draft and ﬁ nal versions of the Report against relevant reporting and report assurance standards and guidelines. 5. Main conclusions and opportunities for improvement Based on the work undertaken as part of this assurance engagement, DNV concludes that: (cid:129) Natura’s Sustainability Report 2010 generally provides a reliable and fair representation of Natura’s sustainability related policies, management approach, initiatives and performance over the reporting period. (cid:129) The Report is well aligned with the principles established in the GRI Sustainability Reporting Guidelines (2006). DNV also endorses the GRI Application Level of A+, declared by Natura. (cid:129) Natura continued to develop their understanding of material topics, in close collaboration with stakeholders in Brazil and overseas (Argentina, Chile, Colombia, México and Peru). The outcomes from these initiatives have been adequately considered in the preparation of the Report. (cid:129) The reliability of the information is still limited due to the lack of systematization of the company’s data management processes, in particular in the international operations. In the course of the veriﬁ cation, DNV identiﬁ ed the following opportunities for improvement: (cid:129) Inclusivity and responsiveness: continue to improve the description of the company’s stakeholders’ interests and expectations in relation to Natura’s sustainability strategy and the content of the Report. The Report could also better describe how Natura has responded or intends to respond to stakeholder expectations. (cid:129) Reliability: increase the systematization of data management processes, in particular in the company’s international operations. Internal audits of sustainability data are also recommended. (cid:129) Comparability: (cid:129) improve the monitoring of sustainability performance in international operations, in order to increase the scope of reporting of performance in the Report. This should also increase comparability of performance across the various operations of Natura; (cid:129) continue to deepen Natura’s understanding of the sustainability performance of its main products and supply chains, following the pilot initiatives initiated in 2010. (cid:129) Clarity: improve the clarity and homogeneity of future translated versions of the Report into English. Detailed information on DNV’s approach, conclusions and recommendations is provided in the full Assurance Statement available in Portuguese at www.natura.net/relatorio. Jasmin Eymery Veriﬁ cador principal Alexandre Simões Jorge Veriﬁ cador Antonio Ribeiro Controle da qualidade Det Norske Veritas, São Paulo, 13 May 2011 136 137 ABOUT THIS REPORT For the 11th consecutive year, we are publishing the Natura Annual Report. This report is prepared according to the guidelines of the Global Reporting Initiative (GRI) for the period from January 1 to December 31, 2010. We have adopted the G3 version of the GRI, and for the fourth consecutive year we declare that we have applied the A+ application level for reporting our economic, social, and environmental performances. The socioenvironmental information herein was subject to external veriﬁ cation by Det Norske Veritas (DNV). Greenhouse gas inventory data were subject to a speciﬁ c veriﬁ cation (limited assurance) by the auditing and consulting ﬁ rm PwC, while the economic and ﬁ nancial information was audited by Deloitte Touche Tohmatsu Auditores Independentes. Report Application Level G3 Proﬁ le Disclosures G3 Management Approach Disclosures G3 Performance Indicators & Sector Supplement Performance Indicators T U P T U O T U P T U O T U P T U O s e r u s o l c s i D d r a d n a t S C Report on: 1.1 2.1 - 2.10 3.1 - 3.8, 3.10 - 3.12 4.1 - 4.4, 4.14 - 4.15 Not Required Report on a minimum of 10 Performance Indicators, including at least one from each of: Economic, Social and Environmental C+ B B+ A A+ d e r u s s A y l l a n r e t x E t r o p e R Report on all criteria listed for Level C plus: 1.2 3.9, 3.13 4.5 - 4.13, 4.16 - 4.17 Management Approach Disclosures for each Indicator Category Report on a minimum of 20 Performance Indicators, at least one from each of Economic, Environmental, human rights, Labor, Society, Product Responsibility d e r u s s A y l l a n r e t x E t r o p e R Same as requirement for Level B Management Approach Disclosures for each Indicator Category Report on each core G3 and Sector Supplement* Indicator with due regard to the Materiality Principle by either: a) reporting on the Indicator or b) explaining the reason for its omission. d e r u s s A y l l a n r e t x E t r o p e R * Sector supplement in ﬁ nal version This publication considers the information related to all our operations. These include Argentina, Chile, Colombia, Mexico, Peru, and France, in addition to the operations in Bolivia and Central America, where we operate through distributors. The scope of the socioenvironmental information is mainly related to the activities in Brazil, where our production is concentrated and where most of our social and environmental impacts occur. The economic data include all our operations. Since 2009, the calculation of our key environmental impacts – water and energy consumption and waste generation – has included data from outsourced suppliers who manufacture our products in Brazil. Therefore, we have undertaken a more precise evaluation of the impacts of our operations. One of our challenges for the future is to begin monitoring the indicators of the outsourced operations of our international operations. In 2010 we started production in Argentina, and we expect to begin production in Chile and Mexico in 2011. Possible signiﬁ cant changes in relation to previous years, as well as changes in the calculation basis or measurement techniques, are presented throughout the report and in the tables. We present data on our relationships with our priority stakeholders, whom we deﬁ ne as our brand builders: employees; consultants and Natura Consultant Advisers; consumers; suppliers; supplier communities; surrounding communities; shareholders; and government. The information in this report is available in different formats and accessible through different communication channels: (cid:129) Management Report – published in the Valor Econômico and Brasil Econômico newspapers and in the Diário Oﬁ cial ofﬁ cial gazette on February 24, 2011, containing the main performance data for the year. (cid:129) Report for key opinion leaders – the main printed publication containing the most relevant information about our performance. Available in Portuguese, English, and Spanish. (cid:129) Internet – presents the full content in Portuguese and English. Access our electronic address www.natura.net/relatorio. (cid:129) Special edition for employees – contains topics of interest to our internal stakeholders and is also available on the Internet in Portuguese and Spanish. (cid:129) Special edition for our consultants – contains speciﬁ c information for our sales channel, available in Portuguese only and on the Internet. The preparation of the report was discussed as well as published on the Natura Conecta virtual platform (www.naturaconecta.com.br). Access to the portal is free to all. CONSTRUCTING MATERIALITY The participation of our stakeholders in developing the materiality matrix not only involves deﬁ ning the content of the report, it also directs our strategic management of sustainability. The concerns identiﬁ ed during the process produce a blueprint for senior management to draw up the company’s plans, which are consequently reﬂ ected in the company report. Undertaken every two years, the materiality matrix cross-references the socioenvironmental topics identiﬁ ed by our stakeholders as relevant (external axis) with their importance for the company (internal axis). Topics are selected on the basis of importance to the company’s strategy, operating risks and opportunities, and for their pioneering spirit. The matrix presented in this report was constructed in 2008 and detailed and expanded with our stakeholders from the Brazilian operations in 2009. In all, 1,400 people were involved in the process. The high-High-priority Topics in sustainability were deﬁ ned as the Amazon, Biodiversity, Education, Greenhouse Gases, Product Impact, and Quality of Relationships. The Amazon region was not identiﬁ ed by the stakeholders, but we included it in our priorities because we consider this to be a key factor for Brazil’s development (learn more on page 24, High priority Topics). MATERIALITY MATRIX l r e d o h e k a t s f o s t s e r e t n I L A N R E T X E Biodiversity Greenhouse gases Quality of relationships Impacts of products Education Control and influence level high medium low INTERNAL Natura´s importance 138 Throughout 2010, we undertook a new cycle of engagement so as to update the materiality matrix, making important progress. A description of this process will be incorporated into the discussions of Natura’s strategic planning in 2011 and published in the next reporting cycle. The next matrix will include stakeholders from our Latin American operations. This will enable us to identify high-High-priority Topics that reﬂ ect all our units, not just our Brazilian operations. We held a multistakeholder panel at our head ofﬁ ce in Cajamar (São Paulo), in addition to dialogues for this purpose in Argentina, Peru, Colombia, and Mexico in 2010, and in March 2011 in Chile. We moved forward with the Wiki Reports in early 2011. We revisited the discussions held in the six virtual forums of 2010 and presented the progress of our work on high-High-priority Topics. This platform was also used to set priorities for the topics in the new materiality matrix. Our objective was to enable participants to contribute to the Natura’s actions in a collaborative manner, evaluating them and making suggestions — thus turning the report into a living document in the spirit of ongoing communication and permanent dialogue. The Wiki Natura Report community is available at www.naturaconecta.com. br and all those interested can participate (learn more on page 33, Collective Construction). GLOBAL COMPACT PRINCIPLES Since July 2000, Natura has been a signatory of the Global Compact, a United Nations initiative that brings together companies, workers, and civil society to promote sustainable growth and citizenship. We are also part of the Global Compact Brazilian Committee (CBPG), created from the partnership between the Ethos Institute and the United Nations Development Program in 2003. We also hosted a panel discussion led by specialists. Employees and suppliers involved in the Natura reporting process and external communication and sustainability professionals participated in this event. We reﬂ ected on current characteristics of our reporting and what changes are required, pointing out more appropriate formats, types of approaches, and frequency. The process of gathering information for the annual report is supported by a communications agency with experience in sustainability. It includes more than 50 interviews with representatives of both employees and management, who update indicators by different departments of the company. Last year, we improved data collection with the support of an online tool for ﬁ lling out data by the relevant areas, though there is still a need for better data management throughout the year. The information in this report is validated by senior management and is subject to external audit. We are recognized for our effort to integrate economic, social and environmental information into our report. We are aware, however, that we still have a lot to develop until we succeed in interrelating the main impact of our activities. For further information on this report, please directly contact the team responsible for its preparation by e-mail: relatorioanual@natura.net. The CBPG is made up of companies, UN agencies in Brazil, legal entities, academia, and organizations that work on such topics as human and labor rights, the environment, and combating corruption. For further information on this initiative, visit www.pactoglobal.org.br. Global Compact Principles Human Rights Principles Principle 1 Respect and protect human rights Principle 2 Prevent human rights violations Principles of Labor Rights Principle 3 Support freedom of association in the workplace Principle 4 Abolish forced labor Principle 5 Abolish child labor Principle 6 Eliminate discrimination in the workplace Principles of Environmental Protection Principle 7 Support a preventive approach to environmental challenges Principle 8 Promote environmental responsibility Relevant GRI Indicators HR1; HR2; HR3; HR4; HR5; HR6; HR7; HR8; HR9 HR1; HR2; HR8 HR5; LA4; LA5 HR7 HR6 HR4; LA2; LA13; LA14 EN2; EN5; EN6; EN7; EN10; EN13; EN14; EN18; EN21; EN22; EN26; EN27; EN30 Indirectly relevant GRI indicators LA4; LA13; LA14; SO1 Performance information p. 37 and 50 p. 52 p. 39 HR1; HR2; HR3 HR1; HR2; HR3 p. 50 and 51 p. 50 and 51 HR1; HR2; EC5; EC7; LA13 p. 41 and online EC2 p. 14 and 62 Performance Chapter EC2; EN1; EN3; EN4; EN8; EN9; EN11; EN12;EN15; EN16; EN17; p 60 to 66 EN19;EN20; EN23; EN24; EN25; EN28; EN29; PR3; PR4 Principle 9 Encourage environmentally friendly technologies Principle against Corruption Principle 10 Fight corruption in all its forms, including extortion and bribery EN2; EN5; EN6; EN7; EN10; EN18; EN26;EN27 p. 30 and 31 SO2; SO3; SO4 SO5; SO6 p. 18, 56 and 57 139 GRI INDEX See the table below to locate the performance indicators, as per the GRI standard, as well as references and explanations for those that we reported partially. 1. STRATEGY AND ANALYSIS Proﬁ le Disclosure 1,1 1,2 2. ORGANIZATIONAL PROFILE Description Statement from the most senior decision-maker of the organization. Description of key impacts, risks, and opportunities. Proﬁ le Disclosure 2,1 2,2 2,3 2,4 2,5 2,6 2,7 2,8 2,9 2,10 3. REPORT PARAMETERS Proﬁ le Disclosure 3,1 3,2 3,3 3,4 3,5 3,6 3,7 3,8 3,9 3,10 3,11 Description Name of the organization. Primary brands, products, and/or services. Operational structure of the organization, including main divisions, operating companies, subsidiaries, and joint ventures. Location of organization's headquarters. Number of countries where the organization operates, and names of countries with either major opera- tions or that are speciﬁ cally relevant to the sustainability issues covered in the report. Nature of ownership and legal form. Markets served (including geographic breakdown, sectors served, and types of customers/beneﬁ ciaries). Scale of the reporting organization. Signiﬁ cant changes during the reporting period regarding size, structure, or ownership. Awards received in the reporting period. Description Reporting period (e.g., ﬁ scal/calendar year) for information provided. Date of most recent previous report (if any). Reporting cycle (annual, biennial, etc.) Contact point for questions regarding the report or its contents. Process for deﬁ ning report content. Boundary of the report (e.g., countries, divisions, subsidiaries, leased facilities, joint ventures, suppliers). See GRI Boundary Protocol for further guidance. State any speciﬁ c limitations on the scope or boundary of the report (see completeness principle for explanation of scope). Basis for reporting on joint ventures, subsidiaries, leased facilities, outsourced operations, and other entities that can signiﬁ cantly affect comparability from period to period and/or between organizations. Data measurement techniques and the bases of calculations, including assumptions and techniques underlying estimations applied to the compilation of the Indicators and other information in the report. Explain any decisions not to apply, or to substantially diverge from, the GRI Indicator Protocols. Explanation of the effect of any re-statements of information provided in earlier reports, and the reasons for such re-statement (e.g.,mergers/acquisitions, change of base years/periods, nature of business, measurement methods). Signiﬁ cant changes from previous reporting periods in the scope, boundary, or measurement methods applied in the report. Table identifying the location of the Standard Disclosures in the report. Policy and current practice with regard to seeking external assurance for the report. 3,12 3,13 4. GOVERNANCE, COMMITMENTS AND ENGAGEMENT Proﬁ le Disclosure 4,1 4,2 4,3 4,4 4,5 4,6 4,7 4,8 4,9 4,10 4,11 4,12 4,13 4,14 4,15 4,16 4,17 Description Governance structure of the organization, including committees under the highest governance body responsible for speciﬁ c tasks, such as setting strategy or organizational oversight. Indicate whether the Chair of the highest governance body is also an executive ofﬁ cer. For organizations that have a unitary board structure, state the number of members of the highest governance body that are independent and/or non-executive members. Mechanisms for shareholders and employees to provide recommendations or direction to the highest governance body. Linkage between compensation for members of the highest governance body, senior managers, and executives (including departure arrangements), and the organization's performance (including social and environmental performance). Processes in place for the highest governance body to ensure conﬂ icts of interest are avoided. Process for determining the qualiﬁ cations and expertise of the members of the highest governance body for guiding the organization's strategy on economic, environmental, and social topics. Internally developed statements of mission or values, codes of conduct, and principles relevant to econo- mic, environmental, and social performance and the status of their implementation. Procedures of the highest governance body for overseeing the organization's identiﬁ cation and manage- ment of economic, environmental, and social performance, including relevant risks and opportunities, and adherence or compliance with internationally agreed standards, codes of conduct, and principles. Processes for evaluating the highest governance body's own performance, particularly with respect to economic, environmental, and social performance. Explanation of whether and how the precautionary approach or principle is addressed by the organi- zation. Externally developed economic, environmental, and social charters, principles, or other initiatives to which the organization subscribes or endorses. Memberships in associations (such as industry associations) and/or national/international advocacy or- ganizations in which the organization: * Has positions in governance bodies; * Participates in projects or committees; * Provides substantive funding beyond routine membership dues; or * Views membership as strategic. List of stakeholder groups engaged by the organization. Basis for identiﬁ cation and selection of stakeholders with whom to engage. Approaches to stakeholder engagement, including frequency of engagement by type and by stakeholder group. Key topics and concerns that have been raised through stakeholder engagement, and how the organiza- tion has responded to those key topics and concerns, including through its reporting. PERFORMANCE INDICATOR ECONOMIC Performance Indicator Economic management approach Economic performance Description Detailing about what isn’t reported Detailing about what isn’t reported Detailing about what isn’t reported Reported Fully Fully Pages 5 5 Reported Fully Fully Pages 9 9 Fully Fully Fully Fully Fully Fully Fully Fully 9 9 9 9 9 9, 102, 103 and 128 9 10 Reported Fully Fully Fully Fully Fully Pages 138 138 138 139 138 Fully Fully Fully Fully Fully Fully Fully Fully 138 138 138 139 138 138 140 134 Reported Pages Detailing about what isn’t reported Fully Fully Fully Fully Fully Fully Fully Fully Fully Fully Fully Fully Fully Fully Fully Fully Fully 16 16 16 41 23 16 16 3 21 17 61 75;139 85 138 138 33 and 39 32-33; 38; 54; 62; 68 Reported Pages Detailing about what isn’t reported Fully 98 EC1 EC2 EC3 EC4 Market presence EC5 Direct economic value generated and distributed, including revenues, operating costs, employee compensation, donations and other community investments, retained earnings, and payments to capital providers and governments. Financial implications and other risks and opportunities for the organization's activities due to climate change. Coverage of the organization's deﬁ ned beneﬁ t plan obligations. Signiﬁ cant ﬁ nancial assistance received from government. Fully Fully Fully Fully 94; 103; 105, 106 and 131 21 and 27 50 36; 74 and 95 Range of ratios of standard entry level wage compared to local minimum wage at signiﬁ cant locations of operation. Fully 49 140 Policy, practices, and proportion of spending on locally-based suppliers at signiﬁ cant locations of operation. Partially 69 Procedures for local hiring and proportion of senior management hired from the local community at signiﬁ cant locations of operation. Fully 47 Development and impact of infrastructure investments and services provided primarily for public beneﬁ t through commercial, in-kind, or pro bono engagement. Understanding and describing signiﬁ cant indirect economic impacts, including the extent of impacts. Fully Fully 48; 68 and 92 54 and 94 We report our purchasing practices from local suppliers and related expenses, but we do not show the percentage in relation to total supplying because that information is not available. We will begin managing that data in 2011, and will therefore report the results in 2012. Description Reported Pages Detailing about what isn’t reported Fully 79 EC6 EC7 Indirect economic impacts EC8 EC9 ENVIRONMENTAL Performance Indicator Environmental manage- ment approach Materials EN1 EN2 Energy EN3 EN4 EN5 EN6 EN7 Water EN8 EN9 EN10 Biodiversity EN11 EN12 EN13 EN14 EN15 Emissions, efﬂ uents and waste EN16 EN17 EN18 EN19 EN20 EN21 EN22 EN23 EN24 EN25 Products and services Materials used by weight or volume. Partially 86 Percentage of materials used that are recycled input materials. Direct energy consumption by primary energy source. Indirect energy consumption by primary source. Energy saved due to conservation and efﬁ ciency improvements. Initiatives to provide energy-efﬁ cient or renewable energy based products and services, and reductions in energy requirements as a result of these initiatives. Initiatives to reduce indirect energy consumption and reductions achieved. Total water withdrawal by source. Water sources signiﬁ cantly affected by withdrawal of water. Percentage and total volume of water recycled and reused. Location and size of land owned, leased, managed in, or adjacent to, protected areas and areas of high biodiversity value outside protected areas. Description of signiﬁ cant impacts of activities, products, and services on biodiversity in protected areas and areas of high biodiversity value outside protected areas. Habitats protected or restored. Strategies, current actions, and future plans for managing impacts on biodiversity. Number of IUCN Red List species and national conservation list species with habitats in areas affected by operations, by level of extinction risk. Total direct and indirect greenhouse gas emissions by weight. Other relevant indirect greenhouse gas emissions by weight. Initiatives to reduce greenhouse gas emissions and reductions achieved. Emissions of ozone-depleting substances by weight. NO, SO, and other signiﬁ cant air emissions by type and weight. Total water discharge by quality and destination. Total weight of waste by type and disposal method. Total number and volume of signiﬁ cant spills. Weight of transported, imported, exported, or treated waste deemed hazardous under the terms of the Basel Convention Annex I, II, III, and VIII, and percentage of transported waste shipped internationally. Fully Fully Fully Fully Fully Fully Fully Fully Fully Fully Fully Fully Fully Fully Fully Fully Fully Fully Fully Fully Fully Fully Fully 86 and 87 91 91 91 90 90 89 89 89 86 83 69 and 86 29 and 83 29 and 84 79 79 79-80 80 80 89 88 89 88 Identity, size, protected status, and biodiversity value of water bodies and related habitats signiﬁ cantly affected by the reporting organization’s discharges of water and runoff. Partially 89 EN26 Initiatives to mitigate environmental impacts of products and services, and extent of impact mitigation. Partially 78; 86-88 EN27 Percentage of products sold and their packaging materials that are reclaimed by category. Partially 57 Compliance EN28 Transport EN29 Overall Monetary value of signiﬁ cant ﬁ nes and total number of non-monetary sanctions for noncompliance with environmental laws and regulations. Fully 83 Signiﬁ cant environmental impacts of transporting products and other goods and materials used for the organization’s operations, and transporting members of the workforce. Fully 78 and 80 EN30 Total environmental protection expenditures and investments by type. Partially 95 SOCIAL – LABOR PRACTICES AND DECENT WORK Performance Indicator Labor management approach Employment LA1 Total workforce by employment type, employment contract, and region. LA2 Total number and rate of employee turnover by age group, gender, and region. Description Reported Pages Detailing about what isn’t reported Fully 43-44 Fully Partially 43 47 We report the total terminations and turnover rate by region, but we do not show segmentation by gender and age group. This is not material information for our business. 141 We report the total materials used by weight and volume, but we don’t use stratiﬁ cation by non- renewable materials and direct materials because that information is not available. We will begin managing that data in 2012, and will therefore report the results in 2013. We report information about bodies of water impacted by our disposal, but we do not report the dimension and value of the biodiversity in the body of water. This is not material information for our business. We report various initiatives to mitigate the environ- mental impacts of our products and services. We did not include measures to mitigate impacts related to noise in the publication. Natura’s materiality matrix prioritized environmental issues such as greenhouse gases and impacts from products with special focus on solid waste, not inclu- ding the issue of noise pollution. This is not material information for our business. We report the total weight of recovered products and packaging, but not the percentage in relation to the total billed. That information is not yet available. We will begin managing that data in 2012, and will therefore report the results in 2013. The Residue issue is our priority at Natura, reﬂ ected in our materiality exercise. It is important to us to act in such a way as to promote results for society, beyond just for Natura. Hence, our actions will also consider materials beyond our products. We report various organizational investments and expenses, including those related to the environment, but we do not use the segmentation requested by the indicator. This is not material information for our business. LA3 Beneﬁ ts provided to full-time employees that are not provided to temporary or part-time employees, by major operations. Labor/ management relations LA4 Percentage of employees covered by collective bargaining agreements. Fully Fully LA5 Minimum notice period(s) regarding operational changes, including whether it is speciﬁ ed in collective agreements. Partially Occupational health and safety Percentage of total workforce represented in formal joint management–worker health and safety com- mittees that help monitor and advise on occupational health and safety programs. Fully LA6 LA7 LA8 LA9 Training and education LA10 LA11 LA12 Diversity and equal opportunity Rates of injury, occupational diseases, lost days, and absenteeism, and number of workrelated fatalities by region. Partially 52 Education, training, counseling, prevention, and risk-control programs in place to assist workforce mem- bers, their families, or community members regarding serious diseases. Health and safety topics covered in formal agreements with trade unions. Average hours of training per year per employee by employee category. Programs for skills management and lifelong learning that support the continued employability of employees and assist them in managing career endings. Percentage of employees receiving regular performance and career development reviews. LA13 Composition of governance bodies and breakdown of employees per category according to gender, age group, minority group membership, and other indicators of diversity. LA14 SOCIAL – HUMAN RIGHTS Ratio of basic salary of men to women by employee category. Description Performance Indicator Human rights manage- ment approach Investment and procurement practices HR1 HR2 HR3 Percentage and total number of signiﬁ cant investment agreements that include human rights clauses or that have undergone human rights screening. Percentage of signiﬁ cant suppliers and contractors that have undergone screening on human rights and actions taken. Total hours of employee training on policies and procedures concerning aspects of human rights that are relevant to operations, including the percentage of employees trained. Non-discrimination HR4 Freedom of association and collective bargaining Total number of incidents of discrimination and actions taken. Fully Fully Fully Fully Operations identiﬁ ed in which the right to exercise freedom of association and collective bargaining may be at signiﬁ cant risk, and actions taken to support these rights. Fully HR5 Child labor HR6 Fully Fully Fully Fully Fully Partially Fully 52 52 44 50 47 48 49 50 50 50 52 63 63 45 41 50 We communicate operational changes in advance, but we have a minimum timeframe to issue this notice. This is not material information for our business. We report various data about occupational health and safety, but we do not report the distribution of this information by region. This is not material information for our business. We report our staff breakdown according to our view of diversity, but we do not segment the data by gender and age group. This is not material information for our business. Reported Pages Detailing about what isn’t reported Fully 38; 41 and 45 Operations identiﬁ ed as having signiﬁ cant risk for incidents of child labor, and measures taken to contri- bute to the elimination of child labor. Fully 55, 63 and 65 Forced and compulsory labor HR7 Security practices HR8 Indigenous rights HR9 SOCIAL – SOCIETY Performance Indicator Social management approach Community SO1 Corruption SO2 SO3 SO4 Public policy SO5 SO6 Anti-competitive behavior SO7 Compliance SO8 Operations identiﬁ ed as having signiﬁ cant risk for incidents of forced or compulsory labor, and measures to contribute to the elimination of forced or compulsory labor. Fully 55 and 63 Percentage of security personnel trained in the organization’s policies or procedures concerning aspects of human rights that are relevant to operations. Partially 46 We report our safety practices, which encompass Human Rights training, but we do not report the per- centage of the safety teams that undergo training and outsourcers that participate in the training sessions in relation to the total. This data is not available. Total number of incidents of violations involving rights of indigenous people and actions taken. Fully 65 and 96 Description Reported Pages Detailing about what isn’t reported Fully 92 and 95 Nature, scope, and effectiveness of any programs and practices that assess and manage the impacts of operations on communities, including entering, operating, and exiting. Percentage and total number of business units analyzed for risks related to corruption. Percentage of employees trained in organization’s anti-corruption policies and procedures. Actions taken in response to incidents of corruption. Public policy positions and participation in public policy development and lobbying. Total value of ﬁ nancial and in-kind contributions to political parties, politicians, and related institutions by country. Total number of legal actions for anticompetitive behavior, anti-trust, and monopoly practices and their outcomes. Fully Fully Fully Fully Fully Fully Fully Monetary value of signiﬁ cant ﬁ nes and total number of non-monetary sanctions for noncompliance with laws and regulations. Fully 64 21 45 21 74 16 74 74 SOCIAL – PRODUCT RESPONSIBILITY Description Performance Indicator Product responsibility management approach Customer health and safety Reported Pages Detailing about what isn’t reported Fully 60-61 and 87 PR1 PR2 Product and service labeling PR3 PR4 PR5 Marketing communications PR6 PR7 Customer Privacy PR8 Compliance PR9 Life cycle stages in which health and safety impacts of products and services are assessed for improve- ment, and percentage of signiﬁ cant products and services categories subject to such procedures. Total number of incidents of non-compliance with regulations and voluntary codes concerning health and safety impacts of products and services during their life cycle, by type of outcomes. Type of product and service information required by procedures, and percentage of signiﬁ cant products and services subject to such information requirements. PR4 Total number of incidents of non-compliance with regulations and voluntary codes concerning product and service information and labeling, by type of outcomes. PR5 Practices related to customer satisfaction, including results of surveys measuring customer satisfaction. Programs for adherence to laws, standards, and voluntary codes related to marketing communications, including advertising, promotion, and sponsorship. Total number of incidents of non-compliance with regulations and voluntary codes concerning marketing communications, including advertising, promotion, and sponsorship by type of outcomes. Fully Fully Fully Fully Fully Fully 61 61 87 61 44 and 59 60 60 Total number of substantiated complaints regarding breaches of customer privacy and losses of custo- mer data. Fully 55 and 60 Monetary value of signiﬁ cant ﬁ nes for noncompliance with laws and regulations concerning the provision and use of products and services. Fully 61 142 EDITORIAL TEAM Art direction and graphic design Modernsign Design e Inovação Writing and proofreading Report Comunicação Image treatment and prepress Modernsign Design e Inovação Printing Margraf Photography Daniela Giorgia Spinardi and Wilson Spinardi Júnior (cover, back cover, cover ﬂ ap, p. 1 to 5, 20, 21, 34, 35, 38, 42, 54, 58, 59) Marcio Scavone (p. 6 and 8) Marcos Suguio (p. 48) Taterka (p. 36, 46, 50, 52 and 73) Determination of Indicators Sustainability Ofﬁ ce, Ofﬁ ce of the Senior Vice President of Financial and Legal Affairs and Report Comunicação General Coordination Corporate Affairs and Government Relations Ofﬁ ce This report was prepared in GillSans, with the cover printed on Couché Suzano Matte 230 g/m2 paper and the body printed on Couché Suzano Matte 150 g/m2 paper. A total of 3,000 copies of this edition were printed in Portuguese, 1,000 in English and 1,000 in Spanish. THE USE OF MORGAN STANLEY CAPITAL INTERNATIONAL INC.’S (“MSCI”) TRADEMARKS AND INDEX NAMES DOES NOT CONSTITUTE A SPONSORSHIP, ENDORSEMENT OR PROMOTION BY MSCI, ANY OF ITS AFFILIATES, ANY OF ITS INFORMATION PROVIDERS OR ANY OTHER THIRD PARTY INVOLVED IN, OR RELATED TO, COMPILING, COMPUTING OR CREATING ANY MSCI INDEX. THE MSCI INDEXES ARE THE EXCLUSIVE PROPERTY OF MSCI. MSCI AND THE MSCI INDEX NAMES ARE TRADEMARKS OF MSCI OR ITS AFFILIATES AND HAVE BEEN LICENSED FOR USE FOR CERTAIN PURPOSES BY NATURA.

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