Natura &Co Holding S.A.
Annual Report 2015

Plain-text annual report

In channels page 23 Innovation page 28 Operations and logistics page 32 How we generate value In our processes page 34 Index – Introduction Who we are About Natura page 13 Where we are page 14 Performance page 16 Our Essence page 4 Highlights page 5 Message from the founders page 6 Message from the Executive Committee page 8 econômico outros social ambiental Valores que retornam para o mundo Strategy page 10 Governance page 19 Social biodiversity page 36 • s o t D esign d e t o r n o R • 26% de embalagens ecoeficientes1 Diferentes fontes ajudam a realimentar nossos processos e produtos s i a i r e t a m ões e a ç d e i n f o r m a r u t a N a i c E x p e r iê n c • 53,5% dos lares do Brasil têm produtos Natura ao menos uma vez por ano 2 Produtos seguros, de qualidade e que estimulam valores e comportamentos sustentáveis xperiê • E n i a N a t u r a C u l t u r a l d u ro p e s o t i e c n R$ 221 milhões investidos em inovação e c o Rede de inovação aberta global, com mais de 220 parceiros, incluindo Núcleo de Inovação na Amazônia e hub em Nova York o c n c e i t o s e p rodu e Design d • t o s A mbiental I I ã u I I I IIIIII 8 m b e leza, r a : o : i l c p o I I I I III I I l t M is s C u • I I I I I I r o i I r • o p m e I e t I t I x o m I e s e Nossa Essência - bem estar bem I I I I o m n bilidade ao Brasil e IIIIIIIII I I o o c i m ô n o c E r a l I z I a e b I r e o I r I s u s t e n ta n s a d o r e I I I I I I IIIII n d a p o r relaçõ V e 1,9 milhão de consultoras no Brasil e no mundo e s e 97% de entregas no prazo para as consultoras Social ã ç i u b i r t s i d e m m ú l t i p l o s c a n ais • n a c s o l p i t l ú m m Lançamento de novos canais de venda: farmácias, lojas e aplicativos da por relaçõ ais • Ve n e s e o • r a n s f orm a ç T ã 30% do portfólio renovados a cada ano, que significa cerca de 220 produtos lançados o e 13 centros de distribuição 1,4 milhão de produtos separados3, para atender a mais de 49 mil pedidos por dia no Brasil o ã ç a ransform o • T O q u e ext r a s • 12,2% dos insumos vêm da biodiversidade pan-amazônica (em valor de vendas) 83% dos insumos de origem vegetal o m í a r t x e e u q í m o s • O q u e ext raímos •O Our culture page 21 Education page 38 t u d o r p s o r • s C omu n i iv o d a 196 fornecedores de embalagens e matérias-primas Mais de 2 mil famílias fornecendo insumos da sociobiodiversidade i e c r ras e pa ed o d e s f o r n e c d i s t r i b u i ç ã Proposta de valor Nossos recursos Como transformamos Valores gerados Natura Musical page 40 INTRODUCTION Presentation Communication in constant evolution – Our report seeks to provide an integrated view of the multiple facets of life in the company WEL COME TO THE ABRIDGED version of the Natura 2015 Annual Report. Here we have selected the main facts and results during the year. The indicators of our economic, social and environmental performance may be viewed in greater detail on our website www.natura.com.br/relatorio-anual, our main medium for communicating performance. During another year, we have sought to evolve in applying the Integrated Reporting guidelines set forth by the IIRC, the International Integrated Reporting Council. The objective is to continuously enhance the clarity with which we demonstrate the correlation between the economic, social and environmental impacts generated by our business decisions. An important step forward in this direction is the use of a methodology for measuring environmental profi t and loss (EP&L). Prepared for the fi rst time ever by a company in Brazil, this is aimed at the valuation of environmental impacts. This initial application is fundamental to enable us to refi ne the calculation methodology in order to discover the real impacts caused by our businesses so that we may promote concrete improvements where the environmental effects of our operations are concerned. Once again we have followed the Global Reporting Initiative (GRI) G4 guidelines, the international reference standard in sustainability reporting which we were pioneers in adopting fi fteen years ago. Natura’s communication of its performance is the result of a consistent evolution in the way the company holds itself accountable to society, guided by the transparent presentation of our contributions towards generating value for all the stakeholder groups with whom we relate. Enjoy reading it! Marcelo Bicalho Behar Director of Corporate Affairs Ambitions page 41 See the complete version of the 2015 Annual Report on the website www.natura.com.br/ relatorio-anual INTRODUCTION Our essence _ Reason for Being Beliefs Our Reason for Being is to create and sell products and services that promote well-being/being well. well-being is the harmonious relationship of the individual with himself, with his own body. being well is the empathetic, successful and pleasurable relationship of an individual with other people, with nature, and with the whole. Vision Due to our corporate behavior, the quality of the relations we establish and our products and services, we will be a group of brands with strong local and global expression, identified with the community of people committed to building a better world through a better relationship with themselves, with others, with the nature of which they are a part, with the whole. Life is a chain of relationships. Nothing in the universe stands alone. Everything is interdependent. Natura believes that valuing relationships is the foundation of the great human revolution in the pursuit of 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 enhance quality in relationships. The greater the individual diversity, the greater the wealth and vitality of the whole system. The pursuit of beauty, a genuine aspiration of every human being, should be free of 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 towards the evolution of society and its sustainable development. 4 2015 Highlights Achievements Our international operations are expanding vigorously, representing almost 30% of Natura revenues. In reais, gross revenue grew 65%, totaling R$ 2.9 billion. We inaugurated a logistics hub in Itupeva (São Paulo), one of the most modern in the world. In conjunction with the São Paulo distribution center, the complex has helped boost delivery quality, ensuring that our products get to the consumer even more rapidly. We revitalized direct selling with the introduction of new digital tools, providing our consultants and consumers with a faster, more efficient commercial experience. We finalized the plan to open Natura-owned stores, the first of which will be inaugurated before the end of 2016. We successfully implemented the sale of the Sou line in drugstores, the fastest growing retail segment. We applied a valuation methodology to measure environmental impacts throughout the value chain. Natura’s first Environmental Profit and Loss (EP&L) assessment was concluded in 2015, and will help us draft actions to promote a positive impact by 2050, as set forth in our Sustainability Vision. The Instituto Natura commemorated its fifth anniversary, while the Believing is Seeing line, which raises funds for investment in education, completed 20 years in the market. We were listed on the Dow Jones Sustainability Index for the second year running. We gained recognition from the UN with the Champions of the Earth award, in the Entrepreneurial Vision category, granted to personalities and companies having an outstanding commitment to sustainability. Challenges In Brazil, we suffered an unexpected increase in tax load and were affected by the exchange devaluation in a recessive economic environment. The cosmetics, fragrances and toiletries segment shrank for the first time in 23 years, retracting 6%. This impacted net revenue, which at R$ 7.89 billion was 3.6% down on 2014. As a result EBITDA totaled R$ 1.5 billion, a 3.8% reduction compared with the previous year. Natura’s environmental performance is directly linked with business performance. The reduction in the scale of production had a negative effect on eco-efficiency indicators. INTRODUCTION Message from the founders Courage to transform 2015 eloquently displayed the complexity of our time. Analyzed from various different perspectives, the year tested our limits to the extreme. As global citizens, we enthusiastically accompanied the emergence, in December, of the new international agreement drawn up at the Climate Conference in Paris, where the leaders of the nations of the world gathered just one month after the terrorist attacks in the French capital. This emblematic city, which inspires us so much, whether as a cradle of republican ideals or as the center of the world of beauty, did not give in to terror and inaugurated a new phase in dealing with climate change. There are characteristics that link these lamentable episodes. They reflect the reality of an era: the sharp distortion of individual and collective values that culminates in the negation of the ethics of life. Terrorism, corruption and disregard for the environment are some of the many signs of the exhaustion of a mental model that has begun to threaten our coexistence in society and the very survival of humans on this planet. At this time, we are compelled to reaffirm the sense of dignity and responsibility that we should have toward one another, which is the foundation of the tenets that sustain us as individuals and as a company. In our country, we experienced severe This moment calls for transformations setbacks in social and economic gains. We were again astonished by the crisis of governability caused by innumerous investigations of corruption that lay bare the inadequacy of our political system. As if that were not enough, we also witnessed the biggest environmental tragedy in recent history that swept millions of tons of mud and iron ore waste through the states of Minas Gerais and Espírito Santo and into the sea. in all dimensions, from individual to collective, from private to public, from local to global. We must, therefore, have the courage to carry through these transformations, though without ever losing sight of our ethical foundation. To find solutions within the complex web of interests that unite us, it is important to be open to cooperation, to contradictory opinions and to open dialogue. Only then we will be able to build a new consensus that is tolerant when faced with differences and that will foster fair and sustainable development. It is important to remember that courage literally means “acting with the heart.” This is what we have done at different times in our history when we also faced adverse moments. Supported by our belief in the strength of relations and interdependence, in 2015 we achieved the results made possible by a company with a global network, an effort that began in the late 1980s, with the first of our International Operations. Today, they already represent nearly 30% of our business and continue to grow at an accelerated pace. In addition to welcoming our brands, concepts and products, these markets inspire us, teach us, enrich our worldview and reinforce the prospects of entering new geographies. It is the same determination that mobilizes us to face the challenges of the Brazilian market. As founders, we are committed to supporting the changes needed to increase the value created by our Reason for Being, which is well being well. We understand that our brands must keep up with the new demands of consumers and of society as a whole by offering experiences, products and services through a variety of channels, both physical and virtual, while always driving sales through relationships. Therefore, our role is to always ensure that, through the values of Our Essence, we will find the expressions that best meet the spirit of the time. The moment calls for action: everyone, whether government leader, businessperson or citizen, must endeavor to meet the Sustainable Development Goals set forth by the United Nations. To travel this path together, we invite everyone to join in the spirit of the words of South African leader and Nobel Peace Prize winner Nelson Mandela, whose wisdom and persistence ended one of the most perverse systems ever created: “Together we must suppor t courage where there is fear, foster agreement where there is conflict and inspire hope where there is despair.” Antonio Luiz da Cunha Seabra, Guilherme Peirão Leal and Pedro Luiz Barreiros Passos 6 INTRODUCTION From left to right, top to bottom, members of the Natura Board of Directors: Plínio Villares Musetti, Giovanni Giovannelli, Marcos de Barros Lisboa, Luiz Ernesto Gemignani, Pedro Luiz Barreiros Passos, Antonio Luiz da Cunha Seabra, Silvia Lagnado and Guilherme Peirão Leal A P / F r a n ç o i s M o r i 7 INTRODUCTION Message from the Executive Committee Beauty, pleasure and sustainability The business environment we are experiencing reflects the new world at the beginning of this century marked by intense, fast-paced, comprehensive and interdependent relationships and by exponential connections. We believe that one success factor for companies in this environment is having the agility to identify new expressions of their basic tenets that are in keeping with the spirit of this time of transformation. Natura is moving rapidly toward the assimilation of this reality. In 2015, we advanced in the understanding, development and amassing of the capacities required to meet the renewed demands of our relationship network. An important step was to understand that to promote well being well in the world today means to also provide beauty, pleasure and sustainability to those who maintain a relationship with us. It is to be present in consumers’ lives when and where they want it. It is to know them well enough to be able to surprise them. It is to put all of the company’s structures at the service of our consultants to ensure their success. It is to create platforms that enable the management of this network with the speed and quality it requires. It is to organize and reorganize itself in a flexible way, on a daily basis, based on the circumstances and needs. It is to innovate with the agility of a startup and to gain economies of scale with the strength of a global company. In 2015, we took the first steps of this evolution in our way of thinking and acting. Profoundly impacted by the country’s economic environment, by the increase in the tax load and by the devaluation of the local currency, the results for the year do not express everything to which we had aspired, but reaffirm some of our strategic choices, such as our vocation for international expansion. Our performance was heavily influenced by the expansion of our International Operations, which already account for nearly 30% of Natura’s total business. In Brazil, our largest market, the cosmetics, fragrances and toiletries industry suffered a retraction due to the recession, an occurrence without precedent in the last 23 years. Given these distinct forces, we achieved consolidated net revenue of R$7.9 billion, with EBITDA of R$1.5 billion and net income of R$513 million. The significant evolution of our International Operations is the fruit of the visionary efforts of more than 30 years of Natura, which evolves permanently and still has a lot to offer. We have strengthened the strategic integration and the decision- making process of our leaders to better meet the needs in each country, to disseminate knowledge and to accelerate the incorporation of practices, tools and processes. In the same way, we support and seek mutual learning experiences with Aesop, which in three years has tripled its revenue and doubled the number of stores around the world. In 2015, it opened a store in São Paulo, its first unit in Latin America. In every market, we want to be closer and more responsive to consumers’ needs. By providing the best experience in terms of access, convenience, quality, communication and service, we are always driving and evolving sales through relationships. That’s why we have invested in expanding our technological capacity to process and interpret information and in offering everyone, from managers to consultants, the opportunity to adequately serve each market segment or public. Similarly, we have been increasingly adopting digital tools that support our sales. For example, with the Você Conect@ project, which gives our consultants connection and access to applications and payment methods through tablets and mobile phones, and also with the Rede Natura (Natura Network), which is our digital platform through which customers and franchise consultants can develop relationships. We also have successfully tested our business models in different channels. We tested the launch of the Sou brand in drugstores in cities in the interior of São Paulo state, which generated positive results, ensuring its expansion across Brazil this year. We developed the Natura store format in shopping malls to meet urban consumers’ need for prompt delivery and to encourage experimentation of our products, with the first store scheduled to open by June 2016. More than being definitive paths for Natura’s future, these initiatives symbolize an attitude that is consistent with the demands of modern times: the adoption of a new execution pace that is faster, convenient and simple, and in synch with the interconnected and dynamic environment of collaborative creation in which we live. We do not want definitive answers to the challenges that arise, but instead, we want to rely on a powerful advantage: the collective intelligence and commitment of our relationship network. We want to awaken in people, both inside and outside of Natura, the spirit of leadership and entrepreneurship required to build, together, creative solutions and in this way fulfill people’s aspiration for a life of beauty, pleasure and sustainability, all at the same time. Roberto Oliveira de Lima, Chief Executive Officer, on behalf of the Executive Committee 8 INTRODUCTION In the photo on top, from left to right, members of the Natura Executive Committee: Agenor Leão de Almeida Júnior, Vice President, Digital Technology; José Roberto Lettiere, Vice President, Finance and Investor Relations; Robert Claus Chatwin, Vice President, Internationalization; Roberta Salvador, Legal and Compliance Director ; Roberto Oliveira de Lima, Chief Executive Officer ; João Paulo Ferreira, Vice President, Networks; Erasmo Toledo, Vice President, International Operations; Fátima Rossetto, Director, People and Culture; Andrea Alvares, Vice President, Marketing and Innovation¹; Josie Peressinoto Romero, Vice President, Operations and Logistics; and Gerson Valença Pinto, Vice President, Innovation. 1From January 2016. 9 INTRODUCTION Strategy Multiple forms of expression _ We intend to develop the Natura business model using different channels and technologies to deliver the best buying experience as a means of driving expansion in Brazil and overseas WE ARE A COM PANY focused on providing its consumers with the best buying experience via different channels. Our efforts, work and dedication are directed, above all, at enhancing the mechanisms that facilitate relationship selling. We are addressing consumers who have new habits, who use multiple channels and means of payment and who, at the same time, value experimentation, an enjoyable buying experience and expect the best value for their money. As is to be expected, our 1.9 million Natura Consultants (NCs) also experience this multiple offer of brands and relationship channels. Within this context, Natura is striving to develop its business model, offering products and services that promote beauty, pleasure and sustainability, all at once. To do this, we want to communicate and generate the best possible value proposition for each consumer and consultant segment. We seek to invest in new technologies, constantly attuned to the demands of life in large urban centers. In operational terms, we intend to become an increasingly effi cient and productive organization, capable of responding rapidly to consumer needs while retaining our focus on the cash generation which will enable us to expand our operations to new markets. Encouraged by what we have learned from the success of our operations in Latin America (Argentina, Chile, Colombia, Mexico and Peru), we plan to expand Natura’s internationalization. We are focused on maintaining the pace of growth in the region, where market presence, consumer preference and team engagement are all on the increase. To do this, we are further integrating strategy and decision making to accelerate the transfer of innovation and knowledge to the diverse countries in which we operate. Similarly, the ongoing international growth of the Aesop brand (including the fi rst Brazilian store, inaugurated in the São Paulo in 2015) is helping to build the company’s experience in the retail trade and in the developed markets. This experience is complemented by the multichannel model in place in France. While our development strategy for the coming years is adjusting to a market reality undergoing intense transformation, the company remains fi rmly rooted in the Natura fundaments. We have always sought to achieve economic, social and environmental results in a balanced and integrated manner. Fortunately, these days an increasing number of companies are concerned about ethics and sustainability. We are prepared to continue to contribute to building this new corporate culture which values doing business responsibly, reaffi rming the practices adopted by Natura since its foundation. 10 economic others social environmental Values that return to the world Our business model – We seek to organize our activities in a circular way. Processes are designed to leverage the full potential of the resources involved with a view to boosting productivity while reducing environmental impact.It is a model which undergoes constant renewal: as each cycle ends, it lays the foundation for the coming cycle. The fact that most of the ingredients in Natura products come from plants (83%) enhances environmental preservation and the social development of the suppliers of these inputs. In our open innovation model, Brazilian and global partners share traditional knowledge, science and design in the development of new product lines. A large part of our packaging has great recycling potential and the company incentivizes the use of refi lls. But it is the Natura consultants who provide an essential service throughout this chain. They are the ones who advise customers on the best way to use company products, creating an experience which exceeds consumer expectations, leverages results and forges closer links with the brand. Through our products and services, we foster more sustainable values and behaviors. The fl ows created by our model generate impacts in four major spheres: environmental, cultural, economic and social. These spheres overlap and encompass all company processes. n e i r e p x E ce • N a t u r a Ex p e r i e 53.5% of Brazilian households purchase Natura products at n c e least once a year2 • N a t u r Safe, high quality products that a r promote values and u t a sustainable commitments ience • N e r a E x p d t c u d o r p d n a e s i g • n C once p t R$221 million invested in innovation a n d p r o d u c t d Global open innovation network with over 220 partners, including the Amazon Innovation Center and the hub in New York t p Conce • n esig e t u rn of info R 29% eco-efficient packaging1 terials • a m d n a n Different sources that are fed back to o i t a m r products our processes and terials • Return of info r m a t i o n a n d m a E n vironmental I I u i s III I I u l t M i s I I I IIIIII r e : 8 , 0 o n : b eau I I 0 I I 0 t y , I I I C • I I I I • s a e e c n o I s I r t a C u l t u r a l Our Essence - well being well I e I v l l a I o y I I I d n tainabilit s razil a IIIIIIIII I e I p l m e I a p I s u r e l o y I I I I a n e e s I I I I d su i n IIIII B I c i m o n o c E Social r t x e e w t • c a W h a t we e 12.3% of inputs are from Pan Amazonian biodiversity (in sales value) x t r a 83% of production inputs are plant-based t a h W tract • x t w e e c t • W h a s e r n t r a p n o i t c u d • S u pp li e r 196 packaging and raw materials suppliers More than 2,000 families supplying social and biodiversity inputs s and pro c o m m u n i t ie i o n s hip sellin t g v i a e l a R els • n n a h c e l p i t l u m 1.9 million consultants in Brazil and overseas m u l t 97% on-time delivery to consultants Launch of new sales channels: drugstores, stores and applications i p l e c h a n n a i g v ionship sellin t els • R ela r a n s f orm a ti o n T io n • t u b i r t s i d d n a 30% of the portfolio renewed every year, with approximately 220 product launches 13 distribution centers 1.4 million products picked³ to fulfill over 49,000 orders a day in Brazil a n d d i s t r i b u t n o ti a ransform ion • T Value proposition Our resources How we transform Values generated economic others social environmental Values that return to the world INTRODUCTION d t c u d o r p d n a e s i g • n C once p t R$221 million invested in innovation a n d Global open innovation network with over 220 partners, including the Amazon Innovation Center and the hub in New York t p Conce n • esig e t u rn of info r R m 29% eco-efficient packaging1 terials • a m d n a n o i t a m r Different sources that are fed back to our processes and products terials • Return of info a t i o n a n d m a n e i r e p x ce • N a t u r a Ex p e r i 53.5% of Brazilian households purchase Natura products at least once a year2 e n c e • E a r u t a Safe, high quality products that promote values and sustainable commitments ience • N e r p x N a t u r a E C u l t u r a l E n vironmental I I I IIIIII I I r e : 8 , 0 o n : b eau u i s I I 0 I I 0 t y , III I I l t M i s • C u I I I I I I s a I I e s I r • e c n o t a Our Essence - well being well I e I v l l a I o y I I I d n tainabilit razil a IIIIIIIII s I n i s d su IIIII B I e I p l m e I a p I s l I u r e a n I o y e e I I I I I I p r o d u c t d t • c a r t x e W h a t we e x 12.3% of inputs are from Pan Amazonian biodiversity (in sales value) e w t a h 83% of production inputs are plant-based W tract • e e x t r a c t • W h a t w c i m o n o c E n t r a p n o i t • s e r S u pp li e 196 packaging and raw materials suppliers More than 2,000 families supplying social and biodiversity inputs r c o m m u n i t ie c u d s and pro T r a n s f orm a ti o t e l a R i o n ship sellin g v i Social els • n n a h c e l p i t l u m a 1.9 million consultants in Brazil and overseas 97% on-time delivery to consultants Launch of new sales channels: drugstores, stores and applications i g v ionship sellin ela t a m u l t i p l e c h a n n els • R io n • t u b i r t s 30% of the portfolio renewed every year, with approximately 220 product launches i d d n a n 13 distribution centers 1.4 million products picked³ to fulfill over 49,000 orders a day in Brazil o ti a ransform ion • T n a n d d i s t r i b u t Value proposition Our resources How we transform Values generated 1 Progressively reducing negative environmental impacts and intensity of resource use throughout the product life cycle. 2 Kantar Worldpanel (October 2014 to September 2015). 3 Does not include Aesop. Economic Economic indicators (R$ million) Consolidated net revenue Consolidated EBITDA Consolidated net income Free cash generation 2013 2014 2015 7,010.3 7,408.4 7,899.0 1,609.0 1,554.5 1,495.9 513.5 732.8 842.6 818.1 208.6 295.1 Average daily stock trading volume1 61.1 47.9 30.2 % revenue contribution from IOs (%) Distribution of wealth (R$ million) Shareholders2 Consultants Employees Suppliers Government 16.1 19.2 27.0 2013 2014 2015 854 4,107 917 5,425 1,804 702 4,122 1,075 5,925 1,724 352 4,166 1,245 6,374 2,149 Caption: IOs: International Operations; NCs: Natura Consultants; NCAs: Natura Consultant Advisors. Notas: 1Source: Bloomberg. 2Figures correspond to the dividends and interest on equity effectively paid out to shareholders, i.e., cash accounting basis. Environmental Social Other indicators 2013 2014 2015 Relationship quality (%) 2013 2014 2015 2013 2014 2015 Relative GHG emissions (kg CO2e/kg product billed)3 4 2.93 3.00 3.17 GHG emissions in the value chain (‘000s of tons)4 328,452 332,326 321,267 Water consumption (liters/unit produced) % of post-consumer recycled materials % of eco-efficient packaging5 0.40 0.45 0.49 1.4 22 1.2 29 2.9 26 3CO2 (or CO2 equivalent): measure used to express greenhouse gas emissions based on the global warming potential of each gas. 4Includes GHG Protocol scopes 1, 2 and 3. 5Packaging at least 50% lighter than regular/similar packaging; or comprising 50% post-consumer and/or renewable non-cellulosic materials that do not increase mass. Climate sur vey – Favorability among employees (Brazil and IOs)6 Supplier loyalty (Brazil and IOs)7 NC loyalty in Brazil7 NCA loyalty in Brazil7 Consumer loyalty in Brazil7 NCs loyalty International Operations NCAs loyalty International Operations 6Climate survey – Hay Group. 7Loyalty survey – Ipsos Institute. 78 30 23 38 52 38 47 75 24 28 30 64 39 45 78 18 30 29,5 58 37 52 Overall rating in brand image sur vey in Brazil (%)8 78 74 73 Believing is Seeing Funds Raised (R$ million) 21.9 25.5 30 Cumulative business volume in Amazon region (R$ million) 385 582 752 Families benefiting in Supplier Communities9 3,117 3,121 2,251 8Brand Essence Survey - Ipsos Institute. 9Reduction due to discontinuation of relations with two communities and the classifi cation of a third as idle (no input purchases). 11 Who we are Topics from the 2050 Sustainability Vision addressed in this chapter Our Network Employees Management and organization Ethics and transparency WHO WE ARE About Natura A powerful relationship network _ Natura is the largest Brazilian cosmetics and beauty products multinational The São Paulo distribution center is the most modern of its kind in Latin America, integrated in a system which ensures that a large part of the products reach the consumer in up to 48 hours SI NCE THE COMPANY was founded in 1969, it has been driven by relationship selling. We reach millions of consumers through 1.37 million Natura Consultants (NCs) in Brazil and 505,000 in our International Operations (IOs), in Argentina, Chile, Colombia, France, Mexico and Peru. Natura has five plants, located in Cajamar (São Paulo) and Benevides (Pará), with a total annual production capacity of 508 million units – in addition to manufacturing by third-party suppliers in Argentina, Colombia and Mexico. The company has eight distribution centers in Brazil, the one in São Paulo being the most modern in Latin America, conceived to fully integrate people with physical and cognitive disabilities into the labor force. The system is completed by a logistics hub in Itupeva (São Paulo) and distribution centers in the countries in which we operate. manufacturer Aesop, which has 135 stores in eighteen countries in America, Asia, Europe and Oceania, predominantly located in large urban centers. We have more than 7,700 employees together with companies that share our belief in building a fairer world. In 2015, we received important acknowledgements, particularly worthy of note being three aligned with our strategic focuses: Infrastructure investments over the last five years have enabled the company to carry out 42% of deliveries in Brazil and 60% of deliveries in the International Operations in up to 48 hours. Natura’s constant pursuit of innovation in concepts and products is supported by research and technology centers in São Paulo, Manaus and New York (USA), as well as the multichannel operation in Paris. Our international activities are complemented by a 78.75% stake in the Australian cosmetics in Brazil and overseas (including Aesop), oriented by an organizational culture focused on the sustainable development of our entire relationship network. Natura is one of the largest B Corps in the world, having become the first publicly traded company to gain this certification in 2014. This seal is an international certification awarded by B-Lab to organizations whose businesses seek to generate a positive social and environmental impact. This is a reaffirmation of our commitment to working • Champions of the Earth Award, in the Entrepreneurial Vision category, granted by the United Nations Environment Program (UNEP) to personalities and companies having an outstanding commitment to sustainability First place in the Exame IBRC Ranking for customer service excellence • Champion in the consumer goods • sector in the Exame magazine Biggest and Best ranking 13 Where we are The Natura world WHO WE ARE Mexico Production and distribution 130,400 NCs 5 Natura manufacturing units 4 in Cajamar 1 in Benevides 9 distribution centers in Brazil Itupeva Hub (São Paulo) São Paulo DC (São Paulo) Canoas DC (Rio Grande do Sul) São José dos Pinhais DC (Paraná) Mathias Barbosa DC (Minas Gerais) Uberlândia DC (Minas Gerais) Castanhal DC (Pará) Jaboatão dos Guararapes DC (Pernambuco) Simões Filhos DC (Bahia) 4 research and innovation centers Cajamar (São Paulo) Benevides (Pará) Manaus (Amazonas) New York (USA) Stakeholder groups and sales channels • More than 1.37 million NCs in Brazil • More than 505,000 NCs in the International Operations • More than 7,700 employees in Brazil and overseas, including Aesop • Approximately 5,000 • suppliers 30 social biodiversity relationship communities • Rede Natura (online sales platform) available in every state in Brazil and in Chile 135 Aesop stores in 18 countries in Europe, Oceania, Asia and America • • More than 700 points of sale in Raia Drogasil chain drugstores in the state of São Paulo 14 Canada United States New York (USA) Innovation Hub Aesop New York Paris (France) Natura Store 1,060 NCs Colombia Production and distribution 72,300* NCs Peru Distribution 91,500* NCs Brazil Production and distribution and Aesop store 1.4 million* NCs Chile Distribution 73,400* NCs Brazil Argentina Production and distribution 139,600 NCs Norway Sweden United Kingdom Germany Switzerland Paris (France) Natura Store 1,060 NCs France Italy WHO WE ARE Aesop Zurich Aesop Berlin South Korea Japan Hong Kong Taiwan Macau Malaysia Singapore Aesop Tokyo Aesop Hong Kong Aesop Melbourne Aesop São Paulo 15 Australia Natura Operations Distribution Centers Countries with Aesop Stores *includes Natura Consultants and Natura Consultant Advisors (NCAs) WHO WE ARE Performance Ever more global _ The International Operations already account for almost 30% of Natura’s business and continue to grow rapidly ACCOUNTING FOR ALMOST a third of Natura’s net revenues, the International Operations (IOs) have expanded significantly over the last five years, at an average annual growth rate of 47%. The operations comprise Argentina, Colombia and Mexico – where we have local production through partners –, as well as Chile and Peru and Bolivia, which employ a commercial representation model. We also operate in France, through direct sale and retail. In Latin America, we are the leaders in brand preference in Chile, with 35%, in Argentina (23%) and in Peru (26%), and brand awareness continues to grow in the more recent operations in Colombia and Mexico. Our opportunities for international expansion are as significant as the rate at which these countries are subscribing to the Natura value proposition. We are among the top 11 companies with the best corporate reputation in Argentina and among the top 50 in Mexico, according to a study by the consultancy Merco. The company’s reputation is further strengthened by recognition of its people management practices. Natura is in the best company to work for rankings in Colombia (1st), Argentina (2nd), Peru (2nd) and Chile (6th). Argentina is the company’s largest operation outside Brazil and is the headquarters of the International Operations. We initiated production in the country in 2010, and currently half the products invoiced are manufactured locally, helping reduce costs and CO2 emissions from product transportation, Growth in the IOs* (R$ million) Gross revenue Ebitda 2,914 245 1,765 1,411 103 52 2013 2014 2015 2013 2014 2015 Above, on left, the headquarters of the International Operations in Argentina. Above, the store in France moves *International Operations: Latin America, France and Aesop. to new address in Marais, and helps us to identify trends as well as boosting our local economic and social impact. We are the second largest direct sale operation in Argentina and leader in a number of CTF segments. Our sales network comprises more than 140,000 Argentinean consultants, having grown 130% in five years. In Mexico, where the company also has its own production, a quarter of the products commercialized are manufactured locally. Our relationship network in the IOs has more than 505,000 consultants (NCs) and continues to expand, driving increased share in these markets. We are the leaders in direct sales in Chile, with more than 73,000 NCs and Natura Consultant Advisors (NCAs), and the fourth largest company in the Cosmetic, Toiletry and Fragrance market. To expand sales alternatives in this market, we launched the Chilean version of the Rede Natura, our first experience with this project outside Brazil. The model enables the NCs to maintain their online pages for the sale of Natura products under a digital franchise model (read more on page 27). In addition to the Rede Natura model in Chile, the company operates a differentiated direct sale format in Mexico, the second largest cosmetics market in Latin America, coming only after Brazil. The Sustainable Relations Network has been in place since 2011. Its growth rate is accelerated, reaching 33% last year, with a total of 130,400 NCs. The model is based on multilevel direct selling, driving entrepreneurship while incorporating sustainability-related concepts of quality and inclusion. The consultants can set up their own sales networks and develop new links with Natura as these networks grow and as they undertake community-based social and environmental initiatives. Natura has also operated in Bolivia for 28 years, employing a distinct distribution model. Year on year growth is strong, with the consultant base reaching 22,000 in 2015. To support this increasingly important expansion, Natura has stepped up logistics investments in Latin America. We are building a new distribution center in Argentina which is scheduled to come into operation in 2016. The company’s largest production investment outside of Brazil, the new distribution center will expand order processing capacity in the country by 80%. Colombia gained its new, enlarged high tech distribution center last year. The facility will ensure the infrastructure necessary for the growth projected in the country up to 2018. In Peru, Natura installed a new pick to light line, a technology which optimizes order fulfillment, boosting the number of orders picked from 220 to 300 an hour. The logistics investments in the IOs are focused on the modernization and expansion of facilities, using high technology order picking similar to the Brazilian operation. 16 WHO WE ARE A leap in growth for Aesop _ Three years after its acquisition by Natura, the Australian brand has expanded greatly. It also arrived in South America, opening a first store in São Paulo Michael O’Keeffe, CEO of Aesop, highlights major advances, resulting, for example, in the store in São Paulo (above), designed by the architect Paulo Mendes da Rocha New home in France – Known as the global center of beauty and cosmetics, France represents a strategic presence for the Natura brand. In 2015, we enhanced our representation with a sales model based on consultants, website and a company store. We also moved from the Saint-Germain region to Marais, a more contemporary district in which the store may operate seven days a week. The model in France enables us to capture trends, reinforce the international positioning of the brand and gain experience in multichannel sales. THE R APID EXPANSION of the Aesop brand, which was incorporated into Natura in 2013, exceeded all the company’s initial expectations. In these three years, the number of stores has doubled. Currently there are 135 stores in 18 countries, all in large urban centers located worldwide. Moreover, revenues have tripled, while Ebitda has grown by a factor of seven. In 2015, a further 37 units were inaugurated, one of which in São Paulo, the brand’s first retail outlet in South America. Natura has supported the cosmetics brand of Australian origin in its ambition to gain in scale and global reach. In turn, Aesop provides Natura with key insights into operating in highly competitive, mature markets such as Europe, Asia and the United States, while retaining its entrepreneurial spirit and agility. Find out about the outlook for Aesop in 2016 in this interview with CEO Michael O’Keeffe: What has it been like working together with Natura over the last three years? Time has just flown and things are coming on really well. 17 Natura has supported our growth both in terms of strategic advice at board level and at the operating level. Aesop is a truly international brand but is still small in the markets in which it operates, which means there will be many opportunities for growth in coming years. How do the companies work with each other? Natura gave us a great deal of support for the launch of our first store in Latin America, in São Paulo, in practical questions such as logistics and product registration. As a global leader in sustainability, the company has also helped us improve our practices in this area. For our part, we have provided support in Natura’s movement towards becoming a multichannel operation based on our retail experience in the markets we operate in. Additionally, Natura’s recent bout of accelerated growth has proven to be extremely valuable for us. What is the outlook for Aesop for 2016? We will continue to expand in 2016, starting up operations in two new countries: Denmark and Thailand. We plan to open another 40 stores in the countries in which we already operate, and we will launch our e-commerce operation. Above all, we expect to make the most of the collaboration and synergies with Natura to drive the growth of the two brands. WHO WE ARE Five year overview _ Net revenue (R$ billion) 7.9 5.6 Number of Natura consultants (million) 1.9 1.4 Average annual growth rate 8% Average annual growth rate 9% 2011 2015 2011 2015 Net revenue International Operations (R$ billion) Relative CO2 emissions (kg CO2e/kg product) 2.3 Average annual growth rate 47% 0.5 3.21 3.17 Average annual growth rate 1.4% 2011 2015 2012* 2015 *Compared with 2012 because it is the base year for the company’s commitment to a 33% reduction in relative emissions by 2020. Dividends (declared, R$ per share) 1.896 0.818 2011 2015 Average annual growth rate 19% Performance The challenge of the Brazilian market _ The conjuncture resulted in an even tougher competitive environment in Brazil, demanding great discipline in managing cash and investments 20 15 SAW A MARKED contrast between the company’s results in Brazil and in the International Operations (IOs). While business overseas continues to expand rapidly, in Brazil the deterioration in the economic environment, the increase in tax load and the devaluation of the Real further complicated the retraction in sales and profitability the company has experienced in recent years. Consolidating the Brazilian and the International Operations, Natura had a gross revenue of R$ 10.8 billion in 2015 (8.6% up on 2014), with almost 1.9 million consultants (an increase of 8% over the previous year), Ebitda of R$ 1.5 billion (decrease of 3.8%), net income of R$ 513 million (down 29.9%) and free cash generation of R$ 818 million (compared with R$ 209 million in 2014). It should be noted that in Brazil, where Natura’s gross revenue totaled R$ 7.89 billion, 3.6% down on 2014, the cosmetics, fragrances and toiletries market experienced its first retraction in the last 23 years, according to the industry associations Sipatesp/Abihpec1. In a year in which revenues were under pressure in our largest market, rigorous cash management prevailed. Natura rationalized Capex investment, which totaled $ 383 million, in line with the guidance of R$ 385 million for 2015 and down on the R$ 505.7 million invested in 2014. This freed up R$ 313.6 million in working capital in 2015, compared with the consumption of R$ 208.3 million the previous year. As a result, free cash generation totaled R$ 818 million compared with R$ 209 million in 2014. The projection for 2016 Capex investment is approximately R$ 350 million, aimed at ongoing reinforcement in technology and in segmentation capacity for product offerings, as well as the inauguration of the first Natura stores in Brazil, the expansion of the Aesop global chain and ongoing growth in Latin America. 1Sipatesp/Abihpec: respectively the São Paulo state and the Brazilian Cosmetic, Toiletry and Fragrance industry associations 18 WHO WE ARE Governance Closer and closer _ The return of the founders to the co-chairmanship of the Board of Directors symbolizes the new business expansion cycle WITH THE END of Plínio Villares Musetti’s term as chairman of the Board of Directors in April 2015, Natura’s founding partners Antonio Luiz Seabra, Guilherme Peirão Leal and Pedro Luiz Barreiros Passos resumed their co-chairmanship, the position they had held until 2013. The decision reflects their desire to retain close links with the company as the new business expansion cycle gains traction. franchises. Together with Luiz Ernesto Gemignani and Marcos de Barros Lisboa, they constitute the 50% of the independent external board members. “These are adjustments that are in tune with the company’s natural dynamics, aligning governance with the company’s new strategic vision”, says Corporate Governance director Moacir Salzstein. In the course of 2015, the Board In the renewal process, Raul Gabriel Beer Roth and Júlio Moura Neto left the board after years of important contributions to the company’s development. The vacancies were filled with the re-election of Silvia Lagnado, an executive with a brilliant career in the consumer goods industry, and the arrival of Giovanni Giovannelli, who has broad experience in technology companies and proceeded with the review of company strategy, focused on structural questions, the market and the consumer. In conjunction with company executives, initiatives and priorities were defined for the next three years, underscoring the revitalization of the direct sale channel, multichannel opportunities, portfolio rationalization and the concentration of investments in priority brands and projects. 19 Expansion of the Executive Committee In order to achieve the company’s strategic goals, the Executive Committee (Comex) was reinforced to ensure the execution of the strategy agreed upon with the Board of Directors. In 2015, we reorganized the former Brands and Products area, which was renamed Marketing and Innovation, incorporating the management of the company’s marketing matrix. Commercial management continues to report to the vice president of Networks. At the beginning of 2016, we hired Andrea Figueiredo Teixeira Alvares as vice president of Marketing and Innovation. A graduate in Business Administration, she has broad experience in large multinational corporations. Comex now comprises the CEO, nine vice presidents (Digital Technology, Finance and Investor Relations, Innovation, International Operations, Internationalization, Marketing, Networks, Operations and Logistics and People and Culture), and the directors of the Legal and Compliance and Strategic Planning and Management Systems areas. The reorganization of the executive board favors process integration and ensures alignment between Comex and company strategy, driving greater dynamism and faster decision making. Ethics and transparency Natura’s mechanisms to promote control and transparency are evolving year on year. In 2015, the company created the Compliance area, which holds a seat on the Executive Committee, as well as a new channel to receive reports on corruption and any cases related to the Board of Directors, its supporting committees and the Executive Committee. Other types of non-conformance continue to be handled by the Ombudsman and the Natura Ethics Committee, also headed by the Compliance Officer, whose function is to analyze all reports received via both channels. These changes are designed to intensify Natura’s anti-corruption controls and reinforce ethical conduct. Natura voluntarily adopts best practices as established under the US Sarbanes-Oxley act, which provides for audit and security mechanisms aimed at fraud prevention. For the first time, these standards were also applied in Argentina. The company is planning to extend this control to the other operations in Latin America. WHO WE ARE Our culture Leadership development incorporates hands-on experience _ Our leadership development program Mosaico uses experiences to stimulate agility, flexibility and empathy CEO Roberto Lima presents the Mosaico Project to leaders in Cajamar (São Paulo) TO OVERCOM E the challenges product and service commercialization. in today’s business world we strive to extend the capabilities of the people who work with us. In addition to hiring recognized and experienced talent from the market, we prioritize measures aimed at driving leadership capacity to provide the skill sets and knowledge necessary to execute company strategy. The focus is on ensuring managers understand the needs of consumers and, by extension, the Natura Consultants (NCs). Launched in 2015, the new leadership development program called Mosaico is focused on living experiences applied to the reality of the business and the solution of routine questions, leveraging the multidisciplinary make up of the group. In the phase called Living Natura, executed between October and December, managers underwent experiences designed to stimulate a wide-ranging systemic vision of the entire business by means of activities in key areas such as manufacturing, product picking, consumer care, order delivery and The Mosaico program combines self- knowledge and business strategy. As the name suggests, it consists of a framework of panels, divided into priority and optional subjects. This means that all par ticipants share a common development base and build up their personal program with optional modules in accordance with the requirements of their function and their personal interests. “The different practical experiences make learning more hands-on and effective, bringing it closer to the day to day issues faced in the company. In one of them, for example, the employees spend a day on the production line. In another, they pick the orders to be delivered to the consultants. They will then accompany the delivery of the order to the home of the NC or the end consumer”, says Anaísa Carlini, Human Resources manager. An application for cell phone or tablet provides support for the program, with additional materials, suggestions for reading and videos to complement the training. The software was developed in Portuguese, Spanish and English to ensure it is accessible to all Natura employees. In 2015, 300 leaders took part in the first phase of the program. Within three years, all the company’s 700 or so managers should have completed the full program. The organization in modules enables the incorporation of new subjects into the program in accordance with business needs and the Natura succession process. Another key program feature was the emphasis placed on internal knowledge and experience and resource optimization. As a result, 70% of the program content uses internal leaders as facilitators and multipliers of the contents in which Natura is specialized, such as direct sales and cosmetics, with support from external consultancies for the development of new competencies such as digital technologies, internationalization, new channels, among others. A favorable climate for all In 2015, we achieved the best result in favorability* at Natura since monitoring of the indicator was begun in 1995. With an average rating of 78% for the entire company, the score was three percentage points higher than the target set for the period, equaling the 2013 result. This result positions Natura in the group of companies with the best organizational climate in a market benchmark comprising the 10% of companies with ratings of 76% or higher in the survey conducted by the Hay Group. In the International Operations, we maintained a high favorability rate; at 86% it climbed two percentage points compared with the previous year. We have also obtained outstanding results in work place assessments: Natura came in first place among the best companies to work for in Colombia, second in Argentina and Peru, and sixth in Chile. *Favorability is equivalent to the percentage of employees who gave the items surveyed a score of 4 and 5 on a scale from 1 to 5 points 20 Climate survey: Favorability 1 – Natura2 78% 75% 78% 2013 2014 2015 Brazil 77% 73% 75% 2013 2014 2015 International Operations3 84% 86% 80% 2013 2014 2015 Favorability in the IOs Argentina Chile Colombia France Mexico Peru 2013 2014 2015 86 78 83 88 80 77 88 82 88 81 81 80 78 83 89 77 78 87 1Hay Group. The data do not take into account the International Businesses Management area, the offi ce in Buenos Aires responsible for coordinating all the International Operations. 2Consolidated data for Brazil and the International Operations 3Consolidated data for the International Operations. WHO WE ARE Our culture Natura’s Mission _ “We are Natura. Inspired by Our Essence and our proximity with nature, science and technology, we propose to expand and mobilize our Relationship Network, in pursuit of creative solutions in pursuit of that promote a life of beauty, pleasure and sustainability, all at once.” sustainability, all at once. BASED ON THE fundaments of Our Essence, we have sought to provide more practical orientation in the conduct of routine company activities, synthesizing our Mission as members of Natura. To do this, we organized encounters with employees in Brazil and in the International Operations and listened to the founders and the Executive Committee. Now this text and the concepts within it will be disseminated throughout the company’s operations so that everyone may be more closely attuned with the goals set forth in our strategy. The Natura Mission will be part of our routine until we are sure it has been incorporated into organizational culture. This work was initiated at the end of last year, with the presentation of the new mission in awareness workshops and management meetings. “It was very interesting to see how people were able to recognize themselves and connect key elements of the Mission with their experience in Natura”, said CEO Roberto Lima, who led the initial encounters. The next step will be to connect the Mission with all the Natura management mechanisms, from strategic planning to managing performance indicators, ensuring an ongoing, focused direction in decision making. In parallel, we will seek to incorporate the mission into all our systems, symbols and daily work rituals, so that employees will internalize it as the purpose which reinforces the links between us as members of the same organization. 2 1 The key elements of our Mission: Proximity to nature For us, nature is the source of life, inspiration and creativity for everything we do. Our relationship with nature is one of love. Science and technology We study and use traditional and leading edge knowledge. For us, access to the best in science and technology is fundamental for creating and delivering products and services that value every aspect of life. Relationship Network We have built the company based on quality relationships. For us, it is essential to cultivate relationships, develop dynamics and articulate resources for our ecosystem to attract more and more people and partners who identify with our purpose. Creative solutions We relentlessly pursue the most creative solution for each problem we encounter. For Natura, the more creative a solution is, the greater its positive impact and the smaller its negative impact will be for all concerned. Beauty, pleasure and sustainability, all at once We do not separate moments of beauty from moments of pleasure or from sustainability. With unbridled enthusiasm, we rise to the daily challenge of making beauty, pleasure and sustainability possible all at once in each experience provided by Natura. How we generate value Topics from the 2050 Sustainability Vision addressed in this chapter Brands and products Packaging Climate change Social biodiversity Supply chain Waste Water Our Network Natura Consultants Communities Management and organization Management model HOW WE GENERATE VALUE In channels Where and how the consumer wants it _ To enhance our business model, we are making our products available in new channels, facilitating the shopping experience Consultant Márcia Carvalheira’s store was transformed by the Vitrine project C ONSUME RS ARE AT THE heart of our strategy. We strive to offer them the best brand experience, as well as fulfilling their needs in terms of access to and use of products. We are attuned to the demands of modern life in large urban centers and to new consumption habits. In a world undergoing transformation at an accelerated rate, the demand for practicality, speed and convenience is growing. This consumer is also more demanding when it comes to quality and price, given the more extensive offer of brands and products. advantage of an extensive and relevant product portfolio, with certain lines readily adaptable for sale in retail channels, as well as a brand that enjoys broad consumer acceptance. Natura identified the daily beauty care brand Sou as being ideal for commercialization in drugstores. As a rapidly expanding channel, drugstores have also gained increasing importance for consumers. Our first experiment was initiated in September, in partnership with stores in the Raia Drogasil chain in the Campinas region of São Paulo. Faced with this new reality, in 2015 Natura introduced its multichannel sales model. We realized we had the major The results confirmed the success of the strategy, with sales volume higher than expected in the first months. In the 29 stores participating in the pilot test, the Sou brand became the best seller in specific categories, such as bar soap. In March 2016, the project was extended to include the rest of the state of São Paulo and is scheduled to go nationwide by July. One of the company’s initial concerns regarding the project was the potential impact of commercializing Sou in drugstores on Natura Consultant (NC) sales. Surveys showed no significant differences in business for consultants in the Campinas region. “The survey will be conducted on a monthly basis. We do not want to create competition between channels, but this new space is further strengthening the brand, driving sales across all channels”, says Herlan Paiva, Natura New Businesses manager. Additionally, local NCs claim that advertising to promote the brand has benefited them. Support for NC entrepreneurs Márcia Carvalheira has been an NC for some 20 years. A resident of the city of Osasco in São Paulo, she started her career selling door-to-door. Encouraged by the good results, she saw an opportunity to become an entrepreneur and expand her 23 23 HOW WE GENERATE VALUE The Sou product line passed the sales test in Raia Drogasil stores in São Paulo state. On the opposite page, a prototype of the stores for shopping malls network. She put together a small stock for off-the-shelf sales and opened a store on a busy street in the city. Some time ago, Natura recognized that consultants like Márcia with an aptitude for this business format could represent an opportunity to drive improved sales for both parties. The company then developed a model to leverage the productivity of consultants with their own points of sale, most of which are multibrand, in off-the-shelf sales. In partnership with these NCs, the company created a plan that encompasses training, point of sale activation and commercial management, achieving impressive results with the first 100 sales outlets in the states of São Paulo, Rio de Janeiro and Paraná that had met the required criteria in terms of business maturity and sales volume. To strengthen these small businesses, Natura introduced its Vitrine (Showcase) project, involving the revitalization of the stores and the provision of support for the NCs to enhance their businesses. Márcia’s store was one of the first to benefit from this initiative at the end of 2014. Going beyond decoration, the proposal incorporates a new architecture for the Natura space in these outlets, valuing company products and consumer contact with the brand. As part of the project, a sales supervisor accompanies the consultant providing her with sales support and communication materials. The outlets receiving this support have increased their average gross income by around 18%. For Márcia, sales have grown by 45%, “in spite of the tough economic situation”, as she says. “The most impor tant aspect of this project is the relationship Natura has established with me. I have learned a lot from the supervisor. Thanks to her, I am now aware of things that I used to do more intuitively, such as choosing the products to display in the shop window in accordance with the season”, she explains. “The learning goes both ways, because our teams are also benefiting from their first experience in retail, which will be invaluable for company strategy”, adds Segments manager Edimilson Miguel. 24 Natura stores are on their way _ We also want to expand communication of our value proposition by means of company-owned Natura stores in shopping malls, with inaugurations beginning in 2016. In addition to increasing opportunities for contact with customers who do not usually buy via the direct sale channel and to ensuring off-the-shelf product delivery, these stores will help the company to identify trends more efficiently and will serve as an environment for experimenting with products and services. In 2015, we developed the store format and tested the model in a temporary initiative. During this time, the area was presented to investors, consumers, NCs and other groups, who were asked to assess two architectural plans and the purchase model. In these stores, which should carry part of our portfolio (such as the best selling lines and classic Natura products), the objective is to provide the consumer with an enjoyable shopping experience, to expand visibility and to strengthen the brand, as well as to drive increased sales. “With the Natura stores, sales of the Sou line in drugstores, the consultant run points of sale and the Rede Natura, we expect to make it easier for the consumer to acquire our products, offering a true omnichannel experience. We want to be present in the most suitable location and format for our consumers”, states Roberto Lima. “We are sure that these new opportunities to buy Natura products will further strengthen the direct sale channel, because they will boost the visibility of our products, increasing consumer interest.” HOW WE GENERATE VALUE 25 In channels New formats for direct selling _ Technology is an ally for the consultant, driving agility and deeper relations, as well as higher sales Above, image from the Você Conect@ launch campaign for our consultants. At the side, the app that offers new means of payment and streamlines sales HOW WE GENERATE VALUE CURR ENTLY THE company is supported by more than 1.37 million Natura Consultants (NCs) in Brazil and over 505,000 in the International Operations, who commercialize Natura products in an independent, non-exclusive manner. We envisage major opportunities to further direct selling based on the advance of digital technologies and have invested constantly in transforming electronic tools into enablers for the NCs’ businesses. “If the consumer has changed her habits and is now to be found everywhere, the NCs need to be prepared to serve them via different purchasing channels”, says Networks vice president, João Paulo Ferreira. Similarly, studies undertaken in 2015 also helped us gain more in-depth understanding of the consultant profi les in our network. We identifi ed consultants who sell our products only as a means of complementing their income, others who are more entrepreneurial, some who specialize in determined product categories, such as hair or facial care, and ones who provide more detailed consultancy, recommending the most appropriate products according to the specifi c characteristics of each client. In the coming years we intend to provide customized service, training and communication in accordance with the reality of each NC. In conjunction with management by micro-region of the country, this information will help enhance CRM (customer relationship management) and our relationship strategy with the sales channel. Connected consultants Launched in August 2015, Você Conect@ is a suite of digital tools including 26 HOW WE GENERATE VALUE Rede Natura a chip that offers exclusive benefi ts in data use, an application for sending in orders and a credit and debit card reader. These three essential resources enable mobile sales for the NCs at special internet access rates, below market tariffs. The service combo on offer provides a series of additional benefi ts. There is no charge for data sent to the Natura website, for the order capture application, the card reader and the social networks. The plan adopted is the pay-as-you-go model, the most affordable in the market. The Você Conect@ suite was developed to facilitate and speed up the sales process, to boost connectivity and to further consultant interaction with Natura and with clients, in addition to offering consumers a new means of payment. For Natura, the project also enables easy, direct and speedy communication with consultants. “The combo is very affordable, reinforcing digital inclusion by providing easy access to information and to diverse services”, says vice president of Digital Technology, Agenor Leão. Shortly, this service developed in partnership with the telecom operator Claro and the PagSeguro network, will be extended to NCs in the International Operations. Rede Natura upgrades technology and reaches Chile Our technology initiatives have accelerated the consultants’ adaptation to new consumer behavior, supporting them in interactions in new environments and generating synergies between face-to-face and virtual relationship. In 2013, we launched the Rede Natura (Natura Network) website, a model unlike any other in the world in which the Natura Consultant (NC) continues to be the link between the company and the end customer. In 2015, Rede Natura coverage was extended nationwide and was introduced 60,000 digital consultants 60% of the NCs work on a hybrid basis, combining sales in the traditional environment and in the virtual space 700,000 consumers registered in Chile. As part of our quest to integrate and streamline operations throughout Latin America, the launch of the platform was brought forward. Initially scheduled for 2016, it was possible to accelerate this launch given the robustness of the Natura Operations and Logistics infrastructure following fi ve years of heavy investments (read more on page 32). Thus, the company has consolidated digital cosmetics sales in an innovative format. Using the Rede Natura, the consultants commercialize the products and relate to their customers via a digital franchise system. In Brazil, Natura already has 60,000 NCs registered on this platform, with 60% of them working on a hybrid basis – combining physical and internet sales and leveraging the synergies between the two channels.“Revenues already position us as one of the leading cosmetics e-commerce stores in Brazil. Moreover, the operation reached break even just nine months after implantation, proving that it is a resounding success”, explains Rede Natura director Murillo Boccia. Enhancements were introduced in the platform during 2015, such as the launch of the Natura Sempre Presente application at Christmas. Using a cell phone camera, the app can identify photos of company products and automatically add them to the consumer’s shopping cart within the Rede Natura. 2 7 Você Conect@ – Pay-as-you-go service package and special rates for NCs using mobile devices 90 ,000 chips distributed 200 ,000 downloads of the application 7% of the consultants’ orders already use the new tool 45 ,000 card terminals sold Numbers for August to December 2015 Innovation Expanding frontiers to innovate _ We want a more global process driving greater differentiation, speed and relevance for the consumer HOW WE GENERATE VALUE years – stood at 58.9%. Because Natura products are manufactured in different locations: in Brazil, in the International Operations, and by partners, the company created a group dedicated to the transfer of technology and knowledge. “We need to ensure that innovation can be readily transferred to all of these countries and leverage the use of local inputs, reducing social and environmental impacts, as well as production costs”, Gerson explains. Well-being as seen by science A strategic partnership with the São Paulo research foundation Fapesp (Fundação de Amparo à Pesquisa do Estado de São Paulo) will result in the Center for Research into Well-Being. The goal is to develop a sound knowledge NAT UR A’S VOCATION for innovation enables the company to promote advances in processes and in its portfolio, making them more and more global. We invest in areas of research which, when interconnected and combined, generate, expand and disseminate knowledge, delivering benefits for our entire relationship network. The innovation structure comprises centers in São Paulo and in the Amazon region, a hub for capturing trends and forming partnerships in the United States, as well as the Aesop innovation unit in Australia. This structure is leveraged by a global network consisting of more than 200 researchers and institutions (including the MIT in Boston, the Federal University of Amazonas in Manaus and the University of São Paulo). In 2015, Natura maintained its investments in innovation, channeling 3% of the company’s net revenues or R$ 221 million to this area. These funds support a broad spectrum of initiatives, ranging from gaining greater insight into consumers, their preferences and the active principles that scientifically fulfill their demands, to strengthening the partner network to drive a global innovation process. Measures include connection via digital technology as a means of expanding the boundaries of cosmetics and the quality of the consumer experience, for example, by offering applications that help consumers base through the integration of diverse areas such as neuroscience, positive and social psychology, and applied health, human and social sciences. The project has been under development for three years. The scientific proposal incorporates the technical experience of an acclaimed group of more than 40 scientists and their teams. Planned as a joint investment with Fapesp until 2026, the Center will be launched in 2016. The partnership will include the University of São Paulo (USP), where the project will be housed,the Federal University of São Paulo (Unifesp) and the Mackenzie Presbyterian University. The collaboration entails a shared governance model. Investment will total R$ 40 million, divided among all the partners. “It is a unique model for an integrated center involving a Brazilian company, in an unprecedented field of research in the academic world”, says Luciana Hashiba, director of Innovation Networks at Natura. Ucuuba is our new jewel Innovation Indicators 2015 2014 2013 221 216 239 220 207 179 67.9 63.4 58.9 Investment in innovation (R$ million) Number of products launched1 Innovation Rate (%)2 diagnose the needs of their skin or hair.“We are pursuing greater differentiation, greater speed and greater relevance, within a more global approach”, states Natura vice president of Innovation Gerson Pinto. All company efforts are channeled into achieving this differentiation in terms of shorter time-to-market for the consumer and greater internationalization in the entire innovation process. As a result of this readjustment, the company launched fewer products 2015 (220 compared with 239 in 2014), and the innovation rate – that is the percentage of revenues obtained from the sale of products launched in the last two 28 company’s pursuit of innovative ways of doing business, allying technological research and dialogue with supplier communities in the Amazon region. The line, comprising moisturizing products, has been developed based on the fruit of the ucuuba tree. In cosmetic terms, the tree is a true jewel of the Amazon region. The butter extracted from the seed contains a combination of fatty acids such as trimyristin (a compound rarely found in nature, but present in large quantities in the ucuuba), responsible for its lightness and smoothness, providing prolonged and heightened moisturizing, together with velvety, dry-touch textures. The body care products both nourish the skin while forming a film that protects it. Research and development for the product took three years. Normally, the greater the moisturizing power of products in this category, the heavier their texture and greasiness to the touch. Natura Ekos Ucuuba restorative butter for the body and dry skin ruptures this paradigm by delivering prolonged moisturizing for up to 48 hours together with a light texture. This feature is captured in the product’s main slogan – the light butter from the Amazon. The product also drives social and environmental benefits. Commercialization of the ucuuba seeds is essential for reducing degradation of the species. The ucuuba tree is threatened with extinction due to increased exploitation for timber over the last 30 years. The wood is used to make stakes, broom handles, door frames and roofing. We believe that the new Ekos Ucuuba line presents an opportunity to reverse this predatory cycle by redefining the value of this asset and its role in the production chain, generating income based on a forestry rather than a timber product: the seed. By doing so, the conscious harvesting of the seed will enable sustainable stewardship of the species while keeping the forest standing, thus benefiting 15 communities comprising some 600 families. 1Includes only products that represent a new value proposition for the consumer. It does not include product combinations in kits that receive new sales codes or Believing is Seeing (Crer para Ver) products, accessories and NC support materials. 2 The innovation rate is the total The launch of the Ekos Ucuuba line last year is the most recent result of the contribution to annual gross revenue of products launched in the last two years. The result only takes Brazil into account. New products in the market – Natura’s main product launches in 2015 Amis New line of women’s fragrances for pre-teens. Natura Homem Relaunch of the sub- brand colognes, with a new fragrance based on woody notes. Ekos Ucuuba and Murumuru Two new active principles, the former never used before in cosmetics. Esta Flor Two fragrances based on the aroma of fl owers, the proposition being to develop a monothematic collection of aromas, unique in Brazil. Una The new items in the line are a deodorant oil for the body and a moisturizer. Tez New line for women who appreciate practicality. It comprises moisturizers, soap and multipurpose wipes (clean, exfoliate, tonify, remove make up and moisturize). 29 Faces New items for the collection, including a blue lipstick. In addition to a new tone, the lipstick may be mixed with others in the line to make completely different colors. A win-win cycle for all _ Ekos Ucuuba is the most recent example of our efforts to deliver functional attributes, reduce social and environmental impacts and boost value generation for all our stakeholder groups The Natura Consultant and sales Our NC network is an ally in transmitting our product values and concepts. The consultants receive training in product attributes and the benefi ts of using them, so that they are better prepared to provide orientation for consumers. Product conception Transforming social and environmental challenges into innovative business, combining technology and dialogue with partners, is part of the company’s innovation strategy. Eco-efficient packaging Composition of bottle: 50% green PET, made from renewable plant-based material 50% post-consumer recycled PET One out of every two packs produced returns to the cycle 40% of the cartons are made from post-consumer recycled paper The role played by cooperatives Working with cooperatives is essential to ensure the volume and quality of recycled material necessary for production. Currently, we are testing a pilot initiative to implement logistics for the return of packaging after use by the consumer, promoting the expansion of this production chain. Product usage The product line includes moisturizer for the body, a hand butter and moisturizing body deodorant. Recycling By means of product communication and orientation provided by the Natura Consultants, we encourage consumers to recycle. We provide refi lls for a large part of our portfolio, and we support communication measures aimed at conscious resource consumption. Suppliers receive benefits 15 communities in Amazonas and Pará 600 families Income is 3 times higher for the communities in which the ucuuba tree is preserved. Traditional Knowledge The riverside communities in the Amazon use the ucuuba to make medicinal teas, candles, incense, as well as in preparations to restore the skin. Combining traditional knowledge with technology derived from research and development, the company discovered that the butter extracted from the seeds is a powerful moisturizer Natura performance in the Amazon _ Cumulative business volume in the Amazon region (R$ million)1 752 385 582 2013 2014 2015 Purchase of Amazonian inputs (%)2 13.4 13.3 12.3 2013 2014 2015 Communities with which Natura maintains relations 32 33 30 2013 2014 2015 Families benefi ting3 3,117 3,121 2,251 2013 2014 2015 Direct income per family (R$ thousand) 6.6 3.0 2.3 2013 2014 2015 1Cumulative value since 2012. 2 Percentage of Pan-Amazonian raw materials purchased in relation to total Natura raw material purchases. 3In addition to a reduction in the number of supplier communities from 33 to 30, there was a change in the methodology for counting the number of families. Previously the number of associated and partnering suppliers was monitored. With the introduction of the tracing system, since 2015 all the families have been registered and georeferenced, ensuring greater control over this number. Keeping the forest standing is a good deal By purchasing the fruit to produce cosmetics, Natura creates the possibility of reversing the predatory cycle threatening the species, generating income based on a non-timber forestry product. Community members are instructed to harvest only 50% of the fruit. The remainder falls in the water and is carried away, ensuring the continuity of the germination process The species The ucuuba tree grows in waterlogged and fl ooded areas and is threatened with extinction due to increased exploitation for timber over the last 30 years. HOW WE GENERATE VALUE Operations and logistics The best service _ Our vocation to serve gained recognition for Natura as the best in customer service in the country The Itupeva Hub facility in São Paulo IN 2015, NATURA WAS considered the best company in customer service in Brazil in a survey conducted by Exame magazine in par tnership with the IBRC, (the Brazilian Customer Relationship Institute or Instituto Brasileiro de Relacionamento com o Cliente). The survey was conducted among some 5 thousand people in 143 cities. Since 2011, a series of measures have been implanted to enhance relations with the Natura Consultants (NCs) and consumers. For example, a basket of more than 70 indicators has been created to monitor the quality of services for NCs. Information on factors such as delivery time, product non- availability and billing errors is monitored during each sales cycle (which lasts on average 21 days) and used to enhance management. Last year, the company star ted to incentivize managers throughout the company to gain first hand-experience of these challenges. In the new leadership development program, managers are required to accompany and par ticipate in key activities throughout the Natura production process, right down to delivery of the product to the home of the consultant or end consumer. “We are working on continuously improving our customer service culture, discussing how we relate to customers and the impact our activities and practices have on satisfaction and loyalty both inside and outside the company”, says Josie Romero, vice president of Operations and Logistics. Technology boosts logistics efficiency Ser vice excellence is also a reflex of the logistics investments the company has under taken in recent years. In May of last year, we inaugurated the hub in Itupeva (São Paulo), a warehouse for the products that leave the company plants in Cajamar and those manufactured by par tners installed in the region - our main suppliers are located within a 40-kilometer 32 HOW WE GENERATE VALUE “We are working on continuously improving our customer service culture, discussing how we relate to customers and the impact our activities and practices have on satisfaction and loyalty both inside and outside the company” Josie Romero, vice president of Operations and Logistics Service levels in Brazil (%) 2015 2014 2013 97 95.5 84 6.8 4.5 4.2 73 71 42 38 15 On-time deliveries Deliveries in up to 48 hours Customer service index1 Average delivery time (days) 1Index comprising 52 service indicators for consultants and the end consumer, such as registration, exchange and services. The methodology was changed in 2014 to generate greater insight into impacts on the customer. We do not have a 2013 index covering the same scope. radius of the facility. The hub supplies Natura distribution centers in Brazil and in the International Operations. Close to Viracopos airport and the São Paulo Rodoanel ring road, the facility enables rapid connection with a number of key highways, the port of Santos and the São Paulo distribution center (Natura’s largest, which began operating at full capacity in the beginning of 2016). A new link in the logistics chain, the hub is the most modern of its kind in the Americas. It is highly automated, with technologies that are in use in only two other facilities worldwide. Operated by robots, products are stored both in boxes and pallets. The 35,000 m2 of built area comprises 90,000 pallet and 35,000 box positions. The system is organized around triangulation between the plants in Cajamar, the Itupeva warehouse and the São Paulo distribution center, in a highly agile closed loop. Trailers equipped with automatic platforms designed especially by Natura permit loading and unloading in a question of minutes, halving the number of trucks required for the logistics operations between the plants, the hub and the São Paulo distribution center. For the more distant distribution centers, such as Salvador (Bahia), Jaboatão dos Guararapes (Pernambuco) and Castanhal (Pará), the hub is able to ship cargo in bulk (without pallets, the cartons are stacked and receive special protection). This means these long distances may be covered using a third fewer truck trailers: today two trailers transport the same volume of cargo as three under the old system, representing a significant reduction in CO2 emissions. The new processes reduce inventories and improve operating costs (estimated monthly savings in logistics costs are R$ 1 million). Investments in the equipment and systems installed at the Itupeva hub totaled R$ 73 million. “We are preparing the company for the forthcoming growth in sales and are learning how to manage inventories and logistics for the company’s evolving requirements, including supplying the Natura Consultant points of sale, the drugstores commercializing the Sou product line and our own stores”, comments Angel Medeiros, director of Logistics Innovation. 33 HOW WE GENERATE VALUE In our processes The measure of sustainability _ By mapping and disclosing environmental externalities throughout its value chain, Natura takes a major step towards building the new capitalism The use of biodiversity assets in our products is an incentive to conserve forests and promote sustainable stewardship OVE R THE PAST 50 YEARS, the wear on ecosystems has occurred more rapidly than at any other time in world history. Consumption of the Earth’s resources has generated unprecedented advances in prosperity for mankind, but the price has been high: atmospheric concentrations of greenhouse gases (GHG) are reaching very dangerous levels, with the potential to raise the planet’s average temperature between 4°C and 6°C by the end of the century, which could be catastrophic. Faced with this situation, companies have a key role to play by reducing the environmental degradation caused by their activities and helping to contain the threat to conditions for life on the planet. To be able to plan this reduction more effectively, corporations need to find ways to take natural capital into account throughout their business value chains. Having access to reliable numbers makes it easier to reduce negative impacts and to leverage positive ones (for example, by innovating in materials and production processes). When a company is able to map its environmental externalities and disclose this information, it creates a degree of transparency which is extremely important for its stakeholders. Investors can take decisions based on the environmental risks and the opportunities for innovation a company presents. Similarly, customers have the chance to select products and services based on the environmental footprint the company discloses. In this regard, the valuation of impacts generates the possibility of modifying consumer preferences and attracting investment to companies that are engaged in building a new, more responsible and more sustainable capitalism. In 2015, Natura endeavored to measure its impacts on the environment. To better understand our current situation and provide a basis for future decision making, the company undertook a study to calculate the financial cost of the business’s impacts and the ultimate consequences of these for society. The study was based on factors such as GHG emissions, water, waste and land use and occupation. This is known as Environmental Profit and Loss or EP&L Accounting. For some time, the company has been implanting environmentally conscious decisions, including the use of organic alcohol in all of its production (alcohol is one of the main ingredients in perfumery) and replacing fossil-based ingredients with plant-based substitutes (83% of our formulations come from renewable sources). The EP&L will drive learning that will enable us to reexamine our innovation, distribution and production processes, among others. This in turn will ensure greater quality in strategic decision making at Natura, helping the company to achieve its 2050 Sustainability Vision. The weight of emissions GHG emissions represent the greatest impact among all the factors measured and are distributed along the length of the value chain. As far back as 2007, aware of the need to combat and prevent climate change, the company created the Natura Carbon Neutral Program to drive a significant ongoing reduction in GHG emissions, from the extraction of raw materials to the destination of post-consumer packaging. Natura is a Carbon Neutral company – that is, it offsets all its emissions, taking into account both its own processes and others throughout the production chain. This compensation involves the purchase of carbon credits (investment in projects promoting reforestation, waste treatment or the substitution of fossil fuels with renewable or more efficient ones). In parallel with this offsetting, we will continue to pursue significant reductions in our relative carbon emissions throughout the value chain. Our ambition is to achieve a 33% reduction in relative carbon emissions by 2020 against base year 2012. The main positive highlight in the EP&L is the biodiversity assets the company uses in its products. They promote the conservation of forests and sustainable stewardship practices, which in turn contribute towards regulating the climate, for example through controlling atmospheric pollution and maintaining the water balance. Other benefits are also made clear in the EP&L statement, such as those derived from the use of organic alcohol. In 2013 alone, the positive value generated by the company’s sustainable practices was in excess of 900 thousand reais. And EP&L accounting has also proven to be a powerful internal management tool for our business units. 34 HOW WE GENERATE VALUE Innovations in methodology The valuation of externalities is a new model applied by few companies in the world. With support from the consultancy PwC, Natura is the first company in Latin America to conduct an in-depth EP&L assessment of its businesses. Since this is an emerging methodology, a number of metrics still need to be improved or adapted for different realities. This is the case, for example, with the impacts caused by the use of products during showering and bathing, which involves heating the water (normally done using electricity) and the generation of waste which frequently ends up not being disposed of properly, polluting rivers and oceans. We continue to work on measuring this type of impact, so that our methods will reflect all the environmental ramifications of our operations. The assessment of the impact of biodiversity assets on land use and occupation also required methodological innovations. The inputs for this indicator included factors such as the wealth of species and vegetation coverage existent before cultivation of the raw materials used by Natura was initiated. From the standpoint of preserving the forests, the results have been positive. “When we started buying inputs such as fruits and nuts, we generated economic value for the local communities and provided an incentive for keeping the forest standing”, explains Luciana Villa Nova, Sustainability manager at Natura. Global movement We believe companies must go beyond merely reducing or attenuating their impacts: they need to drive the improvement of the environment and the society around them. Based on this understanding, we got together with a group of organizations and other global companies to develop a protocol for the valuation of positive and negative environmental impacts. The Natural Capital Protocol is a movement led by the World Business Council for Sustainable Development (WBCSD) comprising environmental organizations, representatives from the academic world and companies operating in different Meeting with Natura shareholders: financial, social and environmental results segments. It is sponsored by: the Gordon and Betty Moore Foundation, the Swiss Ministry of the Economy and the Dutch Ministry of International Relations, by means of the World Bank. Natura and another nine companies (including Kering, Roche, Nestlé, Shell and Holcim) are conducting pilot tests which will help to adapt the protocol for application in different economic sectors. Additionally, we are members of the B-Team, another participant in the coalition for the construction of the protocol, which is striving to expand the concept of corporate responsibility beyond financial gains to encompass both negative and positive contributions to the economy, the environment and society. We intend to share this learning with other Brazilian companies. “We do not want to restrict this knowledge to our own business. Valuation is an extremely new question. We would like to be able to discuss the dilemmas and challenges involved with a network of other companies”, Natura’s director of Sustainability Marcelo Alonso states. In Brazil, our goal is to mobilize a network of entrepreneurs to discuss what we have learned from our first environmental profit and loss assessment. Together with other companies interested in this question, it would be possible to drive improvements in the metrics for our specific local context. Factors such as the positive effects of the sustainable stewardship of social biodiversity are still difficult to calculate in financial terms. It is also necessary to take into account challenges such as waste management in a local context when there is no accurate information about the final destination of packaging and products – which can, for example impact water resources. “We want to get the discussion started in Brazil, which is where our main operations are, but with time, also expand it to our international operations”, Luciana Villa Nova concludes. In our Sustainability Vision, we assumed the commitment of integrating environmental and social effects into Natura’s economic results by 2020. Attributing a value to these non-financial aspects will enable comparison with the wealth that we produce and distribute and represents a decisive step towards drafting the actions that will bring us to an even more ambitious target. By 2050, we intend to be a company that generates a positive total impact in all its dimensions of activity: economic, environmental, social and cultural. Thus, the next step will be the valuation of the impacts and the benefits generated by the business for the social development of communities, incentives for employment and enterprise, through the construction of a SP&L (Social Profit and Loss) assessment for the company. 35 HOW WE GENERATE VALUE Social biodiversity Valuing the Amazon _ Development in the region must go beyond generating income for families We engage riverside communities to identify the real impact on the region FOR SOME 15 YEARS we have been acquiring plant-based assets from communities in the Amazon region. This partnership involves approximately 2,000 families and is aimed at developing sustainable production chains in a standing forest economy – one in which the trees are worth more alive than felled. Despite having strengthened local leadership, generated work and boosted family incomes, we realized that this was not enough to impact social development in the region at scale. “The communities in the Amazon face many challenges. This was why we felt we needed to go further. To not just measure how much income we generated for the region, but to understand how we could truly improve people’s quality of life”, says Renata Puchala, Sustainability manager at Natura. In 2015, we established an unprecedented partnership. Together with the communities, public partners, NGOs and local companies, we developed the Community Social Progress Index (IPS in the Portuguese acronym). This was used to measure quality of life and well- being in the riverside communities along the Juruá River in Carauari (Amazonas). As the basis for the index we used the principles of the global Social Progress Index which is applied in more than 150 countries. This index was developed by Michael Porter and utilizes 52 social and environmental indicators. The Communities Social Progress Index influenced the activities of the Mid-Juruá Territorial Development Forum – a multisector body that fosters development in the region. 2015 saw some important achievements: remodeling of an oilseed mill, driving a 25% gain in efficiency, the construction of a pier more than 1 km long to facilitate product flow, as well as access to basic sanitation and treated water for more than 50% of the region’s families. In the education area, we offered vocational programs, courses in forestry and sustainable development, in addition to a sustainable fishery stewardship project for the pirarucu species. Our activities in the Amazon also include institutional partnerships for the donation of computers, benefiting more than 600 families (in Amapá, Amazonas, Pará and Rondônia). Moreover, we provided support for the Associação Regional das Casas Familiares Rurais do Pará, which runs 30 community schools in the state, providing secondary technical education for 2,300 young people. We also work with the Rede de Apoio à Educação in 27 municipal districts in the Baixo Tocantins region in northeastern Pará, in partnership with the Instituto Natura – whose programs to improve teaching quality have impacted 2,340 schools in the area, benefiting 476,000 students. These initiatives are coordinated by the Amazônia Program, created by Natura in 2011 with the objective of promoting a new development model for the region. Surrounding communities Generating a positive impact for the people living in the areas surrounding Natura facilities is one of the directives in the 2050 Sustainability Vision. Currently, priority is being given to the municipalities of Benevides (Pará) and Cajamar (São Paulo), where we have plants, as well as the Jaguara district in the city of São Paulo, where the São Paulo distribution center is located. In 2015, we established partnerships with other companies, the local communities, NGOs and civil society and drafted a Local Development Plan for each of these locations. Among the main achievements, worthy of note was social mobilization in the form of movements like “Comunidade Viva” in Jaguara, and “Inova Cajamar”. In the former, improvements were made in public cultural and leisure areas, with the revitalization of squares and the organization of workshops; in the latter, the focus was on improving the quality of basic education for 18 schools and 6,500 students, as well as the creation of a Citizen Observatory, based on the Sustainable Cities program, which enables greater community participation in public affairs. In Benevides, the educational improvement projects involved 31 schools and 8,000 students. In partnership with SENAI and SEBRAE, the company was involved in programs to promote vocational training and foster the development of local micro and small companies. 36 HOW WE GENERATE VALUE Our version of the HDI _ Information gathering system tracks indicators on consultants’ health, knowledge and standard of living Valéria Borsoni, NC, Mara Menezes, Relationship Manager, and Nice Soares, NCA: en route to human development DOES WORKING AS A NATURA Consultant make a difference to people’s human development? We used this question as a star ting point to gain more in-depth understanding about the influence our commercial model has on improving quality of life for the NC network. Inspired by Human Development Index (HDI) methodology, we created a model to sur vey a series of data and establish the current standards of living of the NCs and monitor their evolution on an annual basis. This is in effect the first corporate human development index in the world, tailored in accordance with the reality at Natura. “Because it is the company’s own indicator, the HDI- NC assesses Natura’s social investment in the NCs and their families. As such, the methodology not only measures the results of our actions but also ser ves as a management instrument, within a differentiated model of social action”, explains Cida Franco, Relationship director. The challenge with the HDI-NC was to create the company’s knowledge in areas such as financial literacy, digital inclusion and civic awareness. Use of money, knowing the annual inflation rate, and patterns of computer and internet use were some of the questions surveyed. The first year was instituted as the baseline for monitoring evolution. Between 2014 and 2015, we recorded 7.3% growth in the development of the consultants, from 0.550 to 0.590. Although it is impossible to compare the HDI-NC with the national HDI because of methodological differences, it is possible to draw some conclusions in comparison with cer tain national indicators. The percentage of NCs who smoke (around 4%), for example, is lower than the national average of women smokers (9%). Understanding mathematical calculations with percentages is a common difficulty for beginning NCs, but as the consultant gains experience in the activity, her dexterity grows (37% of the NCs have difficulties with this type of calculation compared with two thirds of women in the national average). own information gathering system. Like the HDI for countries, the Natura study takes three dimensions into account: health, knowledge and standard of living. But in our case the information was customized in accordance with the reality of the consultants. In terms of knowledge, for example, instead of using traditional metrics for schooling, we opted to assess the quality of the NCs’ The HDI-NC will be monitored on an annual basis and will enable the company to produce and fine tune management and corporate social investments intrinsically linked with the business as a means of influencing and improving quality of life for the NCs. Our target is to reach the top of the HDI-NC scale, with a score of 1, between 2027 and 2032. 37 HOW WE GENERATE VALUE Education Transforming the Brazilian reality _ For two decades, the Believing is Seeing line has been funding improvements in teaching quality at public shcools OUR I NVOLVEM ENT with education goes back to the 1990s, based on Natura’s perception that it had a social commitment beyond its business activities and that it would be possible to engage a large network in building a fairer and more supportive society. Thus, in 1995, the Natura Believing aimed at enhancing public education. Like Natura, the consultants forgo their profit from the sale of these products and act as promoters of the cause of education. Consumers demonstrate their support by acquiring the products. And Natura provides support with its operating infrastructure, managing and investing these funds. is Seeing (Crer para Ver) product line was created with the intention of mobilizing all our employees, Natura Consultants (NCs) and partners around the cause of education. The income from the sale of these products (such as returnable bags, exercise and notebooks and pencils) is invested in projects In 2010, the company took a further key step with the creation of the Instituto Natura, a not-for-profit public interest civil society (Oscip in the Portuguese acronym), with the goal of increasing its contribution to quality public education in Brazil and in the Latin American countries in which it operates. The Instituto Natura assumed responsibility for managing and investing the funds raised from the sale of the Believing is Seeing line, which in 2015 totaled a record of R$ 19.5 million in Brazil, and R$ 10.5 million in the International Operations. In Brazil, more than 1.1 million consultants contributed to the cause by selling at least one item from the line during the course of the year. Based on the vision of “creating a foundation upon which people may develop a learning community”, the Instituto Natura believes in the transformational power of education as the key to the development of a more cohesive and less unequal society. It values lifelong learning, believing that we all learn, we all teach and we are all responsible. “The work the institute does helps to strengthen the people and the organizations involved in education. The aim is to combine the strengths and potential of each individual to form a large, collaborative community capable of promoting more effective transformational processes and environments”, says David Saad, president of the Instituto Natura. “This is the dream that began 20 years ago with the Natura Believing is Seeing line and continues at the core of the Instituto Natura’s commitment today.” 38 HOW WE GENERATE VALUE Students at the Prof.ª Judith Siqueira Weber school in Potim (São Paulo), beneficiaries of the Digital School project. Below, Believing is Seeing products, that generate funds in support of Instituto Natura actions 39 Believing is Seeing line Funds 1 2015 2014 2013 19.5 18.8 17.1 10.5 6.7 4.8 Believing is Seeing line funding in Brazil (R$ million ) Believing is Seeing line funding in the International Operations (R$ million) 1Refers to income before income tax for the Natura Believing is Seeing Fund. New steps, the same direction _ In 2015, the Instituto Natura reflected on its vision, initiatives and projects based on its learning in five years of activities. During the year, Pedro Villares migrated from the position of president to chairman of the Instituto Natura Board of Directors. To assume executive management and proceed with our dream of offering children and young people an effective transformational education characterized by social cohesion and equality, we invited David Saad, a specialist with vast experience in this area. Further information about these and other Instituto Natura highlights can be found at www. institutonatura.org.br (only available in Portuguese). HOW WE GENERATE VALUE Natura Musical All the tones of Brazil _ Established artists, new talents and training and legacy projects make up the repertoire of ten years of support for Brazilian music Various trends in evidence at the Natura Musical 10th anniversary celebration NEY MATOGROSSO, Luiz Melodia, Carlinhos Brown, Chico César, Elza Soares, Nação Zumbi and Arnaldo Antunes are some of the hundreds of artists receiving support from the Natura Musical program, which commemorated ten years of investing in valuing Brazilian music. The celebration took place in November 2015, in a special edition of the Natura Musical Festival held on Copacabana beach in Rio de Janeiro. Sponsored artists, such as Emicida and Tulipa Ruiz took their turns on the stage, culminating in an historical presentation by Gal Costa and Milton Nascimento, who had not performed together for 30 years. This was the festival’s fifth consecutive year, the four previous ones having been held in Belo Horizonte (Minas Gerais). As has been the case since 2005, in 2015 the program supported new works – for established artists and emerging talents – and training and heritage projects.”The album A Mulher do Fim do Mundo was an amazing present the universe sent me. I am extremely happy about everyone who took part in the project, and I am very proud of the result”, says Elza Soares about the work launched with sponsorship from Natura Musical. “Spending the last six years of my life in Paraíba, the place where I was born and lived until I was 20, heightened my perception of the glaring contradictions between the wealth of creativity and the relative poverty of the means of production”, said the singer and composer Chico César. The result is this Estado de Poesia, selected in the Natura Musical National Tender – undoubtedly an outstanding and successful case of innovation in relations between private initiative and musical production in Brazil. This drives the reinvention of people, societies, ways of making music, listening to music and loving.” Natura Musical is preparing a number of novelties for music fans for the coming years. With inauguration scheduled for 2017, the Museu da Imagem e do Som (MIS) in Copacabana, Rio de Janeiro, will have a complete floor dedicated to music sponsored by Natura Musical. The auditorium, to be named after the Natura program, will have programming devoted to Brazilian music. You can hear all the music and find out more about Natura Musical at www.naturamusical.com.br. 40 Sustainability Vision Not initiated At planning phase Under implementation In Execution AMBITIONS Brands and Products Our Network Dimension 2020 Ambition 2015 Performance Status* Dimension 2020 Ambition 2015 Performance Status* Packaging Use at least 1% post-consumer Natura used 2.9% post-consumer Communities To develop a strategy for the Consolidation of the territorial recycled material in the total mass recycled material in the total mass of of Natura Brazil packaging its packaging 1.4% 2013 2020 10% Achieved in 2015 17% social biodiversity territories in the development arrangement in the Pan-Amazon region and for the mid-Juruá region in partnership communities around our main facilities with other companies, communities, in Brazil, based on dialogue and joint NGOs and civil society, achieving construction with local populations significant progress in the areas of In execution Climate change Reduce Natura brand relative 5.8% growth in relative GHG and actors greenhouse gas emissions emissions. The indicator is directly (scopes 1, 2 and 3) by 33% linked with business performance; however, the reduction compared with 2012 was -1.4% Social biodiversity Reach R$ 1 billion in business The cumulative volume of business volume in the Pan-Amazon region generated in the region corresponds to R$ 752 million 0% 2012 2020 -33% Achieved in 2015 4.2% R$ millions 89 2010 2020 1,000 Achieved in 2015 73% Waste Collect and channel for recycling Natura began a pilot initiative in 50% of the waste generated by partnership with five cooperatives in Natura product packaging in Brazil Greater São Paulo. 306 metric tons of (in t equivalent) waste collected In execution Water For the Natura brand in Brazil, The study for the calculation of the implement an impact reduction water footprint throughout the value and neutralization strategy based chain was concluded on measuring the water footprint throughout the value chain Supply chains To ensure traceability of 100% All the manufacturers in the 1st link of of the inputs produced by direct the raw material, packaging material manufacturers (last link) by 2015 and finished product value chains and implement a traceability identified. program for the other links in the Natura brand value chain by 2020 At planning phase In execution education, infrastructure, sanitation and production chains in the region. Implementation of the digital inclusion program in the Amazon region, benefiting 600 families. Execution of projects to improve education in the Amazon, reaching more than 400,000 students Management and Organization Dimension 2020 Ambition 2015 Performance Status* Management For the Natura brand, implement the The valuation of environmental model valuation of social and environmental externalities was undertaken for externalities, taking into account the first time in 2015, monetizing the positive and negative impacts the impacts of the business in areas of the extended value chain (from such as GHG emissions, water, waste raw material extraction to product and land use and occupation. The Under implementation disposal) calculation took into account the full Natura product portfolio throughout the value chain. In 2016, preparations will begin for an unprecedented study for the valuation of social impacts Ethics and transparency For the Natura brand, implant full The company undertook the transparency in the provision of collaborative design of the information about products and the architecture for communicating development status of the company’s sustainability, organizing product Under implementation sustainability vision information in accordance with the consumer’s level of interest Our Network Dimension 2020 Ambition 2015 Performance Status* sustainability comprising external specialists to Board of Directors for the creation of Governance of Implant a Consulting Council Strategic alignment with the Natura Natura Consultants Promote interest in ongoing learning The company developed and and provide a broad educational offer tested projects to improve the that meets consultants’ needs education of willing consultants for implementation on a large scale Under implementation Employees To reach a 50% rate of leadership During the year, the company positions (director level and above) reached a 25% rate of leadership occupied by women for Natura positions occupied by women. The company reviewed its internal processes for selecting, attracting and developing women leaders as of 2016 29% 50% 2013 2020 Achieved in 2015 -14% assess the company’s progress and a consulting network to support the to further develop strategy generation of creative and innovative At planning phase solutions and the formulation of guidelines for the development of company strategy *Refers to the extent to which the ambition was achieved in 2015 in relation to 2020 and the base. year stipulated. The full list of Natura’s 2020 ambitions and commitments may be consulted in the complete version of the Annual Report: www.natura.com.br/relatorio-anual 41 Credits _ Cor pora te Affairs Marcelo Bicalho Behar Institutional Communications Manager Newton Branda Coordination of the Annual Report Fábio Peixoto and Thiago Freitas Editorial project and art direction Thiago Freitas Copy a nd sustainability consultin g Report Sustentabilidade Editing Álvaro Almeida (MTb 45.384/RS) and Michele Silva (MTb 11.829/RS) Reporting Renata Costa Project and relationship management Ana Souza GRI Consulting Victor Netto, Cristiane Garcia and Fabíola Nascimento Tran sla tion to Englis h Raymond Maddock Pho tog raphy Marlos Bakker, Marcos Suguio, Eduardo Delfim, João Avila, Andreas Heiniger, Cacaio, Arnaldo Pappalardo, Milton Carelo, Touché and Acervo Natura Executive producer Carol Gariani Beauty Hailton Hesse (Agência First) Illus tr ation A Barca Estúdio Fina nce a nd Institutional Relatio ns Financial information Márcio Bologna, Marcel Goya, Enzo Russo and Leandro Grellet Galvão Market relations Fabio Cefaly and Luiz Palhares Sus taina bility Marcelo Alonso, Luciana Villa Nova, Renata Puchala, Keyvan Macedo, Andreza Souza and Pedro Gattás Print ing Stilgraf 42 NATU3 BM&FBOVESPA ® NATU3 BM&FBOVESPA All carbon emissions related to the production of this report have been offset. Natura Brazil Av. Alexandre Colares, 1.188 Vila Jaguara, São Paulo (SP) 05106-000 Tel. +55 11 4446 2000 Natura Argentina Calle Cazadores de Coquimbo, 2.860, piso 2 Munro, Buenos Aires B1605AZF Tel. +54 11 4756 9300 Natura Chile Av. Apoquindo, 4.501, Piso 9 Las Condes, Santiago Tel. +56 22 595 9200 Natura Colombia Carrera 7, 77, Edificio Torre Siete, piso 14 Bogotá Tel. +57 1 326 8787 Natura Mexico Av. Ejército Nacional, 579 Mezzanine C, Colonia Granada, Del. Miguel Hidalgo, México D.F. C.P. 11520 Tel. +52 55 2282 6000 Natura Peru Av. del Ejército 801 Miraflores, Lima 18 Tel. +51 1 440 1362 Natura France Natura Europa SAS 10 Rue de Chevreul 92150 Suresnes Tel. +33 1 53 64 21 00 

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