natura annual report 2011
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report 11#natura
FULL GRI VERSION
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1. OUR ESSENCE
3 Reason or Being3 Vision3 Belies4 Culture Drivers
2. WHERE WE ARE
5 Message rom the Chairmen o the Board
7 Message rom the Executive Committee9 Natura10 Highlights o the year10 Awards and Recognitions12 Our market12 Progress in Our Commitments
14 Governance14 Board o Directors16 Executive Governance19 Risk Management19 Internal Audit19 Senior Management Compensation22 Natura Management System
3. WHAT WE AIM FOR
23 Strategy and Prospects24 Inrastructure to support growth24 Managing sustainability25 Priority topics
25 Water
25 Education26 Sustainable entrepreneurship26 Climate change27 Relationship quality27 Solid waste28 Sociobiodiversity
29 Innovating innovation
4. WHO WE WORK WITH
31 Relationship quality
33 Ombudsmans Ofce35 Employees47 Consultants and NCAs53 Consumers56 Suppliers58 Suppliers communities62 Surrounding communities65 Shareholders67 Government
5. WHAT FOOTPRINT WE LEAVE
74 Natura Value Chain75 Generating Environmental Value
75 Carbon Neutral82 Solid Waste management83 Water and euents
86 Generating Social Value86 Instituto Natura87 Support and sponsorship
90 Generating Economic Value
93 Financial Statements126 About this Report127 Global Compact128 Assurance Declaration130 Remissive Index134 Credits
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Because o its corporate behavior, thequality o the relationships it establishes,and the quality o its products and
services, Natura will be an internationalbrand, identifed with the communityo people who are committed tobuilding a better world, based onbetter relationships with themselves,with others, with nature o which theyare part, and with the whole.
vision
Lie is a chain o relationships. Nothingin the universe exists alone. Everything isinterdependent.
We believe that valuing relationships is theoundation o an enormous human revolutionin the search or peace, solidarity, and lie inall o its maniestations.
Continuously striving or improvement
develops individuals, organizations, and society.Commitment to the truth is the route toperecting the quality o relationships.
The greater the diversity, the greater the wealthand vitality o the whole system.
The search or beauty, which is the genuineaspiration o every human being, must be ree opreconceived ideas and manipulation.
The company, a living organism, is a dynamicset o relationships. Its value and longevity
are connected to its ability to contribute tothe evolution o society and its sustainabledevelopment.
beliefs
Our Reason or Being is to create and sell productsand services that promote well-being/being well.
WELL-BEINGis the harmonious and pleasant relationship o
a person with ones body.BEING WELLis the empathetic, successul, and gratiyingrelationship o a person with others, with natureand with the whole.
reason for being
1.ouressence
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culture drivers
THE CULTURE DRIVERS WERE CREATEDBASED ON OUR ESSENCE AS A GUIDE FOROUR CHOICES AND MINDSETS. THEY ARELIKE TRACKS SHOWING WHAT WE NEED TOPAY SPECIAL ATTENTION TO IN OUR DAILY
ROUTINES.
THE CREATION OF THESE DRIVERS WAS THERESULT OF A PROCESS THAT INVOLVED THECOMPANY FOUNDERS, MEMBERS OF THEEXECUTIVE COMMITTEE AND THE LEAD-ERSHIP TEAM. WE ALSO DREW ON REFLEC-TIONS FROM THE CULTURE DIALOGUESHELD WITH 150 EMPLOYEES FROM ALL LEV-
ELS OF THE ADMINISTRATIVE, OPERATIONALAND SALES FORCES IN 2009.
THEY ARE:
COMMITMENT TO THE TRUTHBeing authentic and true, honoring ourcommitments with others and our owns.Deending what we believe in and doing what
we say we will.
CARING RELATIONSWorking together is better. Being generous, openand empathetic with others, creating a climate o
trust based on relationship quality.Recognize that others are dierent rom us,listen without judging, respecting their opinionsand incorporating dierences to fnd the bestsolution or the whole.
CONTINUOUS IMPROVEMENTImproving always, evolving in every dimension:material, emotional, intellectual and spiritual.Striving continuously or sel-knowledge,recognizing our talents and our limitations.
Creating an environment that promotes learning,continuous improvement and recognition o highperormance.
DOING THINGS WELLInsisting on doing everything simply, but withbeauty, quality and care o details.Discipline to honor what has been agreed upon.
INNOVATION
Be entrepreneurial, taking the lead, doing whathas never been done and assuming the risks.Continuously scrutinize the ways things are doneand striving to fnd new ways to do them.
SUSTAINABLE DEVELOPMENTConsistently deliver superior results and relevantvalue in the economic, social and environmentalfelds.Manage the short term, with a commitment to
build the companys uture.
PLEASURE AND JOYFace daily challenges with optimism, lightheartedlyand in a good mood.Celebrate achievements, ueling the enthusiasmand energy that encourage us to grow andcontinue to do more and to do it better.Find satisaction at work, afnity with our purposein lie, giving meaning to everything we do.
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2.1message romthe chairmen
In 2011, we witnessed the confrmation that our world will be unsustainable, i current trends oproduction, global consumption and socio-environmental imbalances continue. The wave o eventsin recent years says a lot: in 2006, the awareness o global warming risks caused by man came intobeing; two years later, we lived through the hardships o an economic crisis, now deepening in theEuropean Union. Lastly, since 2010, we have watched with bewilderment the social convulsions othe Arab Spring in their many orms, but which have one thing in common: the quest or a airerand equalitarian society. We believe that only a deep transormation based on ethics o lie, in whichnew development logics and revigorated global governance prevail over and above the interests o
religions, countries, economic groups, will be a source o hope or uture generations and or man tocontinue existing on Earth.
I on the one hand this scenario is troubling, on the other hand it reasserts our determination tomake our best emotional and intellectual eorts or Natura to act increasingly as agent o necessarysocial change, always managed in accordance with the principles o sustainability, in the search or thebest results in an integrated manner in the economic, social and environmental dimensions. Thiscorporate behavior which is in harmony with societys aspirations, means we simply must take Naturaand its proposed values to new heights and rontiers.
THE ETHICAL CHALLENGE
OF OUR TIMES
2.wherewe are
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ANTONIO LUIZ DA CUNHA SEABRA
PEDRO LUIZ BARREIROS PASSOS
GUILHERME PEIRO LEAL
Co-Chairmen o theBoard o Directors
Today, Brazil and Latina America, our main operating markets, are in a privileged position. Though not
immune to the eects o a tougher international environment, they are less likely to be adverselyaected by global upheavals. The economic rise o an important section o the population withwomen playing a particularly prominent role seems to have a wingspan that will be able to ostera long and promising cycle o development, albeit ar rom a sustainable development, ostering ullsocial inclusion, broadening distribution o wealth and mitigating environmental impacts. The signifcantinvestments o large companies in products or grooming, perumery and cosmetics in Latin Americaare evidence o this much more avorable scenario. In the near uture, Brazil will be the wor lds secondlargest market in this industry.
We began our message with an excerpt rom the recently-published book by Chris-topher Meyer, Harvard University proessor, who inspiringly describes the way in
which we seek to carry on our business. We are very grateul or his generousinterpretation, which simultaneously highlights our distinctive traits and encour-ages us to take part in a new and more community-oriented, air and inclusivecapitalist project. We believe that our path to success lies in the historicalsearch or continuous improvement and innovative solutions or current anduture dilemmas, learning the zeitgeist and projecting it into the uture. In thisnew rame o mind, our greatest challenge will be to put together the newtechnologies with hearts attuned to the same cause. Thereore, we envisage thepossibility o expanding the transormation power o our relationship network.
The ever greater exercise o our raison dtre, which is to oster well-being, will lead us toimprove and deepen the ties which unite us to our consultants, collaborators, business par tners and
consumers. Energized by the dreams and by the quest or proessional and personal achievements, weare convinced that this group is determined to oster values such as solidarity, creativity and altruism,with respect and reverence to lie. We thereore emphasize our historical commitment to stand bythe side o all those who want to participate in this urgent collective construction o humanity.
Friendly greetings rom
Natura may be themost evolved exampleweve seen thus ar o a
company managing its worldin ull color and maximizing
value added to itsecology.
Christopher Meyer, Standing on the Sun: How explosion o capitalism abroad will change business ever ywhere.
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2.2message romtheexecutive committee
THE BASIS FOR THEFUTURE OF NATURA
In the last fve years we have spurted proound changes at Natura. The Company practically doubled in sizebetween 2007 and 2011, and our results prove the consistency o our strategy: the number o Consultantsincreased rom 718 thousand to 1.4 million, boosting product orders rom 9 million to a telling 17 milliona year; Ebitda rose rom R$ 700 million to R$ 1.4 billion, with net revenue increasing rom R$ 3 billionto R$ 5 billion. International operations increased thei r share rom 4.4% to 9%. To suppor t this growth,we completely reormulated our logistics model and attracted new leaders ully aligned with our businessculture and conduct. We set up a management system based on Business Units and Regional Units, andwe continued to invest in innovation, in the conception o our products, in managing our environmental
impacts and in our commercial model.In 2011, we made our biggest investment ever, worth around R$ 350 million to expand production, deve lopour logistics model and improve inormation technology, that are essential or sustaining our growth. Weworked on bringing about a step change in inrastructure to increasingly streamline delivery o our prod-ucts to consultants, at a reduced cost per order and lower greenhouse gases emissions.
However the simultaneous set up o new capture o orders systems, changes in the logistics model andthe opening o new DCs aected our operat ions, ser vice quali ty and relations. In parallel, we saw a dropin commercial and market efciency. The combination o these two conditions impacted negatively on ourresults, which were below expectations, requiring planning adjustments during the year.
We intend to increase the impact o our promotions, setting a better balance between central and regionalpromotions. We are convinced that the inrastructure modifcations in progress will enable us to reachservice levels capable o boosting our brands competitive dierentials.
The year also brought new opportunities. Ater a period o signifcant expansion through growth in thesales channel that increased product penetration rom 40% to 60% in Brazilian homes, we identifed anopportunity to modiy our strategy. Our ocus is now on boosting our Consultants productivity by per-suading consumers to buy a greater variety o products more requently. Ater all, ours is the top brand inthe market, and our Consul tants connect with 100 million consumers.
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We continue to be enthusiastic about the expansion o our international operations which is the resulto a high perormance leadership team, allying experience in Natura and knowledge o the local markets.In Argentina, Chile and Peru, countries in which our operations are at the consolidation stage, Natura grewat the rate o 36% in local weighted currency. The Company recorded a signifcant increase in proftability,with our brands positioned among the industrys leaders. In 2011, we continued to implement local manu-
acturing, with the start-up o production in Colombia and the duplication o our Distribution Center inMexico. We also began to reap results rom the Red de Relaciones Sustentables (Sustainable Relation-ship Network), an innovation in our commercial model developed especially or the Mexican market whichencourages socio-environmental enterprise, a novelty in the direct selling industry.
In fnancial terms, our net revenues increased 8.9%, with Ebitda growing 13.4%. In the social area, we ex-panded wealth distribution among our main stakeholders. The changes throughout the year aected ourorganizational climate and our service instability bore an impact on consultant s satisac tion levels. On theother hand, with regard to the environment, we achieved our targets, with reductions in emissions and inthe use o natur al resources such as water and energy.
In parallel with the changes under taken on multiple ronts, we advanced towards a new perspective orour business. We are particularly enthusiastic about the u ture o direct sales. We have always believedin the entrepreneurial and transormational capacity o people engaged in a common purpose. In anever more digitally connected world, in which personal treatment o consumers becomes increasinglyimportant, direct sales has great potential to drive continuous growth. We anticipate a uture in whichrelations between consultants and consumers will be suppor ted by cutting edge inormation technologyand social networks, a feld in which servi ces should expand greatly and drive increased value generationor all those involved.
Inspired by our desire to see our brand occupy new spaces, we reafrm our desire to proceed with theentire Natura community, urther reinorcing this unique relationship network.
ALESSANDRO GIUSEPPE CARLUCCIChie Executive Ofcer
JOO PAULO FERREIRASenior Vice-President o Supply Chain
JOS VICENTE MARINOSenior Vice-President o Sales andMarketing
MARCELO CARDOSOSenior Vice-President, OrganizationalDevelopment and Sustainability
ROBERTO PEDOTESenior Vice-President o Finance, LegalAairs and Inormation Technology
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Natura was born in 1969, the ruit o two passions: cosmetics and relationships. For 43 years, we have sought topromote well being well an expression that embodies our reason or being: to make people eel good aboutthemselves, about others and about the natural environment and the whole o which we are part.
We operate in the Cosmetics Fragrances and Toilletries. Since 1974, we have used direct sales as our commercialmodel. This means our products reach our consumers through a network o 1.4 million consultants (NCs) in Braziland abroad.
To support this sales channel, we have almost 7 thousand employees working in Brazil, in our head ofce in Cajamar,So Paulo (So Paulo State), in fve commercial ofces Salvador (Bahia), Campinas (So Paulo State), Alphaville(So Paulo State), Rio de Janeiro (Rio de Janeiro State) and Porto Alegre (Rio Grande do Sul State), in additionto our plants and research and technology centers in Cajamar and in Benevides (Par State) and eight distributioncenters spread nationwide (see fgure).
We also have a strong presence in Latin America. The regional head ofce, located in Buenos Aires, Argentina, co-ordinates our operations in Chile, Colombia, Mexico and Peru. Our products are also marketed in Bolivia throughlocal distributors.
Additionally, Natura has an operation and an Advanced Technology Center in Paris, France, where the Companydevelops research into new technologies, trends and advances in the area o beauty and well-being.
2.3natura 2.1 - 2.9
BRAZIL
ARGENTINA
CHILE
PERU
COLOMBIA
MEXICO
FRANCE
MANUFACTURING
INTERNATIONAL MANUFACTURE
HUBS
DISTRIBUTION CENTERS
PRODUCT CIRCULATION
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HIGHLIGHTS OF THE YEAR
ECONOMIC_ Natura net revenues reached R$ 5,591 mill ion, a growth o 8.9%.
_ EBITDA was R$ 1,425 mil lion, with an EBITDA margin o 25.5%, and net earnings o R$ 830 million,and margin o 14.9%.
_ Our international operations showed vigorous growth, with 40% increase in net revenues inweighted local currency (35.4% in Reais); they now account or 9% o the business.
_ We under took our largest investment ever, with capita l expenditure o R$ 350 mi llion in produc-tion, logistics and technology.
_ The Companys growth was below projections due to operational instab ilities caused by changesin the order capture systems and lower growth in the country and in the industry.
ENVIRONMENTALThe ollowing initiatives were taken:
_ Launching o the Amaznia Program aimed at yielding business around R$ 136 million in theregion in 2012.
_ Perormance o our fr st water inventor y us ing the Water Footpr int methodology; this should en-able diagnosis and serve as the basis or a new water management policy.
_ Implementation o a new supplier selection methodology which takes into account social andenvironmental impacts, in addition to price, quality and logistics.
_ Reduction o our relative GHG emiss ions by 25.4% between 2006 and 2011. Our target i s a 33%reduction by 2013.
_ On the other hand, with regard to our water and solid waste generation program unor tunate lywe were unable to reach the set targets per unit invoiced,
SOCIAL_ The quality o our relations with our main stakeholders was below the desired levels . There was a
drop in organizational climate rom 73% to 70%. The NC and NCA loyalty rates also decreased to19% and 24%, respectively.
_ On the other hand we created an innovative and enterprising commerc ial model in Mexico, ob-taining 50% growth in the frst six months.
_ We initiated an impor tant leader ship development program or the 600 top Natura managers inBrazil and overseas.
_ The Trilhas Program, a partnership with the Ministry o Education, became public policy and shouldbeneft more than 3 million students in 2012.
_ We raised R$ 8.4 million with the Crer para Ver program, yet alling shor t o our target o
R$ 13 million.
AWARDS AND RECOGNITIONSIn 2011, Natura was elected the second most sustainable company in the world by the Canadian Research Insti-tute Corporate Knights. This was the third time we were classifed in this ranking. We were also elected the 8thmost innovative Company worldwide by Forbes magazine and were the subject o a Harvard Business Schoolcase study. The main recognitions in the year are presented below.
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MAIN NATURA AWARDS AND RECOGNITIONS IN 2011
FINANCE
Recognition Organization Category 2011
FT ArcelorMittal Boldnes
in Business Awards
Financial Times and
ArcelorMittal
Natura was recognized as one o the 6 best
companies in the Environment category.
x
INSTITUTIONALINSTITUTIONALRecognition Organization Category 2011
The 10 Most Innovative Companiesin the World
Forbes MagazineThe Most Innovative Companiesin the World
8
The 100 Most Prestigious Companies poca Negcios Magazine
The Most Prestigious Companies 2
Most prestigious brand in the Beautycategory.
1
The Most Admired Companies in Brazil Carta Capital Magazine
The Most Admired Companies in Brazil 1
The Most Admired Companies in theCosmetics Fragrances and Toilletries.
1
DSN Global 100: The Top Direct
Selling Companies in the World Direct Selling News
World Ranking o the Biggest DirectSelling Companies.
3
Latin American Ranking o BiggestDirect Selling Companies.
1
Worlds Most Ethical Company EthiSphere Health and Beauty 1
MARKETING PROD UCT AND PACKAGINGMARKETING PRODUCT AND PACKAGINGRecognition Organization Category 2011
Abre Award or Brazilian PackagingAbre Brazilian PackagingAssociation
Company o the year 1
Cosmetics and Personal Care ProductsPackaging - New Line Ekos Hair
1
Packaging o Family o Products - New LineEkos Hair
1
Sustainability - New Line Ekos Hair 1
Structural Design Functionality New LineEkos Hair 1
Marketing Communication Strategy: NewLine Ekos Hair
1
INVESTORS RELATIONS
Recognition Organization Category 2011
Best Annual ReportABRASCA BrazilianAssociation o PublicCompanies
Public Company Ranking 3
CR Reporting Awards Corporate Register Best Integrated Report 1
SUSTAINABILITY
Recognition Organization Category 2011
The 20 Most Prestigious Companies
in ArgentinaClar in Newspaper Environmental Commitment Ranking 2
100 Most Sustainable Corporationsin the World
Corporate Knights Inc.,Innovest Strategic ValueAdvisors, Asset 4 andBloomberg.
100 Most Sustainable Corporationsin the World.
2
Exame Sustainability Guide Exame MagazineOne o the 20 Corporate Role ModelsExame Sustainability Guide.
x
Best Social ResponsibilityPractices - Mexico
Centro Mexicanopara la Filantropia
Best Practices: Community Relations 1
Fundacin Chile Ranking: Best PreparedCompanies or Climate Change.
Fundacin Chile and CapitalMagazine
Companies best prepared or climatechange.
1
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OURMARKETAccording to the most recent data rom the Brazilian CFT industry association Abihpec/Sipatesp2, the market inthis country grew 7.7% in nominal terms in the frst ten months o the year, albeit below projections. Even withlower economic growth, increased competition, and higher overseas investment in Brazil, Natura maintainedits market leadership, with 23.2% market share against 23.6% the previous year. We also retained high levels oconsumer preerence: 89% intend to buy our products and 68% actually acquired Natura brand products.
In the Latin American countries in which we operate (Argentina, Chile, Peru, Colombia and Mexico), the mostrecent Euromonitor fgures show a 7.5% average annual growth or the CFT industry. This rate has remainedsteady over the last our years. In the same period, Natura has grown on average 38% per year in these coun-tries, climbing rom the 15th to the 9th position in the CFT company ranking or the region.
The numbers or the direct selling market showed the same trend. According to the Associao Brasileira deVendas Diretas (Brazilian Direct Selling Association), some 3 million consultants were involved in door to doorsales last year, 3.2% up over 2010. The growth rate during the previous year was 12.2%.
PROGRESS IN OUR COMMITMENTSEvery year we assume commitments and targets to drive our socio-environmental perormance. These targetsare incorporated into our Socio-Environmental Budget and are monitored by the Natura Executive Committee.Our 2012 targets were adjusted in accordance with the operational market ramework we encountered in 2011and Natura made them challenging. The table below presents the results or the year:
2011 TARGET 2011 PERFORMANCE 2012 TARGET
WATER
Reduce total water consumption per unitinvoiced by 3%.
NOT ACHIEVED
Water consumption increased by 14%.
Maintain water consumption at 0.40 litersper unit produced in Brazil.1
EDUCATION
EMPLOYEES
Reach average o 100 hours training peremployee in Brazil
NOT ACHIEVED
Natura had the same average as the previous year, 90hours.
None. The scope o the target was expan-ded to include international operations (seebelow).
Reach an average o 88 hours training peremployee throughout Natura.
NOT ACHIEVED
85 hours reached.
Reach an average o 80 hours training peremployee throughout Natura.
CONSULTANTS AND NCAS
Train 540 thousand consultantsper subject2.
ACHIEVED
566 thousand NCs trained.
Train 1,005,000 consultants per subject.1
Achieve R$ 13 million sales rom Crer paraVer product line.
NOT ACHIEVED
Sales were R$ 8.4 million.
Achieve R$ 10.3 million sales rom Crerpara Ver product line in Brazil and R$ 2.5million rom international operations.
Reach 134 thousand NCs engaged in Natu-
ra Movement.
NOT ACHIEVED
Almost 123 thousand NCs engaged in NaturaMovement.
Maintain 123 thousand NCs engaged in
Natura Movement.
Achieve 13% penetration amongconsultants with the Crer para Ver programin Brazil.
NOT ACHIEVED
Rate achieved was 9.5%.
Achieve 11% penetration among consul-tants in the Crer program in Brazil and17.7% in international operations.
CLIMATE CHANGE
Reduce relative greenhouse gases (GHG)emissions by 33% by 2013, against 2006baseline inventory.
UNDERWAY
Reduction o 25.4% up to 2011.
Reduce relative greenhouse gases (GHG)emissions by 33% by 2013, against 2006baseline inventory.
Reduce scope 1 and 2 GHG Protocol emis-sions by 10% by 2012, against 2008 baseline.
UNDERWAY
The accrued variation rom 2008 to 2011 incre-ased 11%.
Reduce scope 1 and 2 GHG Protocolemissions by 10% by 2012, against 2008baseline.
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RELATIONSHIP QUALITY
EMPLOYEES
Achieve 32% employee loyalty in Brazil. NOT ACHIEVED
The rate was 28%.
Achieve 30% employee loyalty in Brazil.
Achieve 76% avorability in Naturaclimate survey. NOT ACHIEVEDThe rate achieved was 70%.
Achieve 74% avorability in Naturaclimate sur vey.
CONSULTANTS AND NCAS
Achieve 22% loyalty among consultantsin Brazil.
NOT ACHIEVED
The rate achieved was 19%.
Achieve 21% loyalty among consultants inBrazil and 36% in international operations.
Achieve 37% loyalty among NaturaConsultant Advisors in Brazil.3
NOT ACHIEVED
The rate was 24%.
Achieve 33% loyalty among NaturaConsultant Advisors in Brazil.
CONSUMER
Reach 54% consumer loyaltyin Brazil.
NOT ACHIEVED
The rate was 52%.
Reach 54% consumer loyalty in Brazil.
SUPPLIERS
Maintain 28% Natura suppl ier loyalty. NOT ACHIEVEDThe rate was 27%.
Reach 29% Natura supplier loyalty.
SUPPLIER COMMUNITIES
Achieve 44% loyalty among supplierscommunities.
NOT COMPARABLE
The rate was 28%, but it was not possible tocompare it with the 2010 results because ochanges in methodology.
Achieve 30% loyalty among supplierscommunities.
Achieve average score o 3.67 in assess-ment o BioQlicar community developmentprogram.
UNDERWAY
Results will be available in May 2012.
Achieve average score o 3.76.
SOLID WASTE
Reduce total weight o solid waste genera-ted per unit invoiced by 3%.
NOT ACHIEVED
Total weight o solid waste generated by unit soldgrew 3%.
Maintain quantity o solid waste generatedper unit produced in Brazil at 20 grams.1
Sociobiodiversity
AMAZON
Did not exist. - Generate R$ 136 million in businessvolume in the Amazon region, consideringNatura and other partners.
Did not exist. - Achieve 12% share or Amazon rawmaterials in Naturas raw material purchasevolumes.
SUPPLIERS COMMUNITIES
Increase unding or communities by 25%. NOT ACHIEVED
Funding was increased by 15%.
Distribute R$ 12 million in wealth to sup-pliers communities.
PRODUCT IMPACTSEliminate the use o the preservative para-bens rom the portolio by July 1, 2011.
ACHIEVED
Natura excluded parabens rom the ormulationo all its products.
No ingredient substitutions are scheduledor 2012
1. We replaced the unit sold metrics with the unit produced. In other words, we no longer do the calculation based on the units sold (invoiced), considering instead whatis actually manuactured (produced) by Natura. According to the new calculation, water consumption and solid waste generation were reduced. (more on page 81).
2. Starting in 2012, we should have a new method o tracking this indicator, recording NC participation per subject and counting all the NC learning interactions.Training by subject reers to dierent actions with specifc subjects and ocuses.
3. Errata: the NCA loyalty target or 2011 was 37% and not 40%, as published in the 2010 report.
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Natura aims or the best standards o corporate governance, and continually strives to or excellence in thisarea. We are listed on the BM&FBOVESPA New Market, a special segment o the Brazilian Stock Exchangewith the most demanding levels o corporate governance.
Even though it is not listed on the New York Stock Exchange, Natura was the frst Brazilian Company to
voluntarily obtain SOx certifcation in line with the Sarbanes-Oxley Act to guarantee the integrity o oursystems and controls against raud and corruption. Since 2007, we have been members o the CompanyCircle o Latin American Corporate Governance, ater being selected by the World Banks InternationalFinance Corporation.
BOARD OF DIRECTORS
The Natura Board o Directors includes seven members who hold a one-year mandate, renewable byapproval o the General Shareholders Meeting. Currently one chair is vacant, and two o the board membersare independent.
In 2011, the Board o Directors was renewed and two o its members replaced. Edson Vaz Musa and JosGuimares Monorte stepped down ater helping in the growth and strengthening o Natura or 13 years.Marcos Lisboa and Adlson Primo were appointed to replace them in the Annual Shareholders Meeting heldin April 2011. Well known in the market, they joined the Board as independent external members. However,Adilson Primo resigned in November and his position is still vacant. The same meeting confrmed the returno Guilherme Leal, who had resigned the previous year to run in Brazil presidential elections.
We believe renewing the Board is a healthy practice that helps bringing in new ideas and a dierentiatedvision or the company. In 2012, we intend to increase the number o chair members rom seven to nine .This change and the new members will be voted in during the next Extraordinar y and Annual ShareholdersMeeting to be held on April 13, 2012.
The three new names to be indicated or the Board are Plnio Musetti, who is already on the StrategyCommittee, Raul Beer and Roberto Lima. This composition will give the Board three independent members.The choice o these nominees is based on executive experience, knowledge o sustainability and the lack o
conicts o interest.This increase in size is aligned with Naturas plans or the uture, which include signifcant expansion in Braziland Latin America, and will reinorce the team with proessionals who have extensive and diverse corporateexperience. The change will also enable us to broaden the composition and reinorce the capacity o thesupport committees.
The six meetings o the Board o Directors in 2011 were held in So Paulo (So Paulo State). We were unableto ulfll our wish o holding meetings in the other cities in which the Company business units are located,alternating between Brazilian and international operations.
There are our committees which meet at set intervals or discussions, to assess study proposals and makerecommendations to the Board (see fgure below).
2.5governance 4.1; 4.2; 4.3; 4.6
4.7
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COMPOSITION OF THE BOARD OF DIRECTORS*
PEDRO LUIZ BARREIROS PASSOSBoard Member and CoChairman in ofce
ANTONIO LUIZ DA CUNHA SEABRA
Board Member and CoChairman
GUILHERME LEALBoard Member and CoChairman
MARCOS LISBOABoard Member and Chairman o the Audit, Risk Management and Finance Committee
JULIO MOURA NETOBoard Member and Chairman o the Strategy Committee
LUIZ ERNESTO GEMIGNANIBoard Member and Chairman o the People and Organizational Development Committee
BOARD OF DIRECTORS - SUPPORT COMMITTEES
Audit, Risk Management and FinanceThis committee is responsible or reviewing issues associated with taxes, accounting, company structureand new investments. It provides inormation to the Board on fnance, risks and relations with externalauditors. Since the beginning o 2011, it has been composed exclusively o independent external members.With the stepping down o Jos Guimares Monorte, Edson Vaz Musa and Adilson Primo rom the Boardo Directors, the current Committee members are Luiz Ernesto Gemignani and Marcos de Barros Lisboa.
Although the Sox Act recommends that the committee should have three independent members, webelieve our Audit Committee works well with the cur rent number. The committee receives suppor t roma technical group consisting o: the external specialists Gilberto Miano and Taiki Hirashima; RobertoPedote, Senior Vice-President, Finance, Legal Aairs and Inormation Technology; Moacir Salzstein, Director
o Corporate Governance, and the Risk Management and Internal Audit Manager Mercedes Stinco. Thecommittee meets quar terly.
StrategyThis committee monitors projects drawn in strategic planning and its purpose is to study long-term initiativesor the Company. Its composition changed last year with the entry o Plnio Musetti. Edson Vaz Musa wasreplaced by Adlson Antonio Primo, who held ofce until the end o October. Other members are PedroLuiz Barreiros Passos, Julio Moura Neto and the company CEO, Alessandro Carlucci. The Committee meetsevery month, except in January and June.
Corporate GovernanceThis Committee is responsible or discussing improvements in the governance process and businessoperations. It also coordinates assessments by the Board and Corporate Governance. The our current
members are: Pedro Luiz Barreiros Passos, Antonio Luiz da Cunha Seabra, Guilherme Peiro Leal and JulioMoura Neto, and a Secretary, the Director o Corporate Governance, Moacir Salzstein. Meetings take placequarterly.
People and Organizational DevelopmentWith the departure o Edson Vaz Musa, the Committee was reduced to two Board members: Pedro LuizBarreiros Passos and Luiz Ernesto Gemignani. The other members are: Ftima Raimondi, an external participant;Alessandro Carlucci, CEO; and Marcelo Cardoso, Senior Vice-President, Organizational Development andSustainability. The committee addresses issues in connection with compensation, succession, projects andtraining, in addition to Human Resources, the Culture Program and Natura Management System.
* On the date o publication o this report
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SENIOR MANAGEMENT ASSESSMENT AND SELF-ASSESSMENTThe most recent assessment process involving the Board o Directors took place at the end o 2010. Thisconsisted o a sel-assessment and a broad review conducted by external consultants which included issuessuch as the Boards size, attributions and work ow. This analysis indicated opportunities or improvement that
have been implemented over the last two years. Due to the two analyses conducted in 2010 and the renewalo the Board in 2011, the decision was taken not to repeat this process last year. It should be resumed in thefrst hal o 2012.
ORDINARY GENERAL SHAREHOLDERS MEETINGFor two years we have been making every eort to attract more shareholders to attend the Ordinary GeneralShareholders Meeting, in particular our individual investors. Accordingly, in 2011 we assembled around 250investors in Cajamar, where they were able to accompany the meeting held in Itapecerica da Serra in real time.All the members o the Board o Directors and Executive Committee were present at the Cajamar event toanswer shareholders questions.
A public meeting by Association o Investment and Capital Market Analysts and Proessionals (Associao dosAnalistas e Profssionais de Investimento do Mercado de Capitais, Apimec - So Paulo State) was also organizedand held along the same event. Due to the success o the encounter and the importance o this audience, the
event is expected to be repeated in 2012.
EXECUTIVE GOVERNANCEThe Executive Committee (Comex) is Naturas main executive body and is charged with overseeing developmento the companys strategic planning and strategic projects, overall business management and evaluation oresults based on the triple bottom line. In 2011, the CEO Alessandro Carlucci accumulated the position o VicePresident o Innovation. This vacancy should be flled out in 2012.
Comex has eight supporting committees in which subjects in connection with the executive areas are discussed.
COMPOSITION OF THE EXECUTIVE COMMITTEE (COMEX)ALESSANDRO GIUSEPPE CARLUCCICEO
JOO PAULO FERREIRASenior Vice-President, Operations and Logistics
JOS VICENTE MARINOSenior Vice-President, Business
MARCELO CARDOSOSenior Vice-President, Organizational Development and Sustainability
ROBERTO PEDOTESenior Vice-President, Finance, Legal Aairs and Inormation Technology
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EXECUTIVE BOARD
ALESSANDRO MENDESProduct Development Director
ALEXANDRE ALVES LEMOS
Commercial Director
ALEXANDRE CRESCENZICommercial Director
ANA LUIZA MACHADO ALVESBrand and Culture Director
ANGEL MEDEIROSLogistics Innovation Director
ARMANDO MARCHESAN NETOOperations and Logistics Director
ARNO CORREIA DE ARAUJOCommercial Director, Mexico
AXEL PABLO MORICZ DE TECSOGeneral Manager, Chile
DANIEL DE ALMEIDA GUSMAO ALVES SILVEIRACommercial Director
DANIEL LEVYBusiness Unit Director
DANIEL MADUREIRA GONZAGAGeneral Manager, Peru
DENISE LYRA DE FIGUEIREDOBusiness Unit Director
DENISE REGINA DE OLIVEIRA ALVES
Sustainability Director
DIEGO DE LEONEBusiness Unit Director International Operations
ERASMO TOLEDOBusiness Director International Operations
FABIO NOBRE DA COSTA BOUCINHASDigital Media Director
FLAVIO PESIGUELOInternational Organizational Developmentand Sustainability Director
CECILIA GOYA MEADEGeneral Manager, Mexico
HERIOVALDO RAMOS DA SILVACommercial Management Director International Operations
JOAO AUGUSTO PEDREIRAGeneral Business Director, Brazil
JOAO CARLOS MOCELINIndustrial Director
JORGE LUIS ROSOLINOcommercial director
JOSE THOMAZ DEVECZ PENTEADO DE LUCACommercial Innovation Director
JOSELENA PERESSINOTO ROMERO
Product Availability Director
LOREDANA SARCINELLA MARIOTTO
Business Unit Director
LUCILENE SILVA PRADO
Legal Aairs Director
LUIS RENATO COSTA BUENO
Commercial Director
LUIZ CARLOS DE LIMA
Finance Director
MARCEL GOYA
Finance, IT and Legal Aairs
Director International Operations
MARCIA ANDREA DE MATOS LEALManagement Systems Director
MARCUS OLIVER RISSEL
Commercial Director
MOACIR SALZSTEIN
Corporate Governance Director
MONICA GRANJA GREGORI
Communication and Marketing Director
NESTOR MARIANO FELPI
Order Cycle Director
NEY MAURO SIMONE DA SILVAPeople Management Director
PEDRO CRUZ VILLARES
President, Instituto Natura
PEDRO ROBERTO GONZALES
General Director
RENATO ABRAMOVICH
Business Unit Director
RICARDO LOBATO FAUCON
Customer Service Director
ROBERT CLAUS CHATWINBusiness Development Director
RODOLFO WITZIG GUTTILLA
Corporate Aairs and Government Relations Director
TATIANA DE CARVALHO PICCOLI PIGNATARI
Business Unit Director
THIERRY AUBRY LECOMTE
General Director International Operations
VICTOR MUNIZ FERNANDES
Research and Development Director
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COMEX SUPPORT COMMITTEES
CustomersCreated in January 2011, the committees main attributions are the monitoring o the quality o service Naturaprovides to end consumers and consultants. It is led by Joo Paulo Ferreira, Vice President, Logistics Operations,with the par ticipation o Jos Vicente Marino, Vice President, Business.
EthicsCharged with ensuring the application o the Natura Relationship Principles and correcting potential deviations,it is led by Roberto Pedote, Senior Vice-President, Finance, Legal Aairs and Inormation Technology, with theparticipation o Marcelo Cardoso, Senior Vice-President, Organizational Development and Sustainability.
Ideas and ConceptsInitiated in March 2011 and led by the CEO Alessandro Carlucci, this committee has as members the co-chairmen Pedro Luiz Barreiros Passos and Antonio Luiz da Cunha Seabra and investigates innovative long-termideas and concepts or Natura.
Commercial InnovationThe committees major unction is to review projects that drive innovation. It is led by Jos Vicente Mar ino, VicePresident, Business, with the participation o Roberto Pedote, Senior Vice-President Finance, Legal Aairs andInormation Technology.
BrandResponsible or managing the Natura brand, the committee addresses brand architecture, Natura language andmovements. It is led by Alessandro Carlucci, CEO, with the participation o Jos Vicente Mar ino, Vice President,Business, and Marcelo Cardoso, Senior Vice-President, Organizational Development and Sustainability.
ProcessesLed by Marcelo Cardoso, Senior Vice-President, Organizational Development and Sustainability, this committeeis charged with overseeing the implementation o Management by Processes and defning action ronts and
strategies. Joo Paulo Ferreira, Vice President, Operations and Logistics, is involved.
ProductsLed by the Innovation area, the committee monitors approval processes or new Natura products. AlessandroCarlucci assumed temporarily the leadership o the committee, supported by Jos Vicente Marino, vice president,Business.
SustainabilityLed by Marcelo Cardoso, Senior Vice-President, Organizational Development and Sustainability; the other mem-bers are Roberto Pedote, Senior Vice-President, Finance, Legal Aairs and Inormation Technology, and JooPaulo Ferreira, vice president, Operations and Logistics. This committees role is to defne and track the com-panys Socio-Environmental Budget and Materiality Matrix, and other matters linked to the Companys strategicplanning. Its attributions also include the defnition o strategic sustainability-related projects such as CarbonNeutral and Solid Waste and the companys positioning and strategies related to its vision o sustainability andrelationship quality.
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RISKMANAGEMENT
Risk management at Natura is an instrument incorporated into the strategic planning cycle encompassing eco-nomic, social and environmental matters. These are divided into two main groups: strategic risks, that is, risksthat could aect company s continuity and operational risks, in which our internal processes are monitored and
verifed periodically by the manager responsible and his/her team.Ongoing improvement o our sustainability risk assessment mechanisms is integral to our strategy. It is ourunderstanding that the challenge o integrating sustainability into companys management includes continuallyassessing socio-environmental risks in the business. Even though we do not have a specifc analysis o eectsassociated with climate change in the risk management process, the company has important mitigation projectsaimed at the impacts our business may generate, such as the Carbon Neutral Program (more on page 26) andwater consumption reduction measures (more on page 25)
We identiy major risks and controls or all processes, including regulatory questions and opportunities to de-velop technologies or products to ace the challenges posed by climate change.
We have a strategic risk map which is monitored by all the committees supporting corporate and executivegovernance.
Since 2009, we have been working on refning a crisis prevention system, studying the most relevant scenarios
or the company within a broader contingency plan or all our operations.
INTERNAL AUDITThe Natura internal audit team reports to the Audit, Risk Management and Finance Committee within a rame-work which guarantees the auditors reedom o action with no intererence rom other companys unctions.During the year, 29 audits were conducted in the company, encompassing all the countries in which we operate.A total o 36 processes were assessed, compared to 33 in 2010.
Naturas internal audits include tests and procedures that assess control environment, including measures toprevent raud and corruption. In 2011, we received three reports rom Brazilian and international operations.These were noticed via dierent channels, particular ly worthy o note being the Ombudsman area. One case oirregularity was proven, resulting in the dismissal o an employee. All the operations are subject to the processesset orth in the Sarbanes-Oxley Act, including those involving corruption. We received SOx certifcation at thebeginning o 2011, and this was renewed in 2012.
In 2012, we should integrate our raud prevention controls with the involvement o internal controls, audit, theombudsman and legal areas. This initiative is intended to urther reinorce raud prevention. To ensure an envi-ronment that is increasingly open and ethical, we will step up communication with all the stakeholders aboutthe channels available or reporting breaches and suspected breaches such as the ombudsman, the investigationprocess and the role and responsibilities o the Ethics and Audit Committee.
SENIOR MANAGEMENT COMPENSATION
Our compensation plan or senior management seeks to oster engagement, balance short, medium andlong term gains and is linked with the companys growth and share value.
For a group o executives that includes the CEO, vice presidents, directors and senior managers, gains arelinked with long-term commitment through a share option subscription or purchase plan. Since 2009 the
plan has required that the executive invest at least 50% o his/her net earnings rom the proft share planin the acquisition o Natura shares. 50% o these shares vest ater three years, and 100% ater our years.
In both cases, the plan is valid or eight years and the shares may not be sold beore the end o the thirdyear. The model establishes an annual grant limit o 0.75%, and a maximum o 4%.
In December 2011, the volume o share options owned by the companys executives corresponded toaround 1.71% o Naturas stock, compared with 1.59% in 2010. The total number o Natura shares onDecember 31st, 2011 was 431,239,364.
Since 2002, we have granted 21,191,529 options, 23% o which have been canceled due to employeesleaving the company.
Tables: Number o Options and Appreciation o Plans
EC2
SO2; SO4
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NUMBER OF OPTIONS
Plan Granted Exercised Mature Balance Non-Mature Balance Cancelled
2002 3.533.610 2.712.645 0 0 820.965 23%
2003 3.969.220 3.404.495 0 0 564.725 14%
2004 1.901.460 1.606.063 0 0 295.397 16%
2005 1.120.760 651.354 0 0 469.406 42%
2006 1.153.756 230.007 320.062 0 536.687 47%
2007 1.305.508 150.985 470.274 0 614.843 47%
2008 1.800.010 0 347.838 498.823 802.364 45%
2009 2.690.0641 0 0 2.249.793 440.271 16%
2010 2.112.352 0 0 2.001.021 111.331 5%
2011 1.604.789 0 0 1.470.940 133.849 8%
Total 21.191.529 9.042.940 1.138.174 6.220.577 4.789.838 23%
APPRECIATION OF PLANS*
Amounts in 000s R$
PlanRestated
amount o plan
ActualDiscountObtainedin year
Discountobtained in
year
Potentialdiscount o
mature balance
Potentialdiscount onon-mature
balance Plan Status
2002 R$ 7,29 42.412,4 55.612,0 0,0 0,0 Vencido
2003 R$ 4,08 66.917,3 84.884,7 0,0 0,0 Vencido
2004 R$ 10,05 26.152,8 31.214,9 0,0 0,0 Vencido
2005 R$ 21,56 8.531,0 9.396,3 0,0 0,0 Vencido
2006 R$ 32,13 3.421,0 3.705,8 1.384,6 0,0 100% maduro
2007 R$ 30,39 3.139,9 3.342,7 2.855,4 6.416,7 100% maduro2008 R$ 23,60 2.670,4 2.744,9 4.474,5 -24.125,5 50% maduro
2009 R$ 25,74 0,0 0,0 0,0 -2.607,7 No maduro
2010 R$ 37,76 0,0 0,0 0,0 -11.196,1 No maduro
2011 R$ 44,07 0,0 0,0 0,0 No maduro
Total 153.244,8 190.901,3 8.714,6 30.542,2
* Accrued amounts, corrected by the IPCA index up to December 2011. NATU 3 on December 29th, 2011: R$ 36,46
The quantity o shares granted was altered due to contract changes with some employees (impacting 52,064 options).
50% MATURE 100% MATURE VALIDITY
April 10 05 April 10 06 April 10 08
April 10 06 April 10 07 April 10 09April 10 - 07 April 10 08 April 10 10
March 16 08 March 16 09 March 16 11
March 29 - 09 March 29 10 March 29 12
April 25 10 April 25 11 April 25- 13
April 22 11 April 22 - 12 April 22 14
April 22 - 12 April 22 13 April 22 17
March 19 13 March 19 14 March 19 -18
March 23 14 March 23 - 15 March 23 19
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VARIABLE COMPENSATION
Variable compensation is designed to recognize and reward Naturas executives or their perormance andresults during the year. Because the Company did not achieve the social targets set or 2011, around 600
Companys managers, Directors and Executive Committees members were not rewarded with any variablecompensation.
The Proft Share System or management consists in the payment o monthly salary multiples in accordance withthe executives position in the organizational structure and is linked to the eective achievement o targets andminimum growth levels established or the year. Payment is contingent on Naturas perormance reaching thestipulated minimum. The criter ia reect perormance in the triple bottom line dimensions:
_ Economic Consolidated Ebitda, covering Brazil and international operations;
_ Social Organizational climate survey or employees in the Brazilian and international operations andloyalty rate or Brazilian consultants;
_ Environmental Carbon emissions in Brazil and in the international operations;
_ Others Product shor tage, the percentage o products not available when ordered by consultants.
The total amount awarded in the proft share scheme, based on the long-term incentive program, may not
exceed 10% o net earnings. This limit provides Natura with a balanced and coherent system that preventsdistortions between executive compensation and company perormance. The variable component, both shortand long-term, is proportionally larger or senior executives than or other employees.
The table below shows the compensation o the main employee segments in the company:
2011
Average numbero employees
(number)Total salary(in millions)1
Total variable(in millions)2
2012 StockOption Plan(in numbero shares)3
Board 7 3,13 1,30 -
ExecutiveCommittee
5 5,86 5,49 -
Senior Management
and Directors102 36,40 19,90 -
Middle Management 405 60,63 20,79 -
Administrative 1.488 92,85 9,20 -
Sales Force 875 49,09 49,67 -
Operational 2.436 52,21 12,77 -
Total 2011 5.317 300,17 119,11 -
1. Total Salary: Takes into account annual average base salary over 12 months (without charges) and overtime (with remunerated weekly rest -DSR), 13th and 14th salaries, in millions.2. Variable Total: Bonus, Proft Share and Sales Bonus (with DSR) paid in year3. Stock Options: 2012 plan not approved yet.
1. Total Salary: Takes into account annual average base salary over 12 months (without charges) and overtime (with remunerated weeklyrest - DSR), in millions.2. Variable Total: Bonus, Proft Share and Sales Bonus (with DSR) paid in year3. Stock Options: 2011 plan approved in March 2011.
2010
Average numbero employees
(number)Total salary(in millions)1
Total variable(in millions)2
2011 StockOption Plan(in numbero shares)3
Board 6 2,64 2,08 -
ExecutiveCommittee
6 5,25 6, 28 346.476
Senior Managementand Directors
86 27,04 17,83 1.258.313
Middle Management 336 42,17 18,14 -
Administrative 1.255 63,63 6,29 -
Sales Force 905 44,60 43,19 -
Operational 2.542 41,89 10,33 -
Total 2010 5.135 227,23 104,13 1.604.789,00
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All our businesses and operations are run based on the Natura Management System designed specifcally tomeet our needs and to transorm Natura into a company that is undamentally process driven.
This system makes or greater alignment with the companys Essence and organizational culture, establishingrequirements that enable Natura to run the business more dynamically while simultaneously operating withinwell-defned processes. This is vital considering the decentralized structure we adopted in 2008. With ourexpansion in Brazil and Latin America , we needed an administration aligned with our value proposition, butexible enough to meet specifc demands rom each location and segment.
The Natura Management System is based on three dimensions: the individual, the organization and therelationships. It unctions through 12 priority interrelated components: leadership, strategic planning, relation-ships, sustainability, learning, individuals, processes, brand, culture, customers, innovation and triple bottomline results.
As an ongoing process, the System generates learning and is constantly improved. In 2011, the Companyrefned the defnitions o each o the components, progressed in the processes and conducted extensivetraining or the teams directly involved. We also s tar ted to a lign the system with the Fundao Nacional daQualidade (National Quality Foundation) management excellence model, enabling us to measure our matu-rity and make comparisons with other process-driven companies.
Our ongoing challenge is to ensure our employees to learn and appropriate the Natura Management Systemso that it is unders tood and executed seamlessly. In 2012, we will engage in an extensive eort to disseminatethe sys tem and train people accordingly.
The system will increasingly align business management with our Essence, oriented to service quality andtriple bot tom line results .
2.6naturamanagement system
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Brazil continues to be one o the major cosmetics, ragrances and hygiene products markets in the world. Al-
though growth in 2011 was reduced as compared to previous years, it will continue to expand at a higher ratethan the global industry. Now the third top market worldwide, coming ater the United States and Japan, Brazilis expected to become number two in 2012.
In this expansion ramework, it is our intent to make sure that services or our consultants and end consumersreach a level o excellence that will boost our competitive edge.
Given the high penetration o our products, ound in the homes o some 100 million Brazilians, and consumerpreerence or the Natura brand, more than twice as high as the runner up, we can grow by selling consumersa wider variety o products more oten. This will involve an increase in the productivity o our consultants. To dothis we should modiy our marketing mix and introduce innovations to occupy niches in which the brand is notyet present, among other initiatives.
We are confdent and optimistic about the expansion o our international operations, which have proved to bean important and proftable business platorm. In the Latin American countries we are expanding our sales chan-nel and increasing local manuacturing, with a perspective o accelerated growth in a highly promising market.
We have closely accompanied transormations in the business environment, with a more demanding consumer,the advance o digital technologies and social networks. We intend to use these tools to ur ther expand ourbusiness, generating income or our consultants and providing the consumer with an enhanced purchase experi-ence.
Confdent about the innovative spirit o our team, we believe this moment o transormation will enable Naturato extend its value proposition to new regions, urther expanding the Companys relationship network and itspotential to contribute toward the construction o the business model o the uture.
3.1strategyand prospects
3. what we
aim or
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INFRASTRUCTURE TO SUPPORT GROWTHNaturas investments in inrastructure will underpin the Companys new cycle o growth. Since 2009, our logis-
tics inrastructure has undergone signifcant transormation. We are striving to ensure that products get to ourconsultants more rapidly, at a lower cost per order and with ewer greenhouse gases emissions.
In 2011, we inaugurated a new Distribution Center (DC) and expanded the capacity o three others. With hightechnology product picking, extensive automation and low energy consumption, they are prepared to handle ahigher number o orders, including those with ewer items, enabling more split deliveries. Gains in productivityensue while reducing order costs.
This expansion will continue in 2012 with the inauguration o yet another distribution center and hub (cargotransshipment center) in So Paulo (So Paulo State). These investments have brought the remodeling o ourlogistics network orward by almost two years. Our overriding aim is to cut delivery times to consultants.
We have also driven logistics efciency gains in our international operations with new distribution planning orLatin America, centralized in Colombia and Mexico. We consolidated the perume bottling operation in Ar-gentina where we started in 2010 and have begun soap production in Colombia. This is expected to increasesignifcantly the proportion o products manuactured locally.
MANAGING SUSTAINABILITYInnovation and the ongoing evolution o our business are underpinned by driving sustainability throughout ourprocesses. To that eect our management o sustainability is cross-structured to defne socio-environmentalpositioning and guidelines or every organizational area.
It is our understanding that the defnition o targets and the ongoing monitoring o our socio-environmentalperormance provide the basis or transorming the organization and the decision-making processes. They alsogenerate new business opportunities, transorming socio-environmental challenges into value or Natura andor our relationship network.
This evolution is an integral part o our Strategic Planning and is tracked systematically by Senior Management.
The main socio-environmental indicators, with short and long-term goals, are part o the companys strategictargets and are reected in our public commitments (more on page 12).
Priorities are defned in conjunction with our stakeholders. Through the discussion panels held in Brazil andabroad, we identifed a set o high impact subjects or the company which are represented in the materialitymatrix. Reviewed every two years, these subjects operate as a guide or management, driving projects andoperational initiatives. The Sustainability Committee reports on perormance to Naturas Senior Management.
The matrix was reviewed in 2010 and fnalized in 2011 helping to expand the scope o Naturas operations inLatin America, and the identifcation o the ollowing priority subjects: water, education, sustainable entrepre-neurship, climate change, relationship qual ity, solid waste and sociobiodivers ity(more on page 25 and 28).
Due to their relevance and the stage o maturity Natura has reached in these areas, some o these prioritysubjects are now structured as companys sub-processes.
As steward o this process, the Sustainability unction is incorporated into the Organizational Development
and Sustainability process. Managing relations quality with stakeholders and meeting their demands also comesunder sustainability, encompassing the employees instruction as to how to relate to and dialogue with strategicstakeholders (more on page 27 and 31).
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3.2priority topics
The threat o drinking water shortage represents one o the major threats to lie on our planet. Consequently,what was already a major ocus in reducing our product impacts became a priority or Natura when it revisedits materiality matrix in 2010 and 2011 (read more on About this Report).
To identiy the real impact our business has on water resources, two years ago Natura initiated a broad-basedstudy throughout the production chain rom the extraction o raw materials used in manuacturing to fnalproduct disposal. This enabled the Company to measure the business main impacts, both in terms o water
consumption and pollution potential.This study became Naturas frst water inventory. The methodology, also known as Water Footprint, was cre-ated by WFN, the frst international organization devoted to promoting the sustainable, equitable and efcientuse o water. Natura has partnered with WFN since 2009 and was the frst Company in the cosmetics industryworldwide to apply this technology. We are also the only company in the world to include consumers productuse in the inventory.
In parallel, we invested in a series o initiatives to rationalize, reuse and treat the water used in our operations.This resulted in a 4.7% reduction in consumption per unit produced in 2011 (more on page 83).
WATER
EDUCATION
We believe that improving the quality o education is key to developing awareness among individuals capableo promoting a airer, more sustainable society. This is a collective challenge that goes beyond organizationsand civil institutions. It is everyones responsibility. This is why in 2011 we set about building a new educationalarchitecture or Natura, resulting in a matrix that will guide all our internal and external actions.
Our measures aimed at education or sustainability seek to drive a transormational culture that will promote
excellence in our business and enable us to inuence the defnition o a new economy. We intend to use thesustainability management structure we have, considered a benchmark in the industry, and our relationshipnetwork to raise the awareness o our employees, suppliers and other stakeholders.
Another basic pillar o our education strategy is the Instituto Natura. A not-or-proft organization createdin 2010, it oversees our private social investments in Brazil with a ocus on quality education. The majorcomponent in this commitment is the Crer para Ver program, which is unded by the sale o a specialproduct line which proceeds are invested in public education improvement projects in Brazil and LatinAmerica. Neither Natura nor the consultants make money rom the sale o these products. The aim is tooer educational technologies that positively inuence public policy on education as a means o expandingthe reach o our initiatives. This is the case with the Trilhas Project to encourage reading and writing in inanteducation. In 2012, the initiative will be implemented in partnership with the Ministry o Education in twothousand municipal ities, reaching three million students.
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Sustainable entrepreneurship is not only a new priority subject or Natura, but also a relatively unexploredconcept in the business world. It is relevant or our strategy, but we know we still have some way to go to learnhow to promote it. We are convinced, however, that our commercial model based on direct selling providesus with an opportunity to oster socio-environmental actions and boost the entrepreneurial potential o ourrelationship network.
In 2011, we held a discussion panel with employees to address this subject. A number o initiatives have alreadydemonstrated this potential, such as the Acolher Program, which encourages and supports socio-environmentalprojects developed by NCs and NCAs. This is also the case with the Sustainable Relations Network the Com-pany created in Mexico. In this direct selling model launched in mid-2011, the consultants level o involvementwith Natura increases not only as a unction o their commercial perormance, but also on account o theirengagement in socio-environmental projects in the communities in which they live (more on page 48 and 51).
In 2007, Natura assumed one o its boldest and most important environmental commitments: the decision tobe carbon neutral. This means that the Company compensates or all product manuacturing greenhouse gasesemissions throughout the value chain by investing in reorestation programs, energy efciency and uel substitution.
Even so, we know that the best initiative to save the planet is to eectively reduce our emissions. In this con-nection we are committed to a 33% reduction in our relative emissions by 2013, against a 2006 baseline. Bythe end o 2011, we reached a relative reduction o 25.4%. A urther goal is a 10% decrease in our absoluteemissions (generated in the production process) between 2008 and 2012. By the end o 2011, absolute emis-sions had increased by 11%, as a result o difculties in implementing certain projects. This condition should beremediated in 2012.
The Companys commitments present some intense challenges which require serious learning. To achieve thetargeted reductions we under take constant analyses. In spite o our eor ts, we are still dependent on externaldecisions such as the composition o Brazils energy matrix, defned by public policy. With the increased use othermoelectric power plants, which pollute more than hydroelectric plants, the electricity grid emission actoris more signifcant in calculating carbon emissions, impacting the emissions o companies plugged to the grid.
Another vital point is getting our employees on board. We have presented our managers with the challenge oincorporating carbon into our business vision, driving the issue throughout the company.
To compensate or our 2010 emiss ions, in 2011 we bought carbon credits in a compensation project in Colom-bia, the frst time we have done so outside Brazi l. We also launched a tender to select projects to neutralize our2011 and 2012 emissions (more on page 75).
SUSTAINABLEENTREPRENEURSHIP
CLIMATECHANGE
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Natura believes our development and that o our stakeholders depends on our capacity to seek broad collec-tive solutions to our current challenges and the relationships we establish with our diverse audiences .
To turn this belie into action, the Company has been developing structured relationship management ini-tiatives since 2009, with permanent channels or interac ting with and engaging our s takeholders . We havepromoted discussion panels to receive inputs on strategic Companys projects and initiatives, as well as toassess relationship quality.
This has led to innovative thinking and dierentiated solutions. We have increased the number o multistake-holder panels, noting that bringing together dierent visions and interests drives a creative tension that helpsus see things rom other peoples perspective. This exchange o ideas broadens the perspective o all involved,allowing people to understand and respect dierent s tandpoints.
We organize activities to promote sel-development and raise awareness on dierent subjects involving di-erent audiences.
Our interactions also occur virtually through Natura Conecta (www.naturaconecta.com.br), a communitydedicated to inormation exchange and discussion.
Maintaining relationship quality is an increasingly s trategic process or Natura and the perceptions captured inthese discussions are vit al inputs or our strategic planning (more on page 31).
For the last two years, Natura has been developing its own solid waste management program involvingpartners, third-parties and consumers. The proposal is to use solid waste management to leverage new busi-nesses through continuous innovation, collective construction, adaptation and social inclusion.
We developed a methodology which was applied to the frst Natura solid waste generation inventory cov-ering the ull product lie cycle. This enabled a broader diagnosis o solid waste generation throughout theproduction chain. The data will be used to guide Naturas solid solid waste management planning or thecoming years.
However, we believe that eective solid waste management and a consequent reduction in impacts will onlyoccur through a collective eort involving companies, public authorities, solid waste collection cooperatives,civil society and all the other links in the production and consumption chain. We also participate in a plan thatis being led by the CFT segment association, Abihpec, to drive compliance with Brazils national solid wastepolicy regarding reverse logistics o post-consumption packaging (more on page 82).
RELATIONSHIPQUALITY
SOLID WASTE
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Naturas experience o more than ten years using Brazilian biodiversity assets in our products and distr ibuting
wealth based on traditional knowledge demonstrates the potential to use these resources to generate wealthor the countrys sustainability.
Eleven years ago the Company developed a production model based on relations with suppliers communitiesorganized as cooperatives and associations. These are located in diverse regions o Brazil, in particular in theAmazon. We created production chains with these communities based on air prices, compensation or theuse o biological resources and valuing tr aditional knowledge. These relations are governed by Naturas Policyor the Sustainable Use o Biodiversity and Traditional Knowledge which in turn adopts the guidelines set or thby the United Nations Organizations (UN) Convention or Biological Diversity.
This production model provides a value proposition that generates income or hundreds o amilies, whiledriving regional development and environmental conservation. For this reason we seek to promote discussionabout the sustainable use o sociobiodiversity products and services. We also advocate the establishmento a new legal ramework or access to biodiversity that avors the sustainable use o the countrys biologicalresources and its traditional associated maniestations. We want this relationship to drive research, produc-tion and conservation o the biological diversity in these regions.
This discussion is extremely timely. Ater making 2010 the Year o Biodiversity, the UN determined that theperiod rom 2011 to 2020 would be the United Nations Biodiversity Decade, in which governments wouldbe encouraged to disseminate the results o their national strategies or protecting biological diversity and theservices provided (more on our practices on page 58).
AMAZNIA PROGRAMBy recognizing the importance o the Amazon region or the country and Naturas history in this region,we intend to use our brand to create sustainable development proposals or the region that will beneft itsinhabitants and conserve the orest. Launched in 2011, the Amaznia program expands and reinorces thiscommitment with view at promoting new sustainable business based on science, innovation, productionchains and local entrepreneurship. These initiatives will be ocused on sociobiodiversity and valuing tradi-tional knowledge and regional culture. Already in its frst year, the region was impacted by R$ 64.8 millions.
As such, we defned three interrelated action ronts:
Science, Technology and Innovation Following the open innovation model adopted by Natura morethan fve years ago, we aim to develop knowledge in the Amazon, about the Amazon and or theAmazon. We want to oster new research and to help local researchers and scientists remain in theirregion o origin. In 2012, we are going to build the Natura Knowledge and Innovation Center in Manaus,bringing together local and Naturas researchers. Our target is to connect a network o more than one
thousand researchers rom diverse ins titut ions by 2020.Sustainable Production Chains Natura should increase production in the Amazon in Benevides (ParState), where a manuacturing plant exists since 2007. The set up o a new plant will begin in 2012 and willoccupy a site area o 172 hectares. Our goal is to stimulate the ormation o a network o local extrac-tivis t communities , encouraging the development o local product ion and socia l entrepreneurship. Thepurchase o materials rom the Amazon is projected to grow rom 11% to 30%, engaging 10 thousandamilies by 2020.
Institutional Reinorcement Natura wishes to develop wide-range sustainable development plans andinitiatives jointly with civil organizations, local governments, national and oreign companies, fnancialagents and other partners. An example o this kind o articulation was the defnition o priority subjectsor the Amaznia Program, which involved the collaboration o around 100 people rom diverse back-grounds with experience in the eatures o Par, Amaznia and neighboring States. This eort helpedrefne the program strategy and defne our priorities: education; entrepreneurship; conservation, valuing
and using biodiversity sustainability ; social justice and citizenship; public policy and culture.
SOCIOBIODIVERSITY
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We understand innovation as a process that should cross permeate all our activities. It is at the core o our valuecreation and is expressed not only in our products, but also in our commercial model, management system andthe relations we establish with our stakeholders and society as a whole. This dedication led us to be electedthe 8th most innovative Company in the world by Forbes Magazine, in a survey published in July 2011. The onlyBrazilian Company ranked among the 50 most innovative companies, Natura was placed close to global iconsin innovation such as Apple (5th place) and Google (7th place).
Ater preparing our Vision 2030 (a document which projects the uture and seeks to defne the Companysrole in this new world) and Naturas vision o innovation in 2010, we are now consolidating governance o theinnovation process and deciding on our courses o action.
We refned the defnition o our our innovation dierentiators which, in alignment with strategic planning, guidethe creative process and underpin research in science, technology and open innovation. These are strategicguidelines that include new competencies as well as classical science, resulting in a more integrated approach.In addition to traditional methods, they encompass state-o-the-art science and technology, reduced socio-environmental impact and our desire to create products that provide an ongoing ow owell being well experi-ences or our consumers.
Natura Innovation Dierentiators:
_ Classical and Advanced Skin and Hair Sciences
_ Sustainable Technologies_ Well-Being and Relationship Sciences
_ Senses, Design and Experiences
Some recent examples o our innovation capacity are to be ound throughout this repor t, such as the measure-ment o our water ootprint (more on page 25), the launch o the Amaznia Program (more on page 28) andthe creation o the VV sub-brand, introducing the pioneering concept o celebrating the relationship betweengrandparents and grandchildren.
To develop these and other innovations, the Company invested between 2.5% and 3% o its net annual revenuein science, technology and the construction o knowledge networks. Investments in 2011 totaled R$ 146.6 mil-lion. We also received tax incentives or innovation and promotion through partnerships with institutions suchas FINEP, BNDES, NCPq and FAPs. In 2011, these incentives totaled more than R$ 11 million in reimbursableand non-reimbursable unding.
We monitor our innovation closely. It is currently at a level the Company considers optimal - between 55% and65%. The index indicates the proportional contribution o new products launches within the last 24 months toNaturas revenues.
INNOVATION INDICATORS
2009 2010 2011Investment in innovation (R$ millions) 111,8 139,7 146,6Percentage o net revenue invested in innovation (%) 2,6 2,8 2,7Number o products launched (units) 103 168 164Innovation rate (%) 67,6 65,7 64,8
3.3innovating
innovation
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INNOVATION MANAGEMENTNatura has a governance model structured to manage innovation. It was upgraded in 2011 ater the creation othe Ideas and Concepts Committee, which is ocused on ideas or the long term (more on page 18). In our businessroutine, we work on our major ronts: Research and Technology; Product Development; Consumer Saety; andPartnerships and Promotion.
Management o the product unnel, the process or introducing new projects and proposals, was also refned. Weincreased the level o detail and specifcations required or initiating a project or to develop a product. With welldefned criteria, we drove efciency, investing only in projects that truly add value to the brand. In this ramework,value is understood in its broadest sense, including brand, environmental ootprint and other benefts. This meansthat all new products must have attributes that strengthen our market presence, such as providing a new experi-ence or consumers and having an environmental impact which is the same or lower than that o a similar product.
OPEN INNOVATIONWe continually seek creative, innovative solutions or our scientifc and technological challenges. Natura believes thatcollaboration and collective construction are eective tools or generating innovation. This is why we have groomed andexpanded our open innovation program.
Through partnerships with scientifc institutions Natura develops new products, processes and tools and has ocused oncreating a global science and knowledge network. In 2011, we revised the guidelines to align them with our innovationdierentiators.
Natura established a partnership with the laboratory LNBio (Laboratrio Nacional de Biocincias) to open the Com-panys Bio-Essay Laboratory in Campinas (So Paulo State). This acility enables high perormance research through High-Throughput Screening (HTS) techniques, a rapid, automated screening method or natural and synthetic compounds.We expect results to come in the long term; however, partnerships play a undamental role by acilitating the discoveryo new compounds to be used in our products and new uses or existing ones. The laboratory is managed by a boardcomprising representatives rom LNBio, Natura and two other bodies. The project received unding rom the Ministryo Science and Technology.
We have also strengthened relationship with the Massachusetts Institute o Technology (MIT), partnership which wasannounced in 2010. The projects to be developed are under discussion, and in 2012 we should sign the relevant agree-ments and start cooperative research.
NATURA CAMPUSOur main communication and relationship platorm with the scientifc community is the Natura Campus portal(www.naturacampus.com.br). Reorganized last year, it is designed to encourage interaction among users, con-nectivity with the social networks and to diversiy the means or building knowledge networks. Part o our openinnovation strategy, the portal provides inormation on science, technology and innovation. It hosts blogs andinteractive communication tools enabling researchers to contact Natura and the entire network.
Users have access to the programs relationship agenda, inormation on relevant activities and events organizedby Natura and partners, and data rom research and case studies we perorm, reinorcing our commitment toshare learning and driving new research. In 2011, we made presentations to more than 500 people and re-corded more than 4,400 accesses to the por tal. More than 100 researchers have newly enrolled in the program.
COMMERCIAL INNOVATIONIn tune with transormations in the business environment, the Company has also identifed opportunities to innovate ourdirect selling model in Brazil and abroad. E-commerce has transormed relations between companies and consumers,who are more and more willing to access their preerred products in dierent ways. We anticipate a huge potential indigital media.
In the communication with our sales channel, we have noted growing interest in our digital media. The digital RevistaNatura has grown around 30% in user numbers, reaching 300,000 single visitors in the last cycle. Three million accesseswere counted throughout the year. In 2011 we launched the digital version or tablets (iPad and other models). We alsointegrated production o communication materials or the international operations, in a more efcient manner, central-izing that production in Buenos Aires. This means that any advance in Brazil may be more rapidly incorporated in theother Latin American countries.
The evolution o our commercial model has been continuous. Three years ago the Company created the Natura Con-sultant Advisor (NCA), and more recently the Sustainable Relationship Network, developed especially or the Mexican
market (more on page 48).
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4.who we work with
In line with its Belies, Natura constantly strives to improve relations and dialogue with the persons who impactor are impacted by our business (more on page 25). In spite o our eorts, we experienced a drop in the qualityo our relationship with our stakeholder s in 2011, as captured in the loyalty and satisaction surveys. This was eltmost strongly among employees and consultants (more on pages 35 and 48).
Since 2010, we have increased the number o multistakeholder discussion panels. These exchanges o ideasprovide participants with more inormation, giving them the opportunity to compare dierent viewpoints ona subject. For Natura, it results in a new vision and valuable inputs or the innovation process and collectivesolutions. In 2011, more than 800 people took part in the 23 discussion panels promoted by Natura. Webrought together representatives o employees, consultants, Natura Consultant Advisors, shareholders , consum-ers, suppliers, suppliers communities and surrounding communities, the press and the government. The subjectsdiscussed included product innovation, CO2 emissions and the construction o the Companys new actory inBenevides (Par State).
In addition to the round o discussions or the preparation o the new Natura materiality matrix (more on page129), we promoted three panels involving more than 100 people with background and experience regard-ing Par, the Amazon and neighboring States, the objective being to build a specifc materiality matrix or theAmaznia Program, launched in May 2011. One o these meetings was reserved or specialists and opinionleaders amiliar with the region, who contributed to Natura strategy(more on page 28).
Natura also promoted activities centered on sel-development, awareness, spirituality and sustainability. Oneo these was the What you hunger or program, a cycle o talks and meetings or employees and partnersdesigned to stimulate discussions on issues related to Naturas value proposition. Additionally, Natura sponsoredthe cycle o talks Frontiers o Thought (more on page 88).
4.1relationship
quality 4.14; 4.16; 4.17;DMA HR
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2011 DISCUSSION PANELS
Subject Stakeholders Attendees Date and place ObjectivesAmazniaMaterialityMatrix
Multistakeholders 59 Feb. - Belm (Par) Defnition o priority subjectsor Amaznia program materialitymatrix.
AmazniaMaterialityMatrix
Multistakeholders 40 Feb. - Manaus(Amazonas State)
Defnition o priority subjectsor Amaznia program materialitymatrix.
Natura strategyor the Amazniaprogram
Specialists andOpinion Leaders
40 Feb. - Manaus(Amazonas State)
Inputs or refning Naturasstrategy or the Amazniaprogram.
MaterialityMatrix - Chile
Multistakeholders 38 March Casa NaturaSantiago / Chile
Defnition o priority subjectsand preparation o Naturamateriality matrix.
Carbon Neutral Multistakeholders 54 April - So Paulo(So Paulo State)
Inputs or CarbonNeutral Program.
Sustainable SupplyChains
Suppliers (thirdparties, eet,transport,ragrances,oleochemicals)
88 May So Paulo (SoPaulo State)
Joint mapping o potential positiveand negative operational impactswith supply chain.
Sustainable SupplyChains
Suppliers(plastics andgraphics)
78 May - So Paulo (SoPaulo State)
Joint mapping o potential positiveand negative operational impactswith supply chain.
Public consultation- New Benevidesplant
Multistakeholder 57 July - Benevides(Par State)
Presentation o plans ornew Benevides plant. Inputsor evolution and improvement.
Mapping and minimizingpossible economic, socialand environmental impactson region.
Product Innovation-Hair Category
Multistakeholder 32 August - Cajamar (So Paulo State)
Obtaining inputs or hairproduct innovation process.
Product Innovation-Body Category
Multistakeholder 29 August - Cajamar (So Paulo State)
Obtaining inputs or bodyproduct innovation process.
Product Innovation-Shaving Category
Multistakeholder 22 August - Cajamar (So Paulo State)
Obtaining inputs or bodyproduct innovation process.
Product Innovation-FunctionalDeodorant
Category
Multistakeholder 27 August - Cajamar (So Paulo State)
Obtaining inputs or unctionaldeodorant product innovationprocess.
Natura Culture Multistakeholder 49 August - Cajamar (So Paulo State)
Understanding perceptionso Natura Culture and fndingpoints o leverage.
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2011 DISCUSSION PANELS
Subject Stakeholders Attendees Date and place Objectives
ResultsCommunication
Multistakeholder 32 September Cajamar (So Paulo State)
Obtain inputs to expand andinnovate in Natura resultscommunication process
Requirementsor Hiring andApproving Suppliers- Production
Employees 21 September Cajamar (So Paulo State)
Examine current supplier hiringand approval requirements and getinputs or revising and improvingthem.
Requirementsor Hiring andApproving Suppliers- Services
Employees 12 September Cajamar (So Paulo State)
Examine cur