Betterware De Mexico, S.A.P.I. De C.V Q2 FY2021 Earnings Call

Thank you and welcome to Betterware's Second Quarter 2021 Earnings Conference Call. On the call today are Betterware's Executive Chairman, Luis Campos, Chief Executive Officer, Andres Campos, and Chief Financial Officer, Diana Jones. Before we get started, I would like to remind you that this call will include forward-looking statements, which are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. Any such statement should be considered in conjunction with the cautionary statements and the Safe Harbor statement in the earnings release and risk factors discussed in reports filed with the SEC. Betterware assumes no obligation to update any of these forward-looking statements or information. A reconciliation and other information regarding non-GAAP financial measures discussed on the call could be found in the earnings release issued earlier today as well as the Investors section of the company's website. Now, I would like to turn the call over to the company's Executive Chairman, Luis Campos. Please proceed.

Thank you, Operator. Good morning, everyone, and thank you for joining us today. I will begin my remarks by providing a summary of our second quarter performance. Then, Andres will discuss the progress we have made against our three strategic pillars to increase efficiency and elevate our operating platform in support of the significant growth we see for the company. Diana will then review our financial results and our 2021 outlook. We are pleased to share another quarter of outstanding results with a strong double-digit growth even as we anniversary the surge in demand in last year's second quarter. I will share some highlights of the quarter and first half of the year that we are particularly proud of including revenue growth of 81% from Q2 2020 and EBITDA growth of 92% from Q2 2020. For the first half of the year, revenue grew 130% and EBITDA grew 166% from the first half of 2020. We ended the quarter with a strong balance sheet and strong cash flow generation, which gives us the opportunity to invest in our organic growth, evaluate possible M&A opportunities, and expand internationally after the initial positive results of our operations in Guatemala. We are also pleased to be in a position to invest in our growth while returning value to our shareholders through our ongoing payment of a quarterly dividend. Also, at the end of the first half of the year, I am pleased to announce that Betterware is the largest active sales force in the direct-to-consumer market in Mexico, and we expect to continue to grow. We also continue to grow our household penetration, moving toward our goal of reaching 40% household penetration by the year 2025. As it relates to our sales force, we are pleased to have ended the second quarter retaining the majority of the distributors and associates we had over the past year, with average distributor growth of 109% over the second quarter of 2020 and average associates increasing 110% over the second quarter of 2020. During the quarter, we completed the consolidation of our sales force and by quarter-end, our distributor and associate base returned to growth. With our consolidation complete, we expect to deliver increases in our sales force sequentially going forward as we remain a highly attractive organization for those working in Mexico. During the quarter, we remained focused on executing against our three strategic pillars of product innovation, technology, and business intelligence. Andres will expand on our progress from the second quarter in a moment. Regarding capital allocation, as I mentioned, we remain committed to returning value to shareholders and our strong balance sheet, including cash and cash equivalents balance of MXN520 million as of quarter-end, afforded us the opportunity to propose an annual dividend of MXN1,400 million to be paid in four installments, of which the first two were already paid in March and May. We are proposing the payment of the third installment of these dividends, which implies a dividend of MXN9.38 per share for this quarter, which is subject to approval at the next Ordinary General Shareholders' Meeting to be held on August 13, 2021. In summary, we are pleased to finish the first half of the year above our expectations of revenue, EBITDA, and our distributor and associate base. As we enter the second half of the year, we are confident about our business prospects. Our strong results year-to-date reflect the success of our growth pillars, combined with the flexibility and liquidity of our balance sheet, which has also positioned us well to capitalize on M&A and international expansion opportunities that may come our way. Our differentiated business model has driven consistent results to date, and we believe we are poised to capture additional share as we increase our household penetration and our share of wallet over the near and long term. I will now turn the call to Andres, our Chief Executive Officer, who will highlight our progress on our three growth initiatives and plans for 2021.

Thank you, Luis. And good morning to everyone. We are very pleased with our strong results in the second quarter and the first half of 2021 and the continued progress we have made towards increasing our two avenues of organic growth: household penetration and share of wallet. This year's challenge was to consolidate our sales force to ensure we have an efficient platform and the processes in place to service the significant growth we have achieved over the past year and continue to drive strong rates of sales and earnings growth as people go back to normal. We are proud to have accomplished this objective as we sustained our sales force and activity levels, which means we have successfully consolidated 2020's gain in penetration. This confirms a new level on which we can continue to drive penetration and share of wallet going forward. That said, I would like to give more insight on the strength of the strategies that support future growth. To do so, I will elaborate on our three strategic pillars, namely Product Innovation, Technology, and Business Intelligence. Starting with our first pillar, Product Innovation. We have two key initiatives starting in September 2021. We will increase the number of catalogs per year from 9 to 12; having a monthly catalog will help us increase the purchase frequency from our customers, enhance the amount of product innovation, and increase our ability to adapt to seasonality throughout the year. This means more total and new SKUs exposed to the consumer, increasing our consumer's need to purchase Betterware products. Second, we are reorganizing our product categories by functionality rather than by areas of the home. This new categorization will take our home solutions core to a whole new level. On one hand, it increases our innovation capabilities as it expands our product range potential, thus increasing our total market potential. At the same time, it will make it easier for customers to understand our product offering, thus increasing their need to buy. The new categories under these new functional dimensions include: Number one, home organization and simplicity. Number two, home improvement. Number three, home comfort. Number four, food preparation and conservation. Number five, cleaning and hygiene solutions, and number six, commuting solutions. Regarding our second pillar, technology, we view our investments in two buckets: commercial initiatives and service initiatives. On the commercial side, we are on track to launch by the end of the year the third version of our proprietary salesforce app, Betternet 3.0. This new version will be more user-friendly, which should drive associate and distributor motivation and loyalty. It will also have new features such as a better rewards points calculator and simulator, quick bottles, and personalized indicators, timely personalized notifications, among many other new functions. We are also expanding our chatbot capabilities, integrating natural language processing technology. Betty, as we call commercially our bot, has been instrumental in efficiently serving and motivating our sales force and will continue to differentiate us from traditional sales force management systems. We will also launch the second version of our innovation platform, Pipeline 2.0, later this year. This new platform will make a key difference as we embark on a new era of more and faster innovation with our expansion to 12 catalogs per year. Finally, we continue to roll out and improve our recently launched e-commerce platform. A recent study shows that while e-commerce is growing fast in Mexico, its penetration is still very low in the home solutions category, representing less than 1% of the total market. This confirms we started this front on time, giving us the opportunity to lead the growth of e-commerce in our category. With this in mind, we expect the sales from the platform to be increasingly relevant over the next three to five years. On the service side of our technology initiatives, after some delays due to the worldwide shortage of chips and semiconductors, our new pick and pack tower will start operations in the fourth quarter of this year. This new tower will be almost 100% automated and will double our pick and pack installed capacity. Regarding capacity expansion, we have reached a decision to open a new distribution center near Mexico City. This new distribution center will almost double our capacity as we continue to scale the business. It will also reduce delivery times for Central and Southern regions, which represent approximately 40% of the total market. Finally, it will give us resiliency by having two distribution centers instead of one. We will work towards starting operations during the first quarter of 2022, and it is worth noting that we will operate this new distribution center in a rented warehouse, thus it will not lead to a significant increase in CapEx to improve our service. We have also introduced technology that provides real-time shipment updates to our distributors, offering a two to three hour window of order arrival. This new technology has been received well by our distributors, who are now able to free up time during the days that they receive the orders. Moving on to our third pillar, Business Intelligence. Our BI team is constantly analyzing data from a 2.4 terabyte database generated from 1.3 million active associates and distributors and more than six million associates and distributors historically to make the best decisions focused on increasing our household penetration and share of wallet. They analyze more than 430,000 weekly transactions and four million weekly units sold in more than five million households and 25,000 neighborhoods. In terms of household penetration, we received a recent study noting our household penetration was approximately 24% as of May 2021, up from our estimated 20% at the end of fiscal 2020. We remain confident that we will increase our household penetration to 40% in the next five years as we capitalize on our category leadership position in Mexico and strong associates and distributor base. To achieve this objective, our business intelligence team has segmented the country into more than 63,000 neighborhoods and estimated we have presence in approximately 40% of those neighborhoods, which indicates we have good room to expand our neighborhood penetration and a clear roadmap on how to do it. Furthermore, based on what I have already mentioned regarding our three strategic pillars, we feel confident in our strategies, which have us poised for sustainable growth in the years to come. After our first half of 2021 of consolidation and setting the stage to revamp growth in household penetration and share of wallet, we are confident in our outlook, which is reflected in our increased guidance. I will now turn the call over to Diana to review our second quarter financial results.

Thank you, Andres. Good morning, everyone. I would like to take this time to review our second quarter 2021 results and provide perspective on how we are approaching the remainder of 2021. Please keep in mind that the currency I will refer to when reviewing our results and guidance is the Mexican peso, which is our functional and reporting currency. Our second quarter results included a string of growth in all key operating metrics with strong growth in sales, expansion in gross margin, and disciplined expense management. This fueled a 92% increase in EBITDA. I will review the highlights as the fuel results are included in the 6-K we issued yesterday. For the quarter, net revenues increased 81% year-on-year. Gross profit margin expanded 512 basis points to 56.8%. EBITDA increased 92% and EBITDA margin expanded 172 basis points to 28.8%. Operating cash flow was MXN435 million or 58% of EBITDA, and free cash flow was MXN345 million for the quarter. For the first half of the year, total net revenues increased 130% year-on-year. Gross profit margin expanded 373 basis points to 57.1%. EBITDA increased 166% and EBITDA margin expanded 415 basis points to 30.4%. Operating cash flow was MXN945 million or 57% of EBITDA, and free cash flow was MXN669 million for the first half of the year. We are an asset-light business with high free cash flow generation, which historically has represented approximately 65% of EBITDA. For 2019-2020 and year-to-date 2021, free cash flow was impacted due to material investment to open our new state campus. Even with this investment, we delivered MXN669 million in free cash flow for the first half of the year. With this investment behind us, our CapEx will normalize, and as such, we expect our free cash flow generation to increase significantly and return to historic levels. I must state that our cash flow generation for the first half of the year allowed us to finish the second quarter with cash and cash equivalents of MXN520 million, in line with the prior year period, even after dividend payments of MXN700 million year-to-date, a 312% increase compared to the first six months of 2020. Due to our business model, considering the favorable payment terms to our suppliers and the terms to collect receivables from our distributors, we have a negative cash flow cycle that purely supports our organic growth. This is reflected in our strong balance sheet that includes a low leverage ratio of 0.02 times net debt to EBITDA and gives us the ability to continue to return value to our shareholders with our ongoing dividend payments. As previously announced, and to showcase our financial flexibility, we are working on a note issuance in the Mexican market of approximately MXN1,200 million to MXN1,500 million. This will allow us to refinance our debt at an attractive rate as well as serve as an additional source of capital to fund future geographic expansion and M&A opportunities. After this note issuance is complete, our leverage ratio of net debt to EBITDA will remain unchanged at approximately 0.02 times. In terms of an outlook for 2021, as disclosed in our press release, we are raising our revenue guidance for 2021 to be in the range of MXN10,800 million to MXN11,300 million, which implies net revenue growth to be in the range of 49% to 56%. We expect EBITDA to be in the range of MXN3,200 million to MXN3,400 million compared to MXN2,164 million in 2020, which implies EBITDA growth in the range of 48% to 57%, and EBITDA margin to be approximately in the range of 29.6% to 30.1% versus 29.8% in 2020. Over the long term, we expect that our strategies, supported by a strong operating platform and a talented team, will enable our company to deliver consistent growth in sales and EBITDA in the coming periods. I will now turn the call over to the operator, and we would take any questions you may have.

Thank you. At this time, we will conduct a question-and-answer session. Our first question comes from Eric Beder with SCC Research. Please proceed.

Good morning and congratulations on the quarter.

Thank you, Eric. Hi.

Hi, could you talk a little bit about A, inventory, and B, where you see - in terms of three. Yes. Hi, just curious about inventory.

All right. Inventories increased and they have around MXN48 million from 2022 to 2021 reflecting the abnormally low inventory levels in the second quarter of 2020 due to unexpected demand facilitation in inventories. Inventory days in 2020 were 47 versus 99 in 2021.

Okay. Could you talk about your last year at this time you were dealing with very high FX. Yes, I'm sorry.

Sorry, can you repeat the question, Eric?

Sure, this time last year you had the US dollar was much stronger than it is right now, but what is the opportunity for you. And I guess what's the opportunity also in the shipping costs for you going forward now?

So, and you know, the Peso is stronger this year than it was last year. We always hedge the US dollar to make sure that is covered for in the year as regards to our hedging policies. And in terms of freights, we also have contracts with the companies to make sure that we have a hedged price in the shipments. So, we feel confident it can remain at normal levels for the rest of the year.

Great. Last question, do you see the need for your last year. I know will ask them because - sorry. All right, guys. All right, thank you.

Thank you.

Our next question comes from Cristina Fernandez with Telsey Advisory. Please proceed.

Hi, good morning everyone and congratulations on the quarter. I wanted to ask about the product innovations going forward, particularly with the change in the number of how much should we think about it like a third more innovation, and are you planning any additional sort of categories or I guess businesses versus what you discussed in the past?

Yes, sure. Hi, Cristina. So, you know, in terms of innovation with this change to 12 catalogs, we will have more products exposed throughout the year, and among those more products, of course, we will have more new products as a percent of those products exposed. In terms of categories, we talked about this change of viewing the categories as functions, and we believe that there is a lot of room to expand in innovation within those categories that we mentioned. So, I would say that we will focus on those new functional categories, and we have a lot of room to innovate within those for the coming months and years coming forward.

Thank you. Another question I had was with what sort of trend normalizing in consumers, you know, kind of being more normal in the high-performance assuming more normal activities, are you seeing any change in the type of product they're buying versus perhaps at this time last year or six months ago?

Yes. So, I think there are two parts to this. The first part is that even as people go back to normal, the home has taken a much more important role in people's lives. So, we are seeing and we believe that it will continue that people will invest in their homes because now it's taking a whole new role in their lives. Now, there are two important categories I would like to remark. One is cleaning and hygiene. I think that this category will remain a strong category as people will have in their minds that it is very important to keep a clean home and hygiene home. The second category I would like to mention is the commuting solutions that we were talking about. This is a category of Betterware that goes outside of the home to help people solve everything within commuting; either they go by bus, train, or by car, bicycle we have solutions for commuting, and we think that this, as people go back to normal, will continue to gain penetration. So, we think we're covered, both in the home aspect and with these commuting solutions also outside of the home.

Very helpful. I know another question is, I wanted to see if you could expand on the new DC, maybe give us some data on what the delivery times are now for those regions and how, how that will change, I guess how much shorter as facilities open?

Yes. So, we are reducing from right now in the Central and South part of Mexico, we are delivering between 48 to 72 hours, and we will reduce that by 24 hours with the new DC.

Okay. Yes. Great, thank you. Yes, I mean I think that's it for me now. I appreciate it will be answered in the call. Thank you.

Thank you.

Our next question comes from Alvaro Garcia with BTG. Please proceed.

Hi, Luis and Andres. Yes, thanks for the call. Good morning, congrats on the results. I have a couple of questions as well. My first one is on input cost inflation, particularly resin. We've seen a lot of inflation around the world, and I was just wondering if you can give us a read-through of what your suppliers are saying and sort of as you position yourself on the pricing front for the second half of this year and for 2022 on whether or not you might be employing strategies to lower the take rate of the gross margin for your sales force to manage pricing or what strategies you might take to manage margins in 2022. That's my first question.

Yes, hi. So we have seen increases in raw material, commodity costs, and freight costs, but we have been able to mitigate this effect due to increases in the volumes of every SKU, and also we have favorable contracts with the shipping companies, and these have allowed us to mitigate the effect of price increases. Therefore, we don't expect significant impacts, but obviously, we are closely monitoring the situation going forward.

Yes. And Alvaro, I would like to add that we have to remember that we are coming out from the COVID period, three times the size we were before COVID in terms of sales and EBITDA. As Andres was saying, due to this, we have somehow mitigated the increase, the price increase in raw materials with much higher volumes—three times or more than three times. Then we have not even needed to increase prices, generally speaking, I mean just a few price increases in some given products. Then I think we will be able to sustain our gross margin and our EBITDA margin as time goes.

It's a great point on scale, specifically, Luis. My second question is on the consolidation of your sales force at these levels, which has been quite impressive.

Hello operator, do you feel hear us on this side.

At this time, I'd like to turn the call back to management for closing comments.

Yes, I think Mr. Alvaro Garcia was going to make another question.

Okay. We have a question from Kazuo Okamoto from Apalache. Please proceed.

Hello, good morning to everyone and congratulations for the results. My first question is compared to the second quarter of 2020. We saw an increase of 110% in the number of distributors and associates. However, total sales for the period were 80.7%, which implies that the average sale per distributor and associate decreased. What was the reason for this contraction?

So we don't see any significant impact from this contraction. Yes, I don't know the way you are calculating that we have precise numbers that we can provide you afterwards to give you more information about our activity and sales, which are very strong, as usual.

Okay, thank you. I appreciate you forwarding information, and I have another question. Has the pressure on continued costs for the transportation of goods from China been maintained in recent weeks, or is a reduction already observed?

Yes. As we were saying before, we have significant contracts with the shipment companies, which help us to have a good price and a fixed price in the freight costs, so we don't expect any significant impacts from this front different from where we are today.

Thank you for taking the time to answer the question. That's it.

Thank you.

Mr. Garcia, you have a question?

Yes. Can you hear me?

Yes.

Great. Sort of getting back to my question. On the 40% household penetration, which is your long-term targets, sort of what that implies in terms of new categories and productivity, and obviously, you're ramping up the catalogs from 9 to 12. You're adding this functionality basis, which is great. I was just wondering if that was just based on feedback or if that 40% household penetration implies you need to get to more categories to get there. Thank you.

Hi, Alvaro. So, no, this 40% household penetration is solely focused on growing our sales force and our associates and distributor base to reach those households. Those are households that do not buy from us today. So with the same categories that we have today, we can reach those households and increase sales.

Great.

The category expansion focus is more on increasing share of wallet per household.

Okay, wonderful. Thank you very much.

Thank you, Alvaro.

Thank you. At this time, I'd like to turn the call back to management for closing comments.

Well, thank you for joining us today. We look forward to speaking with you when we report third quarter results and meeting many of you at upcoming investor conferences. Thank you, everybody. Have a good day.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation. Have a great day.