Betterware De Mexico, S.A.P.I. De C.V Q1 FY2022 Earnings Call

Thank you and welcome to today’s Betterware’s First Quarter Fiscal Year 2022 Earnings Conference Call. With me on today’s call for Betterware’s Executive Chairman, Luis Campos; Chief Executive Officer, Andres Campos; and Corporate Chief Financial Officer, Carlos Doormann. Before we get started, I would like to remind you that this call includes 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 a report filed with the SEC. Betterware assumes no obligation to update any of these forward-looking statements or information. A reconciliation of the information regarding non-GAAP financial measures discussed on the call can be found in the earnings release issued yesterday, as well as Investor sections of the company’s website. Now, I’d like to turn the call over to the company Executive Chairman, Luis Campos. Please proceed.

Thank you, operator. Good morning, everyone and thank you for joining us today. I would like to begin my remarks by highlighting the strength and resiliency of our company and its asset-light and agile business model, which has allowed us to successfully navigate through an uncertain environment, both locally and globally, of high inflation, supply chain disruptions, and changing consumer trends, and to recover our profitability levels after the extraordinary expenses experienced during the fourth quarter of last year. Compared to the preceding quarter, our gross and EBITDA margins expanded 993 and 1003 basis points, respectively, which demonstrates the flexibility of our business to adapt promptly to different market conditions. While we are operating in a dynamic and challenging environment, we remain focused on our long-term growth strategy and the opportunities ahead as we have in the last 20 years. And we are confident that we have the right strategies in place to seize these opportunities to achieve a 40% household penetration in Mexico by the end of 2025. Later in the call, Andres will discuss some of these strategies in detail, which are based on our three strategic pillars of product innovation, technology, and business intelligence that will pave the way for future growth. Carlos will discuss our quarterly financial results, our expectations for the rest of the year, and the financial strength of our business. Before turning the call to Andres, I would like to take the opportunity to welcome again all Jafra employees, leaders, and consultants to our company. As announced on April 7, we are very pleased to complete the acquisition of Jafra’s operations in Mexico and in the US, along with Jafra’s trademark rights worldwide, funded primarily by debt, taking advantage of our current low leverage ratio. As previously mentioned, each company’s management team will operate as an independent subsidiary, remaining fully focused on its operations and growth strategies. And we will replicate Betterware’s three strategic pillars across Jafra’s operations to accelerate its future growth. This acquisition expands our category and geographic reach as Jafra’s know-how and presence in the US market of over 65 years will pave the way for us to enter the attractive US market by the end of 2023. We will discuss in detail the strategy during our next conference call when we have properly assessed potential synergies and its accretive impact on our results. I will now turn the call to Andres to discuss our business strategies.

Thank you, Luis and good morning to everyone. Thank you for joining us today. The COVID period from 2020 to 2022 brought about an abnormal expansion of the market with the consequent very positive impacts on our revenues, which have now adjusted back to normal conditions. Despite the adjustment, the secular trends on which we act continue to be valid and growing. Namely, number one, people’s living spaces are getting smaller and smaller. Number two, people have more stuff every day. Number three, people’s lives are more and more hectic, so they need practical solutions for everything. Number four, people are more and more in need of an extra income, opening a huge space for the gig economy. Therefore, we remain confident in our ability to return to year-on-year growth. And we have the commercial strategies in place to achieve this. First, we must remember our two main avenues of growth. Number one, household penetration and number two, share of wallet expansion. In terms of household penetration, we have different studies that show there is still room for growth. The latest study of May 2021 showed that with 1.2 million associates, we reached almost 24% of Mexican households on a regular basis or approximately 7 million households had purchased Betterware products in their prior 12 months. We are confident in our ability to reach 40% household penetration by 2025. In terms of share of wallet expansion, there are two things to stand out. First, as we have mentioned before, we have deconstructed our complete product portfolio, reorganizing our product categories by functionality, rather than by areas of the home, elevating thus our innovation capabilities. Within these functional categories, we have identified more than 200 product concepts that we offer to the consumer, which will allow us to increase our growth opportunity going forward. With that in hand, we are in progress of making a thorough market analysis that will be concluded by the end of the second quarter of 2022. This will provide groundbreaking information to drive concept and category growth. We plan to share information regarding this story in the second quarter of 2022 earnings release. Now, to see these growth drivers, we are working within our three strategic pillars. On the innovation front, we’ve developed six main initiatives. First, we will strengthen our marketing effort. Having recently hired a new Chief Marketing Officer, Gerardo Mier y Teran, who formerly led strategic Clorox brands for LatAm. Gerardo brings strong experience of 15 years in category management, pricing, and promotion development. Second, we are adjusting our strategy of doubling innovation to focus on smarter innovation by concepts. As I mentioned before, we have segmented our portfolio into more than 200 concepts. We will develop these concepts thoroughly, making sure we are strong players in each one. Third, we are also strengthening our market research analysis and innovation process to ensure we have more assertiveness in all innovation initiatives. Fourth, we have created a category development team that is completely focused on new product category development. We are exploring different categories such as smart home and home respiration, among others. At the same time, we have revised our pricing and promotion strategies, ensuring we position each product at the right price and carry out creative promotions to spark demand. And sixth, we have integrated an engineering and manufacturing department to ensure all designs are optimized in terms of costs. As for our technology pillar, we’re pleased to announce the launch of our new Betterware+ App in May 2022. This third version of our proprietary sales force app will help us enhance support, training, and motivation of our distributors and associates. At the same time, we will roll out the first version of our Natural Language Processing technology within our service BOT during the second quarter of 2022. We have also developed an intelligent outbound messaging system, which reminds all distributors and associates of specific actions they should take to continue growing. Additionally, we are also working on strengthening our digital catalog design, so it can become a more productive tool for all associates and distributors. Finally, regarding the Business Intelligence pillar, we have overhauled our rewards programs to continue motivating market penetration and sales force growth. We are also making progress on researching associates' behaviors and motivations to cater better programs and services to all of them, which we are sure will contribute to increasing attraction and retention of associates starting in May 2022 and going forward. Lastly, we are developing a stronger understanding of our geographic expansion and the local actions we need to take to ensure every city grows according to its potential. This entire set of initiatives is key to achieving a turning point between the second and third quarters of 2022, which will help us return to year-over-year growth going forward. Overall, as we mentioned before, we see the COVID and post-COVID period, meaning from 2020 through 2022, as an abnormal period within our long-term focus on market penetration. We believe that there are still strong secular trends on which we can act to continue growing in the years to come, as we have done for the past 20 years before COVID. We continue deepening our understanding of the market and the most effective actions to seize existing opportunities. Thus, we’re fully confident that our long-term target of reaching 40% market penetration remains valid. I will now turn the call to Carlos, who will discuss our financial results for the quarter.

Thank you, Andres and good morning, everyone. First, I would like to highlight that the first quarter of 2021 was the strongest quarter in the history of the company in terms of net revenue, EBITDA, and the size of our associates and distributors’ network, resulting in an extremely difficult comparison base for this year. That said, during the first quarter of this year, we experienced additional headwinds in our business. Globally, supply chain bottlenecks and input cost pressures continue. While in Mexico, the effects of the return to normality persist, coupled with a weaker-than-expected economic growth and the highest inflation rate since 2001. All these factors have negatively impacted the share of disposable income spent by consumers on discretionary products. Given these factors, results were slightly below our expectations. Net revenues were 36% lower than comparable net revenues of the first quarter of 2021, given the extremely difficult comparison base following a 205% growth relative to the first quarter of 2020. Efficient cost management and the 12% product price increase announced at the beginning of the year were key to expand our gross margin by 610 basis points compared to the first quarter of 2021 and 993 basis points compared to the fourth quarter of 2021. EBITDA for the quarter was 41% lower than the EBITDA for the first quarter of 2021, which was in turn 287% higher than the EBITDA of the first quarter of 2020. EBITDA for the quarter was 30% higher than the EBITDA for the fourth quarter of 2021. Our EBITDA margin was 29.3%, which represents a 1003 basis points expansion quarter-on-quarter, mainly due to the gross margin expansion and the absence of extraordinary expenses similar to those in the fourth quarter of 2021, which clearly reflects that our expenses are under control. Net income, which includes unrealized losses in mark-to-market of financial derivative instruments, was 58% lower than the first quarter of 2021. Excluding the MXN 99.4 million negative impact due to the unrealized loss mark-to-market valuation of derivative instruments, which does not affect the company’s cash flow or operating income, our adjusted net income was 27% lower than the adjusted net income of the first quarter of 2021. Adjusted earnings per share were MXN 9.83 for the quarter. As we have mentioned before, our balance sheet and income statement reflect the strength of our differentiated business model. First, the flexibility of our asset-light business model and a relatively low fixed-cost base allows us to quickly adapt to market conditions and changes in trends as shown in our margin recovery from the fourth quarter 2021 to the first quarter 2022. To further enhance our profitability, we are currently undergoing a streamlining of our expense structure, aimed at further EBITDA margin expansion. Second, our cash conversion cycle stands strong at negative 16 days due to favorable conditions with our suppliers and distributors, as well as effective inventory management, allowing us to fully fund our working capital needs as we grow. And finally, our leverage ratio remains at an extremely conservative level of 0.4 times net debt to EBITDA, as of the closing of the first quarter of 2022. Given the rate acquired to complete the purchase of Jafra on April 6th, our leverage ratio stands below 2 times net debt to EBITDA. Given the current cash flow generation and the low CapEx requirements nature of both, Jafra and Betterware, we will gradually deleverage while we continue with our dividend payments to our shareholders. As mentioned in our earnings release yesterday, we proposed the payment of a MXN 350 million dividend or MXN 9.38 per share, which was approved at the Ordinary General Shareholders’ Meeting held on April 28th, 2022. Regarding our full-year expectations, at this point, we anticipate on the one hand, net revenues to be slightly below, and on the other hand, EBITDA to be close to the previous guidance. We look forward to providing guidance for Jafra within our Q2 report, once we have more visibility into the external situation and have properly assessed Jafra’s synergies and its accretive impact within Betterware. For now, we can gladly share 2021 Jafra’s preliminary figures of net revenues at MXN 5.8 billion and EBITDA of MXN 0.9 billion, pending the release of audited financials from the external auditor and IFRS adoption. We are committed to our cost control strategies and expect our gross margin for the year to be in the range of 58% and 60%. And our EBITDA margin to be in the range of 27% to 29%. In the longer term, we remain confident in our ability to seize growth opportunities in the years to come, which will lead us to reach our target of household penetration and expand our geographic reach starting with the expansion to the United States by the end of 2023. I will now turn the call over to the operator, and we will take any questions you may have. Thank you.

Thank you. We will now conduct a question-and-answer session. Our first question comes from Cristina Fernandez with Telsey. Please proceed.

Hi, good morning. I had a couple of questions. I wanted to start if you can share some color on your expectations for 2022, the revision in the press release as for sales to be slightly below the prior guidance for flat and EBITDA slightly below I guess flat year-over-year. With the first quarter results, I guess I’m just wondering what exactly does that mean? Maybe if you can share some color on what you’re seeing in April so far. Thanks.

Hi, Cristina. This is Luis. What I can say is that our results for the first quarter are pretty much in line with our projections. If you remember, during the last conference regarding the fourth quarter results, we were very clear regarding the fact that we would have progressive comparisons along the year, beginning with a very, extremely hard comparison in the first quarter since we grew 205% in the first quarter of last year as compared to 2020. Then we said that we would see progressively improvement along the year and begin growing as compared to last year sometime in the second half of the year. Which means very clearly that we would be below last year in the first two quarters and begin growing sometime in the second half. What I can tell you is that we are happy to see that our results in the first quarter are pretty much in line with our projections, and in terms of EBITDA margins, they are even better than what we expected.

Okay, that’s helpful. And then I wanted to ask around the price increases. With the Mexican consumer being more cautious, I guess how were those received? Are you seeing any pushback in those higher prices from your consumers or from associates and distributors?

Hi, Cristina, this is Andres. So, yeah, obviously there are two parts to this. One is that we are not the only ones increasing prices. I think price increases are being generally held in Mexico across different categories of products. So, obviously, that puts Betterware aligned with the general price increase. Now, at the same time, obviously, this inflationary pressure puts pressure on the consumer on their ability to keep consumption going. So, that is still to be seen; there are no formal numbers at the moment. We do believe it's going to put pressure on the consumer mainly in the first half of the year. But after that, we believe that the consumer could accept these price increases and consumption could come back by the second half of the year.

And something I could add to my previous answer, Cristina, related to what Andres is mentioning. This is the reason why we want to be conservative and say slightly below in terms of sales and close to, in the case of EBITDA, because if everything under our control internally, we have been taking care of it. And we are very confident about the impacts – the positive impacts they will have. What we cannot control is the external factors, and this is a very important one. We prefer to be conservative and say slightly below because we don’t know whether or not these inflationary pressures could modify our projections. Our expectation with the review of our commercial strategies is that this could neutralize the external factors, but we still have to see how the second quarter will show our strategies working and the way external factors are improving or worsening.

And just to wrap up the comment, Cristina. I think that these inflationary pressures are specifically a short-term impact. We continue to believe that there are strong secular trends that will continue to support our growth in the long-term going forward. We talked about these secular trends in the call. I mean, obviously, there are short-term pressures with inflation happening, but we believe that if we have the strategies in place as we have done in the past, we will continue to achieve the long-term secular trends and be able to act on them and achieve this long-term growth. So, I mean, obviously, there are short-term things we need to take care of. But it’s very important that we keep our focus and target on these long-term trends that we have been able to capture in the past, and that we will continue to capture in the future.

Now that makes sense and is very helpful. And then I have one last question. I know in the Jafra business you’re not sharing guidance till next quarter. But anything you can share at least high level how that business is performing this year so far? And how confident are you in the – you know when the acquisition was announced I think you had talked about MXN 940 million in EBITDA, is that still a good number to use on an annualized basis?

I will make a comment and then I will turn to Carlos to make another comment regarding Jafra. The first one is, we are very happy. I’m very confident about the management of Jafra. They have really, really a wide experience in the business. This is a very strong management team, both in the US and in Mexico. And well, we are already working very intensively in our three strategic pillars, beginning with product innovation. Our management teams in Jafra Mexico and Jafra US are already working very enthusiastically and very hard on improving our product innovation and our product innovation process. We are also already working on transferring as soon as possible in the next months, probably next year, the technology we have for the sales force, which will also allow them to focus more on attracting people and improving sales. We are already working now on strengthening the Business Intelligence area in both Mexico and the US, which will also help to better focus on those concepts that will drive or accelerate growth. All these together, we expect to be very favorable for Jafra’s growth in the near, mid, and long-term future, and we will discuss more of these when we report the second quarter results. And now, I will turn to Carlos for another comment regarding Jafra.

Yes. Thank you, Luis and thank you, Cristina. I would like to comment that along with the synergies estimated in the $5 million to $10 million range, which we previously announced in January, we have identified additional opportunities which will allow us to improve their costing structure and margins in the short-term. These are still under evaluation. Additionally, we have already, as part of our work integration of Jafra, identified opportunities to divest several of Jafra’s unproductive assets, which once completed, will release cash flow for their use. We will be glad to discuss both of these – the synergies and this sell-off of unproductive assets in our next conference call. Thank you.

Thank you.

So we tell him in our report that the 2021 before adapting to IFRS and before we received a report from the external auditors, the EBITDA last year was like a little bit more than MXN 900 million, which is more or less a 16% EBITDA margin.

There are no questions in queue. I would like to turn the call back over to Mr. Luis Campos for closing comments.

Well, thank you for joining us today and we look forward to speaking with you when we report our next quarter results and meeting with many of you at the upcoming investor conferences. Thank you, again.

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time, and thank you for your participation.