Betterware De Mexico, S.A.P.I. De C.V Q2 FY2022 Earnings Call

Thank you and welcome to Betterware’s Second Quarter Fiscal Year 2022 Earnings Conference Call. With me on the call today are 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 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 can be found in the earnings release issued yesterday, as well as the investor section of the company’s website. Now, I’d like to turn the call over to the company’s Executive Chairman, Luis Campos.

Thank you, Operator. Good morning everyone, and thank you for joining us today. I would like to begin my remarks by providing a summary of what we have been doing in JAFRA since the acquisition was completed on April 7, 2022, and the ambitious plans that we have for the company to accelerate growth at increasing rates of profitability. Then Andres will discuss some of the advances we have made in our business strategies for Betterware, to position the business for growth, which are based on our three strategic pillars of product innovation, technology, and business intelligence. And finally, Carlos will discuss our quarterly and year-to-date financial results, which include JAFRA financial results from April 7, 2022, through quarter end, our expectations for the rest of the year for both Betterware and JAFRA, and our dividend policy going forward. As announced on April 7, we successfully completed the acquisition of 100% of JAFRA’s operations in Mexico and the U.S., along with JAFRA’s trademark rights worldwide. This acquisition provides a unique opportunity for us to become a multi-channel company with unique and complementary product segments, enter an attractive beauty and personal care market with estimated annual revenues in Mexico and the U.S. of approximately $100 billion, and leverage JAFRA’s strong and well-positioned international brand with access to millions of households through its more than 430,000 average consultants and leaders as of Q2 2022. Since this acquisition was completed, we have been working very closely with JAFRA’s talented management team to identify and execute synergies and efficiencies in the short-term, and to replicate Betterware’s business model supported by our strategic pillars of product innovation, technology, and business intelligence, which will enhance JAFRA’s growth prospects and profitability in the mid-and long-term. Our main objective is to accelerate JAFRA’s revenues to a high-single-digit to low-double-digit growth rate in the near term, as well as improve its profitability and cash flow. To this end, as mentioned in our earnings release yesterday, we have executed several actions within our three strategic pillars to achieve these targets. First, in terms of product innovation, our objective is to implement our best practices to achieve a successful and enhanced innovation pipeline within JAFRA’s product line. To that end, we have assembled a new product innovation committee led by a talented team, which will streamline decision making and increase efficiencies. The new committee members have significant experience in our three main product categories: Fragrance, Color, and Skin Care. We relocated JAFRA’s research and development team from Los Angeles to our manufacturing plant in Queretaro, Mexico, which will allow for easier and faster joint product development. We have already seen some benefits from this change, reducing the time to market of products to eight months from 18 months. We are increasing JAFRA’s focus in product innovation across every category, mainly in Fragrance, where we are the leaders in Mexico, and for Skin Care and Color where we already participate, both of which have lost market share in recent years. Second, in terms of technology, we have increased our focus on our digital efforts in JAFRA to a comprehensive strategy that prioritizes the use of technology to provide a better experience for our customers and consumers. We have already deployed Betterware’s previous commercial application for JAFRA Mexico, allowing our leaders and consultants in Mexico to perform their most critical business transactions digitally, including placing their orders and monitoring their sales and benefits, among other key features. We are also working on our B2C digital platform and expect it to be ready for JAFRA by Q2 2023. Finally, in terms of business intelligence, we are in the process of replicating our big data capabilities to improve JAFRA’s understanding of the market and accelerate its growth. For this purpose, we have designated Betterware’s Chief Business Intelligence Officer as a new Corporate Chief Business Intelligence Officer overseeing both companies. For the last 10 years, he has been instrumental in developing our data analytic capabilities, and we are confident that under his leadership we will leverage our analytical capabilities in JAFRA. We are also building the appropriate team to lead our business intelligence efforts and to boost the consolidated group’s capabilities. We have already started the process to significantly improve JAFRA’s sales catalog backed by Betterware’s decade-long experience, and we have realigned our strategies to focus on personal contact with our sales force throughout the country. In terms of financial efficiencies and synergies, we have identified great opportunities, which are expected to amount to approximately MXN 200 million and MXN 300 million in 2023. Some of these actions that we are already carrying out include, among others, the elimination of JAFRA’s global expenses in the U.S., the relocation of U.S. offices, and the relocation of our R&D team from Los Angeles to our manufacturing plant in Queretaro, Mexico. Additional details were disclosed yesterday in our earnings release. In summary, we are excited about the opportunities that lie ahead, and we are confident that JAFRA’s talented management team will continue executing against our strategy based on the three strategic pillars of product innovation, technology, and business intelligence, to capitalize on these opportunities and achieve a greater market reach in Mexico and the U.S. I will now turn the call to Andres, to discuss Betterware’s performance for the quarter and our business strategies.

Thank you, Luis, and good morning to everyone. Thank you for joining us today. Our second quarter results were negatively impacted by lapping strong comparisons from last year, combined with a softer economic environment and weaker consumer spending. Despite the significant headwinds from the pandemic and the economic softness that has persisted, we remain confident in our business model and our management team as we navigate a difficult operating environment. As we mentioned in our Q1 2022 earnings release, we have received the results for the third wave of independent market research conducted by one of the most prestigious companies in its field in Mexico. We have been gathering data since 2017, and after four years of diligent and consistent work, we are pleased to share our results. During 2020, the home solutions market in Mexico experienced exceptional positive tailwinds, especially when the pandemic hit, temporarily expanding approximately 63% according to this market research. This was due to an unusual spike in demand for household products during lockdowns. Additionally, in April 2020, 21% of the economically active population lost their main source of income according to INEGI, creating an enormous need to find an alternative income. Our differentiated business model together with our experience and enhanced management team enabled us to capitalize on this opportunity, resulting in an acceleration of our growth from Q1 2020 to Q1 2021. This period was followed by a slow return to normal consumption trends as people started going back to their daily routines, resulting in a normalization in the home solutions market back to pre-pandemic levels according to the market study. In Betterware, we were not immune to the challenges, but our business proved its resiliency. Now, Q2 2022 average weekly sales are 100% higher than the pre-pandemic comparable period, namely Q2 2019, representing a 26% CAGR. And according to the market study, we expanded our market share to 7.7% in 2021, up from 5% in 2020, and 2.6% in 2017. We also expanded our household penetration to 29% in 2021, up from 24% in 2020, and 10% in 2017, achieving stronger brand positioning and market dominance. In this uncertain and unusual period, we have remained focused on maintaining profitability while taking internal actions to stabilize our sales trends and return to growth. Along these lines, during Q1 2022, we recovered our profitability levels, thanks to the flexibility and resiliency of our business model. In Q2 2022, we saw our network of associates and distributors stabilize. During the last eight weeks of the quarter, our base remained at approximately 880,000 and 44,000 respectively, showing signs of recovery in the last two weeks. In fact, month-to-date in July, we have seen growth in our associates base, which is the first month since February 2021 that our sales force has shown growth. This trend gives us confidence that our network will start to grow again before year end and continue advancing going forward. We believe that Betterware’s unique business model will continue to yield results going forward, despite the current normalization in the home solutions market. To this end, we were not only able to achieve a pre-pandemic 39% CAGR from 2014 to 2019, but we are also capable of seizing complex opportunities, both in expanding and contracting times during and after the pandemic, demonstrating our ability to build a strong and resilient business model. Importantly, the home solutions market’s pre-pandemic secular trends remain valid and stronger than ever as consumers appreciate an organized, practical, and enjoyable home that has taken on new relevance. To seize the opportunities that these trends present and return to growth, we are deploying several initiatives based on our three strategic pillars. First, in terms of product innovation, based on the results of the market study recently received, we are increasing our focus in our core categories that have lost share in sales during the downturn. These categories include home organization, space optimization, cooking, and commuting solutions. We will also expand our portfolio into promising concepts with relevant market opportunities, including bedding, entertainment, kids, pets, tabletop, and drinkware. Additionally, we are currently working on an innovative cleaning product line, which could increase recurring purchases from our customers and boost the frequency of purchases in these and other product categories. In terms of our second pillar, technology, we are in the process of updating our e-Commerce website, which will be implemented in both Betterware and JAFRA, allowing us to increase our penetration and attract new customers that our traditional model currently does not reach, while increasing our data analytic capabilities and customer understanding. We have learned a lot since we launched the platform in December 2020, and we are adapting it to ensure success in the medium-term as e-Commerce adoption in Mexico continues to gain relevance. Also, the recent rollout of our new Betterware Plus app should yield more retention and activities as our associates and distributors enjoy the new and improved benefits of this new platform. Finally, in terms of business intelligence, we are evaluating data analysis capabilities at JAFRA and Betterware to replicate best practices across both companies. As we have mentioned before, we have two main avenues of organic growth: expanding our household penetration and increasing our share of wallet. We are convinced that our strategies based on our three pillars will be instrumental in continuing to capitalize on these growth opportunities. Among the relevant opportunities to further expand our household penetration and reach our target of 40%, as disclosed in our earnings release yesterday, are the following: growing our network of distributors and associates, refocusing our rewards program to incentivize associate and distributor growth and reactivation aimed at bringing back those we lost in the last 12 months; reinforcing our hybrid model between personal contact and technology; revamping our physical and digital catalogs in addition to strengthening our digital catalog design so it can become a more productive tool for all associates and distributors; and increasing our social selling and social influencing efforts, which we are currently working on and will share our progress in the coming quarters. Now, we will increase our share of wallet with the insights gained from the market study previously mentioned. We are prepared to navigate the path back to growth as the home and life solutions market stabilizes. We will continue to increase market penetration in our core categories and expand to new categories that show relevant potential for us. In the current high inflation environment, we have revised our pricing strategy to focus on delivering great value packages to encourage consumer purchasing, as disposable income remains pressured. Furthermore, we are adjusting prices to reflect the recent decline in container costs, which should serve as an incentive for consumers to purchase our products. Before I turn the call to Carlos, I want to highlight that we are excited about our international expansion plans to support our long-term growth. We are currently assembling a team to lead Betterware’s expansion into the United States, aiming to start operations by the fourth quarter of 2023. In the midterm, we will focus on our expansion into the U.S. market, while in the longer term, we target further international expansion into South America, namely Colombia and Peru, sometime between 2025 and 2026. I will now turn the call to Carlos, who will discuss our financial results for the quarter and year-to-date.

Thank you, Andres, and good morning, everyone. I would like to review our second quarter and year-to-date 2022 results. Please keep in mind that consolidated results include JAFRA’s results from April 7, 2022, through the end of the quarter; additional details can be reviewed in our earnings release published yesterday. I will then share perspectives on how we are approaching the remainder of 2022 and discuss our proposed dividend payments. As mentioned by Andres, in the case of Betterware, the effects of returning to normality have been tougher than we anticipated and have been intensified by a softer economic environment as well as weaker consumer spending in 2022. Given these factors and the extremely tough comparisons, Betterware’s standalone results for the quarter are as follows: Net revenues declined 30% compared to the second quarter of 2021, explained by a decline in our average associates and distributor base. Our EBITDA for the quarter was MXN 393.3 million, 49% lower than EBITDA in the second quarter of 2021, and EBITDA margin contracted by 484 basis points to almost 24%, caused by lower revenues and lower operating leverage, as our SG&A expenses represented 34.9% of net revenues for this quarter compared to 28.8% in the second quarter of 2021, despite a contraction of 25% in absolute terms in operating expenses. For the first half of the year, driven by similar factors persistently affecting the second quarter of 2022, net revenues declined 37% compared to the first half of 2021. Our EBITDA was MXN 931 million, 44% lower than the EBITDA in the first half of 2021, and EBITDA margin contracted 356 basis points to 26.8%. After the acquisition of JAFRA, we are now a larger and more resilient group with two complementary companies. Our consolidated results for the second quarter and year-to-date of fiscal 2022 include the performance of Betterware for the full period and JAFRA’s performance from the date of the completion of the acquisition through the June period, and they are compared to the financial results of Betterware only in the corresponding periods of fiscal 2021. Consolidated net revenues increased 25% compared to the second quarter of 2021. Consolidated gross margin expanded 1,230 basis points to 69.1% compared to 56.8% in the second quarter of 2021, explained mainly by JAFRA’s higher gross margin. Consolidated EBITDA decreased 20% compared to the second quarter of 2021, impacted by lower operating leverage in Betterware due to the lower revenues as well as other one-time expenses related to the acquisition and the restructuring of our workforce aimed at improving our generation going forward. Our consolidated EBITDA margin was 18.4%, 1,039 basis points lower than the second quarter of 2021, explained mainly by JAFRA’s lower margin profile, which opens an opportunity for us to improve its cost structure and increase the company’s profitability. Consolidated net income decreased 45% year-on-year due to lower operating leverage and higher interest expenses related to the debt used for the acquisition of JAFRA. Regarding the consolidated results for the first half of 2022, consolidated net revenues decreased 7% compared to the first half of 2021 due to extremely tough comparisons for Betterware. Consolidated gross margin expanded 991 basis points to 67.1% compared to 57.1% in the first half of 2021, explained partially by JAFRA’s higher gross margin and partially an expansion in Betterware’s gross margin of 348 basis points year-on-year. Consolidated EBITDA decreased 32% compared to the first half of 2021, and the consolidated EBITDA margin was 22.4%, or 802 basis points lower than in 2021, explained mainly by the inclusion of JAFRA’s results. Consolidated net income decreased 53% year-on-year due to lower operating leverage and higher interest expenses related to the debt used for the acquisition of JAFRA. Consolidated adjusted net income, which excludes non-cash expenses of MXN 71.1 million related to the unrealized loss in mark-to-market valuation of financial derivative instruments, decreased 37% year-on-year. As of the end of the second quarter of 2022, the company’s financial position remains strong even after the acquisition of JAFRA, which represented a cash outflow of MXN 574 million. Our leverage increased to 2.2 times net debt-to-EBITDA in the second quarter of 2022, considering Betterware's last four months’ EBITDA and taking into account JAFRA’s annualized adjusted EBITDA for the first half of 2022. Betterware and JAFRA’s high cash flow generation nature will allow us to gradually deleverage going forward. Additionally, we are evaluating divestments of unproductive assets worth around MXN 500 million to MXN 700 million, which will reduce our leverage ratio and further enhance our financial strength. Regarding our full-year expectations, we expect our consolidated net revenue to be in the range of MXN 12.8 billion to MXN 14.2 billion and our consolidated EBITDA to be in the range of MXN 2.4 billion to MXN 2.7 billion, which includes JAFRA’s full-year figures excluding extraordinary items prior to the closing of the transaction. For Betterware, as we reach stabilization in our associates and distributor bases, we are confident that we can gradually return to growth. We expect Betterware’s net revenues to fall in the range of MXN 6.8 billion to MXN 7.2 billion and our EBITDA to be in the range of MXN 1.7 billion to MXN 1.9 billion. As for JAFRA for the year, we expect JAFRA’s net revenues to be in the range of MXN 6 billion to MXN 7 billion and our EBITDA to be in the range of MXN 700 million to MXN 800 million, which includes JAFRA’s full-year operations. That said, considering the tough and uncertain macroeconomic environment and our lower-than-expected revenues year-to-date, our Board of Directors has proposed to adjust the dividend payment to MXN 200 million for the quarter, which is subject to approval at the ordinary general shareholders meeting to be held on August 19, 2022. This dividend is estimated to be sustainable in this uncertain environment while prioritizing the company’s financial strength, considering the MXN 574 million cash outflow related to the acquisition of JAFRA, as well as other investments in unleashing JAFRA’s full potential. Coupled with several payments due to workforce restructuring and the temporary increase in Betterware’s inventories aimed at preserving another quick service level, we will analyze the long-term sustainable dividend policy as the situation stabilizes. In conclusion, we remain confident in our ability to identify growth opportunities over the long term, which will allow us to generate strong cash flows and continue to maximize shareholder value. I will now turn the call back to the operator, and we’ll take any questions you may have. Thank you.

Thank you. Our first question comes from the line of Cristina Fernandez with Telsey. Please proceed with your question.

Hi, good morning. I have a couple of questions. I wanted to start with the recent growth in the past few weeks you’ve seen in associate and distributor numbers. What do you attribute that growth to, and how much of an impact do the changes you made recently to incentives for the sales force have in that sequential improvement?

Hi Cristina, this is Andres. Thank you. Yes, so the impact of the internal actions that we took was significant. As we mentioned during the call, first of all, we changed our rewards program to refocus the program on bringing in new associates and distributors, especially to bring back all the people that we have lost during the past 12 months. Second of all, we also made changes in the catalog that we shifted from nine catalogs per year to 12 catalogs per year starting in September 2021. This change has yielded much better results because we can react faster month after month to change prices, promotions, and ensure that our pricing and promotions are more impactful to the customers. We also recently launched the new Betterware Plus app, which is being adopted by more associates and distributors. This is also helping to with a more significant associate attachment to the company, resulting in less churn of associates. We therefore believe that these internal actions taken, together with an external environment that has returned to normal over the last 12 months, have contributed to this recent growth in the associate base, and we are optimistic about what will happen in the future, as we truly believe we have hit the bottom during the second quarter of 2022 and can now start thinking about a path to growth again.

Thank you for that. I have a more broad, high-level question. Can you talk about how you assess the state of your consumer today versus three months ago and how is the demand for beauty and JAFRA different from Betterware?

Could you elaborate a bit on the question, Cristina? I want to ensure I understand exactly what you are asking.

Yes, are you referring to JAFRA or Betterware?

Well, both. I wanted to see, first, how you feel about the state of the Mexican consumer today versus the last earnings call and, in light of that, how do the demand trends for, we know that for Betterware they’ve been normalizing, but how is demand for beauty and JAFRA compared to Betterware?

Sure. Well, in the case of Betterware, we sell discretionary products. However, as Andres was saying, we got ready for that and adjusted our strategy in terms of product offering and pricing to sell in a challenging environment. There are definitely inflationary pressures and a slight lack of consumer confidence. Our entire product offering, including pricing, was realigned starting in May and June, and this readjustment will be more intensive in July, August, and the months to come. We have already begun to see positive results starting mainly in July. Regarding JAFRA, last year was tough because people were at home, and women particularly were at home, which impacted their purchasing of cosmetics, especially color and fragrances. As we begin to see women getting out of the house, their purchasing patterns are returning to the normal levels they were at before the pandemic. Month by month, we expect this to continue and will benefit sales. Our sales force is again making personal contact with customers, and we should see favorable results in JAFRA sales in the coming months.

Very helpful. Thank you. I have one last question; I wanted to see if you could expand on your revised pricing strategy. Earlier this year, you raised prices by 12% across the board. It seems that now you are looking to lower them. Can you expand on how much prices are being reduced? Is it broad-based, or just in specific items?

Yes, sure. Last year, we had a contract that affected container costs. We maintained lower prices at that time. At the end of the year, in December, that contract ended, and container prices rose to market levels, which led us to increase prices by 12% in January to maintain profitability. Since April of this year, container costs have dropped back down to almost half of what they were before that increase, relieving some pressure on our cost side. For the second half of the year, we have started becoming more aggressive in pricing—this began in May, June, and July—as we have more leverage on the cost side. We believe this will help drive demand and will continue encouraging consumer purchases in the second half of the year.

Thank you. That's it for me. Thank you.

Thank you.

Thank you. We have reached the end of the question-and-answer session. I would now like to turn the floor back over to management for closing comments.

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

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.