Betterware De Mexico, S.A.P.I. De C.V Q3 FY2022 Earnings Call

Thank you and welcome to Betterware’s Third 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, Alejandro Ulloa. Before we get started, I'd 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. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I’d now like to turn the call over to the company’s Executive Chairman, Luis Campos. Please go ahead, sir.

Thank you, operator and good morning everyone. Thank you for joining our third quarter 2022 earnings call. In terms of the agenda for today, I will begin my remarks by providing highlights on the performance of the whole Betterware JAFRA Group, as well as JAFRA's business strategies. Then Andres will discuss the progress made in Betterware's business strategies and the actions taken to recover our profitability. And finally, Alejandro will discuss our quarterly and year-to-date financial results and our expectations for the rest of the year. We are encouraged about third quarter results for both Betterware and JAFRA. As for Betterware, we are particularly proud of our team's ability to stabilize our sales force in Q3, as well as their completion of the organizational and expenditure restructuring in this quarter. Continuing with our strategic transformation plan, which will deliver an annual savings of around MXN300 million in 2023. Both achievements will be key to resume accelerated growth and increased profitability starting in Q1 2023. As for JAFRA Mexico's results, we are very pleased with the strong results delivered this quarter, with revenue growth of 11% from Q3 2021, marking the first period since 2017 that revenue grew year-over-year. Our focus on adding new consultants to our base was successful and has been key to achieving this improving trend. In particular, September saw the addition of 51,000 new consultants, an outcome not seen since May 2021. We expect to build on this growth as we release a renewed product catalog and execute promotional campaigns, which will give our sales force additional tools from which to drive sales. The identification and execution of synergies and efficiencies is paying off well. Continuous focus on our strategic priorities positions us to continue improving JAFRA Mexico's profitability and cash flow generation. To achieve continuous growth and profitability, we have established strategic imperatives in the commercial front focused on products, sales programs, and digital capabilities aimed at growing our market share, expanding our sales network, and improving consultants' and end consumers' experience. The launching of new products within our skin and color portfolios, targeted promotions to increase average sales ticket, brand renewal and repositioning will increase our share of market. An innovative incentive plan to accelerate the incorporation of our consultants, geographic expansion, and penetrating new segments will drive our sales network growth. As we look to leverage the power of social media amongst our consultants to grow brand awareness, we are also developing digital tools such as our JAFRA App currently being deployed, a virtual store, and artificial intelligence, which will drive efficiencies and productivity while improving experiences for consultants and end consumers. Combined, we expect these initiatives to give us the ability to deliver high single to low double-digit growth in net revenues in 2023. Regarding JAFRA USA, which is still a small contributor to the whole group and is performing below its underlying potential, our efforts remain focused on resolving issues that existed prior to the acquisition. Corrective actions are ongoing to regain control, profitability, and grow the sales force, with the aim of resuming net revenue growth and achieving improved profitability by Q3 of 2023. We reaffirm that the JAFRA acquisition is accretive, as demonstrated already by its better than expected results, which represent progress toward our goal of resuming revenue and earnings growth. JAFRA and Betterware's management teams will remain focused on their respective businesses and continue operating as independent companies, while supported by the corporate structure, which will oversee both companies. Successfully mirroring Betterware's business model at JAFRA will be key to achieving outstanding results and solidifying its position as a leading consumer products company. As we look ahead, to consolidate the group's expansion, we continue making progress for Betterware to begin operations in the USA in late 2023, followed by further international expansion in Colombia and Peru between 2025 and 2026. JAFRA will enter Guatemala in 2023, and Colombia and Peru will follow in the coming years. This will pave the way for entry into other new geographies in the longer term, while we continue leveraging our business model to elevate JAFRA's distribution model. We have never been more confident in our future. We are uniquely positioned to establish Betterware JAFRA Group as a benchmark of constant growth, profitability, and cash flow generation, laying the foundation for long-term sustained shareholder value. I will now turn the call over to Andres to discuss Betterware's business strategies.

Thank you, Luis and good morning to everyone. Having stabilized our salesforce at an average of 870,000 associates and 43,000 distributors from mid-May to date, in line with the second quarter's favorable trend, and having completed our operational and expense restructuring, our focus is now on gradually resuming growth and profitability throughout 2023. To this end, our powerful innovation pipeline will lead the way by increasing our product offering, serving an ever-expanding customer base, and maintaining customer engagement. The launch of our differentiated cleaning products line, and new product categories, such as baby and kids, and wellness, along with an increased range of products within the hydration, home improvement, and tabletop segments will be part of our focus for 2023. In addition to innovation, we are advancing in five key commercial initiatives that are already in place. First, our digital and physical catalogs are both undergoing a profound renovation. Regarding the digital catalog, developed under a mobile-first approach, it will have improvements that will allow our salesforce to easily pass it along and connect with new customers in the short-term, improve our knowledge of the end consumer, and allow for easy interaction via WhatsApp to achieve a higher sales conversion rate. On the other hand, we are leveraging our physical catalog to achieve maximum visual appeal, while making it easier for customers to understand the offer in each category, using improved marketing techniques, and including promotions that create a sense of opportunity that will drive net revenue growth. Second, we have identified relevant opportunities to add value to our commercial business model through predictive churn models and incentive structures to be developed and released in the short term with the purpose of growing our salesforce segments. Third, aligning with the return to normality and with the aim of attracting new associates, we have relaunched our person-to-person companion program to support our associates in developing their businesses. Also, the resumption of live sales meetings will contribute to our deeply person-to-person business model. Fourth, the launch of Betterware Experts, which is our masterclass-type digital training platform, is complimentary and additive to our traditional training programs. It is helping us achieve enhanced results among our associates and distributors, with over 50% of them already leveraging digital connectivity to build engagement. Finally, we continue to make progress in e-commerce as we review our strategy and business model to improve results. Accordingly, we are in the process of upgrading our e-commerce website, which will allow us to increase our penetration, attract new customers who are currently not served by our traditional model, and improve our data analysis and consumer insight capabilities. We firmly believe in our model and we will continue to bet on it in our group's net revenue and EBITDA growth strategy. Finally, we will continue evolving and enhancing our core model, which is part of our competitive advantages and key to continued growth in the future. We will remain focused on increasing profitability while executing internal actions to stabilize and improve our business trends. I will now turn the call to Alejandro, who will discuss our financial results for the quarter.

Thank you, Andres. Good morning, everyone. From a financial standpoint, the summary of the quarter's results would be as follows. In the case of Betterware, we laid the foundations for the recovery of net revenue and profitability by stabilizing the sales network and streamlining expenses. In the case of JAFRA, we grew revenues and increased margins and are strongly poised to continue delivering consistent growth and profitability well into the future. Our focus is on generating value for our shareholders. And to that end, the short to medium-term priorities going forward are; one, growth. In the case of Betterware, we anticipate sequential and year-over-year growth. As for JAFRA, we aim to realize its full potential. Two, profitability, deliver increased profitability for both Betterware and JAFRA with a special focus on JAFRA USA. Three, cash flow. Generate greater operating and non-operating cash flow to reduce the debt burden and return value to shareholders through dividends. Based on these priorities, in the case of Betterware, it is imperative to consolidate net revenue growth and profitability in the coming quarters. As far as the top line is concerned, the key actions behind it are embedded in the commercial strategy commented on by Andres, all of which will drive the growth of the salesforce and sales. The higher operating leverage resulting from increased sales supported by a streamlined expense structure, coupled with healthy inventories after the promotional investments made in recent months, will return our EBITDA margin to historical levels of 20%. As for JAFRA, we should separate between Mexico and the U.S. In the case of Mexico, the results are tangible, just a few months after the acquisition, registering year-over-year and sequential growth already, demonstrating our ability to attract consultants, identify opportunities, and execute them in an agile and accurate manner while preserving the essence of the brand. In this case of JAFRA Mexico, the top-line profitability continues to grow through our renewed product base, strengthened and larger sales force, and propelled by the commercial strategies already mentioned by Luis. In the case of JAFRA USA, we do not expect to obtain results like those from Mexico in that immediate term, as we are rebuilding the fundamentals of the business to prepare for and achieve future and consistent growth, of which we are certain. We've indeed found the rebound in the salesforce achieved in the quarter encouraging, but there is still a lot to be accomplished within our strategy. Today, the US business has a negative contribution to the entire group, but we want to restructure and service it until we achieve breakeven, and then we will be able to accelerate the penetration of the American market and grow the business. In the long term, we aim to continue the expansion of the Betterware JAFRA Group through the scalable model and gradually penetrating new markets in the continent. Finally, I would like to conclude my remarks by highlighting several relevant points of the entire group: one, the portfolio complementarity between JAFRA and Betterware will translate into stronger financial performance. When JAFRA's portfolio of consumable beauty and personal care, which involves frequent repurchases, combines with Betterware's durable and functional products, the independence of complementary product portfolios becomes valuable assets that contribute to growth, financial stability, and improved performance in today's challenging market conditions. Two, the current level of leverage resulting from the JAFRA acquisition will be resolved not only from continued financial discipline and enhanced operating cash flow generation resulting from the recovery of net revenues and profitability, but also from the sale of unproductive assets, improvements in credit terms, synergies, and efficiencies, all of which add up to a cash inflow of MXN700 to MXN900 million in 2023. Three, the board of directors has determined a dividend payment of MXN50 million for this term. The total dividends paid out during the full year 2022 will sum up to MXN950 million. The board will be discussing the long-term dividend policy that the group will follow as we advance with the ongoing initiatives led in the expansion of the group's scalability into new markets. Over and above the third-quarter results, I would like to mention that my priority as corporate CFO of the entire Betterware JAFRA Group will be to develop and execute the financial strategy for the company to optimize resources and maximize profitability after a period where we experienced massive growth. Alongside the acquisition of JAFRA, it is now time to focus on finding efficiencies across the organization. Our high-performance management team has already identified potential synergies that will enhance profitability. Now our main concern is to make things happen in this regard, together with strengthening the team and restating planning and controls. Henceforth, we will concentrate on five main elements that will reinforce our financial performance: one, people, we are working on hiring, retaining, and developing the best talent to have solid teams. The objective is to achieve high-performance teams accountable for every function they execute. Two, planning, both financial and strategic, we will work on data mining to better predict results and have medium and long-term visibility into risks and opportunities ahead. Three, control, we aim to standardize policies, processes, and procedures across the companies to enhance internal control without interfering with the business flow. Four, a business partner approach, where we will strategically support businesses identifying opportunities and adding value by allocating optimal resources to every project or investment. Five, technology, all the previous points will be supported with the best use of technology to optimize organizational structures, job quality, response types, and controls, among others. The goal is to be better prepared to deal with externalities and competitors in today's dynamic market. I will now turn the call over to the operator, who will take any questions you may have.

Thank you very much. At this time, we will be conducting a question-and-answer session. We have a first question from the line of Cristina Fernandez with Telsey Group. Please go ahead.

Good morning, everyone. And thank you for taking my questions. I have a couple. The first one would be on the Betterware business you outlined a lot of initiatives to drive growth next year, with that being the goal. I wanted to ask how much do you need the macroeconomic environment to improve in order to drive growth next year? Is that also taken into account in your assumption to return to growth?

Hi, Cristina. This is Andres. How are you? I think that we have confidence that these strategies will bring us back to growth. As we mentioned in the statement, we have seen a stabilization in the last four to five months of revenue because of some of these strategies that we have started laying out. This means, from our perspective, that we will be able to start growing back beginning early next year. So in summary, we believe that with the macroeconomics as they are today, we can get back to growth starting next year.

My second question is around the JAFRA US business. I know it takes a small part of what I was wondering, how much investment is needed to improve it? And is the launch of Betterware in the US contingent on that business being breakeven or starting to grow again?

Hello, Cristina, this is Luis. I don't think we will need to invest too much to turn around the JAFRA US business. This is merely a question of recovering the original business model. Several changes were made during 2021 that didn’t work well because they were far removed from our original JAFRA business model. We are just going back to this previous model, and we do not think this will require a large investment. I mean, this will be almost normal; we will continue restructuring our expenses and putting together an organizational structure that can work as it used to in the US. Regarding Betterware USA, this will also be an independent business, and we are figuring out how we are going to approach the US market, hopefully by the end of next year.

Thank you. Another question I have is about the debt payments in 2023. Do you have an estimate of how much of the cash inflows you mentioned, MXN700 million to MXN900 million, will be used towards debt repayments?

Hello, Cristina, this is Alejandro. Good morning. As you can see in our balance sheet, our long-term debt totals MXN5,900 million. What we're expecting is that some proceeds, as you can read in the statement, will be an amount between MXN500 million and MXN700 million. These proceeds will be directly used to reduce the debt. That's our main concern right now, and this will improve our debt equity structure. Additionally, any excess cash flows from operations will be used to prepare for even more long-term debt repayment. We are allowed to do so. So the idea is to take advantage of the contracts with banks that allow us to prepay debt without penalties. We're going to do that. By the end of 2023, we expect to have lower outstanding long-term debt and anticipate a reduction of around 10% to 15% less, which should improve our balance sheet significantly.

Thank you. And my final question is about inventory. Can you talk about how much of the inventory is kind of day-to-day recurring goods that can roll over to next season and how much includes items that you need to clear that you would like to exit from inventory sooner rather than later?

Yes, Cristina. The first point I want to mention is that Betterware's inventory has decreased from the second quarter of 2022 to the third quarter. It was approximately MXN1,500 million at the end of the second quarter and is now at MXN1,300 million. This means that our structural operational day-to-day inventory is performing well now, and we have to eliminate the excess inventory that still exists. Remember that the excess inventory was due to two factors: one is that we purchased extra inventory because of supply chain problems, and the second is a decrease in demand. We expect that excess inventory to be removed by the end of the first quarter of 2023. But to reiterate, inventories have started coming down, and we will continue that trend as we stabilize our sales.

Thank you.

Thank you. We have the next question from the line of Eric Beder with SCC Research. Please go ahead.

Good morning. Thank you for taking my questions. Just a quick question on the Q3 income statement. Why was the tax rate so high? And what should we be thinking about that going forward?

Okay. Hi, Eric. This is Alejandro. Good morning. The reason why taxes are so high is that we have an inflationary effect on our balance sheet that is greater than our assets. The Mexican IRS has a rule that if you are having more credits, those credits are regarded as income. Given the high inflation rate we are experiencing right now, we made a provision of MXN150 million in the quarter. We are expecting to see if we have any adjustments in the fourth quarter. But the main idea here is that we will likely experience this effect throughout all of 2022.

Okay.

So, Eric, I will add that this MXN150 million in income tax is in addition to the normal or regular income tax from our profits. The other thing I want to mention is that this is because Betterware de México itself is taking 100% of the debt resulting from the JAFRA acquisition.

Okay. That's an interesting segue into inflation. How are you combating that in terms of your supply chain and your ability to pass on price increases to customers?

Hi, Eric. This is Andres. Throughout this year, we have faced a significant impact from supply chain prices, especially regarding containers and raw materials. We have increased prices approximately 15% throughout the year. However, container prices have begun to decline in recent weeks both in the US and Mexico. It's still not a total confirmation of a trend but it has dropped significantly. In parallel, we have seen the ability to negotiate better prices with our factories due to the decrease in raw material prices as well. So we think that even though this just started happening recently, we see this as an opportunity to both increase margins and remain competitive with prices to drive consumer demand.

Okay. My final question in terms of JAFRA, I know you picked up the factory there at the same time. When you look at that opportunity, what is the potential to increase both capacity and make it more efficient in terms of spending? Thank you.

Yes, I think we have a great opportunity. We have available capacity in our manufacturing facilities in Queretaro. I will tell you that some of the cleaning products that Betterware is planning to launch next year, a very disruptive and attractive cleaning product line, will be manufactured in our Queretaro facilities. This will help us utilize more of the capacity we currently have. I think we will have great opportunities in the factory. In fact, we have identified MXN140 million of efficiencies for next year, 2023 in the manufacturing facility, which will certainly be important for our commercial side of the business in JAFRA because this will result in lower cost increases for our products.

Right. Thank you, and good luck for the holidays.

Thank you very much, Eric.

Thank you. We have the next question from the line of Andres Lomeli with LCA Capital. Please go ahead.

Hello, thank you for taking my question. We too are excited about Betterware's profitability in 2023. My question is based on the pro forma statements; I was wondering if we could expect to see a greater breakdown of both JAFRA and Betterware in the upcoming quarters?

Definitely, yes. Quarter after quarter, we will be reporting in detail on the performance of JAFRA Mexico, JAFRA U.S., and Betterware de México in every single number, including income, profit and loss, balance sheet, and cash flow. We have put together all the necessary systems on the platform to do that. You will notice a significant improvement when we report our results for the fourth quarter.

Excellent. Thank you very much. As an analyst, we really appreciate that.

Thank you.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back over to Luis Campos, Executive Chairman, for closing remarks. Over to you, sir.

Sure, thank you. First of all, I would like to confirm that we will keep focused on delivering value to our shareholders, including our dividends of MXN950 million this year. We will continue with our dividend policy. The only thing is that beginning of next year, in our first Board meeting, we will define our criteria for our dividend policy for the quarters to come. But this practice will continue in the future. Thank you again for joining our call today. We would like to wish everyone a happy and healthy holiday season. I look forward to speaking with you when we report our fourth quarter results. Have a good day.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.