Betterware De Mexico, S.A.P.I. De C.V Q4 FY2023 Earnings Call

Good morning. Welcome to Betterware's Fourth Quarter 2023 Earnings Conference Call. Joining us today are the leadership team members Executive Chairman, Luis Campos; Chief Executive Officer, Andres Campos; and Corporate Chief Financial Officer, Alejandro Ulloa. Before we begin, I would like to remind you that the call will include forward-looking statements, which are subject to various risks and uncertainties that could cause actual results to differ materially from expectations, and any such statement should be considered in conjunction with 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 in the Investors section of the company's website. I would now like to turn the call over to the Company's Executive Chairman, Luis Campos. Please proceed.

Thank you, operator, and good morning, everyone. 2023 has been a transformative year for Betterware. As a group, we have become stronger and more diversified, also leveraging our core competitive advantages such as consumer product and direct selling leaders. This was reflected in a 5.2% year-on-year net revenue increase with strengthened profitability, achieving a total of Ps.2,721 million in EBITDA. At the midpoint of our initial guidance, we exceeded our revised guidance for the year with a strong full-year EBITDA margin of 20.9%. Our strong cash flow generation has enabled us to reduce debt and further strengthen our balance sheet. I would like to commend the entire Betterware Mexico team for their success in navigating challenging post-pandemic headwinds. The stabilization we are seeing in Mexico's home solutions market, coupled with robust execution of our commercial strategy, enabled a 7% year-over-year increase in Q4 net revenue, our first quarter of growth since the third quarter of 2021. Today, we are well-positioned for a new era of sustained growth. I would also like to express my appreciation to our Jafra team. Jafra has surpassed our initial expectations as an acquisition, proving to be highly accretive, delivering exceptional fourth quarter 2023 EBITDA with a 45.3% year-on-year increase in Mexico and achieving almost breakeven in the U.S. The initial implementation of our proven business model's key elements, product innovations, technology, and business intentions has propelled the company back into a growth phase, also with meaningful strategies resulting in cost savings across this business. The Jafra team, with the benefit of strong new leadership, is well positioned for continued future success. As Alejandro will discuss in more detail shortly, the Group's fourth quarter 2023 net revenue represents a 44% CAGR since the fourth quarter of 2019, increasing to Ps.3,402 million from Ps.791 million for the same period in 2019. Therefore, while our Betterware business achieved a 17% CAGR, the remaining CAGR reflects our Jafra acquisition. Among these and the other milestones we will discuss today, we were pleased to announce in January that Andres has assumed the position of Betterware Group’s CEO, which includes the Betterware and Jafra branches in Mexico and abroad. Andres has gained a deep understanding of our business over these 11 years with Betterware, successfully navigating our progress and development, and contributing to our overall success as a strong leader with a strategic vision. I look forward to my continued involvement in our company's accomplishments, and I am confident in our promising path ahead. Our strong foundation, built through decades as an industry leader led by our revitalized management, is a winning formula for success. With that, let me pass our conversation to Andres, and I will return for some brief closing remarks.

Thank you, Luis, and good morning to everyone. As Luis noted, particularly strong performance in the last quarter of the year drove our full year results. We achieved double digit revenue growth and continued our profitability in 2023 with robust cash flow generation that enabled a strengthened capital structure, as Alejandro will discuss in more detail shortly. I am extremely proud of the team's success in returning Betterware to our growth path during the fourth quarter of 2023. Our focused execution resulted in improvements versus the prior year of 7% in net revenue and 17.6% in EBITDA, showcasing our ability to deliver results despite adversity. Our execution is stronger and the 2023 results demonstrate the focus across the organization to enhance the customer experience. I would like to highlight some relevant accomplishments which enabled our success: First, we launched three new categories throughout the year: wellness, kids, and pets. Wellness showed outstanding success and we have modified kids and pets to maintain the most effective concepts. Second, we saw renewed traction within our three core categories, namely home organization, kitchen products, and home improvement through a deepened understanding of our customers’ mindset and evolving needs, also responding to the ever-shifting environment. We are launching further innovation and market activation to capture compelling, long-term growth opportunities in the market we serve, leveraging our unique ability to analyze the extensive data we receive through multiple channels. Third, price decreases implemented in September 2023, reflecting an improved exchange rate environment and moderating freight rate conditions, resulted in positive traction throughout the year with a positive spike in volumes sold by year-end. Fourth, we are seeing strong positive results from training and incentivizing the onsite field staff, which we began reintegrating in February 2023, along with mentoring our distributors to improve their businesses and accompanying them on their routes. Fifth, we have continued to strengthen our Betterware+ app through the launch of more than five new functions throughout the year. Importantly, this resulted in stronger activity rates and increased average monthly orders. This is normally driven by an increase in our Associate base. However, this did not happen in 2023, meaning the average order per Associate is increasing. This will result in a reactivation in the growth of the Associate base going forward. Betterware's strong commercial strategy enables us to reach more homes and increase our share of wallets. Today, we have 25% total home penetration in Mexico and an estimated 4% market share, representing a significant growth opportunity which we are actively pursuing. I am confident that with Santiago's new leadership, which we also announced in January, Betterware Mexico's team is poised for success going forward. Turning to Jafra Mexico, we've gradually implemented key elements of our Betterware success formula since our April 2022 acquisition. Combined with a strong management team, this resulted in double-digit growth in 2023. Importantly, this is the second consecutive year of growth for Jafra Mexico, contrasting a single-digit year-on-year increase in 2022 compared to 2021. The team has been laser-focused on our four operational success pillars, which during the year resulted in: First, accelerated innovation representing 15% of 2023 net revenue, up from only 6% in 2022. Second, continued growth in fragrances, our main category, also with the launch of very successful lines and brand extensions during the year. Third, an increased customer conversion rate resulting from an improved catalog graphic design and overall appeal. Fourth, increased consultant acquisition through small, targeted, and impactful incentive program adjustments. Fifth, ease in doing business for our leaders and consultants through the inaugural launch of our Salesforce app, which we will continue to improve upon based on the team's feedback. Lastly, improved and more efficient interaction with our leaders and consultants through our newly launched chatbot, enabling us to expand our consultant base, reflected in a 2.5% year-on-year increase for the fourth quarter of 2023. Going forward, the Jafra Mexico team is well-positioned to capture the vast opportunity in Mexico's beauty market and importantly expand our 4% market share to become the number one direct sales beauty brand in Mexico. Continued execution of our four pillars will enable our success. Finally, turning to our international operations, 2023 was an important year for Jafra U.S. While we began the year with operating challenges and declining revenue, we made swift decisions to recalibrate this business, correcting our revenue levels in the second half of the year. We remain focused on reigniting our growth to gain market share within the sizable U.S. beauty space. However, it is important to note that despite the year's headwinds within our U.S. operation, we successfully streamlined expenses for our return to profitability, achieving our most profitable quarter in the fourth quarter since acquiring Jafra. Further, we are well positioned to launch Betterware's U.S. operation in the second quarter of 2024. I would like to take this opportunity to announce that we have recently hired our new CEO to lead Betterware U.S. Diego Isaza has considerable U.S. consumer product experience with companies including Procter & Gamble and Hershey, which, when leveraged with Betterware's deep brand experience and proven business model, should result in continued success. Our planned investment for the initial launch phase of Betterware U.S. operations is between $5 million to $7 million in the first year, and we do not expect a meaningful contribution in the first year of operations. Our focus will be on the Hispanic market, comprised of 60 million people representing US$3.4 trillion in estimated GDP, making it the world’s fifth largest economy and double the size of Mexico. Finally, we made further progress toward our launch of Betterware Peru, hiring our General Manager, Ana Cecilia Augusto, who has more than 15 years of experience in the Peruvian and Latin American direct selling industry. We look forward to sharing further updates as they unfold. Let me now pass the call to Alejandro, who will review our financials in more detail.

Thank you, Andres, and good morning, everyone. I would like to review our fourth quarter and fiscal year 2023 results. I will then share perspectives on how we are approaching 2024 and discuss our capital allocation strategy going forward. 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. Additional details can be reviewed in our earnings release published yesterday. Our consolidated results for the quarter are the following: Consolidated net revenue increased 5.2% compared to fourth quarter 2022, supported by the positive performance of our two brands in Mexico, partially offset by a revenue decline in JAFRA U.S. It is relevant to highlight Betterware’s net revenue growth of 7% compared to the fourth quarter of 2022, the first quarter of year-over-year growth since the third quarter of 2021. Consolidated gross margin was roughly in line with the fourth quarter of 2022, decreasing 48 basis points to 70%. This decline was mainly due to margin contraction in Betterware, explained by an unfavorable sales mix; in particular, promotions accounted for a larger share of sales than in the fourth quarter of 2022. However, this was mostly offset by margin expansion in JAFRA Mexico, driven by favorable exchange rates, reduced costs from supplier negotiations, and a favorable sales mix. Consolidated EBITDA for the quarter grew 36.7% to Ps.819.5 million compared to Ps.599.3 million in the fourth quarter of 2022, and EBITDA margin expanded 556 basis points to 24.1%. Profitability improvements in all trade subsidiaries were achieved through successful efforts in expense optimization, allowing us to exceed our EBIT expectations for the quarter. Consolidated net income was Ps.406.1 million, 62.5% higher than in the fourth quarter of 2022, mostly explained by net revenue growth and an increase in operating leverage, which allowed us to increase our earnings to Ps.10.9 per share. For the year, consolidated net revenue increased 13.1% compared to 2022, explained by the consolidation of JAFRA into our results for the full period this year compared to almost three quarters during 2022. Outstanding net revenue growth in JAFRA Mexico was partially offset by the decline of net revenue in Betterware due to lower average distributors and associate base and a net revenue decline in JAFRA U.S. Gross margin for the year expanded 265 basis points to 71.5% compared to 68.9% in 2022, boosted by JAFRA’s higher gross margin profile included in our results for the full year 2023, which was partially offset by gross margin contraction in Betterware due to an unfavorable sales mix during the last quarter of the year. Consolidated EBITDA for 2023 was Ps.2,721 million, 17.5% higher than in 2022, exceeding our previous full year guidance. EBITDA margin expanded 79 basis points to 20.1% due to the positive performance in our three subsidiaries, driven by efficient expense control, leading to margin expansion in all our subsidiaries, and closing near breakeven profitability in JAFRA U.S. Consolidated net income increased 20.3% to Ps.1,049.5 million, driven by higher operating leverage offsetting the effect of higher interest rates on our debt. Earnings per share for the year were Ps.28.2. Finally, our free cash flow generation for the year, defined as operating cash flow minus CapEx, increased 79.6% attributed to a 67.9% increase in our operating cash flow from EBITDA increase, inventory turnover improvement in monthly businesses, and improved payment conditions with suppliers in JAFRA, coupled with lower CapEx investments. As for our balance sheet, the company's financial position continues to improve as we reduce our total net debt by 11.9% during the year, closing 2023 with a net debt to EBITDA ratio of 1.8 times compared to 2.5 times at the end of the previous year. As we have previously stated, while we are now comfortable with our conservative balance sheet, we will continue to use most of our operating cash flow to improve our financial position, aiming to bring our net debt to EBITDA ratio to approximately 1.5 times during 2024. Having said that, and highlighting the confidence we have in our growth prospects, our board of directors has proposed a visible payment of Ps.250 million for the quarter, subject to the approval at the ordinary gain of shareholders meeting to be held on March 6, 2024. We remain committed to returning value to the dividends for shareholders over the long-term. We're confident and optimistic about the results achieved so far and the opportunities that lie ahead of us. For the full year 2024, we expect our consolidated net revenue to be in the range of Ps.13,800 million to Ps.14,400 million, and our consolidated EBITDA to be in the range of Ps.2,900 million to Ps.3,100 million. Over the long-term, we remain confident in our ability to seize growth opportunities, which will allow us to continue to generate strong cash flows and maximize shareholder value. I will now turn the call over to the operator, and we will take any questions you may have. Thank you.

Thank you. Our first question is from Eric Beder with SCC Research. Please proceed.

Good morning. Congratulations on a solid end to the year.

Hi, Eric, how are you?

I'm doing great. About you? Let's talk about your continued significant strides in reducing inventory levels, especially when you compare it to the growth in the top line. How should we be thinking about inventories in 2024 and beyond?

Hi, Eric. This is Andres again. Yes, we feel positive about our ability to continue to reduce inventories during 2024. We think that 2023 was a great year in this regard, where we were able to reduce inventory in both companies, and we think we can reach normal levels by the end of 2024.

Okay. So there are still growth opportunities there. Still gains to be added.

Still opportunity to reduce inventories, and we will continue to do so. A context of growing revenue will obviously help us to make that last impact in the inventory to return to normal levels.

Great. When you look at the opportunities at Jafra, both Jafra Mexico and Jafra USA, obviously you have a very strong position in fragrance. What other categories do you think would continue to make sense to add or expand upon to capture more of your customer share wallet?

Yes. Eric, this is Andres again. Obviously, the fragrance category is the most relevant. As you can remember, we are currently the number one direct selling brand in fragrances in Mexico. The categories where we see a lot of opportunity are color, skincare, and toiletries. They are three very big categories both in Mexico and the U.S., and we see a lot of opportunity to expand these categories and make them very relevant, as we have done with fragrances. So they will be very important for growth going forward, highlighting our great opportunity to grow.

And kind of a structural question on Betterware USA. So you’re rolling that out in Q2. Are you going to be shipping product from Mexico? How do you look upon that as a rollout? Are you going to initially focus on more of the Southwestern regions or is it more nationwide? How should we be thinking about the cadence of the rollout and how you’re going to support it?

Yes, very good question. As we spoke about, we are weeks away from launching in the U.S. This will be based out of Dallas in Texas. And it's very important to note that we’re leveraging many of our existing capabilities, such as our distribution center and utilizing some of the back office synergies for our operations.

We are experiencing technical difficulty. The conference will resume momentarily. Thank you for your patience. We are ready to resume.

Okay, thank you. Eric, this is Andres, do you hear me?

Yes, we can.

Alright, perfect. Thank you. So, as I was telling, we are ready to launch in the U.S. We will begin selling only in the state of Texas to pilot test all our operations. So it is important to note that in the first year, 2024, we should not expect any significant positive impact from our Betterware launch. It will be a year where we will basically focus on Texas in the first month and then maybe expand to other states in the following months. I'd also like to state that we will focus at the beginning, mainly on the Hispanic market. As we stated during the call, it's a very large market, with a 60 million population and huge potential, and it's a market that is very similar in many ways to the Mexican market. So, we think we can be very successful in that market during the first years.

Great. Again, congratulations, and I look forward to 2024. Thank you.

Thank you, Eric. Have a good day.

Our next question is from Cristina Fernández with Telsey Advisory Group. Please proceed.

Hi, good morning, and congratulations on the good results. I wanted to see if you can put in context the results for the first quarter relative to your updated guidance in October. Where did the upside come relative to expectations? Did you see a significant acceleration or change in the trend of the business in November and December? I just wanted to understand what was different and where the upside came from? Thanks.

Hi, Cristina. How are you? This is Andres. We saw significant impact from our commercial strategies in Betterware Mexico. I believe that in the first part, Betterware Mexico had a great fourth quarter. All the different commercial strategies that we had implemented really took effect. Additionally, we did a price decrease in September, which helped all the strategies streamline up again and have a great quarter for Betterware Mexico. Then on the other hand, at the same time, in Jafra Mexico, we had a great quarter as well. Especially in terms of profitability for Jafra Mexico, we saw a great impact from an increased gross margin in the fourth quarter, which helped our EBITDA results for the fourth quarter. So those were mainly the main reasons; Betterware Mexico greatly impacted the revenue achievement, and Jafra Mexico contributed significantly to profitability with an increased gross margin of about 581 basis points.

Yes. Thank you for that. No, I just had a follow-up on the Jafra Mexico profitability. Was there anything that was one-time in nature that helped deliver that 31% EBITDA margin for that segment? And then as we look at 2024, how should we think about the EBITDA margins for Betterware and Jafra Mexico? Given that Betterware has been sort of in that 20% range and down a little bit from the first half of the year, versus Jafra which has been accelerating profitability.

To explain the extraordinary profitability of Jafra for the fourth quarter, and to give you what we can expect in terms of EBITDA margins going forward for 2024.

Hello, Cristina. Nice talking to you. This is Alejandro Ulloa. What happened in the last quarter with our gross margin in Jafra Mexico, we had a significant improvement in this gross margin, basically due to favorable exchange rates. The appreciation of the peso during this quarter was positive. We also had reduced costs achieved through supplier negotiations with specific vendors, and that impacted almost 2% of points for gross margin. Furthermore, we had a favorable variation in product volume in our manufacturing facility. This volume additionally had an effect and the mix of the manufactured products. So that combination resulted in this improvement in margins. But what we are expecting for 2024 is that this will normalize, and we will be once again in margins in the range of 80% to 82%.

Thanks. And then the last question I had was on the revenue outlook for 2024, the 6% to 11%, what are you assuming regarding industry growth? You talked about the home solutions market stabilizing. Do you think that market can grow in 2024, and how? Maybe you can talk about the overall consumer and the beauty market that's underpinning your revenue outlook for the year?

Yes, Cristina, this Andres again. On the Betterware side, the market has pretty much stabilized. It is crucial to note that during the pandemic, after substantial market growth, there came a steep decline. From our market studies, we see the market has stabilized now. With a stabilized market, there's a lot we can do. It is important to remember that we only have around 4% of market share today and we also only have about 25% of home penetration currently. So there is significant room for growth with a stabilized market. Thus, we are not assuming huge growth in the market and this will help us even more. On the beauty side, the beauty market in Mexico has shown buoyancy, growing between 10% and 15% last year. We think we can ride this market growth and also expand our market share. In Jafra Mexico, we also have around 4% market share, and it's important to understand that approximately 50% of this market is sold through direct selling in the beauty space in Mexico. So there is plenty of room to grow, especially within Jafra, so these two factors combined will help. Additionally, in our international operations, as I mentioned earlier, we should not expect any significant contribution from Betterware U.S., but we should expect Jafra U.S. to start growing again and contribute little by little to the overall revenue of the group.

Thank you.

Hello. Thank you for taking my question and congratulations again for the great results. My question is regarding the expansion to new markets. You mentioned that you want to keep margins stable. I just wanted to know if you could talk a little bit about how you plan on managing the costs associated with the expansions: maybe new hires, new offices, and maintaining those EBITDA margins stable throughout the years. Thank you.

Yes, thank you, Andres. This is Andres again. For the Betterware U.S. expansion, we estimate within our projections, a million-dollar investment during 2024. So it’s not a very relevant investment regarding our yearly EBITDA. We are leveraging a lot of our capabilities in Jafra today. As I mentioned earlier, we will be distributing out of Jafra’s distribution center with the excess capacity we have there. Therefore, that will not be a very significant cost. We’re also utilizing all the back office for finance, HR, and other operations. This investment will be mainly in our commercial team for Betterware U.S. One of the advantages of our business model is that we can streamline expenses efficiently when launching in a new market. We are going to go step by step, not just going all out and investing heavily at once. We’re also being cautious in Peru, with an estimated investment between $500,000 to $1 million to cover all the preparations in the pre-operating expenses. Generally, we don’t expect this to be too significant, and it is already factored into our guidance.

Perfect. Thank you very much. And once again, congratulations on a great quarter.

Thank you, Andres.

That will conclude our question-and-answer portion of today’s conference call. I would like to turn the call back over to management for closing remarks.

Hello, this is Luis. Hello, everybody. Thank you, operator. And thank you everyone for joining us today. As we look forward to the year ahead, we expect 2024 will be transformative, expanding our Mexico businesses also with the launch of Betterware U.S. and continuing our Betterware Peru launch in early 2025. Our company’s strong fundamentals, led by a renewed leadership team, will drive accelerated growth and shareholder value. Thank you for your support and for being on this journey with us. Thank you everyone, and have a good day.

Ladies and gentlemen, this concludes Betterware’s fourth quarter, 2023 conference call. We would like to thank you again for your participation. You may now disconnect.