Betterware de Mexico SAPI de CV (BWMX) 2022 Q2 法說會逐字稿

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 Investors section of the company's website.

Now I would 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 balances we have made in our business strategies for better work to position the business for growth, which are based on our 3 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's 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 multichannel company with unique and complementary products segments, enter an attractive beauty and personal care market with estimated annual revenues in Mexico and the U.S. of approximately $100 billion, as well as 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 the 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 3 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 allow us to streamline decision-making and increase efficiencies. The new committee members have significant experience in our 3 main product categories, namely fragrance, color and skin care.

We relocated JAFRA's research and development team from L.A. to our manufacturing plant in Queretaro, Mexico, which will allow for easier and faster joint product development. We have already seen some benefits of this change, reducing the time to market of products to 8 months from 18 months. We are increasing JAFRA's focus in product innovation across every category, mainly in fragrance, which we are the leaders in Mexico and skin care and color where we already participate, both have lost market share in recent years.

Second, in terms of technology, we have increased our focus on our digital efforts in JAFRA through 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.

And 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 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 to developing our data analytic capabilities and hence, we are confident that under his leadership, it will allow us to 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. And we have already started the process to significantly improve JAFRA's sales catalog backed by Betterware's decade-long experience and realign our strategies to focus on personal contact with our sales force throughout the country.

As for 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, which 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 -- their relocation in U.S. 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 3 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 ensured, we remain confident in our business model and our management team as we navigate the difficult operating environment.

As we mentioned in our Q1 '22 earnings release, we have received the results for the third wave of an independent market research conducted by one of the most prestigious companies in this field in Mexico. We have been gathering data since 2017. And now after 4 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 due to an unusual spike in demand for household products during lockdowns. Additionally, in April 2020, 21% of 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 hands-on management team enabled us to capitalize this opportunity, resulting in an acceleration of our growth from Q1 2020 to Q1 2021. This period was followed by a slow back-to-normal adoption in consumption trends. As people started going back to their normal lives, resulting in a normalization in the home solutions market back to pre-pandemic level according to this mentioned market story.

In Betterware, we were not immune to these trends, but our business through this resiliency and now Q2 2022 average weekly sales are 100% higher than 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, attaining thus a stronger brand positioning and market dominance.

In this uncertain and unusual period, we have remained focused on maintaining profitability while taking internal action 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, while during Q2 2022, we saw our network of associates and distributors to stabilize. During the last 8 weeks of the quarter, our base remained at approximately 880,000 and 44,000, respectively, showing signs of recovery in the last 2. 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 growing going ahead.

We believe that Betterware's unique business model will continue to results going forward despite the current normalization in the home solutions market. To this end, we were not only able to create a pre-pandemic 39% CAGR from 2014 to 2019, but we're also able to seize a complex opportunity both in expanding and contracting times during and after the pandemic, showing our ability to build a strong and resilient business model.

Importantly, the home solutions market pre-pandemic secular trends remain valid and stronger than ever as consumers appreciation for an organized practical and enjoyable home has taken a new relevance. Now to seize the opportunity that these trends bring and return to growth, we are deploying several initiatives based on our 3 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, which have lost share in our 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. These concepts include 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, thus boosting frequency of purchases of these and other product categories.

In terms of our second pillar, technology, we are in the process of upgrading our e-commerce website, which will be implemented in both Betterware and JAFRA and allow us to increase our penetration attracting new customers that currently are not reached by our traditional model, while increase our data analytic capabilities and understanding of the customers. We have learned a lot since we launched the platform in December 2020, and we are adapting it to make it successful 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 activity as our associates and distributors enjoy the new and improved benefits of this new platform.

And finally, in terms of business intelligence, we are undergoing a process of evaluation of data analysis capabilities at JAFRA and Betterware to replicate the best practices in both companies. As we have mentioned before, we have 2 main avenues of organic growth. Number one, expanding our household penetration; and number two, increasing our share of wallet. And we are convinced that our strategies based on our 3 pillars will be instrumental to continue capitalizing on these opportunities of growth.

Among the relevant opportunities to further expand our household penetration and reach our target 40% as disclosed in our earnings release yesterday are the following. Number one, growing our network of distributors and associates. To this end, we've refocused our rewards program to incentivize associates and distributor growth and reactivation, aimed at bringing back the people that churned off in the last 12 months.

Number two, reinforcing our hybrid model between personal contact and technology. We relaunched our person-to-person companion program, leveraging on our technological tools developed throughout the years. Number three, 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.

Number four, increasing our social selling and social influencing which we are currently working on and will share our progress in the coming quarters. Now we increase our share of wallet with the new knowledge obtained with the market study previously mentioned, we are ready to write the current back to growth as the home and life solutions market stabilizes. We will continue increasing market penetration in our core categories and expand to new categories that show a relevant potential for us.

In the current high inflation environment, we revised our pricing strategy to focus on delivering great value packages to fuel consumer desire to buy as disposable income remains pressured. Furthermore, we are adjusting prices to reflect the recent decline in container costs, which should be an incentive for consumers to purchase our products.

Before I turn the call to Carlos, I would like to mention that we are excited about our international expansion plans to support our long-term growth. We are currently assembling a team to lead the expansion of Betterware to the United States with the aim of starting operations by the fourth quarter of 2023. In the midterm, we will be focused on our expansion to the U.S. market. While in the longer term, we target further international expansion to 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 the return to normality have been tougher than we anticipated and amplified by a softer economic environment and weaker consumer spending in 2022. Given these factors and the extremely tough comparison, Betterware's stand-alone results for the quarter are the following.

Net revenues declined 38% 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 383.3 million, 49% lower than the EBITDA in the second quarter of 2021 and EBITDA margin contracted by 484 basis points to almost 24%, explained 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. And for the first half of the year, driven by similar factors persisting in the second quarter of 2022. Net revenues declined 37% compared to the first half of 2021. And 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%.

That said, after the acquisition of JAFRA, we are now a larger and more resilient group with 2 complementary companies. Our consolidated results for the second quarter and year-to-date of fiscal 2022 included performance of Betterware for the full period and JAFRA's performance from the date of the completion of the acquisition through June period and 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 onetime expenses related to the acquisition and to the restructuring of our workforce aimed at improving our EBITDA 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.

As for 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 consolidated EBITDA margin was 22.4% or 802 basis points lower than 2021 explained mainly by the inclusion of JAFRA to our 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 and consolidated adjusted net income, which excludes noncash expense of MXN 71.1 million related to the unrealized loss in market-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 ratio increased to 2.2x net debt to EBITDA in the second quarter of 2022, considering Betterware's last 12 months' EBITDA when considering JAFRA's annualized adjusted EBITDA for first half of 2022.

Betterware's and JAFRA's high cash flow generation nature will allow us to gradually deleverage going forward. Additionally, we're evaluating divestments of unproductive assets worth around to MXN 500 million to MXN 700 million, which will reduce our leverage ratio to 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 a stabilization in our associates and distributors base, we are confident that we can gradually return to growth. We expect Betterware's net revenues to be in the range of MXN 6.8 billion to MXN 7.2 billion and our EBITDA 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 in the range of MXN 700 million and MXN 800 million, which includes JAFRA's full year operations.

That said, considering the tough and uncertain macroeconomic environment, and our lower-than-expected earnings 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 company's financial strength, considering the MXN 574 million cash outflow related to the acquisition of JAFRA as well as other investments used on unleashing JAFRA's full potential, coupled with severance payments due to workforce restructuring and the temporary increase in Betterware's inventories aimed at preserving an adequate service level.

As the situation stabilizes, the Board will analyze the long-term sustainable dividend policy. In conclusion, over the long term, we remain confident in our ability to seize growth opportunities which will allow us to generate strong cash flows and continue to maximize shareholders' value.

I will now turn the call over to the operator, and we'll take any questions you may have. Thank you.

(Operator Instructions) Our first question comes from the line of Cristina Fernández with Telsey.

I have a couple of questions, but wanted to start with the recent growth in the past few weeks you've seen in associates and distributors, what did you attribute that to and how much of an impacted the changes you made recently to incentives for the sales force, do you think has played a role in that sequential improvement?

Cristina, this is Andres. Thank you. Yes, so the impact that the internal actions that we took were 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 and especially to bring in all the people that we have lost during the past 12 months.

Second of all, we have been doing also changes in the catalog. You know that we changed from 9 catalogs per year to 12 catalogs per year starting in September 2021. And this has really started yielding a lot better results because we can react faster month after month to change prices, to change promotions and to make sure that our prices 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 more distributors. And this is also helping to have a more significant associate attachment to the company and thus yielding less churn of associates. So we think that these internal actions that we took together with an external environment in which back to normal has already happened during the last 12 months yielded this recent growth in the associate base and is a good premonition of what will happen in the future, where we really believe that we have hit the bottom during the second quarter of 2022. And now we can start thinking of a path to growth again.

And then I have a more broader high-level question. Can you talk about how you assess or how you view the state of your consumer today versus 3 months ago? And how -- was that impact in demand for -- or just how is demand for beauty and JAFRA different from Betterware?

So can you elaborate a little bit on the question, Cristina, to understand exactly what's the...

Yes, do you refer to JAFRA or Betterware?

Both. I wanted to see -- well, first, how do you feel about the state of the Mexican consumer today versus the last earnings call? And then in light of that, how are the demand trends we know for better where they've been normalizing, but how is demand for beauty and JAFRA compared to Betterware?

Sure. Well, this is Luis. Number one, in the case of Betterware, we sell discretionary products. However, as Andres was saying, we got ready for that and then we adjusted our strategy in terms of product offer and pricing in order to sell in a challenging environment because definitely, there are inflationary pressures on consumers, a little bit of lack of confidence of the consumers. But our old product offer, including pricing, was realigned. And we began looking at this new product offer or adjusted product offer in the month of May and June, and will be more intensive and it's been more intensive in July, August and now further months. Then we got ready for that. And we began looking the results in -- mainly in July and we will see that in the months to come.

In the case of JAFRA, even last year was a tough year because people were at home and then women were at home, and they did not buy as much cosmetics, especially color and fragrances as they used to. Now what we are seeing is that people is already getting, women maybe are getting out of home and they are buying or coming back to normal purchase buying that they used to do before the pandemic. Then little by little, we will see month after month that this is coming back to normality, which will help us in terms of sales. And this is what we are seeing now, okay? Then even our sales force they are out of home already and having this personal contact. Then we will see this in the months to come, and this will be favorable for our sales in JAFRA.

Very helpful. And then one last question. I wanted to see if you could expand on your revised pricing strategy. So earlier this year, you raised prices by 12% across the board. It seems like now are looking for lower then. Can you expand on how much prices are being reduced? And is it broad-based or just in some specific items.

Yes, sure. So last year, we have a contract with the container costs which enabled us last year to maintain prices low. At the end of the year, in December, this contract ended and the prices of containers for us increased more towards market levels. So we had to increase prices by 12% in January to maintain profitability. Now we have seen starting in April of this year, container costs came back down to almost half of the price that they were before that, which is taking pressure of in the cost side for us. So for the second half of the year, and we started doing this in May and June and July. We are being more aggressive in pricing because we have more leverage on the cost side as well. And we believe that this is helping a lot to drive demand, and we will continue to help to drive demand towards the second half of the year.

(Operator Instructions) 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.