Betterware de Mexico SAPI de CV (BWMX) 2020 Q4 法說會逐字稿

Thank you, and welcome to Betterware's Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. With me on the call today are Betterware's Executive Chairman, Luis Campos; Chief Executive Officer, Andres Campos; and Chief Financial Officer, Diana Jones.

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 can cause actual results to differ materially from expectations. Any such statements 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 earlier today as well as the Investors section of our website.

Now I would like to turn the call over to the company's executive chairman, Mr. Luis Campos.

Thank you, operator. Good morning, everyone, and thank you for joining us today. I will begin my remarks by providing a summary of our performance for the fourth quarter and 2020. And Andres will discuss the progress we have made against our strategic pillars to increase efficiency and elevate our operating platform in support for the continued growth we see for the company.

Diana will then review our financial results and our fiscal 2021 outlook. Before turning to our results, I want to start by thanking the entire Betterware team for their hard work and contributions all year. I am so proud of all that they have accomplished in 2020, a means the challenges presented by the global pandemic. Their hard work and determination in a difficult operating environment allowed us to maintain continuity of our operations and need our customers' changing needs.

The COVID pandemic demonstrated even more clearly the strength of our people, business model and operating platform. Indeed, we delivered record results and made significant progress on our strategic growth pillars. And while the pandemic caused families to change their buying preferences, which benefited us. Our strength in the fourth quarter was achieved with families resuming more normal lifestyle in the markets we serve, and we remain confident in our ability to continue double-digit rates of growth in 2021.

Turning to a review of the full year. For the full year, we achieved record sales and EBITDA growth, exceeding the increased guidance that we provided last November. The year marked significant milestones for Betterware, including growing revenues over 135% to MXN 7.3 billion, and EBITDA over 154% to MXN 2.16 billion, achieving record annual EBITDA margin of 29.8%. This growth was driven by 180% increase in distributors and 195% increase in associates during 2020.

As we leverage our technology that allows our distributors and associates to conduct business remotely. As of year-end, we have more than 59,700 (sic) [58,600] distributors and 1.23 million associates, another record achievement. We are confident in our ability in continuing to grow our distributor and associate network and expect our larger and stronger team will drive our business forward in the near and long term. Equally exciting for our company is that we entered the public market's trading on the NASDAQ Exchange in March 2020.

And we launched our new work marketing platform in December 2020. In addition, we made significant strides to strengthen our financial health and positioning during the year. We've reduced our leverage ratio of net debt to adjusted EBITDA to minus 0.01 from 0.5 at the end of 2019 and increased our liquidity to MXN 650 million at year-end.

Turning to our fourth quarter results. We had an outstanding finish to a strong year of growth for our company. We achieved record sales growth of 229% and an EBITDA increase of 254% year-over-year. While our results continue to benefit in part from COVID, our consumers spend more time at home, the continued momentum from the first 3 quarters into the final quarter of the year, especially into December, is a testament to the strength of our business and the significant progress we have made against our 4 strategic pillars.

Finally, returning value to shareholders is a top capital allocation priority for us. And we, again, have proposed an annual dividend of MXN 1.4 billion to be paid in 4 installments. This implies a dividend of MXN 9.57 per share for this quarter. This dividend was approved in the ordinary General Shareholders' meeting held on February 18, 2021.

So in summary, we are very pleased with a strong end to the year and the underlying momentum of the business. Despite the challenges the pandemic presented, our distributors and associates successfully conducted business from home and capitalized on the increased demand of our products. At the same time, we remain focused on our strategic pillars. Invested in key areas of the business to improve our efficiency and made a stride to strengthen our financial position. As we begin 2021, we believe we are poised for continued growth, including double-digit sales and profit growth, which Diana will discuss in more detail. I will now turn the call to Andres, our Chief Executive Officer, who will highlight our progress on our 4 growth initiatives and plans for 2021.

Thank you, Luis, and good morning to everyone. Before I review our strategic initiatives, I would like to also personally thank our team for their grit and determination this year as we navigated a challenging environment. Their continued dedication to our customers and our brand drove results for the year that exceeded our expectations from a sales and profitability perspective. In addition to record growth for both the fourth quarter and full fiscal year. I will now disclose the progress made in 2020 on the 4 strategic pillars as well as our plan to advance these priorities in 2021.

As a reminder, these pillars are centered on market penetration, category expansion, business intelligence and technology investments and geographic expansion. These initiatives, along with our web marketing and the new campus, which I will discuss momentarily, are expected to support our future growth and increase efficiency.

Starting with market penetration. In 2020, we significantly increased our household penetration to 20%, driven by our deliberate actions to drive growth with high-impact innovation, combined with the increased demand for our household and cleaning products as a result of the COVID-19 pandemic.

This growth is a testament to our strong competitive positioning as the category leader in Mexico and the deep expertise that drives customer loyalty. As we look ahead, we believe we can continue to increase our market share and double our household penetration from 20% to 40% in the next 5 years, as we focus on innovative products that continue to resonate with our customer base.

Our second strategic pillar is category expansion. In the fourth quarter, we launched 3 catalogs and introduced 98 new products. Customers continue to be receptive to our new products, and we are excited about our product launches for 2021. Before the end of the second quarter of 2021, we will introduce our new category of Home Renovation Solutions, that will let our customers improve their homes at low costs, including products, such as curtains and tapestry.

This new category will allow us to increase our share of wallet of our customers, which we currently estimate to be at 20%. In the coming quarters, we will announce more new categories that we plan to enter to achieve our growth goals.

Next, business intelligence and technology investments. Within business Intelligence, we started using Power BI, one of the most advanced platforms of data visualization available in the market. This tool allows us to optimize day-to-day monitoring of the business and transform millions of data points into business strategies.

We also made great strides using 9 artificial intelligence and data science platforms. Additionally, we started working together with payment company to improve our forecasting methodologies. This project will help us optimize our service and inventory levels, allowing us to allocate capital in a more efficient way.

Within technology, we launched our new web marketing platform in December 2020. Although it's still early, new customer sales have been increasing weakly since the launch. We also consolidated our new WMS platform (inaudible) and launched our new AI-enabled bot.

This year, we plan to launch our 3.0 version of our proprietary sales force app, Betternet, and develop strong natural language processing capabilities with our bot. We also plan to launch a 2.0 version of Pipeline, our proprietary product innovation platform. Finally, we will consolidate all technologies within our new campus, which should yield productivity gains in our day-to-day operations.

Our last pillar is geographic expansion. In 2020, we ran a successful pilot test in Guatemala, where we saw consistent sales, EBITDA, distributor and associate growth. While Guatemala is a relatively small market, with its total market representing only 5% of Mexico's market size, our pilot test proved that we can successfully replicate our business model in other geographies. We see continued opportunity to expand into other countries, mainly Colombia and Peru in the coming years, in both organic and inorganic growth, as we assess M&A opportunities in these countries.

Going deeper into our web marketing. We launched our new and improved transactional website, betterware.com in the fourth quarter. We are very pleased with the early results of our new site, which acts as a tool for distributors and associates to grow their sales and earnings by continuing to reach additional customers.

They are able to do this by, number one, connecting new customers based on location to a distributor if they don't already have an existing relationship with one; and two, the new platform allows the distributors and associates to share a personal link that will ultimately preassign them any purchase completed through the link.

It is relevant to highlight the penetration of e-commerce in Mexico remains low, representing less than 6% of total retail transactions, but is rapidly increasing. With this new platform, we are ready to offer customers the most convenient way for them to buy our products, while giving our distributors and associates the opportunity to increase their earnings.

Touching briefly on our new campus. The new campus opened in the fourth quarter in [Guadalajara, Jalisco]. Currently, almost all of our operations staff, which is approximately 70% of our collaborators, is working from there, and the rest of our people will move by the beginning of March 2021. This will give us operational efficiency, including consolidation of all warehousing and distribution processes, optimization of space usage and inventory management efficiency backed by new technology, and allow increased collaboration, and therefore, quicker decision-making across our organization.

After the triple-digit growth in volume during 2020, the new campus will reach full capacity sooner than expected. We decided to keep a 24,000 square meter rented warehouse to complement our capacity. And we are currently analyzing, together with Bain & Company, the most efficient way to expand our capacity to support our growth.

This could mean an expansion of our campus or a new distribution center located near Mexico City. We will keep you posted on any new developments in this regard. Lastly, on January 15, we launched our biggest marketing campaign today. This campaign includes paid and open-TV video advertisements, radio commercials, out-of-home media and social content, which all highlight Betterware's vast array of easy-to-use and accessible products for organization and practicality.

We are excited to share our values and product solutions for the home with more families and individuals across Mexico through these advertisements. Overall, we expect the new marketing campaign to expand our customer base as we showcase help customers can benefit from our line of products.

So overall, I'm very pleased with the significant progress made in 2020 against our key strategies. As we begin 2021, we enter the new year from a position of strength and remain confident in our ability to drive strong double-digit sales and profit growth. Our priorities remain the same.

We are focused on executing against our 4 growth pillars, while also continuing to invest in key areas of the business and returning value to shareholders to our quarterly dividend program. Similar to 2020, we will continue to take a strategic approach to expand our household penetration and our share of wallet as we focus on further strengthening our marketing positioning in 2021 and beyond. I will now turn the call over to Diana to review our fourth quarter and 2020 financial results.

Thank you, Andres. Good morning, everyone. I would like to take this time to review our fourth quarter and fiscal year 2020 results. I will then share perspectives regarding our outlook for fiscal 2021. Please, please keep in mind that the current year will refer us to reviewing our results and guidance in the Mexican peso.

We achieved our functional and reporting coverages. I will provide highlights of our results, which has details fully in our 6-K filed yesterday. The fiscal 2020 included a 53-week and compares to a 52-week year in fiscal 2019. The 53-week was included in the company's 2020 fourth quarter and added MXN 160 million in net revenues and MXN 63 million in EBITDA. For the fourth quarter, total net revenues increased 229% to MXN 2,601 million from MXN 791 million in the third disclosure. It is important to highlight that 4Q '20 have 14 weeks compared to 15 weeks for 4Q '19. The additional week represented MXN 160 million of net revenue. Comparable net revenues for 4Q '20 were MXN 2,441 million, an increase of 209% compared to 4Q '19.

EBITDA for the fourth quarter 2020 increased 254% year-over-year to MXN 807 million compared to MXN 228 million in the prior year. And EBITDA margin expanded 220 basis points to 31% due to the increase in operational leverage. The additional week in 4Q '20 represented incremental EBITDA of MXN 63 million. Comparable EBITDA for the quarter was MXN 744 million, an increase of 227% compared to 4Q '19. We reported MXN 18.64 in adjusted non-IFRS earnings per share. For the full year, total net revenue increased 135% to MXN 7,260 million from MXN 2,085 million in 2019. Comparable net revenues for 2020 were MXN 7,100 million, an increase of 130% compared to 2019.

EBITDA for 2020 increased 154% year-over-year to MXN 2,164 million compared to MXN 851 million in the prior year, and EBITDA margin expanded 220 basis points to 29.8% due to the increase in operational leverage. Comparable EBITDA for the year was MXN 2,101 million, an increase of 147% compared to 2019. And finally, we reported MXN 43.36 in adjusted non-IFRS earnings per share.

Now turning to the balance sheet. As of December 31, 2020, we have MXN 650 million in cash and cash equivalents, and MXN 243 million versus the prior year period. Inventory increased 269% year-over-year with increasing support of our sales expectations. At year-end, our leverage ratio of net debt-to-EBITDA was minus 0.01, down from 0.5 at the end of 2019. In the fourth quarter, we had MXN 275 million of capital expenditures. And for the year-end, we had capital expenditures of MXN 736 (sic) [MXN 714 million] compared to MXN 182 million invested in 2019. For the year, MXN 615 million (sic) [MXN 613 million] were investments in our new campus.

We expect CapEx in 2021 to be MXN 460 million, which includes additional equipment for our new campus, technology and other investments. In terms of our outlook for 2021, as discussed in our press release, we expect revenue for 2021 to be in the range of MXN 10,100 million to MXN 11,100 million. And expect EBITDA to be in the range of MXN 3,000 million to MXN 3,300 million compared to the MXN 2,164 million in 2020, and EBITDA margin to be approximately 29.7% versus 29.8% in 2020.

Over the long term, we expect our stated growth in strategy supported by a strong infrastructure and talented team will enable our company to deliver consistent growth in sales and EBITDA in Q2 period.

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

(Operator Instructions)

Your first question comes from the line of Eric Beder with SEC -- I apologize, SCC Research.

For the new website, what customers are you seeing? Are the customers different either demographically or geography-wise from your core areas? And where do you see that going as kind of a percent? And the other -- that's one question. The second is there was a slight, I guess, decline in -- if I look at sales per -- cost of item per unit in terms of how much was spent. Is that a shift to more basic products? Or what is kind of the focus there?

Eric, this is Andres. So in terms of the web marketing site, we think it's too early to give -- to tell specifically about this, but it's very important to note that after 6 weeks of operating the platform, the 6 week, we have 5x the number of customers that we had in the first week. So it's growing rapidly. But obviously, it's still a very -- it sells more transactions, and we still have to see it develop in the coming weeks and months.

Okay. Guatemala, where -- when is that going to -- I know it's small. Where does that start to come on to the financial statements? And what should we be looking for as guidepost going forward? Again, I know it's small, but I'm just curious where -- what should be we, as investors, thinking about as seeing more signs that it's working and it can work in other areas?

Yes. Yes, I remember that during the pilot test, Eric, they were operating as distributors in Guatemala. Beginning in March 1, we are going to begin operating as better were Guatemala. And then we will include even when these are very small figures, we are going to include it in -- separately in our reports, and we will begin reporting and giving guidance also about Guatemala, even when this is very small.

What I can tell you now is that they continue doing very well and growing very well down there in Guatemala. And we expect to replicate -- totally replicate the business in the first half of this year. I mean, we have not still replicated 100% of our business model. But by the end of the first half, I think we are going to accomplish that.

Your next question comes from the line of Jorge Lagunas with Apalache.

Luis, Andres and Diana, congratulations for the results. I've got 2 questions. The first one is, does the expected growth in revenue only contemplate the operations in Mexico? Or are you already considering starting some operations in Guatemala? And the second question is if you could share with us your expectations of growth in distributors, and as you see it for this year?

Jorge, this is Andres. First of all, our projections only include Mexico for 2021. And second, the expected rate of growth for distributors and associates, you have to keep in mind that growth rate in sales is very closely related to the growth in distributors and associates. So we expect that correlation to continue in the future.

Your next question comes from the line of Joe Feldman with Telsey Advisory.

And congratulations on the quarter. I wanted to ask one thing, with regard to the CapEx forecast of MXN 460 million this year, it's a bit higher than what we were thinking. Is that residual from the new corporate campus? Or can you talk a little bit more what's going into that MXN 460 million of CapEx?

Yes. So CapEx is mainly divided in 3 parts, I would say, for 2021. The first part is the remainder of investments we have to do in the campus. That is about 1/4 of the CapEx. The second is technology investments, which is about 1/3 of the CapEx. And the third main is, we have estimated a CapEx to open a new distribution center in Mexico City due to the recommendations that we went to with being a company. So the opening of the distribution center is already accounted for in the CapEx. We are still in final evaluations of doing so, but it is within the CapEx expected.

Okay. Got it. That's helpful. And then another question I wanted to ask was about freight costs. Did you guys see any incremental pressure? We hear a lot about freight coming from China and other parts of Asia, having been very expensive in the past quarter or so, and we've seen freight prices increase significantly for product coming to the U.S. I'm assuming it's the same for you guys coming over across the Pacific. Has increased freight cost been a pressure point? And how should we think about it for 2021?

So for -- it is a reality that there has been a temporary -- according to experts, it's a temporary effect on freight costs due to spike in demand and shortage of containers. But that said, within our 2021 projections, it's already taking into account, and we don't expect any significant impact on the 2021 projections.

Got it. Okay. I...

Yes. This is Luis. However, if this price increases would continue for freights from China, we would let you know what -- as Andres says, we are including that impact in our guidance.

Okay. That's in the guidance already. And then maybe the last one for me. Can you share a little bit more about the new app, the version 3.0? Like, what will be different and when do you plan to launch it?

Yes. So the main thing that will be different are 2 things. One is user experience, in general, is going to be a lot more friendly especially for new users, all the incoming distributors and associates, so that they understand rapidly how to use it. And the second part is a lot of new futures for associates, which will -- which we believe will help to retain associates and diminish churn so those are the main 2 things, I would say, and we expect to launch in the fourth quarter of 2021.

(Operator Instructions)

Your next question comes from the line of Phil Kim, private investor.

Very impressive quarter in 2020. I had a few questions for you. So one of them revolves around your days payables. How has Betterware been able to maintain days payables over 120 days when 90% of your goods come from China? Almost all supply relationships in China are within 2 month terms with majority requiring upfront deposits and LCs. How has your relationship developed in kind of that allows you to buy that much time?

Fine. So I think it's a matter of 2 things, mainly. The first one is, we have developed the relationship with Chinese vendors for over 20 years, so this is not a matter of sudden movements. It's something we have built for many years. And the second thing is that we have taken into account a credit line with banks where the banks are the ones who pay the money upfront to the vendor and then we have to pay the bank in 120 days. The interest of that debt is paid by the vendor. But this way, the vendor can obtain their money immediately after they ship. The bank is always providing the loan for the 120 days.

Got it. Okay. And then I guess, the industry, in general, the consumer product companies around the world, we're used to seeing 40% returns on invested capital, 12% operating margins. How has Betterware been able to achieve what looks like 200% returns on invested capital than last quarter and 30% operating margins?

Well, I think that we have a very -- we have 2 things in terms of returns. I think that on the one side, we have a very unique business model that is not only based on one single thing, it's based on multiple things. It's based on a very unique product line, very unique and proprietary technology that we have developed, very unique way of managing the opportunity for all the distributors and associates.

And so it's a combination of things to achieve it. And for -- so -- and the second thing in terms of return, I think that we have a very clear strategy, when we really stick to the strategy and go deep into executing it correctly. In terms of margin, I think that something that helps a lot is that we have a very low fixed cost expenses. Our model is based on variable costs. We outsource many things, such as distribution, among other things. So this helps a lot as well. So I think the combination of these 2 things is what is driving return and what allows us to have a better margin than other consumer goods companies.

And Phil, this is Luis. So something I will add to that is, we have a -- we are very disciplined in the finance area of the business. We have very tight control on the manufacturing cost with the factories we work within China. And we are very, very close to the expense control system we have here. And we are very, very disciplined in that area. Most of our expenses are variable expenses and only, like, 1/4 of our expenses are fixed, okay?

Got it. Okay. That's helpful. I want to get to that as far as the China relationship. But you mentioned your associates and distributors, that's very impressive growth, you're talking about 1.2 million associates. And on the topic of market penetration, we're looking at 84 million roughly people in Mexico between the ages of 15 and 64, call it, the working-age population, if we're being generous here. Your numbers suggest 1 in 67 people working-age people in Mexico as an associate of Betterware. And it's all roughly 6x your largest employer in Mexico, which is Walmart, Mexico. How have you been able to really achieve that type of market penetration? And why do you feel like you can double that to 40% which should result in, call it, 1 in every 30 working adults or 1 in every 15 households? I mean, at some point, don't you think there would be some sort of ceiling there?

Remember that our market penetration strategy is based on a very solid data that comes from our PEI area in the company. We have a very clear road map of market penetration, and we just stick to this strategy based on very solid data from our BI. Then we know the way we are trying to penetrate the market this and next year and the next 4, 5 years. Then -- and this is a very disciplined and very well-organized strategy based on this growth market.

Remember that we have segmentated the country in approximately 56,000 heads that we call . And then we know exactly the direction we're going to take in the years to come in order to increase in a very organized way this market penetration and avoiding cannibalization among our distributors.

Got you. Got you. When you look at your relationships in China, Avon's World Trade Data shows that Betterware has imported $182 million in total value of shipments for 2013 to today. Your COGS numbers, just in the last 3, 4 years, is $300 million; and that doesn't even include the inventory on your balance sheet, which is another $500 million. I guess, how do you explain this gap in about $500 million -- $600 million difference there? And the total value that was imported from China and other countries, including Hong Kong and Taiwan versus your COGS and inventory.

What is exactly the question? Do you mean the results from...

So when you look at waiting data, which every company that imports or exports into a country has to provide that data to the state. It shows $182 million of total U.S. dollar value that's been imported into the 2 for Betterware de Mexico in the last 8 years. But if you look at the last 3 years of your COGS,and the inventory on your balance sheet, we're closing in on, call it, USD 900 million. So there's the $700 million gap there of where is that excess inventory tugs coming from versus what's been shipped to you from your suppliers?

We don't know the source you're talking about. But I mean, we will gladly check into it and look at that source just to mention, between 80% and 90% of our COGS is imported from China. So it should reflect this, but we would like gladly going to that source and check the differences. So our Investor Relations team will get back to you and give clear clarity on that, okay? What is the name of the source you spoke about?

Yes, it's called Abrams World Trade Data, and they log all the bill of lading, import, export information for countries and companies.

Okay. We'll gladly look into it and get back to you.

(Operator Instructions)

Our next question comes from the line of Andres Alvarez with [Betterware.]

Yes. And congratulations on the results. Sorry for the background noise. So my question is related to a previous question that was asked regarding the increasing freight costs from China. I was wondering, what was the amount of extraordinary expenses coming from this increase in freight expenses from China? And how did you account them in the P&L? And if you accounted for it above or below EBITDA, I'm just wondering if the EBITDA is -- should be maybe adjusted on those expenses? Or could you just give some color on that side?

As we said before, we have been posting the impact of this very variable freight cost from China over the last weeks, and our results for 2020 have been negatively impacted by that. However, we have included in our guidance numbers for 2021 the potential impact we expect in this year. What we know is that prices will begin going down again probably by beginning of the second quarter. However, we are being conservative regarding our guidance and the potential impact we can have this year, then we have been conservative, and if things go better, well, our results could improve a little bit.

Okay. And what about just specifically about air freight extraordinary expenses? Can you just...

We do not -- yes, we do not expect a major impact -- a major negative impact this year. I think this will -- this could be a more normal year in that aspect, more predictable year in this aspect. Then we do not expect high expense in airfreight this year.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Mr. Luis Campos for closing remarks.

Thank you, operator. Thank you, everyone, for joining us today. We look forward to speaking with you when we report first quarter results and meeting with many of you at upcoming investor conferences we will be attending. Thank you very much.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.