Betterware - Earnings Call - Q4 2020

Transcript

Speaker 0

Thank you, and welcome to Betterware's Fourth Quarter and Fiscal Year twenty twenty 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. MediWare 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.

Speaker 1

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 Andreas 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 twenty twenty one outlook. Before turning to our results, I want to start by thanking the entire BetterWorld team for their hard work and contributions all year. I am so proud of all that they accomplished in 2020 amidst 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 meet 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 the budgeting preferences, which benefited us, our strength in the fourth quarter was achieved with families resuming more normal lifestyles 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 better work, including growing revenues over 135% to MXN 7,300,000,000.0 and EBITDAR over 154% to MXN 2,160,000,000.00, 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 59.7 distributors and 1,230,000 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 markets trading on the NASDAQ exchange in March 2020, and we launched our new web marketing platform in December 2020.

In addition, we made significant strides to strengthen our financial health and positioning during the year. We reduced our leverage ratio of net debt to adjusted EBITDA to minus 0.01 from 0.5 at the 2019 and increased our liquidity to $650,000,000 at year end. Turning to our fourth quarter results. We have an outstanding finish to a strong year of growth for our company. We achieved record sales growth of 229% and an EBITDA increase of two fifty four percent year over year.

While our results continue to benefit in part from COVID as consumers spend more time at home, the continued momentum from the first three quarters into the final quarter of this year, especially into December, is a testament to the strength of our business and the significant progress we have made against our four strategic pillars. Finally, returning value to shareholders is a top capital allocation priority for us. And we again have proposed an annual dividend of 1,400,000,000.0 to be paid in four 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 02/18/2021.

So in summary, we are very pleased with the 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 four growth initiatives and plans for 2021.

Speaker 2

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 the record growth for both the fourth quarter and full fiscal year. I will now discuss the progress made in 2020 on the four strategic pillars as well as our plans 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 increased demand for our household and cleaning products as a result of the COVID-nineteen 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 five 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 three 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 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 wallets 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 KINE, our artificial intelligence and data science platform. 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 weekly since the launch.

We also consolidated our new WMS platform, Blue Yonder, and launched our new AI enabled bot. This year, we plan to launch our three point zero version of our proprietary Salesforce app, BetterNet, and develop strong natural language processing capabilities with our bot. We also plan to launch a two point zero 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 and A opportunities in these countries. Going deeper into our web marketing, we launched our new and improved transactional website, betterword.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 automatically assign them any purchase completed through the link. It is relevant to highlight that 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 Huaxla Calisco.

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 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 and 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 business marketing campaign to date. This campaign includes paid and open TV video advertisements, radio commercials, out of home media and social content, which all highlight BetterWorld'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 how customers can benefit from our line of growth. So overall, I am very pleased with the significant progress made in 2020 against our key strategies. As we begin 2021, we entered 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 four growth pillars while also continuing to invest in key areas of the business and returning value to shareholders through 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.

Speaker 3

Thank you, Andres. Good morning, everyone. I would like to take this time to review our fourth quarter and fiscal year twenty twenty results. I will then share perspectives regarding our outlook for fiscal twenty twenty one. 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 committee.

I will provide highlights of our results, which are detailed fully in our six ks five year period. The fiscal twenty twenty included a fifty two week and compares to a fifty two week year in fiscal twenty nineteen. The fifty two week was included in the company's twenty twenty fourth quarter and added $160,000,000 in net revenues and $63,000,000 in EBITDA. For the fourth quarter, total net revenues increased 229% to 2,601 million dollars from $791,000,000 in the third week period. It is important to highlight that 4Q twenty twenty had 14 compared to fifteen weeks of 4Q twenty nineteen.

The additional weeks represented $160,000,000 of net revenues. Comparable net revenues for 4Q 'twenty were 2,441 million dollars an increase of 209% compared to 4Q 'nineteen. EBITDA for the fourth quarter twenty twenty increased 254% year over year to $810,000,000 compared to $228,000,000 in the third year, and EBITDA margin expanded two twenty basis points to 31% due to the increase in operational leverage. The additional week in 4Q twenty twenty represented incremental EBITDA of $63,000,000 Comparable EBITDA for the quarter was $744,000,000 an increase of 227% compared to 4Q twenty nineteen. We reported $18.64 in adjusted non IFRS earnings per share.

For the full year, total net revenues increased 135% to 7,260 million dollars from 2,085 million dollars in 2019. Comparable net revenues for 2020 were 7,100 million dollars an increase of 130% compared to 2019. EBITDA for 2020 increased 154% year over year to 2,164 million dollars compared to $851,000,000 in the prior year and EBITDA margin expanded 02/20 basis points to 29.8% due to the increase in operational leverage. Comparable EBITDA for the year was 2,101 million dollars an increase of 147% compared to 2019. And finally, we reported 43.36 in adjusted non IFRS earnings per share.

Now turning to the balance sheet. As of 12/31/2020, we had $650,000,000 in cash and cash equivalents and $243,000,000 versus the prior year period. Inventory increased 269% year over year with the increase in 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 2019. In the fourth quarter, we had $275,000,000 of capital expenditures and for the year end, we had capital expenditures of $736,000,000 compared to $182,000,000 invested in 2019.

For the year, $615,000,000 were investments in our new campus. We expect CapEx in 2021 to be $460,000,000 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 10,100 million dollars to 11,100 million dollars and expect EBITDA to be in the range of 3,000 million to 3,300 million dollars compared to the 2,164 million dollars in 2020 and EBITDA margin to be approximately 29.7 versus 29.8% in 2020. Over the long term, we expect our stated growth strategy supported by a strong infrastructure and talented team will enable our company to deliver consistent growth in sales and EBITDA in future periods. I will now turn the call over to the operator and we will take any questions you may have.

Speaker 0

Thank you. At this time, we'll be conducting a question and answer session. Your first question comes from the line of Eric Beder with SEC I apologize, SCC Research. Please proceed with your question.

Speaker 4

Good morning. Good Eric. 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 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?

Speaker 2

Hi, Eric. This is Andres. So in terms of the web marketing site, we think it's too early to give sell specifically about this. But it's very important to note that after six weeks of operating the platform, the sixth week, we have five times the number of customers that we had in the first week. So it's growing rapidly.

But, obviously, it's still, you know, a very it says small transactions, and we still have to see it develop in the in the coming weeks and months.

Speaker 5

Okay.

Speaker 4

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

Speaker 1

Yeah. Yeah. 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 Betterware 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 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 by the end of the first half, I think we are going to accomplish that.

Speaker 4

Great. Thank you. Congrats on

Speaker 1

the quarter. Good luck to the year.

Speaker 2

Thank you. Thank you.

Speaker 0

Your next question comes from the line of Jorge Lagunas with Appolit. Please proceed with your question.

Speaker 6

Okay. Thank you. Good morning, Luis, Andres and Diana. Congratulations for the results. I've got I got two 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 in Guatemala? And the second question is, if you could share with us your expectations of growth in distributors and associates for this year. Thank you very much.

Speaker 2

Hi. Jorge, this is Andres. First of all, our projections only include Mexico until 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. Okay.

Speaker 0

That's all for for now. Thank you very much, and congrats.

Speaker 1

Your

Speaker 0

next question comes from the line of Joe Feldman with Telsey Advisory. Please proceed with your question.

Speaker 7

Great. Thanks, guys, and congratulations on the quarter. Wanted to ask one thing. With regard to the CapEx forecast of ARS $460,000,000 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 $460,000,000 of CapEx?

Speaker 2

Yeah. Hi. I CapEx is mainly divided in three parts, I would say, for 2021. The first part is the remainder of investments we have to do in the campus. That is about one quarter of the CapEx.

The second is technology investments, which is about one third 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 payment company. So the 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.

Speaker 7

Okay. Got it. That's helpful. Thank you. And then another question I wanted to ask was about freight costs.

Did you guys see any incremental pressure? You know, we hear a lot about freight coming from 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 US. I'm assuming it's the same for you guys coming over, you know, across The Pacific. Has has increased freight costs been a pressure point, and how should we think about it for 2021?

Speaker 2

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

Speaker 7

Got it. Okay. However

Speaker 3

yes.

Speaker 1

This is Rick. However, if these price increases would continue for freights from China, we would let you know what the as Andres said, we are including that impact in our guidance.

Speaker 7

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 three point o? Like, what will be different and and when you plan to launch it?

Speaker 2

Yeah. So the main thing that will be different are two things. One is user experience in general. It's 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 features for associates, which will which we believe will help to retain associates and diminish churn.

So those are the main two things, I would say, and we expect to launch in the 2021.

Speaker 7

Great. Thank you, and good luck with the current quarter. Thanks, guys. Thank you.

Speaker 0

Your next question comes from the line of Phil Kim, Private Investor. Please proceed with your question.

Speaker 5

Good morning, guys, and a very impress 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 a hundred twenty days when 90% of your goods come from China? Almost all supply relationships in China are within two month terms with majority requiring upfront deposits and LCs.

You know, how is your relationship developed in China that allows you to buy that much time?

Speaker 2

Hi. So I think it's a matter of two things mainly. The first one is we have developed the relationship with Chinese vendors for over twenty years. So this is not a matter of sudden movements. It's it's 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. 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 who is providing the loan for the hundred and twenty days.

Speaker 5

Got it. Okay. Thank you for that. 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 in the last quarter and 30 operating margins?

Speaker 2

Well, you know, I think that we have a very we have two things in terms of returns. I think that on the one side, we have a very unique business model. Yeah. That that it's it's not only based on one single thing. It's based on multiple things.

It's based on the, you know, a very unique product line, very unique proprietary technology that we have developed, very unique way of managing the opportunity for all the distributors and associates. So it's a combination of things to to achieve this. For so and and the and the second thing in terms of return, I think that we have a very clear strategy, and we really stick to the strategy and and go deep into executing it correctly. In terms of margin, I think that's something that helps a lot is that we have very low fixed costs and expenses. Our model is based on variable costs.

We we outsource many things such as distribution among other things. So this helps a lot as well. So I think the combination of these two things is what is driving returns and what allows us to have a better margin than other consumer goods companies.

Speaker 1

And, Phil, this is Luis. Something I will add to that is we have a we are very disciplined in the finance area of business. We have very tight control on the manufacturing cost with the factories we work with in 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, or only, like, one fourth of our expenses are fixed. Okay?

Speaker 5

Got it. Okay. That that's helpful. I I wanna get to that as far as the the China relationship. But, you you mentioned your associates and distributors.

You know, that's very impressive growth. You're talking about 1,200,000 associates. And on the topic of market penetration, you know, we're looking at 84,000,000 roughly people in Mexico between the ages of 15 and 64, call it the working age population if you're if we're being generous here. You know, your numbers suggest one in 67 people, working age people in Mexico is an associate of Betterware. It's roughly six times your largest employer in Mexico, which is Walmart in Mexico.

How how have you been able to really achieve that type of market penetration, and and why do you feel like you can double that to 40%, which would result in, call it, one in every 30 working adults or one in every 15 households. I mean, at some point, don't you think there'd be some sort of ceiling there?

Speaker 1

Remember that our market penetration strategy is based on very solid data that comes from our PI 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 going to penetrate the market this next year and the next four, five years. Then and this is a very disciplined and very well organized strategy based on the this road map. Remember that we have semi segmented the country in approximately 56,000 assets that we call.

And then we know exactly the direction we are going to to take in the years to come in order to increase in a very organized way this market penetration and avoiding cannibalization about among our distributors.

Speaker 5

Mhmm. Mhmm. Gotcha. Gotcha. But when you look at your your, you know, relationships in China, Abrams World Trade data shows that Federal Wear has imported a 182,000,000 in total value of shipments from 2013 to today.

Your COGS numbers just in the last three, four years is 300,000,000, and that doesn't even include the the inventory on your balance sheet, which is another 500. I guess, how how do you explain this gap in about five hundred six hundred million dollar difference there The total value that was imported from China and other countries, including Hong Kong and Taiwan versus your COGS and inventory.

Speaker 1

What is exactly the the the question? You you mean the the the source from uh-huh.

Speaker 5

So when you look at bill of lading data, which, you know, every company that imports or exports into a country has to to, you know, provide that data to the to the state, you know, it shows a 182,000,000 of total US dollar value that's been imported into to for Veruer de Mexico in the last eight years. But if you look at the last three years of your COGS and the inventory on your balance sheet, we're closing in on, call it, 900,000,000 US dollars. So there's a $700,000,000 gap there of, you know, where is that excess inventory COGS coming from versus what's been shipped to you from from your suppliers.

Speaker 2

You know, we we don't know the source you you're talking about, but, I mean, we we would gladly check into it and look at the at at at that source Just to mention nine between 8090% of our COGS is import from China, so it should reflect this. But we would like gladly go into that source and 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 you spoke about?

Speaker 5

Yeah. It's called Abrams World Trade Data, and they log all the the bill of ladings, import export information for countries and companies.

Speaker 2

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

Speaker 5

Thank you very much. Appreciate your your your answers today. Thank you.

Speaker 0

One moment please while we poll for questions. Your next question comes from the line of Andres Alvarez with Betterware.

Speaker 6

Yes. Hello. Thank you, guys, and congratulations on the results. Sorry for the background noise. So my question is related to a previous question that was asked regarding the increase in freight costs from China.

I was wondering what was the amount of extraordinary expenses coming from this increase in in freight expenses from China? And how did you account them in the, you know, in the P and L? And if you accounted for it above or below EBITDA, I'm wondering if the EBITDA is should be maybe adjusted on those expenses, Or could you just give some color on that side? As

Speaker 1

we've said before, we have been posting the impact of these very variable freight costs 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.

Speaker 6

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

Speaker 2

we do not ex

Speaker 1

yes. We do not expect a major impact 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.

Speaker 6

Okay. Understood. Thanks a lot, and congratulations again.

Speaker 2

Thank you.

Speaker 0

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.

Speaker 1

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.

Speaker 0

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