Betterware - Q4 2023

Transcript

Operator (participant)

Good morning. Welcome to Betterware's Q4 2023 earnings conference call. Joining us today are the leadership team members, Executive Chairman, Luis G. Campos, Chief Executive Officer, Andrés 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 investor section of the company's website.

I would now like to turn the call over to the company's Executive Chairman, Luis G. Campos. Please proceed.

Luis G. Campos (Executive Chairman)

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 as a consumer product and direct selling leader. This was reflected in a 5.2% year-on-year net revenue increase with a strengthened profitability, achieving a total of MXN 2,721 million in EBITDA. At the midpoint of our initial guidance and exceeding our revised guidance for the year, and 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 Q1 of growth since the Q3 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 that has proven to be highly accretive, delivering exceptional Q4 2023 EBITDA, with a 45.3% year-over-year increase in Mexico and achieving almost breakeven in the U.S. Initial implementation of our proven business model's key elements, product innovations, technology, and business intelligence, 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 a strong new leadership, are well-positioned for continued future success. As Alejandro will discuss in more detail shortly, the group's Q4 2023 net revenue represents a 44% CAGR since the Q4 2019, representing an increase to MXN 3,402 million from MXN 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 Andrés has assumed the position of Betterware Group CEO, which includes the Betterware and Jafra brands in Mexico and abroad.

Andrés 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 Andrés, 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 we entered 2024, 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 Q4 of 2023. Our focused execution resulted in improvements versus prior year in 7% in net revenue and 17.6% in EBITDA, showcasing our ability to deliver results despite adversity. Our execution is stronger, and 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. Number 1, we launched 3 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.

Number 2, 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 the compelling long-term growth opportunities in the market we serve, leveraging our unique ability to analyze the extensive data we received through multiple channels. Number 3, 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. Number 4, we are seeing a strong positive results from training and incentivizing the on-site field staff we began reintegrating in February 2023. Also, from mentoring our distributors to improve their businesses and accompanying them on their routes.

Number five, we have continued to strengthen our Betterware+ app through the launch of more than 5 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 growth going forward. Betterware's strong commercial strategy enables us to reach more homes and increase our share of wallet. 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 gradually implemented key elements of our Betterware success formula since April 2022 acquisition. Combined with a strong management team, this resulted in a 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, number one, accelerated innovation, representing 15% of 2023 net revenue from only 6% in 2022. Number two, continued growth in fragrances, our main category, also with the launch of very successful lines and brand extensions during the year.

Number 3, increased customer conversion rate resulting from an improved catalog graphic design look and feel, which made our catalogs more enticing. Number 4, increased consultant acquisition through small, targeted, and impactful incentive program adjustments. Number 5, 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. And last but not least, number 6, improved 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 Q4, 2023. Going forward, the Jafra Mexico team is well positioned to continue to capture the vast opportunity in Mexico's beauty market, and importantly, expand our 4% market share to become the number 1 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 and correct 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 Q4 since acquiring Jafra. Further, we are well positioned to launch Betterware's U.S. operation in the Q2 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 leveraging 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-$7 million in the first year, and 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 $3.4 trillion in estimated GDP, making it the world's fifth largest economy and double the size of Mexico, according to the Latino Donor Collaborative think tank. 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.

Alejandro Miranda Ulloa (CFO)

Thank you, Andrés, and good morning, everyone. I would like to review our Q4 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. I will then share perspectives on how we are approaching 2024, and discuss our capital allocation strategy going forward. Our consolidated results for the quarter are the following: Consolidated net revenue increased 5.2% compared to Q4 2022, supported by positive performance of our two brands in Mexico, partially offset by a revenue decline in Jafra U.S.

It is relevant to highlight that Betterware's net revenue grew 7% compared to Q4 2022, the Q1 of the year-over-year growth since Q3 2021. Consolidated gross margin was roughly in line with Q4 2022, decreasing 48 basis points to 70%. This decline was mainly due to margin contraction in Betterware, explained by unfavorable sales mix. In particular, promotions accounted for a larger share of sales than in Q4 2022. However, this was mostly offset by margin expansion in Jafra Mexico, driven by favorable exchange rates, reduced costs from supplier negotiations, and favorable sales mix. Consolidated EBITDA for the quarter grew 36.7% to MXN 819.5 million compared to MXN 599.3 million in the Q4 of 2022.

EBITDA margin expanded 556 basis points to 24.1%. Profitability improvements in all three subsidiaries were achieved through successful efforts in expense optimization, allowing us to exceed our EBITDA expectations for the quarter. Consolidated net income was MXN 406.1 million, 62.5% higher than in Q4 of 2022, mostly explained by net revenue growth and an increase in operating leverage, which allowed us to increase our earnings to 10.9 pesos per share. For the year, consolidated net revenue increased 13.1% compared to 2022, explained by the consolidation of Jafra quarterly 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 net revenue decline inJafra U.S. Gross margin for the year expanded 265 basis points to 71.5%, compared to 68.1% in 2022, boosted by Jafra's higher gross margin profile included in our results for the whole year, 2023, which was partially offset by gross margin contraction in Betterware due to unfavorable sales mix during the last quarter of the year. Consolidated EBITDA for 2023 was MXN 2,721 million, 17.5% higher than in 2022 and 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 MXN 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 MXN 28.2. And 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 all three 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 in 2024.

Having said that, and highlighting the confidence we have in our growth prospects, our board of directors has proposed a dividend payment of MXN 250 million for the quarter, which is subject to the approval at the ordinary general shareholders meeting to be held on March 6, 2024. We remain committed to returning value to dividends to our shareholders over the long term. We are confident and optimistic about the results achieved so far and the opportunities that lay ahead of us. For the full year 2024, we expect our consolidated net revenue to be in the range of MXN 13,800 million-MXN 14,400 million, and our consolidated EBITDA to be in the range of MXN 2,900 million-MXN 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 shareholders' value. I will now turn the call over to the operator, and we will take any questions you may have. Thank you.

Operator (participant)

Thank you. If you would like to ask a question, dial in by phone and press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star and then 2. At this time, we will pause momentarily to assemble our roster. Our first question is from Eric Beder with SCC Research. Please proceed.

Eric Martin Beder (Analyst)

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

Alejandro Miranda Ulloa (CFO)

Hi, Eric. How are you this morning?

Eric Martin Beder (Analyst)

I'm doing great. How about you?

Let's talk about you continue to make 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?

Andrés Campos (CEO)

Hi, Eric. This is Andrés again. So, yeah, 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.

Eric Martin Beder (Analyst)

Okay, so there's still growth there. So still, gains to be had there.

Andrés Campos (CEO)

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.

Eric Martin Beder (Analyst)

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

Andrés Campos (CEO)

Yeah. Eric, this is Andrés again. So obviously the fragrances category is the most relevant. As you can remember, we are today in Mexico, we are the number one direct selling brand in fragrances in Mexico. The categories where we see a lot of opportunity are basically color, skincare, and toiletries. They are three very big categories both in Mexico and in the U.S., and we see a lot of opportunity to expand these categories and make them very relevant such as we have made with fragrances. So they will in fact be very important for growth going forward, and they speak about our great opportunity to grow going forward.

Eric Martin Beder (Analyst)

And kind of a structural question on Betterware U.S. So you're rolling that out in Q2. You know, how are you gonna be shipping product from Mexico? How do you look upon that as a rollout? And are you gonna initially focus on, you know, kind of more the southwestern regions, or is it, you know, kind of nationwide? How should we be thinking about kind of the cadence of the rollout and how you're gonna support it?

Andrés Campos (CEO)

Yeah, yeah, very, very good question. Andrés here again. So as we, as we spoke about, we are weeks away from launching in Betterware. This will be based off of Dallas in Texas. And it's very important also to know we're leveraging on many of Jafra's capabilities, such as distribution launch, distribution center, and using some of the back offices that Jafra... synergies for our...

Operator (participant)

We are experiencing technical difficulty. The conference will resume momentarily. Once again, thank you for your patience. We are experiencing technical difficulty, and the conference will resume momentarily. Thank you for your patience.

Andrés Campos (CEO)

Hello.

Operator (participant)

We are ready to resume. Go ahead, sir.

Andrés Campos (CEO)

Okay, thank you. Eric, this is Andrés. Do you hear me there? So we have-

Eric Martin Beder (Analyst)

Yes, we can.

Andrés Campos (CEO)

Okay, perfect. Thank you. So, as I was telling you, so we are ready to launch in the U.S. We will begin selling only in the state of Texas to pilot test all of our operations and everything. So it is important to note that 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 in Texas in the first months, and then maybe expand to other states in the following months. And I'd also like to state that, you know, we will focus at the beginning mainly in the Hispanic markets. As we stated during the call, it's a very big market.

It's according to some studies, it's a 60 million population market with huge potential, and it's a market that is very similar in many ways to the Mexican market. So we think that we can be very successful in that market during the first years.

Eric Martin Beder (Analyst)

Great! Then congratulations, and look forward to 2024. Thank you.

Andrés Campos (CEO)

Thank you, Eric. Have a good day.

Operator (participant)

As a reminder to star one on your telephone keypad if you would like to ask a question. Our next question is from Cristina Fernández with Telsey Advisory Group. Please proceed.

Cristina Fernández (Managing Director and Senior Research Analyst)

Hi, good morning, and congratulations on the good results. I wanted to see if you can put in context the results for the Q1 relative to your updated guidance in October. You know, where did the upside come relative to expectations? Did you see a significant acceleration and or change in the trend of the business in November and December? Just wanted to understand what was different and where the upside came from. Thanks.

Andrés Campos (CEO)

Hi, Cristina, how are you? This is Andrés. So, you know, we saw a significant impact of our commercial strategies in Betterware Mexico. I think that in first part, Betterware Mexico had a great Q4. All the different commercial strategies that we had implemented and that we have mentioned really hit off. And then, it helped, you know, we did the price decrease in September, which kind of helped all the strategies to start streamlining 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, and especially in terms of profitability for Jafra Mexico, we had a great impact from an increased growth margin in the Q4, which helped our EBITDA, our EBITDA results for the quarter. So those were mainly... Those were the main reasons, both, you know, revenue. We think that Betterware Mexico had a great impact for to achieve the revenue, and in this case, Jafra Mexico contributed, was the one who contributed more in the profitability with an increased growth margin of about 581 basis points. Was this,

Cristina Fernández (Managing Director and Senior Research Analyst)

Thank you for that, call.

Andrés Campos (CEO)

Yeah.

Cristina Fernández (Managing Director and Senior Research Analyst)

Yeah, thank you for that.

Andrés Campos (CEO)

Sorry, did you-

Cristina Fernández (Managing Director and Senior Research Analyst)

And so... Sorry, go ahead.

Andrés Campos (CEO)

Yeah. Go ahead, Cristina.

Cristina Fernández (Managing Director and Senior Research Analyst)

Yeah, no, I just had a follow-up on the Jafra Mexico profitability. Was there anything that was, like, 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? I mean, given Betterware has been, you know, sort of in that 20% range and, you know, down a little bit from first half of the year versus Jafra, that has been accelerating the profitability.

Andrés Campos (CEO)

Cristina, so I will go to Alejandro to explain that extraordinary profitability of Jafra for the Q4 and to give you what we can expect in terms of EBITDA margins going forward for 2024.

Alejandro Miranda Ulloa (CFO)

Yeah. 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 because of a favorability in the exchange rate. The exchange rate, the appreciation of the peso during this quarter was positive. We also had a reduced cost achieved through supplier negotiations with specific vendors, and that impacted almost two percentage points for our gross margin. And we had a favorable variation in product volume in our manufacturing facilities. So, volume additionally had an effect, and the mix also of those products that we manufactured. So that combination,

a rise with this improvement in margins. But what we are expecting for 2024 is that this will be normalized, and we will be once again in margins between 80%-82% range.

Cristina Fernández (Managing Director and Senior Research Analyst)

Thanks. And then the last question I had was on the revenue outlook for 2024, the 6%-11%. What are you assuming as far as, like, 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, just that's underpinning your revenue outlook for the year.

Andrés Campos (CEO)

Yeah, Cristina, it's Andrés again. So on the Betterware, we're saying, you know, the market has pretty much stabilized. It is important to note that during the pandemic, after the huge market growth, then came a very steep decline. And now from the market studies that we make year after year, we see that it has stabilized. And with a stabilized market, there's a lot that 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 today. So there is a lot of room for us to grow with a stabilized market. So what we're assuming for Betterware Mexico is that the market continues to be stabilized.

We're not assuming huge growth in the market. And that will help us even more. Now, the general Mexico side, you know, the beauty market in Mexico is a buoyant and growing market today. After the beauty market had some trouble, and now after pandemic, it's growing buoyantly. It grew between 10% and 15% last year, the beauty market in Mexico, and we think we can ride this market growth and also expand our market share. In Jafra Mexico, we also have around a 4% market share. And you know, it's important to understand that around 55% of the market is sold through direct selling in the beauty space in Mexico.

So we have a lot of room to grow, a lot of room to grow in Jafra. So these two combined will help. Now, additional to this, in our international operations, as I spoke 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.

Cristina Fernández (Managing Director and Senior Research Analyst)

Thank you.

Andrés Campos (CEO)

Yeah. Thank you, Cristina.

Operator (participant)

Our next, our next question is from Andrés Lomeli with LCA Capital. Please proceed.

Andrés Lomeli (Analyst)

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 margins, EBITDA margins, stable throughout the years. Thank you.

Andrés Campos (CEO)

Yeah. Thank you, Andrés. This is Andrés again. So for the Betterware U.S. expansion, we are estimating within our projections $1 million investment during 2024. So it's not a very relevant investment as regards to our yearly EBITDA. And, you know, we are leveraging a lot on our capabilities in Jafra today. As I mentioned earlier, we are gonna be distributing off Jafra's distribution center, the excess capacity that we have there. So that will not be a very relevant cost. We're also leveraging on all the back office through finance, HR, all the back office. And this investment will be mainly in our commercial team for Betterware U.S.

You know, one of the good things of our business model is that we can streamline expenses very efficiently when we launch a new market. So we're going to go step by step, not going to just go out and invest more. We're gonna go step by step, and it will not be a relevant investment. Also, in Peru, we're going also step by step. We are estimating...

... an investment of between $500,000-$1 million to make all the preparations in the pre-operating expenses. So in general, we don't expect this to be too relevant, and it is already implied in our guidance.

Andrés Lomeli (Analyst)

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

Andrés Campos (CEO)

Thank you, Andrés.

Operator (participant)

Again, if you have a question, please press star then 1 on your telephone keypad. We will pause for a brief moment to see if there's any final questions. 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.

Luis G. Campos (Executive Chairman)

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 continue towards Betterware Peru 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 being on this journey with us. Thank you, everyone, and have a good day.

Operator (participant)

Ladies and gentlemen, this concludes Betterware's Q4 2023 conference call. We would like to thank you again for your participation. You may now disconnect.