Betterware de México, S.A.B. de C.V. (NASDAQ:BWMX) Q2 2022 Earnings Conference Call July 29, 2022 9:00 AM ET
Company Participants
Luis Campos – Executive Chairman
Andres Campos – Chief Executive Officer
Carlos Doormann – Corporate Chief Financial Officer
Conference Call Participants
Cristina Fernandez – Telsey
Operator
Thank you and welcome to Betterware’s Second Quarter Fiscal Year 2022 Earnings Conference Call. With me on the call today are Betterware’s Executive Chairman, Luis Campos; Chief Executive Officer, Andres Campos; and Corporate Chief Financial Officer, Carlos Doormann.
Before we get started, I would like to remind you that this call will include forward-looking statements, which are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. Any such statement should be considered in conjunction with the cautionary statements and the Safe Harbor statement in the earnings release, and risk factors discussed in a reports filed with the SEC. Betterware assumes no obligation to update any of these forward-looking statements or information.
A reconciliation and other information regarding non-GAAP financial measures discussed on the call can be found in the earnings release issued yesterday, as well as the investor section of the company’s website.
Now, I’d like to turn the call over to the company’s Executive Chairman, Luis Campos.
Luis Campos
Thank you, Operator. Good morning everyone, and thank you for joining us today. I would like to begin my remarks by providing its summary of what we have been doing in JAFRA since the acquisition was completed on April 7, 2022, and the ambitious plans that we have for the company to accelerate growth at increasing rates of profitability.
Then Andres will discuss some of the advances we have made in our business strategies for Betterware, to position the business for growth, which are based on our three strategic pillars of product innovation, technology and business intelligence.
And finally, Carlos will discuss our quarterly and year-to-date financial results, which include JAFRA financial results from April 7, 2022 through quarter end, our expectations for the rest of the year for both Betterware and JAFRA and our dividend policy going forward.
As announced on April 7, we successfully completed the acquisition of 100% of JAFRA’s operations in Mexico and the U.S. along with JAFRA’s trademark rights worldwide. This acquisition provides a unique opportunity for us to become a multi-channel company with unique and complimentary product segments.
Enter an attractive beauty and personal care market with estimated annual revenues in Mexico and the U.S. of approximately $100 billion, as well as leverage JAFRA is strong and well positioned international brand with access to millions of households through its more than 430,000 average consultants and leaders as of Q2 2022.
This acquisition was completed, we have been working very closely with JAFRA’s talented management team to identify and execute synergies and efficiencies in the short-term, and to replicate Betterware’s business model supported by our strategic pillars of product innovation, technology, and business intelligence, which will enhance JAFRA’s growth prospects and profitability in the mid-and long-term. Our main objective is to accelerate JAFRA’s revenues to a high-single-digit to low-double-digit growth rate in the near term, as well as improve its profitability and cash flow.
To this end, as mentioned in our earnings release yesterday, we have executed several actions within our three strategic pillars to achieve these targets. First, in terms of product innovation, our objective is to implement our best practices to achieve a successful and enhance innovation pipeline within JAFRA’s product line.
To that end, we have assembled a new product innovation committee led by a talented team, which will allow us to streamline decision making and increase efficiencies. The new committee members have significant experience in our three main product categories, mainly Fragrance [ph], Color and Skin Care. We relocated JAFRA’s research and development team from LA to our manufacturing plant in Queretaro, Mexico, which will allow for easier and faster joint product development.
We have already seen some benefits of this change, reducing the time to market of products to eight months from 18-months. We are increasing JAFRA’s focus in product innovation across every category, mainly in Fragrance, which we are the leaders in Mexico, and for Skin Care and Color where we already participate, both have lost market share in recent years.
Second, in terms of technology, we have increased our focus on our digital efforts in JAFRA to a comprehensive strategy that prioritizes the use of technology to provide a better experience for our customers and consumers. We have already deployed Betterware’s previous commercial application for JAFRA Mexico, allowing our leaders and consultants in Mexico to perform their most critical business transactions digitally, including placing their orders and monitoring their sales and benefit among other key features. We are also working on our B2C digital platform and expect it to be ready for JAFRA by Q2 2023.
And finally, in terms of business intelligence, we are in the process of replicating our big data capabilities to improve JAFRA’s understanding of the market and accelerate its growth. For this purpose with designated Betterware’s Chief Business Intelligence Officer, as a new Corporate Chief Business Intelligence Officer overseeing both companies. For the last 10 years, he has been instrumental to developing our data analytic capabilities and hence we are confident that under his leadership it will allow us to leverage our analytical capabilities in JAFRA. We are also building the appropriate team to lead our business intelligence efforts and to boost the consolidated group’s capabilities.
And we are already started the process to significantly improve JAFRA’s sales catalog back by Betterware’s decade long experience and realign our strategies to focus on personal contact with our sales force throughout the country. As for financial efficiencies and synergies, we have identified great opportunities, which are expected the amount to approximately MXN 200 million and MXN 300 million in 2023. Some of these which we are already carrying out include among others, the elimination of JAFRA’s global expenses in the U.S., the relocation of U.S. offices and the relocate in U.S. and the relocation of our R&D team from Los Angeles to our manufacturing plant in Queretaro, Mexico. Additional details were disclosed yesterday in our earnings release.
In summary, we are excited about the opportunities that lie ahead, and we are confident that JAFRA’s talented management team will continue executing against our strategy based on the three strategic pillars of product innovation, technology and business intelligence, to capitalize on these opportunities and achieve a greater market reach in Mexico and the U.S.
I will now turn the call to Andres, to discuss Betterware’s performance for the quarter and our business strategies.
Andres Campos
Thank you, Luis, and good morning to everyone. Thank you for joining us today. Our second quarter results were negatively impacted by lapping strong comparisons from last year, combined with a softer economic environment and weaker consumer spending. Despite the significant headwinds from the pandemic and the economic softness that has issued, we remain confident in our business model and our management team as we navigate a difficult operating environment.
As we mentioned in our Q1 2022 earnings release, we have received the results for the third wave of an independent market research conducted by one of the most prestigious companies in its field in Mexico. We have been gathering data since 2017, and now after four years of diligent and consistent work, we are pleased to share our results.
During 2020, the home solutions market in Mexico experience exceptional positive tailwinds, especially when the pandemic hit. Temporarily expanding approximately 63% according to this market research. Due to an unusual spike in demand for household products during lockdowns. Additionally in April 2020, 21% of economically active population lost their main source of income according to INEGI [ph] creating an enormous need to find an alternative income.
Our differentiated business model together with our experience and enhance on management team enabled us to capitalize this opportunity, resulting in an acceleration of our growth from Q1 2020 to Q1 2021. This period was followed by a slow back to normal adaption in consumption trends. As people started going back to their normal lives, resulting in a normalization in the home solutions market back to pre-pandemic level according to this mentioned market story.
In Betterware, we were not immune to the strengths, but our business proved its resiliency and now Q2 2022 average weekly sales are 100% higher than pre-pandemic comparable period, namely Q2 2019, representing a 26% CAGR and according to the market study, we expanded our market share to 7.7% in 2021, up from 5% in 2020, and 2.6% in 2017. We also expanded our household penetration to 29% in 2021, up from 24% in 2020, and 10% in 2017 attaining those as stronger brand positioning and market dominance.
In this uncertain and unusual period, we have remained focused on maintaining profitability while taking internal action to stabilize our sales trends and return to growth. Along these lines during Q1 2022, we recovered our profitability levels, thanks to the flexibility and resiliency of our business model. While during Q2 2022, we saw our network of associates and distributors stabilize. During the last eight weeks of the quarter, our base remained at approximately 880,000 and 44,000 respectively showing signs of recovery in the last two.
In fact, month-to-date in July, we have seen growth in our associates base, which is the first month since February, 2021, that our sales force has shown growth. This trend gives us confidence that our network will start to grow again before year end and continue growing going ahead. We believe that Betterware’s unique business model will continue [Audio Dip] to results going forward despite the current normalization in the home solutions market.
To this end, we were not only able to create a pre-pandemic 39% CAGR from 2014 to 2019, but we’re also able to seize a complex opportunity, both in expanding and contracting times during and after the pandemic, showing our ability to build a strong and resilient business model. Importantly, the home solutions market pre-pandemic secular trends remains valid and stronger than ever as consumers appreciation for an organized, practical and enjoyable home has taken a new relevance.
Now to seize the opportunity that these trends bring and return to grow, we are deploying several initiatives based on our three strategic pillars. First, in terms of product innovation, based on the results of the market study recently received, we are increasing our focus in our core categories, which have lost share in our sales during the downturn. These categories include home organization, space optimization, cooking and commuting solutions. We will also expand our portfolio into promising concepts with relevant market opportunities. These concepts include bedding, entertainment, kids, pets, tabletop, and drinkware. Additionally, we are currently working on an innovative cleaning product line, which could increase recurring purchases from our customers those boost frequency of purchases of these and other product categories.
In terms of our second pillar, technology, we are in the process of operating our e-Commerce website, which will be implemented in both Betterware and JAFRA and allow us to increase our penetration, attracting new customers that currently are not reached by our traditional model, while increase our data analytic capabilities and understanding of the customers. We have learned a lot since we launched the platform in December, 2020, and we are adapting it to make it successful in the medium-term as e-Commerce adoption in Mexico continues to gain relevance. Also the recent rollout of our new Betterware Plus app should yield more retention and activities as our associates and distributors enjoy the new and improved benefits of this new platform.
And finally, in terms of business intelligence, we are undergoing a process of evaluation of data analysis capabilities at JAFRA and Betterware to replicate the best practices in both companies. As we have mentioned before, we have two main avenues of organic growth, number one, expanding our household penetration and number two, increasing our share of wallet. And we are convinced that our strategies based on our three pillars will be instrumental to continue capitalizing on these opportunities of growth. Among the relevant opportunities to further expand our household penetration and reached our target 40% as disclosed in our earnings released yesterday are the following.
Number one, growing our network of distributors and associates, to this end we refocus our rewards program to incentivize associates and distributor growth and reactivation aimed at bringing back the people that turned off in the last 12 months. Number two, reinforcing our hybrid model between personal contact and technology. We relaunched our person-to-person companion program, leveraging on our technological tools developed throughout the years. Number three, revamping our physical and digital catalogs in addition to strengthening our digital catalog design. So it can become a more productive tool for all associates and distributors. Number four, increasing our social selling and social influencing, which we are currently working on and will share our progress in the coming quarters.
Now we increased our share of wallet with the new knowledge obtained with the market study previously mentioned. We are ready to write the curve back to growth as the home and life solutions market stabilizes. We will continue increasing market penetration in our core categories and expand to new categories that show a relevant potential for us. In the current high inflation environment, we revise our pricing strategy to focus on delivering great value packages to fuel consumer desire, to buy as disposable income remains pressured. Furthermore, we are adjusting prices to reflect the recent decline in container costs, which should be an incentive for consumers to purchase our products.
Before I turn the call to Carlos, I would like to mention that we are excited about our international expansion plans to support our long-term growth. We are currently assembling a team to lead the expansion of Betterware to the United States with the aim of starting operations by the fourth quarter of 2023. In the midterm, we will be focused on our expansion to the U.S. market, while in the longer term we target further international expansion to South America, namely Colombia and Peru, sometime between 2025 and 2026. I will now turn the call to Carlos who will discuss our financial results for the quarter and year-to-date.
Carlos Doormann
Thank you Andres and good morning, everyone. I would like to review our second quarter and year-to-date 2022 results. Please keep in mind that consolidated results include JAFRA’s results from April 7, 2022 through the end of the quarter, additional details can be reviewed in our earnings release published yesterday.
I will then share perspectives on how we are approaching the remainder of 2022 and discuss our proposed dividend payments. As mentioned by Andres in the case of Betterware, the effects of the return to normality have been tougher than we anticipated and amplified by a softer economic environment and weaker consumer spending in 2022. Given these factors and the extremely tough comparison, Betterware’s standalone results for the quarter are the following.
Net revenues declined 30% compared to the second quarter of 2021 explained by a decline in our average associates and distributor space. Our EBITDA for the quarter was MXN 393.3 million 49% lower than EBITDA in the second quarter of 2021. And EBITDA margin contracted by 484 basis points to almost 24%, explained by lower revenues and lower operating leverage as our SG&A expenses represented 34.9% of net revenues for this quarter compared to 28.8% in the second quarter of 2021, despite a contraction of 25% in absolute terms in operating expenses.
And for the first half of the year, driven by similar factors persisting in the second quarter of 2022 net revenues declined 37% compared to the first half of 2021. And our EBITDA was MXN 931 million, 44% lower than the EBITDA in the first half of 2021 and EBITDA margin contracted 356 basis points to 26.8%. Taxes after the acquisition of JAFRA, we are now a larger and more resilient group with two complimentary companies.
Our consolidated results for the second quarter and year-to-date of fiscal 2022 include the performance of Betterware for the full period and JAFRA’s performance from the date of the completion of the acquisition through June period and are compared to the financial results of Betterware only in the corresponding periods of fiscal 2021.
Consolidated net revenues increased 25% compared to the second quarter of 2021. Consolidated gross margin expanded 1,230 basis points to 69.1% compared to 56.8% in the second quarter of 2021 explained mainly by JAFRA’s higher gross margin. Consolidated EBITDA decreased 20% compared to the second quarter of 2021 impacted by lower operating leverage in Betterware due to the lower revenues as well as other one-time expenses related to the acquisition and to the structuring of our workforce aimed at improving our generation going forward.
Our consolidated EBITDA margin was 18.4%, 1,039 basis points lower than the second quarter of 2021 explained mainly by JAFRA’s lower margin profile, which opens an opportunity for us to improve its cost structure and increase the company’s profitability. Consolidated net income decreased 45% year-on-year due to lower operating leverage and higher interest expenses related to the debt used for the acquisition of JAFRA.
As for the consolidated results for the first half of 2022, consolidated net revenues decreased 7% compared to the first half of 2021 due to extremely tough comparisons for Betterware. Consolidated gross margin expanded 991 basis points to 67.1% compared to 57.1% in the first half of 2021, explained partially by JAFRA’s higher gross margin and partially an expansion in Betterware’s gross margin of 348 basis points year-on-year.
Consolidated EBITDA decreased 32% compared to the first half of 2021 and consolidated EBITDA margin was 22.4% or 802 basis points lower than 2021 explained mainly by the inclusion of JAFRA to our results.
Consolidated net income decreased 53% year-on-year due to lower operating leverage and higher interest expenses related to the debt used for the acquisition of JAFRA and consolidated adjusting net income, which excludes non-cash expense of MXN 71.1 million related to the unrealized loss in mark-to-market valuation of financial derivative instruments decreased 37% year-on-year.
As of the end of the second quarter of 2022, the company’s financial position remains strong even after the acquisition of JAFRA, which represented a cash outflow of MXN 574 million. Our leverage, which increased to 2.2 times net debt-to-EBITDA in the second quarter of 2022, considering Betterware last four months EBITDA and considering JAFRA’s annualized adjusted EBITDA for first half of 2022.
Betterware and JAFRA’s high cash flow generation nature will allow us to gradually deleverage going forward. Additionally, we’re evaluating divestments of unproductive assets worth around MXN 500 million to MXN 700 million, which will reduce our leverage ratio to further enhance our financial strength.
Regarding our full year expectations, we expect our consolidated net revenue to be in the range of MXN 12.8 billion to MXN 14.2 billion on our consolidated EBITDA to be in the range of MXN 2.4 billion to MXN 2.7 billion, which includes JAFRA’s full year figures excluding an extraordinary items prior to the closing of the transaction.
For Betterware, as we reach stabilization in our associates and distributors days, we are confident that we can gradually return to growth. We expect Betterware’s net revenues to in the range of MXN 6.8 billion to MXN 7.2 billion. And our EBITDA in the range of MXN 1.7 billion to MXN 1.9 billion. As for JAFRA for the year, we expect JAFRA’s net revenues to be in the range of MXN 6 billion to MXN 7 billion. And our EBITDA in the range of MXN 700 million and MXN 800 million, which includes JAFRA’s full year operations.
That said considering the tough and uncertain macroeconomic environment and our lower than expect revenues year-to-date, our Board of Directors has proposed to adjust the dividend payment to MXN 200 million for the quarter, which is subject to approval at the ordinary general shareholders meeting to be held on August 19, 2022. This dividend is estimated to sustainable in this uncertain environment while prioritizing company’s financial strength, considering the MXN 574 million cash outlook related to the acquisition of JAFRA as well as other investments in unleashing JAFRA’s full potential.
Coupled with several payments due to workforce restructuring and the temporary increasing Betterware’s inventories aimed at preserving another quick service level. As the situation stabilizes, the board will analyze the long-term sustainable dividend policy.
In conclusion, over the long-term, we remain confident in our ability to assist growth opportunities, which will allow us to generate a strong cash flows and continue to maximize shareholders value.
I will now turn the call over to the operator and we’ll take any questions you may have. Thank you.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Cristina Fernandez with Telsey. Please proceed with your question.
Cristina Fernandez
Hi, good morning. I have a couple of questions. I wanted to start with the recent growth in the past few weeks you’ve seen in associate and distributors. What did you attribute that to in how much of an impacted the changes you made recently to incentives for that, for the sales force do you think has prior goal in that sequential improvement?
Andres Campos
Hi Cristina, this is Andres. Thank you. Yes, so the impact that the internal actions that we took were significant. As we mentioned during the call, first of all, we changed our rewards program to refocus the program on bringing in new associates and distributors and especially to bring in all the people that we have lost during the past 12-months.
Second of all, we have been doing also changes in the catalog that we changed from nine catalogs per year to 12 catalogs per year starting in September, 2021. And this has really started yielding a lot better results because we can react faster month-after-month to change prices to change promotions and to make sure that our prices and promotions are more impactful to the customers. We also recently launched the new Betterware plus [ph] app, which is being adopted by more associates and more distributors. And this is also helping to have a more significant associate attachment to the company and those yielding less churn of associates.
So, we think that these internal actions that we took together with an external environment in which back to normal has already happened during the last 12-months and yielded this recent growth in the associate base, and is a good premonition of what will happen in the future, where we really believe that we have hit the bottom during the second quarter of 2022 and now we can start thinking of a path to growth again.
Cristina Fernandez
Thank you for that. And then I have a more broader high level question. Can you talk about how you assess or how you view the state of the consumer of your consumer today versus three months ago and how is, was that impacting demand for? Or I guess how its demand for beauty and JAFRA a different from Betterware? Thank you.
Andres Campos
So, can you elaborate a little bit on the question, Cristina to understand exactly what’s the…
Luis Campos
Yes, do you refer to JAFRA or Betterware?
Cristina Fernandez
Well, both I wanted to see, well first, how do you feel about the state of the Mexican consumer today versus the last earnings call and then in light of that how are the demand trends we know for Betterware they’ve been normalizing, but how is demand for beauty and JAFRA compared to Betterware?
Luis Campos
Sure. Well this is Luis. Number one in the case of Betterware, we sell discretionary products, however, as Andres was saying, we got ready for that. And then we adjusted our strategy in terms of product offer and pricing in order to sell in a challenging environment because definitely there are inflationary pressures on consumers a little bit of a lack confidence of the consumers, but our all product offer including pricing was realigned and we began looking at this new product offer or adjusted product offer in the month of May and June, and will be more intensive and it’s being more intensive in July, August, and further months, then we got ready for that. And we began looking the results in mainly in July. And we will see that in the months to come.
In the case of JAFRA, even last year was a tough year because people were at home, and then women were at home, and they did not buy as much cosmetics especially color and fragrances as they used to. Now that we are seeing is that people is already getting our –women maybe are getting out of home and they are buying or coming back to normal portions buying that they used to do before the pandemic. Then little-by-little, we will see month-after-month that this is coming back to normality, which will help us in terms of sales.
And this is what we are seeing now, okay. Then even our sales force, they are out of home already and having this personal contact and then we will see this in the months to come and this will be favorable for our sales in JAFRA.
Cristina Fernandez
Okay. Very helpful. Thank you. And then one last question, I wanted to see if you could expand on your revised pricing strategy. So earlier this year, you raised prices by 12% across the board. It seems like now you are looking to lower them. Can you expand on how much prices are being reduced? And it said broad base, or just in some specific items?
Luis Campos
Yes, sure. So the last year we have a contract with the container costs. We enabled those last year to maintain prices low. At the end of the year in December, this contract ended and the prices of containers for us increased more towards market levels. So we had to increase prices by 12% in January to maintain profitability.
Now we have seen, starting in April of this year container cost came back down to almost half of the price that they were before that, which is taking pressure off in the cost side for us. So for the second half of the year and we started doing this in May and June and July. We are being more aggressive in pricing because we have more, more leverage on the cost side as well. And we believe that this is helping a lot to drive the demand and will continue to help to drive the demand towards the second half of the year.
Cristina Fernandez
Thank you. That’s it for me. Thank you.
Luis Campos
Thank you.
Operator
[Operator Instructions] Thank you. We have reached the end of the question-and-answer session. I would now like to turn the floor back over to management for closing comments.
Andres Campos
Thank you for joining us today. We’ll look forward to speaking with you when we report our next quarter results and meeting with many of you at upcoming investor conferences. Thank you. Have a good day,
Operator
Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
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