Betterware de México, S.A.P.I. de C.V.
Q3 2021 Earnings Call Transcript

Published: 29 Oct 2021

[Operator:]

Thank you and welcome to Betterware's Third Quarter 2021 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 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 the reports filed with the SEC. Betterware assumes no obligation to update any of these forward-looking statements or information. A reconciliation and other information regarding non-GAAP financial measures discussed on the call can be found in the earnings release issued yesterday as well as the Investors section on the company website. Now I would 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 will begin my remarks by providing a summary of our third quarter performance and highlighting the key features of our differentiated business model. That has allowed us to have a 20-year history of constant and profitably growth and will allow us to continue to grow going forward. Then Andres will discuss the main drivers of our performance for the third quarter and our expectations for the rest of the year and beyond. Diana will then review our financial results for the quarter and year-to-date. During the third quarter, our net revenues increased 4% on top of the almost 200% growth we saw in Q3 2020, while EBITDA was down marginally compared to the same period of last year due to the increased operating expense structure that was needed to align the company's operating capabilities to the new much higher level of revenues this year. After last year's extraordinary growth that show an almost 200% year-on-year revenue increase, our cost structure is now aligned to our current level of operations. As such, going forward, we expect to recover the additional operating leverage that we achieved during 2020 as revenues grow. For the first nine months of the year, we are pleased with our revenue growth of 69% and EBITDA growth of 75% compared the first nine months of 2020. From 2001 to 2020, Betterware have a compounded annual growth rate of 23% in net revenue, 27% in EBITDA and 24% in our associates and distributors network. This growth accelerated in the last five years from 2015 to 2020 to a compounded annual growth rate of 57% in net revenue, 64% in EBITDA and 63% in our associates and distributors network. And in 2020 which was an exceptional year for the company, thanks to the features of our differentiated business model and our three strategic pillars we were able to capture the growth opportunity and grow 135% in net revenue, 154% in EBITDA and almost tripled the size of our distribution network from 438,000 by the end of 2019 to almost 1.3 million distributors and associates by the end 2020. For fiscal 2021, we expect our growth in net revenue to be closer to the lower end of our previous guidance, which implies growth in net revenues of approximately 49% and growth in EBITDA of approximately 48% on top of the triple-digit growth seen in 2020. Our consistent ability to deliver strong growth rates reflects the advantages of our differentiated business model. We expect the strength of our business model combined with execution of our growth initiatives to fuel a double-digit compounded annual growth freight in net revenue from 2021 to 2025. This rate of growth positions us to achieve our target household penetration of 40% by 2025. The main features of our differentiated business model are

[Andres Campos:]

Thank you, Luis and good morning everyone. I will start by highlighting the main operational drivers in the third quarter. We are pleased with our third quarter results as even considering the external headwinds faced during the period and the tough comparison base to Q3 2020, when we grew almost 200%, our net revenues for Q3 2021 grew 4%. As mentioned in our last conference call, in 2021, we have been focused on consolidating our larger sales force after the extraordinary growth we achieved during 2020. We are pleased with our progress up-to-date, as we practically maintained the same number of active associates and distributors that we had at the beginning of the year. While we have faced a higher churn during 2021, because of some of the associates and distributors gained in 2020 returned to their pre pandemic lifestyle, we've managed to retain most. And more importantly we've been able to continue to attract new associates at the same rate that we had in the pre COVID era. During the quarter, 468,000 new associates and 16,000 new distributors joined our sales force. This demonstrates that we have the right strategies in place to continue to grow our sales force and thus penetrate more households. After this successful period of consolidation, we are confident that our distributors and associates network can return to growth in the final quarter of 2021 and years to come. As Luis mentioned, during the quarter we faced three external unexpected headwinds

[Diana Jones:]

Thank you Andres. Good morning, everyone. As Luis and Andres provided our third quarter financial results and guidance, my remarks will focus on our year-to-date performance. Please keep in mind that the currency I will refer to when reviewing our results is the Mexican peso, which is our functional and reporting currency. For the first nine months of the year, we continue to show a strong results. Total net revenues increased 69% year-on-year. Gross margin expanded 288 basis points to 56.9%. EBITDA increased 75% and EBITDA margin expanded 115 basis points to 30.3%. Our net income increased 461% and our adjusted net income increased 49%. For the last 12 months, our ROI has been 212% and our return on investment capital has been 222%. Our balance sheet remains strong in the third quarter of 2021 even as we face headwinds reflecting the strength of our business model. Several metrics make it evident among others, our net debt-to-EBITDA ratio, which closed the quarter at minus 0.1 times. Our net working capital calculate as a sum of the trade accounts receivable plus inventories minus accounts variable was essentially zero at MXN41 million. Our equity increased by MXN1,153 million from MXN335 million in Q3 2020 to MXN1,488 million in Q3 2021 as a result of retained earnings and net of a dividend payment of MXN1,390 million for the last 12 months. Additionally we were able to successfully refinance our previous debt under favorable conditions with a long-term bond issuance in the Mexican market and invest on our campus, which will allow for future productivity and improved margins. The investment of approximately MXN1,100 million associated with our campus is financed with these new long-term debt where the order book was oversubscribed by more than three times, which demonstrates the strong support from investors for our business model and their confidence in our ability to continue to grow going forward. The flexibility of our asset-light business model and our cost structure, which is highly variable enable us to gain operating leverage as the business grows and our strong cash flow generation gives us the ability to continue to return value to our shareholders with our ongoing dividend payment. I will now turn the call over to operator and we will take any questions you may have.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question is from Cristina Fernandez with Telsey Advisory Group. Please proceed with your question.

[Cristina Fernandez:]

Hi, good morning. I wanted to ask about the outlook for the year, the revised outlook? And what it implies for the fourth quarter? On the revenue line, it seems like it still implies a reacceleration to double-digit growth in the fourth quarter. As you think about the macro situation in Mexico and some of the supply chain constraints, what gives you confidence that you can see that reacceleration in October? Perhaps maybe you can share with us what you're seeing so far in October?

[Luis Campos:]

Yes, Cristina. This is Luis. Let me begin telling you that our -- probably we'll remember that last year we grew a lot of our sales force mainly in Q3 and Q4. And it was because there was an extraordinary spend in home products. And there was a tremendous unemployment due to COVID at that time. In fact we ended last year with almost 1.3 million associates and distributors. And when -- at the first quarter of last year we ended with 478,000. It means that basically two quarters in the second, but mainly in the third and fourth quarter we almost tripled the size of our sales force. This year it has been a little bit different once we came back to normality. The first quarter was still triple digit -- very strong triple digit. But then in the second quarter and third quarter many people went back -- many of our associates went back to employment. And they began spending money in some other things like the preschool spending and traveling and some others. Just to put it in perspective okay, during third quarter -- during the second and third quarter our churn got to 4.5% well above the 2.8% of pre-COVID churn, okay? Then what we did was to recruit okay to consolidate our sales force recruiting very intensively okay? And just to put it in perspective during the third quarter, we recruited 468,000 new associates to replace those associates that left the company during Q2 and Q3 of this year because they went back to employment and they were as they came in last year only on a temporary basis. Then just to put it in perspective these 468,000 new associates during Q3 it's almost the number of associates the total number of associates that we have at the end of Q1 of 2020 okay? Then this speaks about a totally renewed base of associates more solid base of associates. This was quite a challenge for our team okay? And now we have a more solid base of associates and distributors. And what we can see now right now is that we can begin growing again our sales force okay? Just to put it in perspective okay the churn rate the maximum churn rate we had during Q2 and Q3 was 4.5%. And it went down now to 3.1% as compared to the 2.8% that we had pre-COVID. Then we are almost back to our normal churn. And with this strong recruiting we will begin growing our sales force. Said that okay, answering to your question we feel very comfortable about the fourth quarter, okay? Regarding the headwinds we already mentioned in the report, in the results report okay, this decrease in consumption in Mexico and the challenge we have with the supply chain disruption from China. Then we reiterate that we are going to get by the end of the year, we've seen the guidance, our previous guidance probably in the lower part of our guidance both in revenues and EBITDA okay in the lower level both we are going to get there. And we are very well positioned because of the reasons I gave to you, we are already very well positioned to begin growing next year. Of course, the first quarter of next year okay will be the hardest comparison with this year. But Q2, Q3 and Q4 for next year, you will be stronger and stronger growth, okay? We are going to provide our guidance beginning of the year, beginning of next year. But this is more or less the way we see it, okay? Then yes, we are going to be in the lower side of our previous guidance both in revenue and profit. And we are going to increasingly grow next year in order to achieve our goal for next year then our growth goal for next year.

[Cristina Fernández:]

That's helpful. And then a second question is around supply chain. I guess what are your expectations as far as the costs? I mean you broke down what they would be for the third and fourth quarter. Do you expect the freight costs to remain elevated in -- through 2022? And then also the shift in production to Mexico, I mean how quickly can you shift some of that production? And what are your expectations as far as what that penetration could be in the next couple of years?

[Luis Campos:]

Sure. Well as we said in the report in the results report and also in the . Yes, we have an impact. We are mentioning that in the report. We are having an impact for freight cost in Q3 and we expect an impact in Q4. And in terms of supplying, we have some impact in Q3, probably a little bit more in Q4. But we consider this a non-recurrent negative impact because we are not sure of course, but we expect these headwinds that we are having in Q3 and four to dilute in Q1 and Q2 of next year, okay? . Increasing our manufacturing in Mexico we are hardly working on that and we are going to make progress next year. And but this is going to take some time, okay? But we do not expect next year disruption in the supply chain, okay? That we are as you know China is to be a stabilization of the option. in our case we have some kind of priority with our -- with the factories we work within China. And this is the reason why we are not having major negative impact in supply.

[Cristina Fernández:]

Okay. You broke up a little bit, so I missed some of the explanation. But I think I got more to say. The last question, I had was perhaps for Andre, if you talk about your commercial strategies and the adjustments you've made, can you explain more detail sort of the changes you're making to product mix to make it more attractive and more associates and distributors to join? I mean, that was something new that you hadn't talked about before. So that would be helpful in understanding the changes going on.

[Andres Campos:]

Yes. Cristina we – as we mentioned in the call, we have made some changes in the price ranges to make it easier for consumers to buy our products. This has been the main strategy, in terms of making it easier for them to buy the products. So I think this will help us to navigate through that headwind, and help us for the fourth quarter results for the close of the year.

[Cristina Fernandez:]

Thank you. I'll let someone else ask the questions.

[Andres Campos:]

Thank you.

[Operator:]

Thank you. Thank you. Our next question is from Eric Beder with SCC Research. Please proceed with your question.

[Eric Beder:]

Good morning.

[Andres Campos:]

Good morning.

[Luis Campos:]

Good morning.

[Eric Beder:]

Can we talk a little – I'd like to talk about the supply chain and some of the improvements you're making. I believe you have the recent upgrade in the HQ headquarters supply chain flow through. And I'd like to – I mean, how do you look upon the Mexico City launch? And when is that, a, going to occur? And, b, what the impact it will have?

[Luis Campos:]

Hi, Eric. How are you? So the – we are launching the new tower of pick-and-pack lines during the fourth quarter. We have already started operations in this new pick-and-pack line. And we expect the Mexico City new distribution sector to open by the end of the first semester of 2022.

[Eric Beder:]

And how do you think that's going to impact the business here?

[Luis Campos:]

Well, Eric, we don't – it's going to be meaning we think that the most important thing is that we are on set to our . We I mentioned it before, we have managed to get the churn rates back to all pre-COVID levels. And this quarter, we saw our associates pretty much the same as the last quarter meaning that we are still to top line again. So even when we do expect to have less expenses less operational expenses coming from these two strategies that you mentioned, I believe it's important to reiterate that the most important thing will come from going back to growth in associates and in revenue during the next quarters.

[Eric Beder:]

Speaking of that. So internationally, can we get a little bit of an update? I know it's small but on Guatemala and are you steel very much focused on expanding outside of Mexico with other larger countries?

[Luis Campos:]

Yes. We are making good progress in Guatemala, growing really fast at double-digit. And already with an EBITDA has run very well. And now, we are going to finish the task of replicating our business model in order to even ignite more the growth there. And we are exploring closely the possibilities of further geographic expansion over the next two years. Then, we are working probably more intensively than before in this goal, okay?

[Eric Beder:]

Right. And last question. You have your buybacks you have the dividend. And what should we be thinking in terms of those pieces going forward?

[Luis Campos:]

Well, as you know Eric, we have a very attractive dividend and we are going to continue with our policy -- with our dividend policy in the years to come.

[Eric Beder:]

Okay. All right, guys. Good luck for the holidays.

[Luis Campos:]

Thank you.

[Operator:]

Thank you. Our next question is from Alvaro Garcia with BTG. Please proceed with your question.

[Alvaro Garcia:]

Hi, gentlemen. Thanks for the call. A couple of questions. The first one is on e-commerce. You mentioned this sequential acceleration, particularly in September. I was wondering if you can sort of describe what you think is driving that acceleration and whether or not it's helping you retain associates or improve engagement? That's the first question.

[Luis Campos:]

Hi, Alvaro. So, the website and the e-commerce, is still not significant within our strategy to increase associates and distributors. But that said, it is important to mention that it has been greatly growing as we mentioned in the report in the last two months, it has grown month-on-month. It has grown 44% in September and 95% in October. So it has been growing a lot month-on-month. This is a very good sign that it's going to -- more quickly than expected start to be significant in the business.

[Alvaro Garcia:]

Great. And then my second question is, going back to sort of the changes, the recent changes on the catalog front and on the product mix front. I was wondering if you could maybe share some examples as to how that's working out into the fourth quarter to really drive that associate number higher. It's obviously more catalogs. Have you seen any -- are there any early results, I guess, that we can see as to how that's helping the ecosystem improve? Thank you.

[Luis Campos:]

Yes, Alvaro. So we just started this, but we do see good reports from this change. We expect to drive more consumption per consumer. So we expect from this -- for consumers to see the catalog more frequent time, does increase their spend with us. At the same time we increased our innovation to double the size to that we have before in each catalog. So starting in catalog one of next year, it's going to double besides the amount of new products that are exposed in this catalog. So we are rolling in this. And quarter-by-quarter we do expect to see an increase in consumer spending from these strategies.

[Alvaro Garcia:]

Great. I guess more specifically, like the mobility category, which is new territory. Any early signs from that category as to how that's sort of engaging your sales force?

[Luis Campos:]

Well, the -- I mean we are focused on the 11 category niches that we have mentioned before. One of the categories that have seen -- continue to see strong growth is the home renovation category and that has things to grow. We rolled out this category has things to grow at a very fast pace. Obviously, as people go back to normal and go outside of the homes, the mobility -- as you mentioned, the mobility category starting to gain pace. So we are

[Alvaro Garcia:]

Great. Many Thanks.

[Luis Campos:]

Thank you, Alvaro

[Operator:]

Thank you. There are no further questions at this time. I'd like to turn the floor back over to management for any closing comments.

[Luis Campos:]

Yes. Thank you, operator. Well, thank you everyone for joining us today. We look forward to speaking with you when we report our fourth quarter results and meeting with many of you at upcoming investor conferences. Thank you. Have a good day and a good weekend. Bye.

[Operator:]

This concludes today's call. You may now disconnect your lines. Thank you for your participation.