Q1 2024 Betterware de Mexico SAPI de CV Earnings Call

Participants

Luis Campos; Executive Chairman of the Board; Betterware de Mexico SAPI de CV

Andres Campos; Chief Executive Officer, Director; Betterware de Mexico SAPI de CV

Alejandro Ulloa Miranda; Chief Corporate Administrative and Financial Officer; Betterware de Mexico SAPI de CV

Eric Beder; Analyst; Small Cap Consumer Research, LLC

Cristina Fernández; Analysts; Telsey Advisory Group LLC

Presentation

Operator

Thank you, and welcome to Betterware fiscal first quarter 2024 earnings conference call. Speaking on today's call are Betterware's Executive Chairman, Luis Campos; Chief Executive Officer, Andres Campos; and Chief Financial Officer, Alejandro Ulloa.
Before they begin their remarks, the company would like to remind you that today's call will include forward-looking statement, which are subject to various risks and uncertainties that could 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 issued yesterday. 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 of and other information regarding non-GAAP financial measures on today's call can also be found in our earnings release as well as investors section of the company's website.
Now like to turn the call over to the company's Chairman, Luis Campos. Please proceed, Mr. Campos.

Luis Campos

Thank you, operator. Good morning, everyone, and thank you for joining us today. During the first quarter of 2024 Betterware maintain its growth momentum and its performance levels strengthened. Our increasing profitability is being driven primarily by the effective execution of our various strategies to sustainably drive top line growth and improve operational and financial efficiencies.
Our business strengths and the strategies we have been implementing across Betterware are evident in the results that we published yesterday. We achieved double digit year-over-year growth in net revenues due during the quarter, fueled by a robust utilized promotional mix, a better word, as well as through product innovation and special promotional campaigns adjust from Mexico.
The combination of our strategic initiatives and financial discipline has greatly improved our profitability. Consequently, our EBITDA rose by 15.4% compared to the first quarter of 2023. While our EBITDA margin improved 92 basis points. It is a two year anniversary of our acquisition of JAFRA push remains highly accretive.
JAFRA, Mexico continues to exceed our expectations, delivering outstanding quarterly results once again. The double digit growth in both the top line and profitability of this business is the result of outstanding efforts made by our commercial, operational, and administrative teams. Which have worked intensively to transform the entire operation of the business. Producing significant improvements across the board, among our many growth initiatives is international expansion.
So I am pleased to announce that Betterware US has begun operations as scheduled. We are very optimistic about the growth that we can achieve in the US market. Given its size, dynamic and strong consumption levels. We believe we have the right strategy to effectively penetrate the US home solutions market, and we will do everything necessary to maximize our results and return on investment.
Now let me pass the call over to Andres to discuss more about the performance of Betterware business units during the first quarter 2024.

Andres Campos

Thank you, Luis, and good morning to everyone. We began the year with strong performance levels, delivering double digit growth in consolidated net revenue and EBITDA and generating cash flows that enable us to further strengthen Betterware capital structure.
We continue to improve our profitability by further optimizing direct and operating expenses at our Betterware and JAFRA business units. Betterware Mexico achieved its second consecutive quarter of year-on-year growth in net revenues, which increased 12% and reached our highest net revenue in the second quarter of 2022.
Net revenues continued to grow due to the successful combination of our selected product offerings and promotions focused on providing more attractive and affordable products to associates in the lower income [kentals]. This growth demonstrates the resilience of Betterware and its ability to navigate adverse environments and emerge a stronger business, reflecting Betterware strength as a market leader as well as its potential to perform at high levels and contribute to increasing shareholder value.
It is important to add that our commercial strategies led an increase of 16% in average monthly orders per associate in the quarter. We continue to believe that this strength in order volume will stimulate growth in Betterware associate base during the remainder of the year.
I would also like to highlight new products introduced by Betterware. During the quarter, we launched our new Gurmy brand, which is revitalizing our food container category. Betterware has also successfully introduced new products in our hydration subcategory, capturing more share in this vibrant and growing concept, and among them is our official B Hero bottle for Mexico's Olympic team, which will be available for sale in May.
EBITDA for the quarter was 7.3% below that of the first quarter of 2023. This was a result of a slightly lower gross margin, which was impacted by a higher mix of promotional products in total sales as well as more spending on promotions and a temporary increase in distribution and shipping expenses as larger volume items shipped resulted in a lower efficiencies. This combination of cost increases was temporary and we do not expect it in the coming quarters, ultimately Betterware is well positioned for a new phase of sustained growth and ready to capitalize on any emerging opportunities that arise.
With respect to JAFRA Mexico, we have successfully increased efficiencies across the company and have also infused Betterware DNA into JAFRA product innovation process and other commercial strategies, all of which we expect will continue driving double digit top line growth.
The business continued performing strongly during the first quarter with net revenue increasing 11.3%. EBITDA growing by 38% and the EBITDA margin expanding by 401 basis points, to 20.7%, JAFRA gross margin improved by 293 basis points due to a 54 basis point benefit from a lower exchange rate and a 174 basis point decrease in some raw material costs that resulted from our ongoing negotiations with suppliers.
Additionally, the clearance of obsolete inventory last year contributed 63 basis points to the improvement in gross margin. The renewal, JAFRA brand image coupled with transformative commercial strategies and new catalog concept, better promotions, enhanced incentives, technology implementations and continued product innovation positively impacted the monthly activity rate of our leaders and consultants in the first quarter, specifically there was an increase of 1.1% in end of period leader base activity and 5.7% increase of end-of-period consultant base activities, both compared to last year's quarter.
Additionally, average monthly orders experienced substantial growth during the quarter with a 19.4% increase for leaders and 14.5% increase for consultants. Accordingly, the JAFRA Mexico team is well positioned for continued success and sustained growth in the foreseeable future.
Regarding our international operations, JAFRA US continued to benefit from significant reductions in direct and operating expenses, which were implementing during part of 2022 and all throughout 2023. The company is now on a firm course to become profitable and grow faster, leaving behind years of poor results, we remain determined to reignite growth and increase our share of the vibrant US beauty market.
We expect the second quarter of this year to be a pivotal one, as a result of our restructuring efforts and having set the stage for gaining additional momentum and profitability by the end of the year. This month, we launched Betterware US operations according to our plan, we selected Dallas, Texas for our US headquarters for several strategic reasons.
Number one, it is home to JAFRA USA distribution center, which will be -- we will be leveraging on Betterware US operations. Number two, it offers a strategic distribution location within the US. Number three, it is close to Mexico. And number four, it has a substantial Hispanic population, which is our primary target market.
While direct selling is core to Betterware strategy and business model, we have decided to cater consumers located anywhere in the continental United States through our online channel, our US website, betterware.com offers a curated portfolio of over 200 products in a wide range of categories, this channel will coexist with our traditional direct-selling model, offering consumers the option to choose the channel they prefer to purchase Betterware problems.
On the direct selling front, we are adopting a new and evolved business model for the US market. This model is based on a customer first, digital first approach. This enables our brand partners, which is how we call our sales force in Betterware US to focus on finding new customers and recruiting other brand partners as well as executing semi strategies with them.
While we at the company take care of deliveries to each one of their customers. In addition, our new digital first approach applies analytical feedback, offers meaningful compensation, and has zero upfront costs. As always, Betterware, direct sales program allows people to manager into renewal pursuits according to their own time lines and schedules. The US is the largest market for direct selling with over 6.7 million Americans currently participating in it.
Furthermore, Hispanic are among the biggest and fastest growing segments in the industry, and we thoroughly understand their specific needs and the opportunities available to them, as we have mentioned before, this segment of the population generates a GDP that is twice that of Mexico's GDP, representing an enormous opportunity for a Betterware, although we aspire to operate across a US, the direct selling arm of Betterware US will initially focus on the cities of Dallas, San Antonio, and McAllen, Texas.
And we will expand to new cities and other states in an orderly fashion. It is important to note that we have begun rolling out a cross-border incentive program where our more than 700,000 distributors and associates in Mexico can refer new brand partners in the US. We believe this is a very unique opportunity for us and could accelerate building a strong base of brand partners in the US achieving success in this market.
Peru is the other international market we are targeting, led by General Manager, [Ana Cecilia Augusto] who has more than 16 years in our industry we continue assembling a management team and preparing to launch the operations there targeting the first quarter of 2025.
So while we expect the US and Peru to be significant sources of growth in the long term. We do not expect them to be profitable in the 1st year of operations. Our primary focus remains on the Mexican market, but we anticipate that these other markets, particularly the US, will become major contributors in the future as we build scale over time.
Let me now pass the call over to Alejandro, who will review our financials in more detail.

Alejandro Ulloa Miranda

Thank you, Andres, and good morning, everyone. As I review our first quarter of 2024 results, please keep in mind that all financial figures and projections being discussed today are in Mexican pesos, which is our functional and reporting currency.
Additional details can be found in our earnings release published yesterday. I will discuss a few other important areas of our consolidated results. The first consolidated gross margin increased by 79 basis points to 73.6% compared to the first quarter of 2023. This was due to a significant improvement in JAFRA Mexico's gross margin, which rose 293 basis points over first quarter 2023.
Key contributors to these consolidated enhancements included a favorable exchange rate contributing 27 basis points, lower material costs from supplier negotiations, adding 89 basis points and a reduction in obsolescence costs contributing 33 basis points, in contrast Betterware Mexico saw a decrease in its gross margin by 117 basis points, largely due to a higher mix of low margin SKUs in sales, which negatively impacted Betterware gross margin by 70 basis points.
First quarter consolidated net income was MXN294.1 million, 56.5% higher than in the first quarter of 2023. The strong increase in our profitability resulted from the top line growth and improved cost and expense management that we have been discussing today. As well as from lower financing costs following the debt restructuring that we completed by mid-2023.
Free cash flow generation during the quarter, defined as operating cash flow minus CapEx decreased 34.5%. This was due to a 30.6% decrease in our operating cash flow that primarily resulted from increased tax payments made by JAFRA Mexico and in the case of Betterware from higher spending on promotions and temporary increase in distribution and shipping expenses, as explained before.
The higher tax payments were triggered by a substantial 56.5% increase in income before taxes. It is important to mention that we have finalized a purchase agreement for the property currently hosting JAFRA Mexico's offices in Mexico City. That deal is valued at MXN385.7 million with payments spread over a three year term. These funds are destined for servicing the company's outstanding debt. JAFRA Mexico, we'll move to our newly leased office building starting in June 2024.
Turning to our balance sheet, our company's financial position continues to improve compared to the first quarter of 2023. Our total net debt was reduced by 7%, closing the first quarter with a net debt to EBITDA ratio of 1.78 times compared to 2.24 times at the end of the first quarter of 2023. We will continue to allocate most of our operating cash flow to further reducing debt with the objective of lowering our net debt to EBITDA ratio to at least 1.5 times by the end of this year.
The strength of our balance sheet also enable us to pay dividends. Another way we have committed to increase long-term shareholder value, reflecting the confidence we have in Betterware financial strength and growth prospects our Board of Directors has proposed a dividend of MXN250 million for the quarter, which is subject to shareholders' approval at the Ordinary General Shareholders' Meeting to be held on May 13, 2024.
This was marked the 17th consecutive quarterly dividend payment since we went public in March 2020. The confidence and optimism that we are conveying today is based on our most recent results as well as the many opportunities that lay ahead of us. For full year 2024, we are maintaining the guidance that we communicated at the beginning of the year, we still expect Betterware consolidated net revenue to grow between 6.1% and 10.7%, while consolidated EBITDA to grow between 6.6% and 13.9%.
Looking beyond 2024, we remain confident in our ability to continue facing domestic as well as international growth opportunities enabling us to generate stronger cash flows and maximize shareholder value over the long term.
I will now turn the call over to the operator, who will open the call for any questions you may have. Thank you.

Question and Answer Session

Operator

(Operator Instructions) Eric Beder, SCC Research.

Eric Beder

Good morning, congratulations. First question, I guess I'll talk about it inventory. So the inventory continues to grow at less than sales. How fresh are we looking at the inventory going forward? And how should we be thinking about that for 2024.

Andres Campos

Hi, Eric this Andreas, do you hear me there?

Eric Beder

Yes.

Andres Campos

Okay. I will pass the call over to Alejandro, so he can tell you about the situation of inventories, both in Peru and Mexico and JAFRA.

Alejandro Ulloa Miranda

Hello, very good morning. Yeah, inventory, our expectations are that we will be slightly decreasing during the year in both companies, JAFRA and Betterware, we have been able to reduce inventory during the last five or six quarters, and we're expecting to reduce our excess inventory in Betterware around MXN200 million and MXN220 million during the rest of the year. And in the JAFRA's case, what we have been doing is to focus on cleaning up the inventory in JAFRA US by promoting most of the items that we have in the US and in Betterware Mexico, we are increasing sales. So those inventories are going, probably due to the plan.

Eric Beder

How does the Betterware USA impact your ability to kind of manage the inventories, and when you look at the ability to, I guess, grow that business, and get better leverage off of it. How do you think about that as a longer-term kind of goal? Because it's kind of the focus the what are you doing Betterware USA is very different and Betterware Mexico? And how does that translate in terms of inventory -- I guess margin potential going forward. And how should we think about that?

Andres Campos

Yeah, Thank you, Eric, this Andres again. So, in Betterware US right now. We are using the same SKUs that we have in Peru or Mexico. We made a selection of those SKUs. So we are leveraging on Betterware Mexico's inventory of those SKUs. At the same time, as we mentioned during the call, we will go step-by-step and in Betterware US expansion, right now we're starting in Texas and very specifically in Dallas, San Antonio, and McAllen, to make sure that we understand, how fast we can grow what it, the impact that we're having and we will be able to see SKU by SKU, which impact it's having. So we can prepare with inventories to start expanding to the rest of the US.
So basically, this is the way that we're managing it. We're sending the inventory from Guadalajara, distribution center to the distribution center in Dallas. And that is basically how we're managing, obviously, eventually as the Betterware US operation grows. We do think that, may come a time where the US operation has its own inventory, its own SKUs, both for the meantime, we're managing it this way.

Eric Beder

Okay. And when you look at JAFRA, I know you are the leading fragrance player in Mexico for JAFRA and you've been rolling out the new products. You mentioned skincare, you mentioned color. When you look at the prospects for JAFRA, for growth in '24 and going forward, what product categories do you think have the biggest potential and I guess how you're going to recognize that? Thank you.

Andres Campos

Yeah, thank you, Eric. So there is, a lot of opportunities in the rest of the category. As you just mentioned, we are number one in fragrances today in Mexico, and we want to become number one in the rest of the categories. We think that skincare specifically as a category, has a lot of potential and that we can at the same time be able to win in that category. We have a whole development team, we have the factory where we can manufacture these products and be very competitive. So, it's a category that takes a little bit of time, but we definitely think we can be very, very competitive in this category, and we will keep working on making this category great.
The other two categories, which are color and toiletries, we also believe can grow. There's still room to grow, but the main, main focus and the number one focus will be skincare.

Eric Beder

Okay. Thank you. And good luck for the rest of you.

Andres Campos

Thank you.

Operator

(Operator Instructions) Cristina Fernández, Telsey Advisory Group.

Cristina Fernández

Thank you and good morning, everyone. I wanted to start with Betterware the growth you saw in the quarter double digit, very good. How sustainable is debt rate of growth? And I wanted to see if you can touch on two areas of the Holy Week that you call out being better in March and April, was that a big contributor to the growth? And then also the higher promotional activity. Do you expect this to continue near term? How does the promotion today compare versus pre-pandemic that 39%? Is that normal or is that above historical terms?

Andres Campos

Hi, Cristina, this Andres again. So first of all, talking about growth prospects, we have been speaking about there the size of the market and our market share we still have, according to our market research, we still have only about 4% market share. So we think that there is a lot of room to grow now to both gain more market share. And now that the market of household products is starting to grow a little bit again, after the whole pandemic disruption, we think we can leverage on that as well.
So there's still a lot of room to grow and Betterware Mexico, and we're working on that. And we think that as you know, we saw fourth quarter growing now we see fourth quarter of 2023 growing, now is the first quarter of 2024 growing. And we believe we can sustain double digit growth going forward, just as we were having before the pandemic. So that is in terms of growth prospects so.
Now in terms of the Holy Week. It's a very technical issue, but one on catering vacation. We normally have a slight decrease in sales Holy Week is one Christmas and New Year's is another one that impacts us because it's a very fast, one or two week vacation and these this year Holy Week landed in March in the first quarter, normally it lands in April. So normally it impacts our second quarter. Now it impacted our first quarter. So this is something that may help our second quarter because this year we won't have Holy Week there.
And in terms of promotions, we're basically maintaining the same strategies, the same fundamental strategies of promotions, obviously, we're polishing them day by day as we used to before the pandemic, but there's nothing fundamentally different there and that would be it.

Cristina Fernández

Okay. Thank you. And then my second question is on JAFRA. I wanted to follow up on Eric's question on the skin care lines that you've been expanding. There was a comment on the press release that it grew, but perhaps not as much as you expected and you needed to work on the pricing. So, I guess, how did it perform? What do you learn from the launch you made and what are you adjusting?

Andres Campos

Yeah. So we made, this Andres, again, we made a couple of launches of skin care product lines last year, which were not as successful as we expected. But, we have to remember that we acquired JAFRA in 2022, and it's not, it took us a year to really start going and we have some new lines that are coming out this year. Now we just launched that JAFRA in the first quarter. We have another big line coming out in July. So we think that -- we have a pipeline prepared now that we think will start impacting the coming quarters.

Cristina Fernández

And then my last question was on the debt paydown of targeted to paid MXN800 million this year. How much of the proceeds of the JAFRA Mexico business that MXN386 million will be this year used for debt paydown? And how much is the rest of the business cash from operations?

Andres Campos

Thank you, Cristina, I will pass the microphone to Alejandro.

Alejandro Ulloa Miranda

Hello, Cristina. Good morning, this is Alejandro. Yeah, the idea is to best in every single peso that we got from [divestments] to reduce the debt. So there are MXN386 million that we will receive during the next three years will be destined to reduce debt, and the idea is to pay during the year around MXN800 million that most of those -- that amount will come from cash flow generated by the company.

Cristina Fernández

Thanks.

Operator

Thank you. And that concludes the question and answer portion of today's conference call. I would like to turn it back over to management for closing remarks.

Luis Campos

Thank you, operator, and thank you again, everyone for joining us, -- thank you for joining us for today's call. We feel very proud of our significant progress we continue making, and we are very excited about the many opportunities ahead for JAFRA, both near and long term. We'll look forward to speaking with you on our next quarterly results call, as well as meeting some of you at upcoming investor conferences and here in Mexico. Thank you all and have a good day.

Operator

Ladies and gentlemen, this concludes Betterware's first quarter 2024 earnings conference call. We would like to thank you again for your participation. You may now disconnect.