Yahoo Finance Betterware de México, S.A.P.I. de C.V. (NASDAQ:BWMX) Q1 2024 Earnings Call Transcript
Betterware de México, S.A.P.I. de C.V. (NASDAQ:BWMX) Q1 2024 Earnings Call Transcript April 27, 2024
Betterware de México, S.A.P.I. de C.V. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you, and welcome to Betterware's 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 statements, 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. BeFra assumes no obligation to update any of these forward-looking statements or information.
A reconciliation of and other information regarding non-GAAP financial measures discussed on today's call can also be found in the earnings release as well as the Investors section of the company's website. Now, I would 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, BeFra maintained 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 BeFra are evident in the results that we published yesterday. We achieved double-digit year-over-year growth in net revenues during the quarter, fueled by a revitalized promotional mix at Betterware as well as through product innovation and special promotional campaigns at Jafra Mexico.
The combination of 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 the two-year anniversary of our acquisition of Jafra, which 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, dynamism 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 BeFra's 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 BeFra's capital structure. We continued 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 since 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 quintiles.
This growth demonstrates the resilience of Betterware and its ability to navigate adverse environments and emerge a stronger business, reflecting Betterware's 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's 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 gourmet 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 big 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 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's DNA into Jafra's 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's 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 of Jafra's brand [indiscernible] coupled with transformative commercial strategies, a new catalogue concept, better promotions, enhanced incentives, technology implementations and continued product innovation positively impacted the multi-activity rates 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 activity, 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 a 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 we're 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's 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's distribution center, which we will be leveraging on for 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's strategy and business model, we have decided to cater consumers located anywhere in the Continental United States through an 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 products. 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 selling 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's direct sales program allows people to manage their entrepreneurial pursuits according to their own timelines and schedules. The US is the largest market for direct selling, with over 6.7 million Americans currently participating in it. Furthermore, Hispanics 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 Betterware. Although we aspire to operate across the 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 long-term, we do not expect them to be profitable in the first 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: Thank you, Andres, and good morning, everyone. As I review our first quarter 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. BeFra's 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 of 2023. Key contributors to this consolidated enhancement 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 its sales, which negatively impacted Befra's 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. The 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 will move to a newly leased office building starting in June 2024. Turning to our balance sheet, our company's financial position continues to improve. Compared to 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 BeFra's 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 would mark 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 Befra's 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 sizing domestic as well as international growth opportunities, enabling us to generate stronger cash flows and maximize shareholders' 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.
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