Betterware de México, S.A.P.I. de C.V. (BWMX) Q1 2021 Earnings Report, Transcript and Summary

Thank you and welcome to Betterware's Firsr 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 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 earlier today as well as the Investors section of our website.

Thank you, Operator. Good morning, everyone, and thank you for joining us today. I will begin my remarks, by providing a summary of our performance for the first quarter 2021. Then, Andres will discuss the progress we have made against our strategic pillars to increase efficiency and elevate our operating platform in support of the continued growth we see for the company. Diana, will then review our financial results and our 2021 outlook. We began the year strongly, reporting first quarter results that reflect our ongoing ability to capitalize on the power of our operating platform, advantageous business model, commercial and technological strategies, and compelling product innovation, which has led us to deliver consistent and sustainable growth. To this end, for nearly two decades, we have recorded robust sales and earnings growth. We expect a successful implementation of our strategic initiatives to enable us to continue our favorable performance in the near and long-term. As it relates to the first quarter, the period was highlighted by triple-digit increases in revenue, EBITDA, and net income, robust cash flow and significant accomplishments to our high level strategy. The increase in our revenue was fueled by outstanding growth from our organic core business. Our distributor and associate growth was strong year-over-year with significant increases in new distributors and associates and normal business attrition that is typical for the first quarter. We expect the rate of expansion in distributors and associates, to accelerate meaningfully as we begin Q2. The quarter included several accomplishments that we expect will add to our long-term growth potential, by leveraging our strengths and advantages. With that end, the first quarter saw our largest marketing campaign, the launch of a new web platform that seamlessly and efficiently allows consumers to purchase our products online. Significant growth in revenue and margin in Guatemala and the acquisition of 60% of GuruComm a Mobile Virtual Network Operator and Software Developer giving us the ability to expand our reach with mobile product and service sales. In terms of capital allocation, we remain committed to returning value to shareholders and our strong balance sheet, including cash and cash equivalents balance of MXN565 million, as of quarter end, afforded us the opportunity to propose an annual dividend of MXN1,400 million to be paid in four installments, which the first was already paid in March.

Thank you, Luis and good morning to everyone. As Luis said, we are very pleased with our first quarter results. We delivered strong inancial performance and continue to execute against our key growth initiatives. I will now discuss the progress made in the first quarter of 2021 and the four strategic pillars, starting with market penetration. In the first quarter, we saw continued growth of our household penetration due to our increase in distributors and associates network. Given our strong competitive positioning as the category leader in Mexico and deep expertise that drives customer loyalty, we believe we will continue to increase our market share over time with opportunity to double our market penetration from 20% to 40% in the next five years. During the first quarter, we focused our commercial strategies towards consolidating and increasing the efficiency of our sales force. This activity was highly productive for us, driving an 11% increase in sales versus Q4 and a slight increase in our associates and distributor sales force. With this work behind us, we are now accelerating our sales force expansion and expect this to result in stronger rates of distributor and associate growth going forward and assist us to penetrate the vast number of households we do not yet reach. Turning to our second strategic pillar, which is category expansion. In the first quarter, we launched two catalogs that included the introduction of 50 new products, which were well received by our customers as reflected in our Q1 results. We have some exciting new product launches in the pipeline for 2021 and are on track to continue the expansion of our recently launched new category of home renovation solutions before the end of the second quarter of 2021.

Thank you Andres. Good morning everyone. I would like to take this time to review our first quarter 2021 results. I will then share perspective on how we are approaching the remainder of 2021. 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. I will provide highlights of our results, which I detailed purely in our 6-K file yesterday. For the first quarter, total net revenues increased 205% to MXN 2,902 million from MXN 952 million in the prior year period. Gross profit increased 212% to MXN 1,668 million. As a percent of sales, gross margin increased 138 basis points to 57.5% driven mainly by an appreciation of the Mexican peso compared to the US dollar. Selling expenses as a percent of sales declined to 10.2% of sales, compared to 14.2% of sales in the year ago period driven by leverage from a strong sales growth. Final sales, gross margin expansion and selling expenses leveraged to a 296% increase in operating income to MXN 908 million from MXN 329 million. Operating margin as a percent of sales increased 721 basis points to 31.3%. EBITDA for the first quarter of 2021 increased 287% year-over-year to MXN 923 million, compared to MXN 238 million in the prior year and EBITDA margin expanded 679 basis points to 31.8% due to the increase in operational leverage. We reported 15.82% in adjusted non-IFRS earnings per share. Now turning to the balance sheet as of March 31, 2021, we had MXN 565 million in cash and cash equivalents, a 103% increase versus the previous year period. Inventory increased 285% year-over-year with the increase in support of our sales expectations and compared to the first quarter -- last when inventory that was initially driven by the initial surge in sales driven by COVID-19 and the timing of Chinese New Year.

Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question comes from Eric Beder with SCC Research. Please proceed with your question.

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

Hi, Eric.

Hi.

Hello, Eric.

I am good. When you look at shipping and the shipping cost last year I know you had some use of airfreight. I know you mentioned in Q1 that the shipping has been a little bit affected by COVID. How are you seeing the shipping, kind of, normalize? And how can you take advantage of that this year?

Hi. This is Andres. Shipping has been normalizing after the Chinese New Year. We have seen it normalizing and we expect it to remain normalized for the rest of the year.

Yes. We do not expect extraordinary airfreight this year, okay. Should be normal from second quarter to the end of the year not extraordinary airfreights.

And what are you guys seeing in terms of costs and other pieces? And what do you think is your ability if you have to raise prices on goods going forward?

Yes. So we are keeping a close look on costs. But we do not expect any impact from this. If there were to be increases we are able to drive prices up in the coming catalogs. But I reiterate, we don't expect any significant impacts.

Great. And the last question. What are you seeing differently from your customers who are coming online -- to buy product?

Sorry is your question what are we seeing different?

I'm sorry you rolled out your new online ordering system.

Yes. We -- I think it's too early, Eric. As we were mentioning we really expect the new online to become significant by the end of the year and the next year. So I think at the moment data points are too insignificant to drive to any conclusions.

Okay. Well, guys congratulations again and good luck for rest of year.

Thank you.

Thank you, Eric.

Thank you. Our next question comes from Joe Feldman with Telsey Advisory Group. Please proceed with your question.

Great. Thanks. Hi, guys. Congrats on the great quarter. I wanted to ask what do you think is driving the acceleration in the sales associates? You seem to have picked up quite a few new associates and distributors. I'm just wondering if there's something going on in Mexico with the economy that we should be aware of or for you guys?

Yes. Not really, John -- Joe. In fact we feel confident that the economy in Mexico will not be disruptive for our business. And I think in terms of economic growth this year in Mexico, this is going to be between 4.5% and 5%, which is what we expect. Consumption remains really strong in Mexico. We believe that it will remain strong for the rest of the year. And what we are confirming is that, this mentality, this set of mind in the people regarding organization cleanliness, et cetera, is continuing, okay, which is something that we believe we will see in the years to come. Then really the challenge for us is continue with a good streaming of very good new products and new product categories. I think this is going to be the challenge and we are going to accomplish our objectives in that respect.

Got it. That's helpful. Thank you. And then another question I had was, I guess what you've started to sell and when should we see your comment how will that flow in? Like will that be the second half of this year or is that next year?

We didn't hear very well, because it was like -- I mean interruptions -- there are interruptions. Can you repeat the question?

I apologize. Yes. No, I was asking about new products and when the new -- how the new products that you introduced are selling? And when you'll start to have more technology introduction in the product, like, when will we see those new products come in to be sold?

Yes. I think, we are in line with our expectations regarding the performance of the new products and the new category that we are going to reinforce in the second quarter, this house renovation. And regarding the technology products, it will take time. As we see in the -- a few minutes ago, we will begin with mobile voice and data and -- in Q3 of this year. And then, probably by the end of last year we would go to the second stage. By the end of 2023, we will go to the third stage, as we mentioned before, okay? Then our first objective is to give all of our sales force distributors and associates the opportunity to connect to Betternet connect older mobile phones. And then this will allow us to go into the second stage sometime in the second half of next year.

Got it. That's helpful. Thank you. And then, I guess, the last one from me. I wanted to ask, with the new customers you're seeing, are they buying different things? Or is it pretty similar to what the traditional customer buys?

The pattern of consumption has not changed, okay? We see the same pattern, but probably a little bit more intensive because of this new set of mind, okay? But the mix of our sales in terms of product categories, et cetera, remain the same.

Thank you. That’s great. Good luck with this quarter, guys.

Thank you, Joe.

Thank you, Joe.

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

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

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.