Q4 2023 Betterware de Mexico SAPI de CV Earnings Call
Participants
Luis Campos; Executive Chairman of the Board; Betterware de México, S.A.P.I. de C.V.
Andres Campos; CEO; Betterware de México, S.A.P.I. de C.V.
Alejandro Ulloa; Chief Corporate Administrative & Financial Officer; Betterware de México, S.A.P.I. de C.V.
Eric Beder; Analyst; Small Cap Consumer Research, LLC
Cristina Fernández; Analyst; Telsey Advisory Group LLC
Andres Lomeli; Analyst; LCA capital, LLC
Presentation
Operator
Good morning, welcome to Betterware Fourth Quarter 2023 earnings conference call. Joining us today are the leadership team members, Executive Chairman, Luis Campos, Chief Executive Officer, Andres Campos, and Corporate Chief Financial Officer. Alejandro Ulloa.
Before we begin, I would like to remind you that the call will include forward-looking statements, which are subject to various risks and uncertainties that could cause actual results to differ materially from expectations and any such statements should be considered in conjunction with cautionary statements and the Safe Harbor statement in the earnings release and risk factors discussed in reports filed with the SEC that aware assumes no obligation to update any of these forward-looking statements or information.
A reconciliation and other information regarding non-GAAP financial member measures discussed on the call can be found in our earnings release issued yesterday as well as in the Investors section of the company's website.
I would now like to turn call over to the company's Executive Chairman, Luis Campos. Please proceed.
Luis Campos
Thank you, operator, and good morning, everyone. 2023 has been a transformative year for Betterware. As a growth, we've had become a stronger and more diversified, also leveraging our core competitive advantages, such a consumer product and value of selling legal. This was reflected in a 5.2% year-on-year net revenue increase with the strength in profitability, achieving a total of MXN2,721 million in EBITDA.
At the midpoint of our initial guidance and exceeding our revised guidance for the year, on their strong full year EBITDA margin of 20.9%. Our strong cash flow generation has enabled us to reduce debt and further strengthen our balance sheet.
I would like to comment the entire vector of our Mexico team for their success in navigating challenging post pandemic statements. The stabilization we are seeing in Mexico Home Solutions market, coupled with robust execution of our commercial strategy, enabled a 7% year-over-year increase in Q4 net revenue. Our first quarter of growth since the third quarter of 2021. Today, we are well positioned for a new era of sustained growth.
I would also like to express my appreciation toBetterware our JAFRA team. JAFRA also passed our initial expectations as an acquisition that has proven to be highly accretive. Delivering exceptional fourth quarter 2023 EBITDA with a 45.3% year-on-year increase in Mexico on achieving almost break-even in the US.
Initial implementation of our proven business models, key elements, product innovations, technology and business intelligence has to pull the company back into a growth phase, also with meaningful strategies resulting in cost savings across these businesses. The JAFRA team with the benefit of a strong new leadership are well positioned for continued future success. As Alejandro will discuss in more detail shortly, the Group's fourth quarter 2023 net revenue represents a 44% CAGR since the fourth quarter 2019, representing an increase to MXN3,402 million from MXN791 million for the same period in 2019.
Therefore, while our Betterware business achieved a 17% [CAGR], the remaining CAGR, which leads our JAFRA acquisition. Among these and the auto milestones we will discuss today. We were pleased to announce in January that Andres has assumed the position of better work group CEO, which includes a Betterware and JAFRA brands in Mexico and abroad. Andres, has to gain a deep understanding of our business over these 11 years with Betterware, successfully navigating our progress on development and contributing to our overall success as a strong leader with a strategic vision.
I look forward to my continued involvement in our company's accomplishments, and I am confident in our promising path ahead. Our strong foundation built through decades as an industry leader led by our verticalized management is a winning formula for success.
With that, let me pass our compensation to Andres, and I will return for some brief closing remarks.
Andres Campos
Thank you, Luis, and good morning to everyone. As Luis noted, particularly strong performance in the last quarter of the year drove our full year results. We achieved double digit revenue growth and continued our profitability in 2023. With robust cash flow generation that enables a strengthened capital structure as we enter 2024, as Alejandro will discuss in more detail shortly.
I am extremely proud of the team's success in returning better work to our growth path during the fourth quarter of 2023. I will focus on execution resulted in improvements versus prior year in 7% in net revenue and 17.6% in EBITDA, showcasing our ability to deliver results despite adversity.
Our execution is stronger and 2023 results demonstrate the focus across the organization to enhance the customer experience. I would like to highlight some relevant accomplishments, which enabled our success. Number one, we launched three new categories throughout the years, Wellness, Kids and Pets. Wellness showed outstanding success, and we can modify kids and pets to maintain the most effective concept.
Number two, we saw renewed traction within our three core categories, namely home organization, kitchen products and home improvement through a deepened understanding of our customers' mindset and evolving needs, also responding to the ever shifting environment.
We are launching further innovation and market activation to capture the compelling long-term growth opportunities in the market we serve. Leveraging our unique ability to analyze the extensive data we received through multiple channels.
Number three, price decreases implemented in September of 2023, reflecting an improved exchange rate environment and moderating freight rate conditions resulted in positive traction throughout the year with a positive spike in volumes sold by year end.
Number four, we are seeing a strong positive results from training and incentivizing the on-site field staff. We began reintegrating in February 2023, also from mentoring our distributors to improve their businesses and accompanying them on their routes.
Number five, we have continued to strengthen our better workflows app through the launch of more than five new functions throughout the year. Importantly, this resulted in stronger activity rates and increased average monthly orders. This is normally driven by an increase in our associate base. However, this did not happen in 2023, meaning the average order per associate is increasing. This will result in a reactivation in the ground of the associate base growth going forward.
Betterwares's strong commercial strategy enables us to reach more homes and increase our share of wallet. Today, we have 25% total home penetration in Mexico and then estimated 4% market share, representing a significant growth opportunity, which we are actively pursuing. I am confident that with some [PROs] new leadership, which we also announced in January that were Mexico's team is poised for success going forward.
Turning to JAFRA Mexico, we gradually implemented key elements of our Betterware succes formula into April 2022 acquisition. Combined with a strong management team, this resulted in a double digit growth in 2023.
Importantly, this is the second consecutive year of growth for JAFRA Mexico, contracting a single digit year on year increase in 2022 compared to 2021. The team has been laser focused on our four operational success pillars, which during the year resulted in. Number one, accelerated innovation, representing 15% of 2023 net revenue from only 6% in 2022.
Number two continued growth in fragrances, our main category also with the launch of very successful lines of brand extensions during the year. Number three, increased customer conversion rate resulting from an improved catalog graphic design Mercantile, which made our catalogs more enticing. Number four, increased consultant acquisition through small targeted and impactful incentive program adjustments. Number five, each in doing business for our leaders and consultants through the inaugural launch of our sales force app, which we will continue to improve upon based on the team's feedback.
And last but not least, number six, improved more efficient interaction with our leaders and consultants through our newly launched chat bot, enabling us to expand our consultant base reflected in 2.5% year-on-year increase for the fourth quarter 2023.
Going forward, the JAFRA Mexico team is well positioned to continue to capture the vast opportunity in the Mexico drilling market, and importantly, expand our 12% market share to become the number one direct sales beauty brand in Mexico. Continued execution of our four pillars will enable our success.
Finally, turning to our international operations. '23 was an important year for JAFRA, US. While we began the year with operating challenges and declining revenue, we made swift decisions to recalibrate these deployments and correct our revenue levels in the second half of the year. We remain focused on reigniting our growth to gain market share within the sizable US beauty space.
However, it is important to note that despite the year's headwinds within our US operation, we successfully streamlined expenses for our return to profitability, achieving our most profitable quarter in the fourth quarter since acquiring JAFRA. However, we are well positioned to launch Betterware's US operation in the second quarter of 2024.
I would like to take this opportunity to announce that we have recently hired our new CEO to lead Betterware US. [Diego saso] has considerable US consumer product experience with companies including Procter & Gamble and Hershey, which one lesson doing better was the brand experience and proven business model should result in continued success.
Our planned investment for the initial launch phase Betterware US operations is between $5 million to $7 million in the first year and do not expect a meaningful contribution in the 1st year of operations. Our focus will be on the Hispanic market comprised of $16 million people, representing USD3.4 trillion in estimated GDP making it the world's fifth largest economy and doubled the size of Mexico according to the Latino buffer collaborative time.
Finally, we made further progress toward our launch of Betterware, Peru, carrying our general manager, let's say, [August] or who has more than 15 years of experience in the Peruvian and Latin American direct-selling industry. We look forward to sharing further updates as they unfold.
Let me now pass the call to Alejandro, who will review our financials in more detail.
Alejandro Ulloa
Thank you, Andres, and good morning, everyone. I would like to review our fourth quarter and fiscal year 2023 results by venture perspectives on how we are approaching '24 and discuss our capital allocation strategy going forward.
Please keep in mind that the currency. I will refer to when reviewing our results and guidance through the Mexican peso, which is our functional and reporting currency. Additional details can be reviewed in our earnings release published yesterday. by investor perspectives on how we are approaching 2024 and discuss our capital allocation strategy going forward.
Our consolidated results for the quarter are the following. Consolidated net revenue increased 5.2% compared to fourth quarter of 2022, supported by positive performance of our two brands in Mexico, partially offset by a revenue decline in JAFRA units. It is relevant to highlight the Betterware's net revenue grew 7% compared to fourth quarter of 2022, the first quarter of the year-over-year growth since Q3 2021.
Consolidated gross margin was roughly in line with fourth quarter 2022, decreasing 48 basis points to 7%. This decline was mainly due to margin contraction in Betterware explained by unfavorable sales mix. In particular, promotions accounted for a larger share of sales than the fourth quarter of 2022. However, this was mostly offset by margin expansion JAFRA Mexico, driven by favorable exchange rates, reduced costs from supplier negotiations and favorable sales mix.
Consolidated EBITDA for the quarter, we were 36.7% to MXN819.5 million, compared to MXN599.3 million in the fourth quarter of 2022. And EBITDA margin expanded 556 basis points to 24.1%. Profitability improvements in multiple subsidiaries were achieved through successful efforts in expense optimization, allowing us to exceed our EPS expectations for the quarter. Consolidated net income was MXN406.1 million, 62.5% higher than in fourth quarter '22, mostly explained by net revenue growth and an increase in operating leverage, which allowed us to increase our earnings to MXN10.9 per share.
And for the year, consolidated net revenue increased 13.1% compared to 2022 explained by the consolidation of JAFRA can results for the full period this year compared to almost three quarters during 2022. Outstanding net revenue growth in JAFRA, Mexico was partially offset by the decline of net revenues in Betterware due to lower average industry returns and associate base and net revenue decline in JAFRA US.
Gross margin for the year expanded 265 basis points to 71.5%, compared to 68.9% in 2022. Boosted by JAFRA's higher gross margin profile included in our results for the whole year 2003, which was partially offset by gross margin contraction in Betterware due to unfavorable sales mix during the last quarter of the year.
Consolidated EBITDA for 2023 was MXN2,721 million, 17.5% higher than 2022 and exceeding our previous full year guidance. EBITDA margin expanded 79 basis points to 20.1% due to the positive performance in our two subsidiaries, driven by efficient expense control, leading to margin expansion in all our subsidiaries and closing near break-even profitability in JAFRA US.
Consolidated net income increased 20.3% to MXN1,049.5 million, driven by higher operating leverage, offsetting the effect of higher interest rates on our debt. Earnings per share for the year was MXN28.2. And finally, our free cash flow generation for the year defined as operating cash flow minus CapEx increased 79.6% attributed to 67.9% increase in operating cash flow from [EBITDA] increase. In the turnover improvement in local businesses and improve payment conditions with suppliers in JAFRA, couple with lower CapEx investments.
As for volume sheet, the company's financial position continues to improve as we reduce our total net debt by 11.9% during the year, closing 2023 with a net debt to EBITDA ratio of 1.8 times compared to 2.5 times at the end of previous year.
As we have previously stated, while we are now comfortable with our conservative balance sheet, we will continue to use most of our operating cash flow to improve our financial position, aiming to bring our net debt to EBITDA ratio to approximately 1.5 times during 2024. Having said that, I'm highlighting the confidence we have in our growth prospects. Our Board of Directors has proposed a dividend payment of MXN250 million for the quarter, which is subject to the approval at the ordinary game of shareholders' meeting to be held on March 6, 2024.
We remain committed to returning value to even shareholders over the long term. We are confident and optimistic about the results achieved so far and the opportunities that lay ahead of us.
For the full year 2024, we expect our consolidated net revenue to be in the range of MXN13,800 million to MXN14,400 million and our consolidated EBITDA to be in the range of MXN2,900 million to MXN3,100 million. Over the long term, we remain confident in our ability to seize growth opportunities, which will allow us to continue to generate strong cash flows and maximize shareholders' value.
I will now turn the call over to the operator and we will take any questions you may have.
Thank you.
Question and Answer Session
Operator
Thank you. (Operator Instructions)
Eric Beder, SCC research.
Eric Beder
Good morning.
Congratulations on a solid end to the year.
Andres Campos
Hi, Eric.
Eric Beder
I heard about significant strides in reducing inventory levels, especially when you compare to the growth in the top line, how should we be thinking about inventories in 2024 and beyond?
Andres Campos
Hi, Eric, this is Andreas. Again. So yeah, we feel positive about our ability to continue to reduce inventories during 2024. We think that 2023 was a great year in this regard where we were able to reduce inventory in both companies, and we think we can reach normal levels by the end of 2024.
Luis Campos
Okay. So there's still growth there, is still (multiple speakers)
Andres Campos
Still opportunity to reduce inventories.
And we will continue to do so. And a context of growing revenue will obviously help us to make that last, that leaves the impact in the inventory to return to normal levels.
Alejandro Ulloa
Right? But when you look at the opportunities at JAFRA, Mexico and JAFRA, USA, obviously have a very strong position in perfume. What other categories which you think make a lot more -- will continue to have it makes sense to add or to expand upon to capture more of your customers' share of wallet?
Andres Campos
Yeah, Eric, this is Andres again. Yeah, so obviously, the fragrances category is the most relevant. As you can remember, we are today in Mexico, we are the number one direct selling brand in fragrances in Mexico. And the categories where we see a lot of opportunity are basically colour skin care and toiletries. They are three very big categories, both in Mexico and in the US. And we see a lot of opportunity to expand these categories and make them very relevant such as we have made with fragrances. So they will, in fact be very important for growth going forward and they speak about our great opportunity to grow going forward.
Eric Beder
And kind of on a structural question on Betterware USA. So you're rolling that out in Q2.
How are you going to be shipping product from Mexico? How do you look upon that as a rollout? And are you going to initially focus on kind of more of the Southwestern regions? Or is it kind of nationwide? How should we be thinking about kind of the cadence of the rollout and how you're going to support it?
Andres Campos
Yeah, a very good question, very theoretical. So as have we spoke about, we are weeks away from launching (technical difficulty) will be based off of Dallas in Texas. And it's very important also to know, we are leveraging on many of just capabilities such as issuing large distribution center and using some of the back office that JAFRA and synergies for our (technical difficulty)
Operator
We are experiencing technical difficulty conference will resume momentarily. once again, thank you for your patience. We are experiencing technical difficulty.
And the conference will resume momentarily.
Thank you for your patience. We are ready to resume. Go ahead, sir.
Andres Campos
Okay. Thank you, Eric, this is Andres, you hear me there? so we --
Eric Beder
Yes, we can.
Andres Campos
Okay. Perfect. Thank you.
So and I will tell you so we are ready to launch in the US, we will begin selling only in the state of Texas to pilot test of all operations and everything. So it is important to note that first year 2024, we should not expect any significant positive impact from our Betterware launch. It will be a year where we will basically focus in Texas in the first months and then maybe expand to other states in the following months.
And I'd also like to add state that we will focus at the beginning, mainly in the Hispanic markets. As we stated during the call, it's a very big market. It's according to some stories, it's a 60 million population markets with huge potential, and it's a market that is very similar in many ways to the Mexican market. So we think that we can be very successful in that market and during the first years.
Eric Beder
Great.
Thanks.
Congratulations, and look forward to 2024.
Thank you.
Andres Campos
Thank you, Eric. Have a good day.
Operator
(Operator Instructions)
Cristina Fernández with Telsey Advisory Group.
Cristina Fernández
Hi, good morning and congratulations on the good results. I wanted to see if you can put in context the results for the first quarter relative to your updated guidance in October, where did the upside come relative to expectations? Did you see a significant acceleration or change in the trend of the business in November and December. Just wanted to understand what was different and where the upside came from?
Thanks.
Andres Campos
Hi, Cristina, how are you? This is Andreas. So we saw a significant impact of our commercial strategies in Betterware Mexico. I think that in our first part, Betterware Mexico had a great fourth quarter. All the different commercial strategies that we had implemented, as Luis mentioned, really hit us and then it helped. We did the price decrease in September, which kind of helped all the strategies to start streamlining off again and have a great quarter for Betterware Mexico.
Then on the other hand, at the same time in JAFRA Mexico, we had a great quarter as well. And the especially in terms of profitability for JAFRA Mexico, we've had a great impact from an increased gross margin in the fourth quarter, which helped our EBITDA results for the fourth quarter.
So those were main reasons both revenue, we think that Betterware Mexico had a great impact for to achieve the revenue. And in this case, JAFRA Mexico contributed was one, contributed more in the profitability with an increased gross margin of about 581 basis points.
Cristina Fernández
(multiple speakers) extra call?
Andres Campos
Yeah.
Cristina Fernández
Yeah, thank you for that. Sorry.
Andres Campos
Go ahead, Cristina.
Cristina Fernández
Yeah, I just had a follow up on the on the JAFRA Mexico profitability. Was there anything that was one-time in nature that helped deliver that 31% EBITDA margin for that segment.
And then as we look at 2024, how should we think about the EBITDA margins for Betterware and JAFRA Mexico, I mean, you give them Betterware it has been -- sort of in that 20% range and then down a little bit from first half of the year versus JAFRA that has been accelerating the profitability?
Andres Campos
Christina. So I'll go back (technical difficulty) November to explain that extraordinary profitability of JAFRA for the fourth quarter and to give you what we can expect in terms of EBITDA margins going forward for 2024?
Alejandro Ulloa
Yeah, hello, Cristina, nice talking to you. This is Alejandro. What happened in the last quarter with our gross margin in JAFRA, Mexico, we have a significant improvement in this gross margin basically because of favorability in the exchange rate, exchange rate and the appreciation of the peso during this quarter was positive.
We also have reduced costs achieved through supplier negotiations with specific vendors, and that added almost 2-percentage-points for gross margin. And you can have a favorable variation in product volume in our manufacturing facilities, so volume additionally, add up back and the mix also of that products that we manufactured. So that combination, all right with this this improvement in margins. But what we are expecting for 2024 is that this will be normalized and we will be once again in margins between 80% to 82% range?
Cristina Fernández
Thanks. And then the last question I had was on the revenue outlook for 2024, the 6% to 11%. What are you assuming as far as like industry growth? You talked about the home solutions market stabilizing. Do you think that market can grow in 2024 and how. Maybe you can talk about the overall consumer and the beauty market. Just that's underpinning the revenue outlook for the year?
Andres Campos
Yeah. Cristina, This is Andres again?
So on the Betterware (technical difficulty) we're saying, I would say the market has pretty much stabilized. It is important to note that that during the pandemic, after the huge market growth then came a very steep decline. And now from the market studies that we make year after year, we see that it has stabilized and with a stabilized market, there's a lot that we can do.
It is important to remember that we only have around 4% of market share today, and we also only have about 25% of home penetration today. So there is a lot of room for us to grow with a stabilized market. So what we're assuming for Betterware, Mexico is that the market continues to be stabilized. We're not assuming speed growth in the market and (technical difficulty) even more.
And now in the process cost side, that the beauty market in Mexico is that it's a buoyant and growing market today after the beauty market had some troubles. -- And now after pandemic, it's growing. Buoyant leads grew between 10% and 15% last year, the beauty market in Mexico, and we think we can ride this market growth and also expand our market share in JAFRA, Mexico. We also have around a 4% market share. And it's important to understand that around 50% of the market is sold through direct selling in the beauty space in Mexico.
So we have a lot of room to grow. A lot of room to grow in JAFRA. So these two combined will help. Now additional to this in our international operations, as I spoke earlier, we should not expect any significant contribution from Betterware, US. What we should expect JAFRA US to start growing again and contribute little by little to the overall revenue of the Group.
Cristina Fernández
Thank you.
Andres Campos
Thank you.
Operator
Andres Lomeli, LCA capital.
Andres Lomeli
Hello. Thank you for taking my question and congratulations again for the great results. My question is regarding the expansion to new markets. You mentioned that you want to keep margin stable. I just wanted to know if you could talk a little bit about how you plan on managing the costs associated with the expansions, maybe new hires, new offices and met maintaining those margins, EBITDA margins stable throughout the years?
Thank you.
Andres Campos
Yeah. Thank you, Andres.
This is Andreas again.
And for the Betterware, US expansion, we are estimating within our projections, -- million-dollar investments during 2024. So it's not a very relevant investment as regards to our yearly EBITDA and we are leveraging a lot of our capabilities in JAFRA today. As I mentioned earlier, we are going to be distributing off JAFRA distribution center, the excess capacity that we have there. So that will not be a very relevant cost. We're also leveraging on all the back office.
We will finance HR all the back office and this investment will be mainly in our commercial team for a Betterware, US and one of the good things of our business model is that we can streamline expenses very efficiently when we launch a new market, so we are going to go step-by-step, not going to go out and invest mode, we're going to go step-by-step and it will not be a relevant investment.
Also in Peru, we are going also step-by-step, we are estimated an investment of between $500,000 to $1 million to make all the preparations in the pre-operating expenses. So in general, we don't expect this to be to relevance and it is already implied in our guidance.
Andres Lomeli
Perfect. Thank you very much. And once again, congratulations on a great quarter.
Andres Campos
Thank you, Andres.
Operator
(Operator Instructions) That will conclude our question and answer portion of today's conference call. I would like to turn the call back over to management for closing remarks.
Luis Campos
Hello, this is Luis. Hello, everybody. Thank you, operator, and thank you everyone for joining us today.
As we look forward to the year ahead, we expect 2024 will be transformative, expanding our Mexico businesses also with allowance of Betterware US and continue to ours Betterware, Peru in early 2025.
Our company's strong fundamentals led by our new leadership team will drive accelerated growth and shareholder value. Thank you for your support and being on this journey with us. Thank you, everyone, and have a good day.
Operator
Ladies and gentlemen, this concludes Betterware fourth quarter 2023 conference call. We would like to thank you again for your participation. You may now disconnect.
