Betterware Reports Second Quarter 2023 Results

GUADALAJARA, Mexico, July 27, 2023 /PRNewswire/ -- Betterware de Mexico S.A.P.I. de C.V. (NASDAQ: BWMX), ("Betterware" or the 'Company"), announced today its consolidated financial results for the second quarter of fiscal 2023. The figures presented in this report are expressed in nominal Mexican Pesos (Ps.) unless otherwise noted, presented and approved by the Board of Directors, prepared in accordance with IFRS, and may include minor differences due to rounding. The Company will host a conference call at 9:00 am (Eastern Time) on July 28, 2023, to discuss its results for the second quarter of fiscal year 2023.

2Q2023 Highlights

Message from Betterware´s Chairman

We ended 2Q2023 with excellent results for the Group, experiencing growth in net sales in Mexico and achieving expense savings and operating efficiencies which led to an increase in profit margin. During this period, we made great accomplishments that set the foundation for us to remain strong into the second half of the year.

At Betterware we had a positive 2Q2023. We were able to grow the number of Distributors at the end of the period by 5% when compared to 1Q2023, and to stabilize the Associate base. We also achieved sales growth of +4.0% vs. 1Q2023. In June, we achieved an average gross weekly sale of Ps. 223M, which represents a growth of 6.6% vs. 1Q2023, and even though sales are slightly below expectations, we have achieved the level of margins we had at the beginning of 2022 throughout 1H2023, which led to EBITDA slightly above our expectations for the period.

Jafra's business evolution continues to be positive. The transformation of the Innovation and Research and Development areas has had a significant impact on the results, where new products have been increasingly participating in total net sales. Regarding Jafra Mexico´s sales force, the EOP base in 2Q2023 grew 14.8% vs. EOP base of 2Q2022. Consequently, net revenues increased 14.5% vs 2Q2022, while EBITDA increased 25.0%, supported also by a strict control in operating expenses. The previous, derived in incremental margins and contributed significantly to the generation of cash flow.

On July 10^th, 2023, we prepaid the syndicated loan utilized for Jafra´s acquisition. The original amount of this credit facility was Ps. 4,499M; we prepaid Ps. 1,250M during 1H2023, ending the period with a balance of Ps. 3,249M. This amount was settled with funds coming from different sources, such as long and short-term credit lines, bonds issued on July 5^th, and cash. The refinancing of this loan allows us to reduce the cost of debt and defer principal payment obligations that we had in the years 2024 to 2026. The net deferment for these years is as follows: Ps. 262M in 2024, Ps. 900M in 2025, and Ps. 1,067M in 2026. More than 70% of the Company's total debt allows early payments at no additional cost. Our goal is to continue gradually reducing leverage.

Regarding our structure, we appointed Santiago Campos as Chief Transformational Officer, whose mission is to ensure that the company offers beloved and relevant brands to the consumer and to become, in the next five years, one of the leading global direct selling companies in terms of net revenue and EBITDA. Thinking that we must anticipate market trends and opportunities in the medium and long term, we decided to create this position that, together with his team, will be setting the guidelines and igniting the necessary actions that will transform our business to boost future revenue streams and/or productivity by thinking and planning 5 years ahead of time.

The approach is to follow two transformation paths:

Exploitation

• Maximize our key capabilities and reinforce those that are important for the future
• Ensure successful geographic expansion and replicate the successful operating model
• Add new categories that allow us to increase share of wallet and market share
• Promote the necessary technologies (like A.I. initiatives) across the company to ensure a full data driven digital transformation.

Exploration

• Evaluate M&A transactions that can be relevant and strategic to the Company such as product industry diversification to stabilize even more the stream of future cash flows
• Set and boost Engine 2 initiatives: find new sources of income based on our scale, capabilities, and operating business model

We are certain that with this new position, the Group will be able to take advantage of relevant business opportunities in the future.

We will continue working to achieve greater efficiencies, focused on further differentiating the Company from our competitors through innovation, technological support for the sales force, and data analysis that informs successful strategic decisions. With solid foundations, we will continue growing revenues and profitability, and will generate greater value for our shareholders. Our first half performance and expectations for the remainder of the year have us well positioned to achieve our 2023 guidance, and we are certain that we are on a great momentum to continue experiencing the positive trend that we have been demonstrating in our results, which encourages us to continue working to achieve the annual objective and maintain the trend of sustained growth in the long term.

Luis G. Campos
Executive Chairman of the Board

2Q2023 Consolidated Selected Financial Information

Group's Consolidated Financial Results

• Net Revenue

Consolidated net revenue for 2Q2023 was Ps. 3,220.1M, practically in line with 2Q2022 net revenue of Ps. 3,243.6M. Performance is mainly attributed to the growth in net revenue in Jafra Mexico, partially offset by a decline in Betterware´s net revenue due to a lower associate and distributor base. Jafra Mexico and Jafra USA results for the quarter accounted for 48% and 7% of consolidated net revenue, respectively.

During the quarter, we continue to see positive performance in Jafra Mexico, and a continued stabilization in Betterware´s network of distributors and associates, which has led to two consecutive quarters of net revenue growth.

Year-to-date, consolidated net revenue increased 27.0% to Ps. 6,484.3M from Ps. 5,103.8M in 1H2022. This increase is explained entirely by the Jafra acquisition, completed in April 2022. Comparable net revenue, which only includes Betterware, decreased by 18.2% due to lower average active associates and distributors and lower activity rates. It is relevant to mention that Betterware´s network of associates and distributors has stabilized, resulting in net revenue for the first half of the year 84.5% higher than the pre-pandemic comparable period (1H2019).

• Gross Margin

Consolidated gross margin for 2Q2023 expanded 368-bps to 73.3%, compared to 69.6% in 2Q2022. Margin expansion is explained by higher gross margins in all of the group´s subsidiaries due to the appreciation of the Mexican Peso, and to improvements in supply chain conditions and input costs normalization globally.

Year-to-date, the consolidated gross margin expanded 517-bps to 73.0% compared to 67.9% In 1H2022 mainly due to the inclusion of Jafra´s results, which has a higher gross margin profile, during the entire period in 1H2023, compared to most of the second quarter in 1H2022.

• EBITDA and EBITDA Margin

Consolidated EBITDA for 2Q2023 increased 16.6% to Ps. 717.4M from Ps. 615.3M in 2Q2022, largely attributed to significant profitability improvement in Betterware and Jafra Mexico, coupled with positive EBITDA contribution from Jafra USA. Consolidated EBITDA margin for the quarter expanded 331bps mainly explained by margin improvement in Betterware.

For the first half of the year, consolidated EBITDA increased 16.1% to Ps. 1,372.0M from Ps. 1,181.8M, due to the inclusion of Jafra´s results during the entire period in 1H2023, compared to only part of the second quarter in 1H2022, coupled with higher operating leverage in Betterware.

• Net Income and EPS

Consolidated net income for 2Q2023 decreased 10.7% to Ps. 258.4M from Ps. 289.4M in 2Q2022, reflecting a 57.2% increase in interest expense due to the syndicated loan utilized for Jafra´s acquisition, higher interest rates in Mexico, coupled with a negative effect related to the realized and unrealized loss in FX (forwards closed vs. real exchange rate). Earnings Per Share (EPS) for the quarter were Ps. 6.94, compared to Ps. 7.77 in 2Q2022.

Year-to-date, consolidated net income declined 21.8% to Ps. 446.4M from Ps. 570.7M in 1H2022, mainly explained by higher interest expense related to the Jafra acquisition (1Q and 2Q2023 vs. just 2Q2022 with the acquisition´s debt) and the negative impact due to a loss in FX explained above. EPS for 1H2023 was Ps. 11.98, compared to Ps. 15.31 in 1H2022.

• Cash Flow

Consolidated cash flow from operations for 2Q2023 improved significantly compared to 2Q2022, going to Ps. 764.8M, from Ps. 38.9M in 2Q2022, due to improved inventory management, along with cost and expense savings related to corporate restructuring expenses to align with the new level of sales at Betterware and the inclusion of Jafra operations in our results.

Consolidated CAPEX for 2Q2023 decreased 83.8% compared to 2Q2022, going to Ps. 9.1M from Ps. 55.9M in 2Q2022, driven by lower investment requirements after the completion of the Betterware distribution center during 2021 and low investment requirements in Jafra due to the current installed capacity.

As a result, consolidated free cash flow, measured as cash flow from operations less CAPEX, for 2Q2023 improved to Ps. 755.7M from Ps. (16.9M) in 2Q2022, primarily driven by improved cash flow generation at Betterware, recovering the key feature of our business model of high cash flow generation.

For the first 6 months of the year, consolidated cash flow from operations increased significantly to Ps. 1,318.8M from Ps. (52.9M) in 1H2022, primarily due to improved cash flow generation in Betterware and Jafra Mexico. On a comparable basis, which only considers Betterware´s operations, cash flow from operations increased to Ps. 751.6M for the period.

Consolidated CAPEX decreased 87.0% to Ps. 13.7M in 1H2023, from Ps. 105.1M in 1H2022, primarily from the focus on integrating Jafra operations into our business, and rationalizing capital investments in Betterware. On a comparable basis, Betterware's CAPEX decreased 86.9% YoY to Ps. 12.3M. And for the semester, free cash flow increased to Ps. 1,305.0M from Ps. (158.0) in 1H2022, driven by improved free cash flow generation in Betterware and Jafra Mexico, partially offset by USA operations.

• Balance Sheet

At the end of 2Q2023, the Company's balance sheet reflects greater strength than first quarter. We maintain financial discipline and have focused on improving Jafra's cash conversion cycle, which has allowed us to reduce our leverage ratio.

YoY, inventories decreased 20.0% to Ps 2,021.7M in 2Q2023 from Ps. 2,527.6M in 2Q2022, mainly reflecting improved inventory management in all of the Group´s subsidiaries, coupled with a reduction in the excess inventories we held in Betterware. As mentioned in our previous results report, we had excess inventories of Ps. 300M in Betterware due to lower-than-expected sales, and we have plans to gradually reduce inventory to align with sales growth through 2023 and 2024, without compromising sales of best-performing products and categories. Excess inventory was reduced by approximately Ps. 130M during 1H2023, slightly above our plans.

During 1H2023 we prepaid Ps. 1,250M to the syndicated loan used for the acquisition of Jafra (Ps. 1,000M in 1Q2023 and Ps. 250M in 2Q2023) and reduced the outstanding balance to Ps. 3,249M.

On July 5^th, 2023, we successfully concluded the offering of a two-tranche bond issuance for a total of Ps. 814M with maturities across 4 and 7 years, offered in the Mexican Market. The 4-year tranche amounted to Ps. 314M with a variable coupon of 28-day TIIE (28-day Interbank Interest Rate) + 0.90% payable monthly, while the 7-year tranche amounted to Ps. 500M with a fixed coupon of 11.23% payable semi-annually.

On July 10^th, we prepaid the syndicated loan with resources coming from long and short-term loans, long-term fixed-rate bonds, long-term variable-rate bonds, and cash.

The estimated weighted average interest rate for our debt´s whole term went from 10.73% to 9.55% once refinanced the syndicated loan. Long-term bank debt with a fixed rate represents now 28.4% of our total leverage, while 71.6% of our debt is at a variable rate, with the possibility of prepaying it at no cost.

We released principal payment obligations for a total amount of Ps. 2,229M until the end of 2026. We defer net principal payments of Ps. 262M in 2024, Ps. 900M in 2025, and Ps. 1,067M in 2026.

Net debt at the end of the semester closed at Ps. 5,071.6M, which represents a 17.7% decrease compared to 2Q2022. Our leverage ratio decreased year-over-year, to 2.0x in 2Q2023 from 2.8x net debt to the last twelve trailing months´ EBITDA in 2Q2022 and from 2.2x in 1Q2023.

2Q2023 and 1H2023 Financial Results by Business

Betterware

• Key Operating and Financial Metrics

Betterware´s network of distributors and associates continued to show positive stabilization trends during 2Q2023, in line with beginning of the year expectations and with 1Q2023. On a QoQ basis, our associate´s EOP base was practically in line with the previous quarter, (1.0%) relative to 1Q2023, showing improving churn rates and weekly activity rates. Average associates during 2Q2023 were 0.2% higher than in 1Q2023, demonstrating positive results of our commercial strategies.

In terms of distributors, our EOP base grew 5.0% relative to 1Q2023. As we have mentioned before, growth in our distributors´ base gives us strength to boost growth in our associates´ base going forward.

Year-to-date trends reinforce our view that our commercial efforts are having a positive impact on our top line, as we achieved two consecutive quarters with QoQ net revenue growth and our 1H2023 net revenues account for almost double the level we had on 1H2019, the pre-pandemic comparable period.

In terms of our profitability, the company showed positive results both on a QoQ basis and a YoY basis, due to continued improvement in terms of international freight and input costs, coupled with an improved expense structure, which is now in line with our current level of operations, and allowed us to show significant expansion in terms of EBITDA and EBITDA margin. Coupled with profitability improvements, year-to-date results show great improvement in our cash flow generation, a key characteristic of our asset-light business model.

May and June´23 continued with a better trend in sales force growth indicators. At the distributors level, during these two months we achieved a net profit of 224 distributors per week on average, driven by better incorporation and churn rates than the last year. In the case of associates, we also achieved better rates, although the effect was neutral (neither grew nor decreased). We expect to improve churn rate in the coming months, maintaining the levels of incorporation of associates above 3%.

• Net Revenue

For 2Q2023, Betterware´s net revenue declined 9.9% to Ps. 1,444.4M from Ps. 1,603.4M in 2Q2022, mainly reflecting a lower average associate and distributor base during the period, down 17.0% and 8.1%, respectively, coupled with a decline in associate´s activity levels, from 28.2% to 27.0%. This was partially offset by a 13.9% increase in average associate orders. Compared to 2Q2019, the pre-pandemic comparable period, Betterware´s net revenue grew 83.2%.

Compared to 1Q2023, net revenue increased 4.0%, achieving QoQ growth for two consecutive quarters, with the size of our network stabilizing while improving weekly activity and Associate´s incorporation rates.

Year-to-date, Betterware´s net revenue declined 18.2% to Ps. 2,833.4M from Ps. 3,463.6M in 1H2022. The decline is explained by the same factors as net revenue for the quarter.

Even though we are slightly below the expected sales level, weekly sales during June'23 reflect a growth of 6.6% vs. average weekly sales of 1Q2023, with a stable average purchase-per-Associate.

• Gross Margin

Betterware´s gross margin for 2Q2023 expanded 356-bps to 61.8%, compared to 58.3% in 2Q2022, related to the continued improvement in supply chain conditions and higher average product prices in our catalogs, coupled with a positive impact of the appreciation of the Mexican Peso.

Year-to-date, Betterware´s gross margin contracted 31-bps to 61.5% from 61.8% in 1H2022, explained by the high comparison base due to an abnormally high gross margin during the first quarter of 2022.

• EBITDA and EBITDA Margin

Betterware´s EBITDA for 2Q2023 increased 10.0% to Ps. 443.5M from Ps. 403.2M in 2Q2022, aided by a leaner operating structure, aligned with the current level of net revenue, and partially offset by the decline in net revenue, due to a lower associate´s and distributor´s base. Compared to 2Q2019, the pre-pandemic comparable period, Betterware´s EBITDA grew 120.7%.

Due to efficient expense control and gross margin expansion, EBITDA Margin expanded 556-bps to 30.7% during the quarter, compared to 25.1% in 2Q2022, which demonstrates that our operating expenses are now aligned with our current operations, resulting in improved profitability levels.

On a QoQ basis, EBITDA increased 7.6% and EBITDA margin expanded 102-bps compared to 1Q2023, which demonstrates continued positive results of our expense reduction strategies, leading to higher operating leverage.

Year-to-date, Betterware´s EBITDA declined 11.7% to Ps. 855.9M from Ps. 969.8M in 1H2022, explained by the decline in net revenue, partially offset by higher operating leverage which led to an EBITDA margin expansion of 221-bps relative to 1H2022.

• Update on Business strategies 2023

As mentioned in our previous earnings releases, we have been actively implementing elevated strategies to lay the foundation for growth and profitability for the years to come. During the quarter, we have made great advancements in these strategies, as well as executed other initiatives, namely:

• Product offer: starting in April, we resumed offering our core product line, recovering the main concepts we previously removed from our catalog to adapt our portfolio during the pandemic. We increased the number of SKUs and pages in the catalog, reaching in June to 375 and 110, respectively.
• Product Innovation: during this period, we launched four different new categories: Baby & Kids, Bedding, Hydration, and Pets. Although too early to assess their performance, all of them had a good volume of sales that represented 12% of total net revenues for 2Q23. During the 3Q2023, we will introduce Cleaning Consumables to the catalog.
• New Catalog: as previously mentioned, during 1Q2023, we improved the design of our digital and physical catalogs, which resulted in increased excitement, engagement, and better sales conversion rates. During May, we launched the "pocket catalog" to help Distributors recruit associates easier and faster. This new version of the catalog was greatly received by the market, allowing us to reach more associates and as well consumers, increasing our monthly printed catalogs from 3 to 4 million units, without increasing our total spending.
• Technology: after completing the migration of our associates and distributors to Betterware+ App in February, we have been working on adding more capabilities to increase our sales network efficiency and productivity. We incorporated new functionalities to ease the onboarding of new associates and distributors, and to improve tracking and visualization of sales network´s performance. Also, we add the possibility to customize the digital catalog with the distributor/associate's data to be shared with their customers.
• Operations: our semi-automated pick-and-pack Tower started operations by mid-June 2023. We have observed a good start in productivity ahead of our plans and will report in more detail next quarter when we have enough time measured to confirm results.

Jafra Mexico

• Key Operating and Financial Metrics

The successful replication of Betterware´s three business pillars of Product Innovation, Business Intelligence and Technology in Jafra continue to deliver positive results, well ahead of the expectations we had when we completed the acquisition, as we continue to recreate the key features of Betterware´s asset-light business model to improve Jafra´s profitability and cashflow generation.

Jafra Mexico's management team remains focused on increasing the consultant and leaders base, providing them with improved training and tools to increase their online sales, which have already yielded positive results and should result in increased market share and better market position in all our categories. During the quarter, the average ticket has shown constant increases; this effect occurs from the reactivation of face-to-face dynamics with the field, in combination with more innovative products.

Constant improvements in our expense structure resulted in a 25.0% YoY growth in EBITDA for the quarter and a 147-bps YoY EBITDA margin expansion compared to 2Q2022.

• Net Revenue

Jafra Mexico's 2Q2023 results reflect a strong performance as net revenue for the quarter increased 14.5% to Ps. 1,536.8M from Ps. 1,342.7M in 2Q2022, driven by a YoY increase of 13.7% in our average consultant base, coupled with higher average orders and partially offset by lower activity rates. We continue to strengthen our position in Fragrances category, which was showed the best relative performance, compared to the rest of our product line.

On a QoQ basis, net revenue declined 7.6% compared to 1Q2023, in line with a reduction in activity and a lower average base of consultants and leaders.

For the first half of the year, Jafra Mexico contributed with Ps. 3,199.2M to our net revenue, representing 49% of the group´s consolidated net revenue.

• Gross Margin

Jafra Mexico´s gross margin for the quarter was 83.3%, 138-bps higher compared to 81.9% in 2Q2022, explained by higher share of revenue of higher gross margin products, coupled with a positive impact of the appreciation of the Mexican Peso.

Year-to-date, Jafra Mexico´s gross margin was 82.7%, in line with our beginning of the year estimates.

• EBITDA and EBITDA Margin

Jafra Mexico´s EBITDA for 2Q2023 increased 25.0% to Ps. 268.7M from Ps. 215.0M in 2Q2022. Results were well ahead of our expectations in terms of profitability, due to efficient expense control related to synergies and optimizations after the acquisition.

Compared to 1Q2023, EBITDA declined 3.2% due to lower net revenue, while EBITDA margin expanded 79-bps, which confirms our strategies are in the right track in terms of reducing our operating expenses.

Year-to-date, Jafra Mexico´s EBITDA was Ps. 546.3M and EBITDA margin was 17.1%, in line with our beginning of the year estimates, which positions us to reach our full year consolidated EBITDA guidance.

• Update on Business Strategies for 2023

During the first half of the year, extraordinary results were achieved across key financial metrics. Net revenue growth was mainly due to higher activity and productivity, coupled with a growing consultant base. In terms of costs and expenses, we achieved several efficiencies which led to savings and significant improvement in profitability.

For the rest of the year, our strategies will remain focused on driving sales network growth, retention and reactivation, executing our previously disclosed business strategies where we continue to show progress, namely:

• Product Innovation: we continue focused on reinforcing and updating our product offering to current global and local consumption trends. We persist to inject into Jafra the essence of innovation that has always characterized Betterware. In the 1H2023, we launched 21 new products that helped us gain ground in different categories, reinforcing our offer in Color, Skin Care and Fragrances. New products represented 4% of net revenue at the end of 2021, 6% at the end of 2022, 7% by the end of 1Q2023, and 12% for the first half of the year. We are reaffirming our leadership in Fragrances, where we continue to be #1 in sales value and volume in the Country, and resuming the path in Color to recover market share that was lost before the acquisition. Part of our strategy is focused on the process of renovating the Jafra brand to make it more current, attractive, and appealing, expecting to complete it by the end of July 2023.
• Business development: our strategies are focused on improving incorporation, retention, and reactivation rates, while working towards improving our incentives programs and promotions during key months, coupled with special focus on the development of future Top Leaders. The guideline of sustained growth in the base of Leaders and Consultants continues, considering an increase in sponsorship, retention, and reactivation, in improvements to the Program and in special promotions carried out in strategic months. In the same way it continues to invest in the development of future Top Leaders and sales force training. Extraordinary sales results were achieved in 2Q2023 because of the sustained activity and productivity of Leaders and Consultants, as well as proper management of promotions aimed at encouraging sales force activity. In the financial aspect, a rigorous control of costs, expenses and collections was maintained in the quarter. The catalog has had a constant improvement considering market trends. Additionally, the incentive program and strategic promotional campaigns have been reinforced to trigger sales.
• Technology: during May 2023, we launched our App for Consultants, which allows them to manage their own business and become more efficient. Within the App, consultants can check their balance, place orders, pay for them, and track them, see the promotions of the month, and have access to the most frequently asked questions. Regarding Jafranet 2.0, our App for Leaders, we will continue to add features such as lineage control and management, revenue calculations and multilevel visibility. During 3Q2023, we will go live with the first stage of our Chat Bot (will operate through WhatsApp), which will allow us to reduce some expenses and to move towards a much more technical and automated operation.
• Operations: continue to focus on cost control and expense reductions, taking advantage of the identified synergies. Improved our days payable from 70 in 2Q2022 to 94 in 2Q2023, and our days inventory from 135 in 2Q2022 to 119 in 2Q2023, significantly improving our cash conversion cycle. We will continue to strive to optimize our working capital, as well as improving processes for leaders and consultants to achieve better service levels.

Jafra USA

• Key Operating Metrics