This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk03: advantages and the work we have done to increase efficiency and elevate our operating platform to support the strong growth we see ahead for the company. Diana will then review our financial results and our updated fiscal 2020 outlook. We have an outstanding third quarter. that included record sales and EBITDA and significant accomplishments toward our strategy. The momentum we have experienced in our business that has led to consistent sales and EBITDA growth over the past five years accelerated significantly this quarter, generating a 199% increase in net sales, bringing to our company 17,000 new distributors and 400,000 new associates, and our growth dropped a 234% increase in EBITDA. Amidst a pandemic backdrop, Better Works successfully capitalized on the market opportunity driven by the increased demand for household and cleaning products and the increased desire for employment in home. We are very proud of our team's ability to adapt, meet the increased demand, and continue to serve our customers in a changing operating environment. While BetterWear has always been a great place to work, the pandemic gave us an even greater opportunity to add to our distributors and associates. Our outreach and the ability to have our associate and distributor network conduct business digitally from home fueled a 100% an 86% increase in distributors and a 179 increase in associates during the quarter. As of quarter end, we have nearly 59,000 distributors and 1.2 million associates, which is the largest number of distributors and associates in the history of Better World. We are confident in our ability to continue to grow our distributor and associate base and expect our larger and stronger team will help drive our business going forward. Finally, during the quarter, we made continued strides to improve our financial health and position, namely, we reduced our leverage ratio of net debt to adjusted EBITDA to minus 0.4 from minus 0.1 at the end of the second quarter and increased our liquidity to 1,155 million pesos at quarter end. We continue to be focused on returning value to shareholders, and we again have proposed a dividend that is subject to approval at the next ordinary shareholders' meeting. So, in summary, we are very pleased with our ability to support the consumers' growing need for our products during the third quarter. Our strategic priorities combined with our continuous focus on managing expenses and working capital, have us poised to capitalize on the increased demand we are seeing across our business. And we believe we are in an invaluable position moving forward. With a strong cash flow and positive business momentum, we have the ability to invest in support of our future growth while maintaining strong financial performance. As Diana will discuss, we expect our strong performance to continue in the final quarter of the year, which is reflected in our updated guidance. I will now turn the call to Andres, our Chief Executive Officer who will highlight our progress on our four strategic pillars.
spk02: Thank you, Luis, and good morning to everyone. Before I review our strategic growth pillars, I would like to commend our team for their unwavering dedication and hard work during this quarter. We delivered an extremely strong third quarter performance, well beyond our expectations, that was supported by the efficiency and effectiveness of our robust operating platform. As you would expect, achieving the level of growth we experienced created some short-term impacts to the business in terms of delivery times and freight expense. Importantly, we reacted swiftly to expand our capabilities with significant increases in our pick and pack lines, operations workforce, forklifts and trucks, as well as an increased number of trucks moving between our warehouses daily. Our actions enabled us to return to optimal efficiency rates and on-time deliveries that were back to pre-COVID levels by the quarter end. Now, I will review our four key strategic growth pillars, which are centered on market penetration, geographic expansion, category expansion, and business intelligence and technology investments. And then I will discuss our web marketing and new campus. These initiatives are expected to support our future growth and increase efficiency. Starting with market penetration, we saw broad-based strength across all categories during the quarter, which was spurred by the increased demands for our household and cleaning products as a result of the COVID-19 pandemic, and also our deliberate actions to drive growth with high impact innovation. This capability sets us apart from peers, allowing BetterWear to take a leadership position with new product introductions. Our increased market penetration highlights our deep expertise in this category for which customers have learned to trust us and why we are the number one brand within the category in Mexico. Our constant focus on product innovation allows us to launch more and more successful products every day. This, combined with our unique multi-source design platform, generates more interest with customers and allows us to continue to differentiate ourselves. Our second strategic pillar is geographic expansion. During next quarter, we will introduce Better World Guatemala, following the successful pilot tests. Our sales, EBITDA, distributor, and associate growth in this new market has been consistently growing each month. We are extremely pleased with the momentum of the business and the strong profitability of Guatemala. In fact, EBITDA margin reached 50% in September, demonstrating that we can successfully replicate our business model in other countries. Up until now, our operations in Guatemala have been through a concessionary. In November, we will have a joint venture with the current concessionary as a minority partner to launch Better World Guatemala as a subsidiary of Better World Mexico. We expect its growth to accelerate towards 2022, and we look to expand to other countries in Central America, including Panama and Costa Rica. We are also targeting the expansion of Better World into South America, specifically Colombia and Peru in the coming years. Next, category expansion. We launched two catalogs during the third quarter, and we introduced 62 new products in these catalogs. Customer response to new categories has been strong. Our last pillar is business intelligence and technology investments. We have been developing our business intelligence capability for many years. with an increased focus over the last seven years. These capabilities enable us to make smart decisions, backed by technology in everything we do. Regarding web marketing, in addition to showcasing our products, our new website is a tool for our distributors and associates to grow their sales and earnings by continuing to reach additional customers. Our new and improved transactional website, betterword.com, will help our distributors and associates reach more customers in two ways. Number one, connecting new customers based on location to a distributor or an associate if they don't already have an existing relationship with one. This makes the purchasing transaction easier for the customer and offers increased incentives and economics for the distributor or the associates. Additionally, the distributors and associates will now be able to share a personal link that will automatically assign to them any purchase completed through their link. Again, generating increased economics for the distributor and the associates. Now, turning to our new campus. The new campus, which is on track to open before year-end, will be located in Huaxla, Jalisco, on the outskirts of Guadalajara, and will become our national distribution center and headquarters, consolidating our operations to one location. Our recent accelerated growth had us reaching full capacity at our existing facility, while the new facility has 2.5 times the storage capacity and 5.3 times the assortment capacity of our current locations, which is a significant increase. Some of the operational efficiencies that we expect to obtain from the new campus are consolidation of all our warehousing and distribution processes, optimization of space usage and inventory management efficiency, all backed by new technology. In support of our long-term growth planning, we recently completed a study by Bain and Company that identified opportunities to invest in future growth, improve service levels, and increase our competitive advantages. We are continuing to evaluate which investments make the most sense for the business, and we will continue to keep you posted. We are excited about our operational initiatives planned for the remainder of this year and beyond as we continue to build a stronger, better world, positioned for sustained, profitable growth. We look forward to updating you on our progress as we focus on building on our success today. I will now turn the call over to Diana to review our third quarter financial results.
spk07: Thank you, Andrés. Good morning, everyone. I would like to take this time to review our third quarter 2020 results. I will then share perspective regarding our outlook for the year. 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. Given the relevance of this matter, I would like to provide clarity regarding the accounting impact of the warrant we inherited as a result of the merger with DD3 to our consolidated financial statement as of and for the nine months ended September 30, 2020. As reported in yesterday's 6K and earnings release, our net income and earnings per share include a $585 million non-cash expense related to the valuation of water. IFRS requires the warrants to be classified as a liability given that the functional currency of better work differs from the strike price of the warrant, which is fixed in U.S. dollars. Changes in the fair value of the liability are presented in the profit and loss statement under the heading Changes in Fair Value of the Warrant. IFRS requires the fair value of the warrant to be recorded in profit or loss for the period However, the company's operating income and the financial position is not impacted. For purposes of the company's EBITDA, the changes in the fair value of the liability are excluded as they represent non-cash charges. In addition, when the warrant has changed for the company's shares, the obligation associated with the liability will be extinguished with a corresponding increase in equity. Once the warrants have been redeemed, the net impact in the company's equity is zero, as the increase in their fair value is recorded in the profit and loss statement, reducing retained earnings, offset by the equivalent increase in equity as a result of the issuance of the shares. Turning to a review of the tier quarter, I will provide highlights of our results, which are detailed fully in our 6K 5G SLA. Total net revenues increased 199% to $2,271 million from $759 million in the prior period year. Gross profit increased 173% to $1,204 million. As a percent of sales, gross margin declined, driven by unfavorable currency as we buy our products in US dollars. and sell them in Mexican pesos. And to a lesser extent, higher freight costs incur to meet the searching demand. Selling expenses as a percent of sales were 10.7% of sales compared to 20.3% of sales in the year ago period, driven by strong sales growth. Higher sales and SG&A leverage a 244% increase in operating income to $721 million from $210 million. Operating margin as a percent of sales increased 410 basis points to 31.8% from 27.7%. EBITDA for the third quarter 2020 increased 234% year-over-year to $731 million, compared to $219 million in the prior year, and EBITDA margin expanded 330 basis points to 32.2% due to the increase in operational leverage. And finally, we report $15.22 in adjusted non-IFRS earnings per share. Now, turning to the balance sheet, As of September 30, 2020, we had $1,155 million in cash and cash equivalents, a 656% increase prior year period, and inventory growth supports our sales expectations. At quarter end, our leverage ratio of net debt to EBITDA was 0.4 times, down 0.3 times from the end of the second quarter. In the third quarter, we had $182 million of capital expenditures. For the year, we anticipate that we will invest $794 million in CAPEX for the year and increase from the $267 million spent in 2019. In terms of our outlook for 2020, as disclosing our pressure list, We are providing a net revenue outlook and raising our EBITDA expectations for the year to reflect our robust third quarter performance and expectations for a strong end of the year. We expect revenue for 2020 to be approximately $7,250 million and expect EBITDA to be in the range of $1,900 million to $2,100 million. up from 1,450 million previously, and EBITDA margin to be 26.2% to 28.9% versus 26.7% to 28.3%. We are pleased with our record growth, and over the long term, we expect our visible growth strategies supported by a strong infrastructure and talented team will enable our company to deliver consistent growth in sales and EBITDA in future periods. I will now turn the call over to the operator, and we will take any questions you may have.
spk05: At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the start key. One moment while we poll for questions. Our first question comes from the line of Christina Fernandez with Telsey Advisory Group. You may proceed with your question.
spk06: Hi, good morning and congratulations on a good third quarter. We had a couple of questions. to start with the EBITDA guidance for 2020, you know, very strong increase. But when we look at the fourth quarter EBITDA margin, it is lower than what we saw, you know, last year, lower than for third quarter. So wanted to see if you could provide some color on any impact of air freight or effects that is waiting on the margin for the upcoming quarter. Thanks.
spk03: Yes, this is Luis, Christina. What we see is that we are expecting probably a lower gross margin due to the exchange rate volatility. If this doesn't happen, I think we could be better by the end of the year, but we have to be a little bit cautious because of any potential pressure on the exchange rate peso-dollar. I think this is basically the reason. And the other thing is... Just taking care of consumption in Mexico, it has gone down a little bit in the last few months. Even when we expect that it doesn't go further down, hopefully it's another opportunity we can have in the fourth quarter. Then this is why we are giving this range, and in the upper range, we could be in the upper range, the 2100, if everything goes well in this quarter.
spk06: Thank you. And I wanted to ask about inventory availability. I mean, it seems like you've been able to... to get deliveries on track. Are there any areas where you're seeing constraints in your ability to meet demand?
spk02: As we mentioned in the call, we have, at the end of the third quarter, we are already meeting our pre-COVID service levels. And now we are prepared to... attack all the service needed and we have increased our inventory levels for this quarter so we believe that we are prepared in all fronts to comply with service levels thank you and then one last one for from our team the expansion to Guatemala can you discuss
spk06: the difference between working with a concession partner versus going direct, and what is the market opportunity you see there over the next, let's say, year or two?
spk03: Yes, Cristina, this is Luis. We run a very successful pilot test with two people in Guatemala. They are from Guatemala. And they did it very well. They are operating the business there. We appointed them as master distributors in Guatemala. And now what we are going to do is to have a joint venture, 70% owned by Better World of Mexico and 30% owned by them. And they will keep running the business down there, okay? One of them as managing director and the other one as commercial director. They are doing very well. We are very happy with their performance and they will continue running the company. But hopefully in December this will be a better world than Guatemala. They're operating the business, running the business there in Guatemala. This is going to be a subsidiary of Better Water Mexico.
spk06: Thank you, and good luck here in the fourth quarter.
spk03: Okay.
spk05: Our next question comes from the line of Eric Vedder with SCC Research. You may proceed with your question.
spk01: Good morning. Congratulations on a strong quarter. Could you talk a little bit about the distributors and associates? And you picked up more distributors and associates probably than any time in your history. You know, what are you seeing in terms of productivity from these new people? And how, just for kind of looking at how long does it take before they really ramp up to kind of where they should be? How should we be thinking about that?
spk02: Hi. This is Andres. You know, we, during the growth, the high growth in distributors and associates, we maintain and even increase a little the productivity per associate and per distributor. The distributors and associates are finding both the actual and the new that they're finding a good business better work. So we are not seeing any changes in that sense.
spk01: Wow, impressive. In terms of the, what is it going to be, I see you signed another dividend, what is going to be the dividend policy going forward and what should we be expecting there?
spk03: Well, we are going to continue with our dividend policy. We do not foresee any change about that.
spk01: All right. And last question here. You've been using a lot of the air freight to obviously keep up with demand. When should we be seeing kind of a slowdown in air freight as a vehicle for sending products Thank you.
spk02: Hi, Andres again. We are ready now for the fourth quarter with inventory levels and capacity in terms of delivery to sustain and deliver good service on demand. So we don't expect to have any more of this during the fourth quarter. unless something changes. But with everything as it is now, we expect to comply without any extra charges.
spk01: Great. And again, congrats on a good quarter and good luck for the holiday. Thank you.
spk03: Thank you.
spk05: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. One moment while we pull for questions. Our next question comes to the line of Jorge Laguna with Appalachia. You may proceed with your question.
spk04: Jorge Laguna Thank you very much, and congratulations to all the team, Luis and Diana and Andres. My first question is, with the recovery of the formal and informal employment in Mexico in this new normal, could we expect a less accelerated growth in the number of associates and distributors for the next quarters?
spk02: Hi, Jorge. This is Andres. Yes, we have a record growth, net growth in associates and distributors during the pandemic. So we are expecting that things going back to normal, we will continue to grow at more similar to historic levels. of associate and distributor growth. Obviously, we are working to continue this strong growth in associates and distributors.
spk03: And this is Luis Jorge. I would like to add something. Now, we are departing from an all-time high level of distributors and associates. then even when we expect it to come back to normal growth in our sales force, this is going to be substantial because we are departing from 1.2 million associates and 60,000 active distributors, both active. Then this is a wonderful platform to remain growing.
spk04: Okay, thanks. Perfect. Very nice. Thank you very much. And the last question is, what is the status of your listing process in Mexico? Is it going to be this year? Excuse me? Yes, of course. Which is the status of your listing process in the exchanges in Mexico, in the stock exchange?
spk03: Yeah. We will continue the process with the authorities in order to get listed in the Mexican stock market soon. We cannot give you a date, but the process... We continue with the process, okay? Of course... We will let you know as soon as we have some clear idea about when we can get listed here in Mexico as we are now in the U.S. Okay.
spk04: Thank you very much, Luis, and congratulations. Thank you.
spk05: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad One moment while we poll for questions. Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Luis Campos for closing remarks.
spk03: Well, I would like to thank you for joining us today. We appreciate your interest in better work And we look forward to speaking with you when we report our fourth quarter and year-end results. If not soon, if there is something else to announce. Thank you and see you for the report of the fourth quarter.
spk05: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a great rest of your evening. Thank you for watching. Thank you.
Disclaimer