Betterware de Mexico, S.A.P.I. de C.V.

Thank you and welcome to BetterWear's third quarter 2021 earnings conference call. With me on the call today are BetterWear'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 the reports filed with the SEC. BetterWear 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 yesterday as well as the investors section on the company website. Now I would like to turn the call over to the company's executive chairman, Luis Campos.

Luis Campos Thank you, operator. Good morning, everyone, and thank you for joining us today. I will begin my remarks by providing a summary of our third quarter performance and highlighting the key features of our differentiated business model. That has allowed us to have a 20-year history of constant and profitable growth and will allow us to continue to grow going forward. Then Andres will discuss the main drivers of our performance for the third quarter and our expectations for the rest of the year and beyond. Diana will then review our financial results for the quarter and year to date. During the third quarter, our net revenues increased 4%, on top of the almost 200% growth we saw in Q3 2020. While EBITDA was down marginally compared to the same period of last year, due to the increased operating expenses structure that was needed to align the company's operating capabilities to the new, much higher level of revenues this year. after last year's extraordinary growth that saw an almost 200% year-on-year revenue increase. Our cost structure is now aligned to our current level of operations. As such, going forward, we expect to recover the additional operating leverage that we achieved during 2020 as revenues grow. For the first nine months of the year, we are pleased with our revenue growth of 69% and EBITDA growth of 75% compared to the first nine months of 2020. From 2001 to 2020, Better World had a compounded annual growth rate of 23% in net revenue 27% in EBITDA, and 24% in our associates and distributors network. This growth accelerated in the last five years from 2015 to 2020 to a compounded annual growth rate of 57% in net revenue, 64% in EBITDA, and 63% in our associates and distributors network. And in 2020, which was an exceptional year for the company, thanks to the features of our differentiated business model and our three strategic pillars, we were able to capture the growth opportunity and grow 135% in net revenue 154% in EBITDA, and almost tripled the size of our distribution network, from 438,000 by the end of 2019 to almost 1.3 million distributors and associates by the end of 2020. For fiscal 2021, we expect our growth in net revenue to be closer to the lower end of our previous guidance, which implies growth in net revenues of approximately 49% and growth in EBITDA of approximately 48%, on top of the triple-digit growth seen in 2020. Our consistent ability to deliver a strong growth rate reflects the advantages of our differentiated business model. We expect the strength of our business model combined with execution of our growth initiatives to fuel a double-digit compounded annual growth rate in net revenue from 2021 to 2025. This rate of growth positions us to achieve our target household penetration of 40% by 2025. The main features of our differentiated business model are, number one, our high cash flow generation. Historically, we have had low CAPEX requirements. We expect our CAPEX to return to a more normalized level of 2 to 2.5% of net revenues per year beginning in 2022 and going forward. As we move past the investment in our new National Distribution Center that reduced our cash flows during 2019, 2020, and 2021. Going forward, our investments will mainly be focused on technology. We also have a negative cash conversion cycle, which allows us to generate cash as we continue growing. In the past, these two factors combined have allowed us to have a cash conversion rate of approximately 65% of EBITDA And given that we are nearing the end of our campus investment, we expect to return to this rate in 2022 and going forward. Number two, we are an asset light business. We manufacture our products through third party suppliers. We currently work with more than 100 certified factories in China and Mexico. This allows us to scale to meet sharp increases in demand, as we did in 2020, and provides us with flexibility to adapt it the demand environment flexes out. We also deliver our products to our distributors through six third-party carriers. On average, we have been working with these providers for more than 15 years. We have built strong and trusting relationships with our business partners who have scaled their operations to meet our growth. This gives us the flexibility to adapt to changes in demand. Our cost structure is very flexible. Year to date, 8% of our total costs are variable. This allows us to adjust and keep our profitability levels, achieving operating leverage in periods of growth and adjusting our expenses when it is necessary. Number three, the flexibility of our business model. We have the capacity to quickly react and adapt to changes in the environment. Our new monthly catalog allows us to react faster than before to changes in the economic environment in order to adjust our commercial strategies to any particular situation. After the extraordinary growth seen in 2020, The first nine months of 2021 have been a transitioning period where our main objective has been to consolidate our network of new distributors and associates gained during 2020 and adapt our operating capabilities to the new, much higher level of revenues. we have successfully consolidated our network of distributors and associates, practically maintaining the same number of active associates and distributors that we had by the end of 2020 with a much more solid base. And our operating expenses structure is in line to support our current operations and our growth for the next years to double our household penetration to 40% by 2025. During the third quarter, we faced three unexpected external headwinds. The first one, overall consumption in Mexico declined compared to the previous quarter, showing the first contraction since Q2 2020 and the first third quarter with quarter on quarter decline since 2014. Consumer confidence also decreased 3.7% during the quarter. Number two, people accelerated the return to pre-pandemic activities, redirecting their spending to products and services that they were not spending on during COVID, such as for the return to in-person activities in the back-to-school season and traveling during the summer. And last, supply chain disruption in China, mainly the increase in freight costs from China, which have lasted longer than what we expected, and the rationing of energy which is causing partial and total shutdowns in some factories, impacting the timely receipt of product and increasing product costs. Our business has proven successful during several economic environments, and we have a proven track record of navigating headwinds. This has us confident that based on our flexible business model, our three strategic pillars, and our ability to adapt and react to different situations, we are well-positioned to achieve our long-term objectives to double our household penetration to 40% by 2025. while also increasing our share of wallet. This would also result in doubling our net revenues from 2020 in 2025. I will now turn the call to Andres, our chief executive officer, who will discuss the main drivers of our operational performance in the third quarter and our growth expectation for the expectations for the rest of the year and going forward.

Thank you, Luis, and good morning, everyone. I will start by highlighting the main operational drivers in the third quarter. We are pleased with our third quarter results, as even considering the external headwinds faced during the period and the tough comparison base to Q3 2020, when we grew almost 200%, our net revenues for Q3 2021 grew 4%. As mentioned in our last conference call, in 2021, we have been focused on consolidating our larger sales force after the extraordinary growth we achieved during 2020. We are pleased with our progress up to date as we practically maintain the same number of active associates and distributors that we had at the beginning of the year. While we have faced a higher turn during 2021 because of some of the associates and distributors gained in 2020 returned to their pre-pandemic lifestyle, we've managed to retain most. And more importantly, we've been able to continue to attract new associates at the same rate that we had in the pre-COVID era. During the quarter, 468,000 new associates and 16,000 new distributors joined our sales force. This demonstrates that we have the right strategies in place to continue to grow our sales force and thus penetrate more households. After this successful period of consolidation, we are confident that our distributors and associates network can return to grow in the final quarter of 2021 and years to come. As Luis mentioned, during the quarter we faced three external unexpected headwinds. Number one, a declining consumption in Mexico. Number two, a shift in the spending towards products that people were not spending on during COVID. And number three, the supply chain disruption in China. As a response to the first two headwinds, we are adjusting our commercial strategies to adapt to current conditions. These changes include, among others, a change in our product mix to make it more attractive for our current associates to continue selling and for new associates to join the network of distributors and associates. While early, these adjustments already began to show positive results and are expected to continue to lead to improvements during November and December 2021. These combined with the increased frequency of catalog distribution is expected to generate increasingly positive results in 2022 and going forward. We are closely monitoring the economic environment to further adjust our commercial strategies in case it is necessary. As it relates to the supply chain disruption in China, our operations have been impacted mainly by two factors. The increase in sea freight costs. We have been able to partially mitigate the impact in our freight costs due to the contracts we negotiated at the beginning of the year. but the increase in costs has lasted longer than previously expected. This translates in an impact of approximately 1.6% of net revenues for the third quarter and for the fourth quarter. We expect the impact to be approximately 1.8%. And the second impact comes from the recent limits in the use of energy. These limits are suppliers' operations and reduces their capacity. This factor did not significantly impact our operations during Q3 2021, but it will for Q4 2021. The impacts for 2022 are still uncertain and depend on how long it takes for the situation to normalize. Recent events indicate that it should not take too long to normalize. Given that we expect these three headwinds to last at least for the rest of the year, we now expect our results for fiscal year 2021 to be closer to the lower end our previous guidance of 10,800 million pesos in net revenue and 3,200 million pesos in EBITDA, which implies net revenue growth of approximately 49% for the year and EBITDA growth of approximately 48% for the year on top of the 135% growth in net revenue and 154% growth in EBITDA in 2020. For the medium and long term, we are accelerating our plans to manufacture a larger share of our products in Mexico. This shift is same to Number one, diversify risks of concentration in China. Number two, give us greater commercial and operational flexibility and allow us to reduce inventory levels on products manufactured in Mexico. And number three, help us advance in our sustainability agenda, reducing our carbon footprint and creating more opportunities for indirect employment in Mexico. Now, Moving on to our long-term organic growth expectations. In terms of household penetration, as previously stated, our target is to reach 40% household penetration by 2025. We feel confident about achieving this goal due to the next reasons. Our target market in Mexico has approximately 29 million households. We know that today we have approximately 25% household penetration, which means that approximately 7 million households buy our products today. This means there are still 22 million households we do not yet reach. According to diverse market research carried out by our business intelligence unit, we estimate that more than two thirds of those 22 million households would be willing to buy Better World products if they knew an associate who would sell to them. To reach all those potential households, we need more associates. Given the fact that we are the category builders of home solutions market in Mexico with a unique and broad product offering with no direct competition, we strongly believe we can reach our 2 million associate goal by 2025. As years go by, people are more and more in need of a gig to generate an extra income. So we have a good tailwind effect from this long-term trend as well. To do so, we are carrying out strong strategies within our three pillars. First, We are close to launching our new BetterNet 3.0 app for associates and distributors. This new app will enhance usability, allow us to communicate more seamlessly with distributors and associates, and motivate them more by showing them constant income opportunities with gamification features. We expect this to help us increase associates and distributors' activity and sales levels, as well as increase their lifespan with better work. On the other hand, we continue to improve our business intelligence tools, such as our penetration digital map, which distributors used to find white spaces to recruit more associates. as well as our loyalty and incentive programs, which are more and more effective as time goes by. We're also expanding the benefits that people can obtain from selling BetterWear, like well-priced phone packages through BetterWear Connect and much more. This strengthens people's willingness to continue to sell BetterWear. Also, our new e-commerce platform which we launched last year, is consistently showing positive results. Even when total e-commerce sales are not relevant to total revenue yet, third quarter of 2021 revenues were 44% higher than revenues on second quarter of 2021. And September revenues were 95% higher than revenues in August 2021. This will continue to grow at a fast pace, allowing us to reach more households. Given all of this, we are confident we can continue to grow our sales force to reach all those potential households. Now, I will explain what we're doing to increase share of wallet. We currently participate in more than 11 category niches. We believe we have a strong potential to expand our share of wallet within these category niches. Our first strategies to do so are, number one, increase our catalog frequency from nine per year to 12. This will increase the number of times the customer sees our catalog throughout the year and allow us to place these analyses more assertively, thus increasing frequency of purchase per household. Second, we are doubling the number of new products within these catalogs. This will result in an increase of approximately 30% in the number of total exposed SKUs per year. Third, our new home renovation category is growing a lot, and we see a great opportunity to expand it even more. These strategies should increase the purchase per household. That said, we still have more strategies to come going forward to expand this category niches where we play, thus achieving an increase in our customers' share of wallet. Overall, we are pleased with the continued operational progress we made in the third quarter of 2021 as we continue to focus on driving household penetration and start to roll out strategies to increase share of wallet. As we enter the fourth quarter, we are adapting our strategies to the current operational environment and are confident in our positioning to continue growing during the quarters and years to come and to capture the important opportunities we have for the coming years. I will now turn the call over to Diana to review our third quarter financial results.