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

Thank you and welcome to BetterWear's fourth quarter and fiscal year 2021 earnings conference call. With me on the call today are BetterWear's Executive Chairman, Luis Campos, Chief Executive Officer, Andres Campos, and Corporate Chief Financial Officer, Carlos Dorman. 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 cautionary statements and the safe harbor statement in the earnings release and risk factors discussed in reports filed with the SEC. Betterware assumes no obligation to update any of these forward-looking statements or information. A reconciliation and other information regarding non-GAAP financial measures discussed on the call can be found in the earnings release issued yesterday as well as in the investors section of the company's website. Now I would like to turn the call over to the company's executive chairman, Luis Campos.

Thank you, operator. Good morning, everyone, and thank you for joining us today. I will begin my remarks by providing a short summary of the historic growth the company has been able to achieve for over 20 years. Then, Andres will discuss better work performance since the pandemic began and the effect of the changing business environment on our operations. Andres will also share our perspective for the business for 2022 and beyond, as well as the commercial and operational initiatives underway to adapt to current conditions. Carlos, in turn, will discuss our results for the quarter and for the year. And finally, I will briefly discuss Jafra's acquisition and our plans for when it is approved. Slide five shows that even before 2020, Better World was able to achieve KGR above 20% in net revenue EBITDA and network of associates and distributors. Even in periods of uncertainty, So just from 2005 to 2010, including the financial crisis, our revenues and EBITDA grew at more than 20% KGR. There have been certain years in the past when our growth has slowed and even our revenues have declined. For example, in 2008 and 2009. But in long term, our business has always tried. Particularly since 2014, our growth rate accelerated, proving the strength of our business model based in three strategic pillars, product innovation, technology, and business intelligence, and paving the way for growth in the years to come. In this way, From 2014 to 2019, we were able to grow at 39% KGR in net revenue, 46% in EBITDA, and 44% in our associates and distributors base. In summary, for the last 20 years, we have been able to profitably grow at high rates due to our business models' key features. namely high cash flow generation, asset-like business model with low CAPEX requirements, and our flexibility to adapt to different environments. Now, Andres will give you a brief overview of 2020. Since the pandemic began, what happened during 2021 when external environments changed our expectations throughout the year and the commercial and operational initiatives we have in place for 2022 after carefully reflecting about the last two years.

Thank you, Luis, and good morning to everyone. Thank you for joining us today. 2020 was an extraordinary year for our business. We were able to capture the opportunity and grow at unprecedented levels in a short period of time from Q1 20 to Q1 21, thanks to the flexibility of our business model. Along with it, during this period, we benefited from several tailwinds. First, the increase in demand for our products. As people spent longer periods of time at home, they realized their need for home solutions and found them in better work. In fact, the total estimated market size for our products expanded 57% from 99 billion pesos per year in 2019 to 156 billion pesos per year in 2020. Second, as many people lost their jobs due to the uncertainty during the beginning of the pandemic, Better World was able to provide an attractive source of income when these people needed it the most. According to INEGI, Mexico's National Institute of Statistics and Geography, 10.3 million people left the economically active population from December 2019 to June 2020, resulting in an 18% decline in economically active population in Mexico. These tailwinds, together with our tech-based model, attractive catalog, and attractive benefit program, accelerated our growth to unprecedented levels. Our average network of associates and distributors base expanded 183%, resulting in a growth of 205% in net revenue and 287% in EBITDA. While this was a positive period, it turned comparisons of 2021 with respect to 2020 quite challenging, especially regarding the second half of the year. As shown in slide nine, 2021 started strong. And in Q1 21, we achieved our strongest quarterly results yet with a 205% growth in net revenue. Multiple factors indicated that the trends that started in 2020 due to COVID would continue through 2021. During Q2 21, strong results continued as we grew 81% compared to the same period of 2020 when our accelerated growth had started. During the third quarter, after the summer ended, it became clear to us that as people returned to their pre-pandemic activities, the consumption trends that had prevailed during 2020 and the unusually strong demand for home solutions would normalize. In addition to a shift in consumption trends from the third quarter and going forward, consumption environment in Mexico softened versus the first half of the year. Therefore, for the fourth quarter, on top of the harder comparison base, our business was impacted by sluggish consumption in Mexico and by external factors related to supply chain disruptions prevailing globally. This led to lower than expected net revenues, 11% below Q420 comparable net revenue. Slide 10 depicts the effects of this return to normality after the worst months of the pandemic in 2020. In the second half of 2021, unemployment returned to 4% after peaking at 5.4%, and economically active population recovered and surpassed its pre-pandemic levels after having declined 18% from December 19 to June 20, according to Inehi. As people return to their normal economic activities, some of the associates and distributors that joined our network during 2020 decided not to continue with BetterWear, thus resulting in a higher than average churn rate and a consequent mild decline in our average network of associates and distributors of 11% comparing Q1 21 to Q4 21. It is relevant to highlight that even when these macroeconomic indicators have fully recovered, we have been able to practically maintain the level of sales force that we gained during 2020. This is a testament that better work is a good second income opportunity for millions of people. And as our churn rates normalize, we will return to growth in our sales networks. Coupled with the effects of the return to normality, during the second half of 21, our business was negatively impacted by two main external shocks, as slide 11 shows. First, weaker consumption trends relative to what we saw during the first half of the year. and a redirection of consumer spending towards products and services that they were not spending on during the pandemic, including traveling, eating out, and expenses related to the in-person back-to-school season. And second, supply chain disruptions worsened globally, which affected practically every business in the world, and our business was not immune to it. By the end of Q321, we were optimistic that the situation would not have significant impacts, but the external satiation was much worse than what we previously expected. During the second half of the year and during the fourth quarter, we incurred higher freight expenses due to the shortage of containers. Restrictions in energy use in China were stricter than previously expected, which led to the partial and total closure of the factories of some of our suppliers and impacted our ability to fulfill demand. And higher container prices continued, impacting our costs and margins. All of these factors impacted our results for the fourth quarter as Carlos will discuss later in the call. As for our associates and distributors, we are confident that we start 2022 with a much stronger network. If we go to slide 13 of the presentation, we can see that the trend of our network of associates and distributors through 2020 and 2021. When the pandemic started in March 2020, economically active population decreased sharply, and our sales network experienced accelerated growth. Since June 2020, economically active population has been recovering steadily, and in fact, in Q321, it surpassed its pre-pandemic levels. As this happened, our network of associates and distributors continued with its growth trend, and practically maintained the level achieved by the end of 2020, 2.7 times the size it was by Q4 2019. Our current base of associates and distributors shows strength in many ways. If we go to the next slide, our sales network derives strength from an adequate mix of seniors and newcomers. The number of associates and distributors with tenure of more than a year has been growing steadily since 2017. And in 2021, it increased almost 100% both for distributors and associates compared to 2020. Historically, people with longer tenures place orders of higher value. Our most senior people incorporated over 10 years ago placed orders which are on average around three times higher in value than those who joined in the last year, which explains our strong focus on retention. We have also managed to maintain higher than average weekly activity rates for over 34% of associates and over 80% of distributors. As for attraction, adding up new recruits is likewise fundamental to growth. During 2021, even when people went back to their normal economic activities, we were able to attract large number of associates and distributors. In fact, during 2021, we attracted 3.1 times the number of associates and 3.3 times the number of distributors that we had attracted during 2019. Our proven ability to retain and acquire talented and committed people will continue being a key source of future growth and productivity, which allows us to reach our target 40% household penetration by 2025. As described in slide 16, in order to adapt to the current environment and having in mind that some of the external headwinds that impacted our results during 2021 will continue through 2022, we are adjusting our commercial and operational initiatives. First, commercially. First, we executed a general price increase of 12% since catalog one. to offset cost pressures coming from higher input costs globally. This is aligned to competitors' actions in the market, and therefore we expect to preserve our competitiveness and profitability. Due to the softer consumption environment, we will increase the share of lower price items in our catalogs. Third, With the increased frequency of our catalogs started in September 2021, we gained flexibility to adapt to changes in consumption trends and patterns. Fourth, as people have gone back to normality, we will increase the in-person attraction with our sales network. And we believe that a hybrid business model combining personal contacts and technology is the way to grow going forward. Five, we also target to increase the share of new products per catalog from 10% to around 20%, which will incentivize incremental purchases per customer. Six, we have adjusted our initiatives program to focus on retention and recruitment of new distributors and associates. as growth in our sales network is instrumental to grow in our revenues and profitability. On the other hand, operationally, number one, to hedge the exposure to additional increases in freight costs, we have signed contracts for approximately one-third of our expected shipment costs for 2022 and 2023. We are also accelerating our plans to manufacture a larger share of our products in Mexico to diversify from China manufacturing. This will also allow for efficiencies in our inventory levels. Third, in terms of exposure to the US dollar, we plan to hedge 100% of our expected operating needs. As of today, we have hedged approximately 85% of 2022's needs. And last, with our peak impact tower finished, we expect to achieve additional operational efficiencies during 2022. All these initiatives will allow us to return to growth and recover our profitability levels during the year. Having said that, In 2022, we still face uncertainties and tough comparisons, especially for the first half of the year. Given the flexibility of our business model, we are confident that we can adapt to any market condition and return to year-on-year growth by the second half of 2022, with our growth rates accelerating going forward. Therefore, We expect our net revenue and EBITDA for 2022 to be in line with 2021, assuming no significant deterioration in the external environment. Over the long term, our target is to reach 40% of household penetration in Mexico, which will remain in place. Now, Carlos will briefly discuss our financial results for the quarter and the year.