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spk00: Good morning. Welcome to BetterWare's 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 requires actual results to differ materially from expectations, and any such statement should be considered in conjunction with the questionnaire statements and the safe harbor statement in the earnings release and risk factors discussed in 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 in the investor section of the company's website. I would now like to turn the call over to the company's executive chairman, Luis Campos. Please proceed.
spk02: Thank you, operator, and good morning, everyone. 2023 has been a transformative year for BetterWeb. As a group, we have become stronger and more diversified. Also, leveraging our core competitive advantages as a consumer product and direct selling leader. This was reflected in a 5.2% year-on-year net revenue increase with a strengthened profitability, achieving a total of 2,721 million pesos in EBITDA. at the midpoint of our initial guidance and exceeding our revised guidance for the year, and a 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 commend the entire Better Work Mexico team for their success in navigating challenging post-pandemic headwinds. The stabilization we are seeing in Mexico's home solutions market, coupled with robust execution of our commercial strategy, enabled a 7 percent 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 to our Jafra team. Jafra has surpassed our initial expectations as an acquisition that has proven to be highly accretive, delivering exceptional four-quarter 2023 EBITDA with a 45.3% year-on-year increase in Mexico and achieving almost break-even in the U.S. Initial implementation of our proven business model's key elements, product innovations, technology, and business intelligence, has propelled the company back into a growth phase, also with meaningful strategies resulting in cost savings across this business. The Jaffa 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 four-quarter 2023 net revenue represents a 44% greater since the four-quarter 2019, representing an increase to 3,402 million pesos from $791 million for the same period in 2019. Therefore, while our Better World business achieved a 17% CAGR, the remaining CAGR reflects our Jaffa acquisition. Among these and the other 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 the Better Work and Jafra brands in Mexico and abroad. Andres has gained a deep understanding of our business over these 11 years with Better Work, successfully navigating our progress and 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 revitalized management, is a winning formula for success. With that, let me pass our conversation to Andres, and I will return for some brief closing remarks. 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 enabled a strengthened capital structure as we entered 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. Our focused 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 year. Wellness, Kids, and Pets. Wellness showed outstanding success. and we have modified kits and pets to maintain the most effective concepts. 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 environments. 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 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 onsite 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 Work Plus 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. Better words, strong commercial strategy enables us to reach more homes and increase our share of wallets. Today, We have 25% total home penetration in Mexico and an estimated 4% market share, representing a significant growth opportunity which we are actively pursuing. I am confident that with Santiago's new leadership, which we also announced in January, Better World Mexico's team is poised for success going forward. Turning to Jaffa Mexico, we gradually implemented key elements of our Better Work Success formula in 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 Jaffa 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 2020 treatment revenue from only 6% in 2022. Number two, continued growth in fragrances, our main category, also with the launch of very successful lines and brand extensions during the year. Number three, increased customer conversion rate resulting from an improved catalog graphic design look and feel, which made our catalogs more enticing. Number four, increase consultant acquisition through small, targeted, and impactful incentive program adjustments. Number five, peace in doing business for our leaders and consultants through the inaugural launch of our Salesforce 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 chatbot, enabling us to expand our consulting base, reflected in a 2.5% year-on-year increase for the fourth quarter of 2023. Going forward, the Japan-Mexico team is well positioned to continue to capture the vast opportunity in Mexico's beauty market and Importantly, expand our 4% 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. 2023 was an important year for Jaffa US. While we began the year with operating challenges, and declining revenue, we made swift decisions to recalibrate these business and correct the 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 Jaffa. Further, we are well positioned to launch BetterWars U.S. 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 U.S. Diego Isaza has considerable U.S. consumer product experience with companies including Dr. Gamble and Hershey, which when leveraging BetterWare's deep brand experience and proven business model should result in continued success. Our planned investment for the initial launch phase of Delaware U.S. operations is between $5 to $7 million in the first year, and do not expect a meaningful contribution in the first year of operations. Our focus will be on the Hispanic market, comprised of 60 million people, representing $3.4 trillion USD in estimated GDP. making it the world's fifth largest economy and double the size of Mexico, according to the Latino DAPA Collaborative Think Tank. Finally, we made further progress toward our launch of Better Work Peru, hiring our general manager, Anace Augusto, 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. Thank you, Andres, and good morning, everyone. I would like to review our fourth quarter of fiscal year 2023 results. I will then share perspectives on how we are approaching 2024 and discuss our capital allocation strategy going forward. Please keep in mind But the currency I will refer to when reviewing our results and guidance is the Mexican peso, which is our functional and reporting currency. Additional details can be reviewed in our earnings release published yesterday. I will then share 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 2022, supported by positive performance of our two brands in Mexico, partially offset by a revenue decline in Jaffa U.S. It is relevant to highlight that BetterWorks net revenue grew 7% compared to fourth quarter 2022, the first quarter of the year-over-year growth since third quarter 2021. Consolidated growth margin was roughly in line with fourth quarter 2022, decreasing 48 basis points to 70%. This decline was mainly due to margin contraction in Delaware, explained by unfavorable sales mix. In particular, promotions accounted for a larger share of sales than in fourth quarter 2022. This was mostly upset by margin expansion in Jaffa, Mexico, driven by favorable exchange rates, reduced costs from supplier negotiations, and favorable sales mix. Consolidated IRIBA for the quarter grew 36.7% to 819.5 million pesos, compared to 599.3 million pesos in the fourth quarter of 2022. An IRIBA margin expanded 556 basis points to 24.1%. Profitability improvements in all three subsidiaries were achieved through successful efforts in expense optimization, allowing us to exceed our early expectations for the quarter. Consolidated net income was 406.1 million pesos. 62.5% higher than in the fourth quarter of 2022, mostly explained by net revenue growth and an increase in operating leverage, which allowed us to increase our earnings to 10.9 pesos per share. And for the year, consolidated net revenue increased 13.1% compared to 2022, explained by the consolidation of JAF lateral results for the full period this year. compared to almost three quarters in 2022. Outstanding net revenue growth in Jaffa, Mexico was partially offset by the decline of net revenue in Delaware due to lower average distributors and associate base and net revenue decline in Jaffa, US. This margin for the year expanded 265 basis points to 71.5% compared to 68.9% in 2022. boosted by Joppa's higher gross margin profile included in our results for the whole year 2023, which was partially offset by gross margin contraction in Delaware due to unfavorable sales mix during the last quarter of the year. Consolidated EBITDA for 2023 was 2,721 million pesos. 17.5% higher than in 2022 and exceeding our previous four-year guidance. Even the margin expanded 79 basis points to 20.1% due to the positive performance in our three subsidiaries driven by efficient expense control, leading to margin expansion in all our subsidiaries and closing near break-even profitability in the upper U.S. Consolidated net income increased 20.3% to $1,049.5 million, driven by higher operating leverage, upsetting the effect of higher interest rates on our debt. Earnings per share for the year were $28.2. And finally, our free cash flow generation for the year, defined as operating cash flow minus capex, increased 79.6%, attributed to a 67.9% increase in operating cash flow from EBITDA increase, inventory turnover improvement in local businesses, and improved payment conditions with suppliers in Jaffa, coupled with lower capex investments. As for our balance sheet, the company's financial position continues to improve, as we reduced 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 in 2024. Having said that, and highlighting the confidence we have in our growth prospects, our Board of Directors has proposed a visible payment of 250 million pesos for the quarter, which is subject to the approval of the ordinary general shareholders' meeting to be held on March 6, 2024. We remain committed to returning value to dividends to our 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 13,800 to 14,400 million pesos, and our consolidated EBITDA to be in the range of 2,900 to 3,100 million pesos. 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 he will take any questions you may have. Thank you.
spk00: Thank you. If you would like to ask a question, dial in by phone and press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star and then two. At this time, we will pause momentarily to assemble our roster. Our first question is from Eric Beter with SCC Research. Please proceed.
spk06: Good morning. Congratulations on a solid end to the year.
spk05: Hi, Eric. How are you doing, Andres? Good morning. Doing great.
spk06: How about you? Let's talk about you had to continue to make significant strides in reducing inventory levels, especially when you compare it to the growth in the top line. How should we be thinking about inventories in 2024 and beyond? Hi, Eric.
spk05: This is Andres again.
spk02: 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.
spk06: So there's still growth there? So there's still gains to be had there?
spk02: Still opportunity to reduce inventories, and we will continue to do so. A context of growing revenue will obviously help us to make that last impact in the inventory to return to normal levels.
spk06: Great. When you look at the opportunities at Jaffa, both Jaffa Mexico and Jaffa USA, obviously you have a very strong position in perfume. What other categories would you think make a lot more, would continue to make sense to add or to expand upon to capture more of your customer share wallet?
spk05: Yeah, Eric, this is Andres again.
spk02: 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. The categories where we see a lot of opportunity are basically color, skin care, and toiletries. They are three very big categories, both in Mexico and in the U.S., 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 to grow going forward.
spk06: And kind of a structural question on Better Wear USA. So you're rolling that 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 you know, kind of nationwide, how should we be thinking about kind of the cadence of the rollout and how you're going to support it?
spk05: Yeah, very, very good question.
spk02: So as we spoke about, we are weeks away from launching in better. It will be based off of Dallas in Texas. And it's very important also to know We're leveraging on many of JAWS capabilities, such as distribution center and using some of the back office that JAWS and synergies for our
spk04: We are experiencing technical difficulty. The conference will resume momentarily. Once again, thank you for your patience. We are experiencing technical difficulty and the conference will resume momentarily. Thank you. Thank you for your patience. We are ready to resume. Go ahead, sir.
spk02: Okay, thank you. Eric, this is Andres. Do you hear me there? Yes, we can. Okay, perfect. Thank you. So as I was telling you, we are ready to launch in the U.S. We will begin selling only in the state of Texas. to pilot test all our operations and everything. So it is important to note that the first year, 2024, we should not expect any significant positive impact from our Better World launch. It will be a year where we will basically focus in Texas in the first month and then maybe expand to other states in the following months. And I'd also like to 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. According to some studies, it's a 60 million population market, It's 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 during the first years.
spk06: Great. Again, congratulations, and I look forward to 2024. Thank you.
spk05: Thank you, Eric. Have a good day.
spk00: As a reminder to Star 1 on your telephone keypad, if you would like to ask a question, our next question is from Christina Fernandez with Telsey Advisory Group. Please proceed.
spk01: 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. You know, 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.
spk03: Thanks.
spk05: Hi, Cristina. How are you? This is Andres.
spk02: So, you know, we... saw a significant impact of our commercial strategies in Better World Mexico. I think that in the first part, Better World Mexico had a great fourth quarter. All the different commercial strategies that we had implemented and that we have mentioned really hit off. And then it helped, you know, we did the price decrease in September which kind of helped all the strategies to start streamlining up again and have a great quarter for Better World Mexico. Then, on the other hand, at the same time, in Jaffa, Mexico, we have a great quarter as well, and especially in terms of profitability for Jaffa, Mexico, we had a great impact from an increased growth margin in the fourth quarter, which helped our EBITDA results for the quarter. So those were the main reasons. Both revenue, we think that Better World Mexico had a great impact to achieve the revenue. In this case, JAPRA Mexico contributed, was the one who contributed more in the profitability with an increased growth margin of about 581 basis points. Yeah, thank you for that. Sorry, go ahead.
spk05: Go ahead, Cristina.
spk01: Yeah, no, I just had a follow-up on the Jafra Mexico profitability. Was there anything that was like 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 BetterWear and Jafra Mexico? I mean, you give them better where it has been, you know, sort of in that 20% range and, you know, down a little bit from first half of the year versus Jafra that has been accelerating the profitability.
spk02: Christina, so I will go to Alejandro 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. Yeah. Hello, Cristina. Nice talking to you. This is Alejandro Llora. What's happened in the last quarter with our gross margin in Jaffa, Mexico, we have a significant improvement in this gross margin. basically because of a favorability in the exchange rate. The exchange rate, the appreciation of the peso during this quarter was positive. We also had a reduced cost achieved through supplier negotiations, specific vendors, and that impacted almost 2% of points for gross margin. And we had a favorable variation in product volume in our manufacturing facility. So volume additionally and the mix also of that products that we manufactured. So that combination arise with this improvement in margins. But what we're expecting for 2024 is that this will be normalized And we will be, once again, in margins between 80% to 82% rich.
spk05: Thanks.
spk01: 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 that's underpinning the revenue outlook for the year?
spk05: Yeah, Christina. It's Andres again. So on the...
spk02: We're saying, you know, the market has pretty much stabilized. It is important to note that during the pandemic, after the huge market growth, then came a very steep decline. And now from the market stories 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 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 Delaware, Mexico, is that the market continues to be stabilized. We're not assuming...
spk05: huge growth in the market.
spk02: And that will help us even more. Now, the Mexico side, you know, the beauty market in Mexico is a buoyant and growing market today. After the beauty market had some trouble... And now after pandemic, it's growing buoyantly through 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 Japan, Mexico. We also have around a 4% market share. And, you know, 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 Jaffa. 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 Better Work U.S., but we should expect Jafra U.S. to start growing again and contribute little by little to the overall revenue of the group.
spk05: Thank you. Our next
spk00: Our next question is from Andres Zameli with LCA Capital. Please proceed.
spk07: 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 margins 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 maintaining those margins, EBITDA margins, stable throughout the years. Thank you.
spk02: Yeah. Thank you, Andres. This is Andres again. So for the Delaware U.S. expansion, we are estimating within our projections $1 million investment during 2024. So it's not a very relevant investment as regards to our yearly EBITDA. And, you know, we are leveraging a lot on our capabilities in Jafra today. As I mentioned earlier, we are going to be distributing off Jafra's distribution center, the exit capacity that we have there. So that will not be a very relevant cost. We're also leveraging on all the back offices, to finance, HR, all the back office. And this investment will be mainly in our commercial team for, better word, U.S. You know, 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're going to go step by step not going to just go out and invest a month. We're going to go step by step, and it will not be a relevant investment. Also, in Peru, we're going also step by step. We are estimating an investment of between $500,000 to $1 million to make all the preparations in the pre-operating expenses. In general, we don't expect this to be too relevant, and it is already implied in our guidance.
spk05: Perfect. Thank you very much. And once again, congratulations on a great quarter. Thank you, Andres.
spk00: Again, if you have a question, please press star, then 1 on your telephone keypad. We will pause for a brief moment to see if there's any final questions. 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.
spk02: 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 the launch of Better World U.S. and continue towards Better World Peru in early 2025. Our company's strong fundamentals, led by a renewed 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.
spk00: Ladies and gentlemen this concludes Better Wears fourth quarter 2023 conference call. We would like to thank you again for your participation. You may now disconnect.
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