Betterware de México, S.A.P.I. de C.V. (BWMX) Earnings Call Transcript & Summary

Thank you, and welcome to Betterware's conference call to discuss the acquisition of JAFRA's operations in Mexico and the U.S. With me on the call today are Betterware's Executive Chairman, Luis Campos, and Corporate Chief Financial Officer, [ Carlos Dorman ]. Before we get started, I'd 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 statements should be considered in conjunction with the 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. Now I'd like to turn the call over to the company's Executive Chairman, Luis Campos. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thank you for joining us today. As disclosed yesterday in our press release, we are excited to announce the acquisition of JAFRA, a leading company in the beauty and personal care products industry. I will begin my remarks by sharing a summary of the acquisition and discussing the strategic rationale behind it, as we believe it represents a perfect strategic fit for Betterware. Then [ Carlos Dorman ], our corporate CFO, will give a brief financial overview of JAFRA and the transaction. You can find the complete presentation in our investor relations website. Starting with Slide 5 of the presentation. We are excited to announce the acquisition of JAFRA's operations in Mexico and in the U.S., as its 443,000 sales representatives and its portfolio of leading brands will widen our product offering, our distribution capabilities and will support our geographic expansion into the U.S. We believe this, along with many other attributes make JAFRA a perfect fit for our company. This acquisition has us well positioned to deliver strong growth and enhance value for our shareholders. Indeed, the acquisition of JAFRA provides a unique opportunity for us to enter an attractive new industry, with estimated annual revenues in Mexico and the U.S. of approximately $100 billion and replicate Betterware's strategic pillars at JAFRA to strengthen its business model and maximize its growth potential. Through this acquisition, we are modifying our international expansion plans to focus on the U.S., taking advantage of JAFRA's presence and experience to eliminate entry barriers and accelerate the introduction of Betterware's portfolio of products in this very attractive market. Our presence in the U.S. will also allow us to focus on the digital transformation of both companies, paving the way for us to more rapidly grow our e-commerce presence. All of these will be possible, thanks to JAFRA's and Betterware's outstanding and experienced management teams, which will remain [ intently ] focused on the respective business operating as independent companies. As customary, the transaction consisting of a total cash offer of $255 million or 100% of JAFRA's operations in the U.S. and Mexico is subject to regulatory approval, which is expected to be granted during the first half of the year as JAFRA belongs to a different industry with a different product line than Betterware. The financial details of the transaction will be reviewed ahead by Carlos ] in a few minutes. The acquisition of JAFRA entails a deep and clear strategic rationale. The incorporation of JAFRA will allow us to create a multichannel group with unique brands in different product segments, targeting similar consumers profiles and distribution channels in Mexico and the U.S.A. JAFRA is a strong and well-positioned international brand with access to millions of households in Mexico and in the U.S. through its direct selling business model. JAFRA's brand value, consumer preference and price architecture have delivered consistent top quartile gross margins while preserving affordability with its proven experience in the beauty and personal care industry. JAFRA's management team will operate as an independent entity focused on the long-term objectives of the company. We are confident that we can replicate the key features of our successful business model in JAFRA to accelerate its growth in a profitable way as we have done in Betterware for the last 20 years. Indeed, our business model shares several common features with JAFRA's, and we have already identified specific operating synergies, opportunities to be achieved. We will leverage on JAFRA's presence in the attractive beauty and personal care industry to expand our product offering and take advantage of their experience and know-how in the U.S. market to introduce our own product line. Through this acquisition, we will expand our geographic footprint to the U.S., enhancing our international focus to the North American market rather than the Latin America with a special focus on California and Texas. By leveraging on JAFRA's more than 65 years of presence and experience in the U.S. market and its current operating capabilities, we will take advantage of these opportunities for Betterware to start distributing our products in key states where JAFRA has approximately 41,000 leaders and consultants. We have conducted a thoughtful search of M&A opportunities. And the JAFRA acquisition matches perfectly our long-term agenda. It will allow us to replicate our business model and deploy our 3 strategic pillars to accelerate its growth as we have successfully done with Betterware. Starting with product innovation, implementing Betterware's best practices will allow for a successful and enhanced pipeline of innovative products in JAFRA's product lines. In terms of technology, Betterware's existing platform of diverse technological tools to support distribution network and commercial initiatives will be applied to JAFRA's business, making us fully confident that they will be instrumental to growth in the coming years. And finally, business intelligence, replicating the big data capabilities that we have developed over the years in Betterware will significantly improve JAFRA knowledge and understanding of the market and will accelerate its market penetration. At Betterware, we have developed the technological tools to take advantage of the growth in e-commerce, namely our B2C digital platform and our Betternet mobile app, which have been instrumental to our growth in the last 7 years. We will use these tools in JAFRA's current and in future operations to continue expanding our market share. The acquisition price of $255 million implies an attractive entry multiple, even before I identified cost synergies and efficiencies that we believe can be achieved. These efficiencies include applying Betterware's best practices to JAFRA's client services, corporate structure, working capital management, distribution and logistics among others. Now Carlos will review the financial highlights of the transaction.

Thank you, Luis, and good morning, everyone. Thank you for joining us today. As Luis has already mentioned, JAFRA is a renowned and profitable business with a strong presence in Mexico and the United States and [indiscernible] potential to be achieved. As of 2021, JAFRA had a monthly average of around 450,000 consultants in both countries and net revenues of approximately MXN 5.8 billion. For the last 5 years, the company has shown stable high gross margins, coupled with expanding EBITDA margins, which demonstrates that JAFRA has a strong and experienced management team, able to focus on profitability. We are confident that replicating Betterware's business model and leveraging on our 3 strategic pillars will result in accelerated growth in revenues, which will drive incremental operating leverage and higher EBITDA margins. As shown in the next slide, we will execute this transaction on a debt-free, cash-free basis with a purchase price of $255 million or approximately MXN 5.4 billion. This implies an attractive entry market growth of 5.5x enterprise value to estimated EBITDA 2022 even though we conservatively projected JAFRA's EBITDA growth around 5% in 2022. Considering the midpoint of cost synergies already identified in the range of $5 million to $10 million, the implied multiple becomes 4.8x. Furthermore, it is relevant to mention that the acquisition will be highly accretive in the first year as the business is expected to add approximately $0.34 in earnings per share in 2022 and [ over ] $45 million of EBITDA without considering any of the identified cost synergies. This represents an accretion of around 15% relative to Betterware's third quarter and last 12 months earnings per share of $2.45. Once considering the midpoint of the synergies, the earnings per share would be $0.48, an accretion of around 20% and additional EBITDA of $54 million. We are confident that we can achieve the cost and expense synergies we have currently identified in JAFRA's P&L, and we expect to see some improvements soon after the closing of the transaction. We will finance 88% of the acquisition price through a unsecured 5-year loan with amortization starting in year 3 and variable interest rate equal to the 28-day Mexican interbank offering rate plus 110 basis points. [indiscernible] received for the acquisition debt is as competitive as [indiscernible] in the Mexican market and is relevant to consider that we have 2 years of interest on the period, which leaves us plenty of time to look for alternatives to refinance the debt with a longer tenure. For the remaining 12% of the acquisition price, we will refinance with existing cash in our balance sheet. Once the transaction is completed, our balance sheet will remain strong with a conservative ratio of 1.4x, total debt estimated 2022 consolidated EBITDA. Additionally, JAFRA's strong cash flow generation capacity, it's also key to assess the transaction and is reflected on its 2.8x estimated EBITDA interest coverage ratio for 2022. In addition to this, we [indiscernible] of JAFRA's cash conversion cycle and improved working capital management. In this way, [indiscernible] case for a financial and compelling acquisition. I will now turn the call back to Luis for his closing remarks. Thank you.

Thank you, Carlos. We are excited with the prospects of this acquisition, which is the perfect opportunity to accelerate JAFRA's growth by leveraging our scale and infrastructure, by replicating our 3 strategic pillars into JAFRA's day-to-day operations. We will share with you our detailed strategy to accelerate both JAFRA's and Betterware's growth once we release our fourth quarter and full year 2021 results in February. And last, I take this opportunity to reiterate my confidence and commitment, along with the rest of the team to Betterware's continued promising future following the unprecedented effects of the pandemic, which led to [indiscernible] in 2020 and then a period of consolidation in 2021. The structural basis to achieve continued and profitable growth is in place as we have the proven experience, resources and financial strength to achieve it. I will now turn the call over to the operator and we'll take any questions you may have.

[Operator Instructions] Our first question comes from the line of Eric Beder with SCC Research.

Congratulations on the acquisition. [indiscernible] awful. Could you talk about kind of the split here between the revenues for JAFRA between Mexico and between the U.S. I know the company has had a commitment to the Latin market for a long time in terms of their network in the U.S. And I have a follow-up.

Eric, thank you very much for your question. As for the revenue splits, as of today, it's around 15% to 20% in the U.S. and the rest in Mexico.

Okay. And just a follow-up here. The Betterware business does not in New Mexico carry the products that JAFRA does. Looking down the road, is there an opportunity to not use maybe the same brands but to use the expertise in JAFRA to sell through the Betterware market? And I guess the same for Betterware in the U.S. potentially.

Eric, can you repeat the question? Do you mean to join the brands in the product line or...?

No, no. JAFRA has expertise in these products. They created lines of their own. Is there the opportunity to create a line for Betterware to sell in Mexico through their distribution network, not the JAFRA's line, but I don't know, a line of JAFRA ex or Betterware ex that they can sell in through the Betterware network in Mexico right now.

No. In fact, the idea, Eric, is to maintain the businesses totally independent, that includes the sales force, okay? We are -- we have identified some operational and commercial synergies that we will be taking advantage of in the next months and years, but the plan is to keep each business totally independent, okay, with their own sales force and their own product lines.

Congratulations. It sounds like a great deal.

Our next question comes from the line of Cristina Fernández with Telsey Advisory Group.

And also, congratulations on the acquisition. I had a couple of questions. First, I wanted to start with -- see if you can give us a little bit of background on the acquisition about, I guess, why the beauty and personal care category, were you actively looking at this category? Or were you just more attractive by the potential synergies and sort of some of the growth prospects you see down the road for both businesses.

Yes. Well, the first objective was to take advantage of our business model in order to replicate it in other business in the same direct-to-consumer channel, okay? And the second 1 was a diversification, okay? And then we identify JAFRA, which model is similar, the sales model is similar to ours. And we identified that it could be relatively easy to replicate our business model based on product innovation, technology and business intelligence. What I mean is that the fundamentals are there in JAFRA. And this will make it easier to replicate our business model and diversification because, well, we are already in the home solution products and now we will be in this big market, okay? And what we are going to do is to replicate our business model there. Then I think we have to -- we can bring a lot of great initiatives in terms of product innovation and the other 2 pillars as well will be replicable in JAFRA business. And also, the cultures are very similar, okay? Then this is why we decided to go ahead with this JAFRA after exploring other opportunities. This is basically it, Cristina.

Okay. No, that's very helpful. Can you also address from a consumer demographic perspective, is there diversification in the sense that it seems to us like the JAFRA's products are a little bit higher price point. So are you essentially -- would you be selling to the same customer you already sell Betterware or is it a slightly different demographic?

I would say they are very similar, okay? The profile of our consumers is very similar. Then this will make it easier also for us. And basically, I think, in many cases, the JAFRA's people are probably selling to some similar end consumers than what we are selling to.

Okay. Another question we had was, if you can talk about the -- looking at your presentation, there's a chart on the growth for JAFRA. The business declined. It seems like 3% in 2021 and 1% in 2020. I assume some of it in 2020 was macro. But can you talk about sort of what -- why has the business been declining? Is it something about the investment or the product line, anything that would be helpful to us understanding sort of the recent trends.

Yes. They have -- I mean they have been basically focused on profitability over the last 5 years. Something I don't want to talk a lot about this now. I will talk about that when we report our results from 2021. But in fact, something we want to do is to reorient the expense and devote or invest more in the commercial side of the business. Then this will definitely help to begin growing the revenues in JAFRA. And based on our 3 pillars and a larger expense investment in the commercial area, I think will accelerate the growth while maintaining or even increasing the profitability as we have done in Betterware for the last 20, 21 years.

And just 1 last 1 for us. Could you provide a time line of when you think based on this acquisition, when do you think you could expand the Betterware business into the U.S. market?

Well, as soon as possible. I think it will take some months. But hopefully, for 2023, we could be entering the U.S.

Our next question comes from the line of [ John Lawrence ] with [ Benchmark ].

Congratulations. Could you talk a little bit about the synergy slide, that $5 million to $10 million sort of what's the spread there, positive and negative? And just a little deeper dive of where those synergies come from?

Yes. I would prefer to wait for that when we report our results in Betterware. These are basically administrative expenses and some operational expenses, okay, including some big expenses in the corporate headquarters in the U.S.

Our next question comes from the line [indiscernible] with Compass Group.

Happy New Year. Two questions on my side. The first one, if you could talk a little bit about because you've talked quite a bit about the similarities. But if you could talk a little bit about the differences between the 2 business models that from what I see from here, there are some specifically you've been talking a lot about having this asset-light model. It seems like these guys manufacture actually their own products just on the selling process, you said that's similar, but just wondering if they rely less on catalogs, more kind of e-commerce type of situations, whether the associates and distributors' model that you have in Mexico is kind of the same as what they call consultants, et cetera. And whether -- I know you said that the businesses are going to be independently run. Just wondering if eventually the idea is to converge those to have this dual system.

Yes. Something I must mention is that 1 of the things we like of JAFRA is number one, the management teams, okay? The management teams, both in the U.S. and in Mexico are very experienced, capable, committed people. The sales force is very strong. I mean, even when they have not grown the sales force over the last 4 years, they have a very strong solid base of consultants and leaders in the sales force. And then if we talk about differences, I would say, first of all, the market, I mean, the product lines, they are very good to develop new products. And probably we spend much more than what they do in terms of product development and the commercial side of the business. This is probably the main difference, okay? And that's why I was saying that we are going to change that, okay? We are going to divert the expense in order to have more emphasis in the commercial side of the business. And this is what, I would say, the most important difference, and we are going to change that, okay? We're going to invest as much as we invest in the commercial side of the business.

And would you keep the manufacturing process? Or would you try it eventually to just move it to an asset-light model?

No, definitely. We are going to keep that. I have visited the manufacturing facility of JAFRA several times. They have a state-of-the-art manufacturing facility, very strong management team there. And I think it's very important in this kind of business, in the cosmetics business to have a manufacturing facility, okay? Because this requires, I mean, you are talking about formulations, and you are talking about specialized equipment -- plant equipment, then I think it's key to have a good manufacturing facility in this cosmetics business.

Great. And then my second question is around valuation. I mean you're paying 5.5x [indiscernible]. Just wondering, as you've been doing a lot of work in terms of M&A, very disciplined in that respect, just wondering if that is the kind of multiple this business to go for, this kind of 5x, 5.5x, and that's kind of representative in general of a potential valuation for a public listed company in this business? Or this was a very unique thing. I'm just trying to understand why the current owners are selling. Now why they don't -- what's in it that they don't like or they don't want to have that push them to sell this.

Yes, this is a very strategic decision. As you know, even when they are in 60 different countries, their main business is in Europe. And they want to focus 100% on their core businesses and on their core geographic opportunities. Then this is basically the reason why. I mean they were the owners of this business for 17 years. They made of this business a very profitable business, also highly cash generators. And this is really a family decision to focus on the core business and on the core geographic areas.

Okay. And the valuation multiple, is that representative of what you see in the market typically for this direct selling model?

I think it represents a good opportunity, okay? I think this is a very attractive multiple, okay? And while we will see that with the time, and we will confirm that with the time, but this is very attractive, okay? And for a company like our company like Betterware, this is a very attractive multiple definitive, okay, definitely.

Great. And my last question is on capital allocation. How does that change with this acquisition in terms of you were focused a lot on organic growth. I know 2021 was kind of a transition year to consolidate the associates network. Just wondering what I thought was you were going to accelerate this associate growth this year. Does that still happen? Or are you going to focus more on this? Also on the dividend side, how should we thinking about going forward? Is this -- is it time to have a formal dividend policy or the $1.4 billion from there you're going to grow it. And also the buyback. I know you mentioned it on the press release that you were kind of restricted to do some buybacks. But after the fourth quarter results, you might be able to do so. Would you be going aggressively on the buyback at this point? Or just to get a sense whether this new leverage level changes some of those views about the different forms of capital allocation.

Yes. I will tell more when we report our 2021 results. For now I can tell you that we will keep the same commercial aggressive approach in Betterware in Mexico. We will be very aggressive commercially speaking in JAFRA U.S. and in JAFRA Mexico. And according to -- in line with our culture, we are going to be very conservative in the financial side of the business in order to keep or even increase our profitability and cash flow. Then this is basically it. And we are going to outline and talk a little bit more about our strategy in this sense when we report the 2021 results. As you said before, 2020 was a tremendous opportunity of growth for us. 2021 was basically a consolidation year. And as we said before and as we said when we reported our third quarter results, we have the strategy in place, and we have all the resources in place in order to continue growing this year and the years to come and achieve our 4, 5 years objectives in Betterware Mexico as we see that JAFRA began igniting the growth also in the years to come.

Our next question comes from the line of Doug Lane with Lane Research.

I'm really interested in your plans for bringing Betterware to the U.S. here. Can you talk about that a little bit more? Do you plan on leveraging JAFRA's sales force in the U.S.? Or are you thinking about basically greenfielding a new sales force under the Betterware comp plan, similar to what you have in Mexico? Just any more details on the move of Betterware into the U.S., please?

Yes. We are still working on that, Doug. But the plan in the U.S. is also probably take advantage of the sales force base they have and begin developing sales force and focus probably a little bit more than in Mexico in e-commerce in order to achieve our growth objectives. And we are still working on that. I think this will be a hybrid strategy in order not to depart from zero, okay, from root, in this case. And we are still working and fine-tuning our strategy. But definitely, we are going to take advantage of JAFRA U.S., know-how and experience in basically California and Texas markets.

Our next question comes from the line of [ Bernardo Maltiga ] with Compass Group.

First of all, if you could talk a little bit to us about M&A. Right now, as you digest the new acquisition, what can we expect in terms of M&A? Will you hold until you digest the new acquisition?

Yes. Yes. Sure. If I got your question correctly, I mean if before aiming or seeking another acquisition, would we before not digest this one. Is that the question?

Yes, that is correct. Will you wait before you digest this new acquisition to do more M&A?

At this point that we intend to do, just assimilate and integrate correctly and achieve the synergies that we -- what we already identified and realize the full potential of this acquisition before proceeding to another one.

Perfect. And just to add a little bit to this 1 in terms of M&A, are you willing to explore LatAm or the only focus will be U.S. for now?

We will continue with our objective of expanding to LatAm but I think it will take some years. I mean the U.S. is a great opportunity and it will take years to take full advantage of that. Then the situation in LatAm is now a little bit unstable. We were targeting for the near future Colombia and Peru. But we have to wait and see what happens in those countries before we decide to enter. For now and for the years to come, at least for the 5, 6, 7 years to come, we are going to focus on the U.S.

Perfect. And just 1 last question. In terms of CapEx for JAFRA, as they have manufacturing, could you compare a little bit CapEx with Betterware's CapEx as a percentage of sales?

Carlos?

Sure. What I can tell you at this point is that in the case of JAFRA, 1 of the potential opportunities realized or has to do with the capacity that is [indiscernible] is not fully used today. So the plant today operates at around 65% of its capacity. So for now, there's not really much to invest behind CapEx and that's actually an opportunity for us.

Thank you. That concludes our question-and-answer session. I'll turn the floor back to Mr. Campos for any final comments.

Thank you for joining us today, everyone. We look forward to speaking with you when we report our fourth quarter and full year results in February and meeting with many of you at the upcoming investor conferences. Thank you, everyone, and have a good day. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.