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Good morning, and welcome, everyone, to Betterware's Second Quarter 2020 Earnings Conference Call. With us this morning from Betterware, we have Mr. Luis Campos, Executive Chairman; and Andres Campos, CEO. They will discuss on the more important strategic, financial and operating aspects of the quarter.
Before we begin the call today, I would like to remind you that the information discussed in today's call may include forward-looking statements on Betterware de Mexico's future financial performance and prospects, which are subject to risks and uncertainties. Actual results may differ materially, and the company cautions not to rely unduly on these forward-looking statements. The company undertakes no obligation to publicly update or revise any forward-looking statements.
I will now turn the call over to Mr. Luis Campos. Sir, you may begin.
Yes. Thank you. Hello, everyone. We are very proud to present our results for the second quarter of 2020. We will be glad to answer questions after our remarks, so please feel free to send them.
Year-on-year, our net revenue increased 82.1%. EBITDA grew 94.3% and net income did so by 132.9%. This was achieved mainly by the growth of our network where distributors grew 108% and associates 94%. As you know, we have been growing a compounded rate of sales growth of 22.4% for the past 20 years and more aggressively at the rate of 46% in the past 6, and a compounded rate of EBITDA growth of 26.7% for the past 20 years and 51.6% in the past 6 years.
Since the start of our journey, we developed a very unique and differentiated direct selling model. But in the past 6 years, we have evolved our model to become what we call now a network-enabled platform. This new model leverages on the power of products, technology and people networks to achieve a new and unique direct-to-consumer business model. Without a doubt, COVID-19 helped to prove the power and resilience that this model represents. Our network was able to execute from home and became even more efficient.
To give some perspective on growth acceleration, the month of June growth year-on-year was 148.4%. Given the beforementioned remarks, we feel comfortable with our revised EBITDA guidance of MXN 1,450 million for the year 2020. This growth, together with our solid balance sheet and growing recurring cash flows, led the Board of Directors to propose a MXN 330 million dividend for the second quarter 2020, which is subject to approval of the next ordinary general shareholders' meeting to be held on August 17, 2020.
We feel confident about our ability to continue to penetrate the Mexican market and eventually expand our footprint to other international markets. Our CEO, Andres Campos, and our strong executive team continue to demonstrate a strong grasp on results and service.
Now I would like to pass the word to him for further explanation of our results.
Hello, everyone, and good morning. I will now further explain key aspects behind our strong results. Revenue growth of 82.1% was driven by the following factors: number one, the unique network-enabled platform model that we have developed in the last 6 years. This commercial platform leverages on the power of people networks and proprietary technology to promote, distribute and collect payments of all products managed through our platform. It represents an economic platform for our more than 42,000 distributors and 740,000 associates, leveraging on their social relations installed capacities. Either as a side gig or as their main economic platform, any person can count on our model and our technology as a very productive means for an extra income.
Second, our product range within the home solutions realm is everyday more successful. We continue to invest heavily on customer research as well as in our proprietary innovation tools, which help us develop and launch over 300 new products annually, which are more and more successful as time passes.
Third, our business intelligence capabilities. We continue to solidify our abilities to process, understand and act on big data. We are happy to have launched our first artificial intelligence actions, which will be key for the future development of our network-enabled platform.
Last but not least, we continue to deliver great service. Even as demand spiked this quarter, we were able to grow our operation capabilities to have minor impacts on service. We hired more than 300 new employees, grew from 4 to 10 pick-and-pack lines and procured more than 200 new delivery trucks, all in just 3 to 4 weeks.
We are also excited to announce that we have begun moving our operations to a new campus. This campus will help concentrate operations under one roof, and this is packed with technological advances that will boost service levels and productivity, which should reflect economic efficiencies starting in 2021. We expect to complete moving by December 2020.
On the other hand, EBITDA growth of 94.3% was mainly driven by revenue growth, and on the second hand, operational leverage on our fixed expenses. These factors offset the temporary impact that a weaker peso have on our gross margins. EBITDA margin growth remains at 26.4%.
Our balance sheet and cash flow generation remains strong. On one hand, our net debt-to-EBITDA ratio is at a negative zone at minus 0.1x. We continue to work mainly on our third-party asset model, which has helped us to strengthen our ROTA to 48% at the end of the second quarter of 2020.
All in all, this leads to a strong capacity of cash flow generation of 59.7% increase in the adjusted levered free cash flow, thus boosting our liquidity. As Luis said before, we are confident on our ability to execute on good results, expanding in the Mexican market and eventually also in other markets as well.
With this, I conclude my remarks. And now let me turn back the call to the operator to open the line for Q&A.
[Operator Instructions] Our first question comes from Jorge Lagunas with Apalache Análisis.
Our very sincere congratulations for the remarkable results. We have 2 questions. The first one is given the strength of your balance sheet and cash flow generation, are you actually reviewing any acquisition opportunity? And the second question is how are you doing in Guatemala, if you can share with us any information in this regard?
Thank you. I will take care of the first one and leave the other one regarding Guatemala to Andres.
Yes, in fact, our main nonorganic initiatives for growing are geographic expansion and some M&A. In fact, we are now in the process of looking for some targets that makes sense. We want to stick to the home concept. And eventually, we're going to make some smart acquisitions in order to continue with our objective of becoming the reference of home products in Mexico. Then, yes, we'll try to do something in that area.
Hi. With regards to Guatemala, we have been operating there for a bit less than 1 year now, and it has been growing. It is, as we know, a pilot test at the moment, but it has been growing well. And we are ready to continue developing the business in Guatemala and making sure that we solidify the way we expand into international markets.
Our next question comes from [ Karthik Srinivasan ].
I've just recently become familiar with your company. Very impressive financial performance, and I must say your stock is dramatically undervalued versus some of your U.S. peers. So hope that changes in the future. But I had a question about your gross margin guidance that's kind of embedded in your EBITDA guidance for the remainder of the year. Are you assuming that gross margins remain roughly comparable to what you experienced in Q2? Or is there going to be some potential for uplift towards the levels that you're experiencing, say, in Q1 of this year and 2019?
So the gross margins in Q2 were impacted by the depreciation of the Mexican peso. Historically, we've been able to recover from these impacts with time. It would be -- it wouldn't be good to stay at that number. But historically, as you can see in our numbers, we have been able to recuperate from these margins. So we believe that we could be able to recuperate on them to recover.
Understood. My next question is related to the growth rate you experienced in Q2 and the dramatic acceleration. Can you provide some insight that you've kind of been able to gather as to why you saw the sharp increase in associate and distributor growth and how that was able to drive your top line growth at such impressive levels?
Yes. This is Luis. I think that, well, we have a very clear road map in order to make home -- people really aware of how important is cleaning and organization at home. We have been working on that for the -- for all these years. And I think that this situation of COVID-19 came to accelerate our process to convince people about the importance of cleaning and organization at home. Then we believe that this is something that will remain. People now are more conscious about cleaning and organization, and we are the right providers for that.
Obviously, demand, as demand has gone up, our network of distributors and associates is growing, okay? Why? Because they are [ seeing ] this as an opportunity. Okay? Then many people are [ then ] looking for getting part of the network because I think it's clear that homes are demanding this kind of products, and therefore, they want to sell it.
Great. Just one last question. As it pertains to your supply chain, from what I've read, you do have a presence in China and source a lot of product from there. I'm just curious, are there any lingering issues related to supply chain as far as being able to source enough product to meet demand or has the supply chain issues basically normalized at this point given COVID-19 has settled down a little bit, at least from what we know in China?
Yes. We don't have any problem with that. In fact, they shut down activities for 2 weeks right after the Chinese New Year. And after those 2 weeks, they continued working basically in a normal way. We don't think we are going to have any impact in the near future because of the kind of products that we manufacture there. And I think this is the answer to that.
Our next question comes from Ignacio Rivero with LCA Capital.
You had meaningful capital expenditures during the quarter, I think, mostly related to your distribution center. Can you provide a little more detail in terms of how much CapEx is left to spend for that distribution center? And then what could be an expectation of recurring maintenance CapEx going forward?
So the total investment in this new campus and distribution center, it's going to be around MXN 700 million. This has been -- the first part of that CapEx was deployed in 2019. And the second part is being deployed in [indiscernible]. Is that -- did I...
Yes. So what -- how much is left to spend during 2020?
Let me get you the exact -- but around -- after second quarter, around MXN 350 million is left to spend in CapEx for the second semester of 2020, around.
Okay. That's very useful. And then for 2021 and onward, I understand your maintenance CapEx is very low. Would that be an accurate statement? Do you have an estimate of what percentage of revenue or, in other words, an estimate would be reasonable to project going forward?
We have not given this information. But obviously, the campus and distribution center is a onetime big investment for us in terms of CapEx, as you say. And then after that, I think it will be better to look at our historic percentage versus revenue that we have spent in the last, I would say, 3 to 4 years. And we obviously invest most of all in technology. This is where we really direct the CapEx year after year. So the...
Understood. That's clear.
Our next question comes from [ Tony Stern ].
Congratulations on a pretty amazing quarter. My question pertains to the dividend. Do you expect this to be the baseline dividend on a go-forward rate should the Board approve it?
Let me -- yes, we will continue with the dividend policy. We have had a dividend policy for the last for 12, 13 years, and we are going to continue [indiscernible] pace regarding these dividends. Then this is not an exception. We will continue with our dividend policy. And we believe this will be a relative and strong dividend policy for the time to come.
Got you. That's helpful. And then as it pertains to the warrants, I'm aware there's an anti-dilution provision, where the dividend of above MXN 0.50 on an annual basis get adjusted into the strike price. I'm wondering if that changes how you think about the warrants and whether you want to clean those up at some point in the near future?
Well, we have to analyze that, and I think we can begin comments on that in our third quarter results report.
Got you. And on the new distribution center, can you size the savings from that?
We know we are going to have some relatively important savings. We want -- we do not want to talk about that for now because we need to finish with our assessment, okay? As soon as we complete the move from our different facilities to this centralized distribution center, we will be in a position to have an accurate assessment about the potential savings.
Now this is a fact that we are going to have these savings beginning on 2021.
And I think it is important to restate that in any projections that we have given, these are not taken into account. So all projections do not take into account any savings.
Got you. And when are you going to give us 2021 guidance? Since you're such a new public company, I'm not sure on your cadence yet.
Yes. Well, this is still 2 quarters to go. Our policy will be that it's a change of guidance. If we have a change of guidance for the projections of 2021, we are going to do it as soon as we feel comfortable with the new guidance. In the meantime, we'll stick to the current guidance.
Then if probably after the third quarter and before the fourth quarter ends, we will be in a position to give the guidance, the new guidance for 2021.
Got you. It seems like your guidance for this year is quite sandbagged, particularly if your June exit rate was well over 100% sales growth. What is driving that acceleration? And do you think it's sustainable at least for the near term?
Yes. So as I mentioned during the remarks, I think it's [ many things ] driving this acceleration. I mean we have really been preparing for the past 6 years, a very unique model, which I was speaking is what we call the network-enabled platform, which includes a lot of technology. Obviously, as we know with COVID-19 and people being at home, they have been needing to use technology and all the technology that we have developed in the past 6 years really came through for them to be able to continue selling, to continue with their social relations during COVID-19. So this really accelerated it in the past 3 months, but it is something that had already been growing a lot, and it is something that we expect to keep growing. So technology is a big factor.
On the other hand, as I mentioned before, product is also very important. We have been investing a lot into market research, customer research. We have investing also in our innovation tools. And this is very important because our products are more and more suitable to exactly what the consumer needs in terms of functionality, price and quality. And this also is obviously a driver. And I think that, on the third hand, our business intelligence and our ability to be a great service also complement to this platform.
And I think that the best way to look at what we can do and -- is looking back, as we were talking about the CAGR, our compounded growth for the past 6 years has been in the realms of 46%. And I think this speaks a lot about what can happen going forward.
And obviously, during the pandemic and during the COVID-19, our growth came mainly from growth in associates and distributors. So these are people that have joined our business, that have joined our model and we expect to remain being part of the model and continue growing from there.
[Operator Instructions] Our next question comes from [ Guillermo Diego ] with Santander.
Congratulations on the results. Just wondering, maybe given your focus on the segment C and D and considering the size of your distributors, the 42,000 and your associates, the 740,000, would it be fair to say that maybe out of the last unemployment rate in Mexico, the 13 million, where 10 million was in the informal side and maybe 3 million on the formal side, some of that people went to the network of your associates. And maybe given the big data that you were mentioning, how much of these new entrants are using the platform as a side gig? And how much are using them as a main economic source, as you said, given either the amount of money they are monetizing or the time they are dedicating?
And just on the second part, you were talking about these network-enabled platforms. Most of this thesis, it remains on getting the network efficient. So maybe how are you dealing with these challenges of some of this segment C and D people coming into the network and focusing your efforts, your scarcity prevention, your time, your value, delivery to the most profitable and maybe long-term sustainable results? Because those are the challenges when doing this system. And looking at your results, it looks like you are having some sort of saturation right now.
Thank you. Yes. So I'll try to answer each of the questions. So the first one in terms of people coming to our network due to [ unemployment ] and needs for work and for economic income, I mean, obviously, when this is an important part of the economy, it accelerates people coming into our business. But it is not something that is just out of the blue that came out. It's something that has been in Mexico for a while. And this brings people to want to join our network more and more.
And I think that as a secular trend, not only in Mexico but in many other countries in the world, people are more and more in need of more income. So we believe that this is very important for the future of our model because more and more, not only 1 person in the household has to work, but 2 people in the household have to work or even more to be able to achieve the economic lifestyle that they live. So this is a secular trend in Mexico and around the world, and we believe that this is something that strengthens our model thoroughly.
On the second part, in terms of gig versus full economic, obviously, [ we are ] seeing it as a gig at the beginning. And as time passes, some of them -- for some of them, it becomes the economic -- the main economic platform. I would not like to give exact numbers on that given the fact that we can also not know obviously exactly how much it represents of their household. But it is natural.
And more and more, we have distributors that become a lot more productive. And obviously, just to end that remark, I would say that for an associate it's more of a side gig or a frequent consumption platform. And obviously, for a distributor, it's where it starts becoming more of the main economic platform.
And in the end, to your third question about the model and the efficiency of the model, so as I was saying, more and more people in Mexico and around the world need extra income for what they need. Obviously, in the C and D economic levels, this becomes more important. And I think that the main strength of our model is that everybody has an installed capacity to make more income. I mean if you go to work every day, you have an installed capacity to sell and distribute to the people from work. If you go to a factory, it does as well. And what we're doing is, through our model, making this a very simple and profitable model for them to earn this extra income. So we believe this is very important for the future.
Guillermo, this is Luis. Just to underline what Andres said before, as I was saying in my remarks, definitely, this is people that will remain in the business. All our commercial intelligence unit information clearly indicates that it is people that came to us looking for this additional income and will remain with us because all indicators are very clear regarding that. Then we have now a very solid and good base of people that have found out in our product line a good opportunity for this additional income. Then it's very easy for them due to our [ EPM ] network enabled platform, it's very easy for them to operate with us. They get very good service, and this is the reason why they come to us instead of going with someone else because, obviously, they have options. But they are coming to us basically because of what we said before and basically because this network-enabled platform that makes everything very easy for them.
Our next question comes from [ George Appleyard ] with [ Appleyard Investments ] .
Yes, gentlemen, congratulations on your debut and nice earnings. Question, do you have any thoughts or plans to expand further into other countries, in Latin America, especially in the central part, Costa Rica, Panama, countries like that. Any comments on that?
Yes. First, as Andres was saying, our experience in Guatemala, the pilot test, has been very successful. Then we will begin accelerating the growth, the replication of our business model in Guatemala in September. From there, we plan to expand [ the business in ] Central America, including Costa Rica in the next 2 years. And also in the next 2 years, we will see them [indiscernible] enter in the next [ 3 ] years to Colombia and Peru.
Colombia and Peru represent now approximately 50% of the size of the consumption in Mexico. Then considering that both countries together represent that, that's a good opportunity for us. And we want [ to be there ] in the next 2, 3 years.
And how would you say the future U.S. dollar versus the peso is going to be [indiscernible]? What are you thinking of the dollar has come down, the peso has not really gone up too much against the dollar? What are your thoughts? What is the way you plan out for the future on your earnings guidance or in terms of the conversion rate on the currency, if you have any comments.
Yes. I mean, we Mexicans, especially baby boomers, have lived with that for many years, and we are used to that. Then in the business, in the [ personal ] business itself, we have gone through very volatile times in terms of exchange rate with [indiscernible]. And we have been able to handle that, like in 2008 and '09. And I mean in the Betterware history, probably at least 3 strong devaluations -- 3, 4 strong devaluations. And we have been able to go through that. And we feel very comfortable about keeping -- doing the same in the future. Okay?
I mean, only in the past few months, the exchange rate went to 25, okay, then down to 20-something, then now it's at [ 22.80 ]. Then we can handle that. And we have been able to do it. And as you can see, our margins have been temporarily impacted, negatively impacted. But by the end of the year, you will see that we will be almost at the same level we were before this devaluation, the devaluation of this year. Then we can handle that, and we have demonstrated that we can do it.
Fantastic. Last question, more of an observation or a question. As you know, you're a Mexican company, but you are the first large Mexican company to trade on the NASDAQ in terms of a SPAC listing. What are you going to do? Or are you planning to improve your communications, meaning do you care only about earnings or do you care about letting know about your company, your exposure in the United States markets, new investors and things like that? Because, as you know, during the past 6 months, there's a big SPAC movement, exactly what you did. And companies seem to publicize those things and they're -- especially, I mean, you have great earnings, great growth. It's just kind of frustrating not to find out much about the company even on your website in terms of things that are going on. And just as I said, it's a personal comment, observation. What are your thoughts? Are you planning to change that? Will we have a full IR department? Or you really want to just put out releases when you have earnings and just giving the updates on these calls?
Yes. Okay. Thank you. And yes, we've done -- I mean, as you said before, we just listed on March 16 (sic) [ 13 ], a few months ago. We are strengthening our strategy in order to have more activity in this regard in the future. In fact, beginning on September, you will see more and more activity from our side because we really want [ our investors ] to know us very well to understand what our business model represents and to be confident about our consistency in terms of growth and profitability.
Thank you. With no questions left in queue, this -- the question-and-answer session has now concluded. Thank you all for being in today's conference call. You may now disconnect. Have a good day.