Betterware de México(US:BWMX)2022-04-28 23:32PART I Key Information Outlines significant investment risks, including business, Mexico-specific, and ownership factors, such as distributor dependence, supply chain issues, and internal control weaknesses Risks Related to Betterware's Business Business risks include heavy reliance on distributors, intense competition, supply chain disruptions from China, and internal control weaknesses - The company is highly dependent on its network of independent distributors and associates for product sales. As of December 31, 2021, this network consisted of approximately 1,063,720 active associates and 50,972 distributors6771 - In 2021, products supplied by Chinese manufacturers accounted for approximately 94% of the company's revenues, exposing it to significant supply chain risks, including political, regulatory, and logistical disruptions like those experienced in the second half of 20219396 - Management identified a material weakness in internal control over financial reporting as of December 31, 2021, related to insufficient policies for complex accounting matters and incomplete implementation of IT controls105 - The controlling shareholder, Campalier, owned approximately 53.38% of outstanding common stock, giving it significant influence over company actions, which may conflict with the interests of other shareholders108 - The company faces challenges in integrating the recently acquired JAFRA business, including potential diversion of management attention, cultural differences, and assumption of unknown liabilities112113 Risks Related to Mexico Operations in Mexico expose the company to economic instability, currency fluctuations, political risks, and security issues - Nearly all operations and customers are located in Mexico, making the company's financial condition substantially dependent on Mexican economic conditions. For 2021, Mexico's GDP increased by 4.8% after a decrease of 8.2% in 2020119 - The company is exposed to currency exchange risk from the U.S. dollar/Mexican peso fluctuation. To mitigate this, it uses forward U.S. dollar–Mexican peso derivative contracts, which covered 100% of product needs until October 2022133 - High inflation in Mexico could adversely affect operations. The annual inflation rate was 7.4% in 2021, compared to 3.2% in 2020 and 2.8% in 2019, impacting consumer spending and increasing cost pressures148 - The company's direct sales model is subject to regulations intended to prevent fraudulent schemes. Changes in these laws in Mexico could negatively affect or prohibit direct sales efforts, harming revenue153156 Risks Related to Ownership of our Ordinary Shares Ownership risks include foreign private issuer status, potential delisting, and anti-takeover provisions that may limit shareholder rights - As a "foreign private issuer," Betterware is exempt from certain SEC rules, including proxy solicitation rules and Regulation FD, and can follow Mexican corporate governance practices, which may offer less shareholder protection than Nasdaq requirements for U.S. issuers159160 - The company's bylaws contain anti-takeover provisions requiring prior board approval for any person or group to acquire 20% or more of the company's shares, which could discourage transactions that might benefit shareholders175176 - The company's Amended and Restated Charter establishes the federal courts in Mexico City as the exclusive jurisdiction for most shareholder disputes, which may limit a shareholder's ability to bring a claim in a favorable forum172173 Company Information Provides an overview of Betterware's history, direct-to-consumer business model, key assets, and sustainability initiatives History and Development of the Company Details Betterware's corporate history, including its public listing, strategic acquisitions, and major investments in infrastructure and sustainability bonds - In August 2019, the company began construction of a new distribution center, which was completed in Q1 2021 with a total investment of Ps. 1.071 billion184 - On August 30, 2021, Betterware issued a two-tranche sustainability bond for a total of Ps. 1.5 billion to finance environmental and social initiatives189 - On January 18, 2022, the company agreed to acquire 100% of JAFRA's operations in Mexico and the U.S. The transaction was completed on April 7, 2022190 Business Overview Describes Betterware's direct-to-consumer model, product innovation, efficient logistics, and growth strategies including the JAFRA acquisition - Operates a two-tier sales model with over 50,972 Distributors and 1,063,720 Associates as of December 31, 2021, serving approximately 24% of households in Mexico192202 - The company constantly innovates, introducing approximately 338 new products annually, which represent 11%–18% of the products in a catalogue191210 - The business model features zero last-mile delivery cost, as distributors and associates deliver products directly to final consumers194 - Following the JAFRA acquisition, Betterware plans to replicate its strategic pillars of product innovation, technology, and business intelligence to accelerate JAFRA's growth196 Property, Plant and Equipment Details the company's primary asset, a new distribution center in Jalisco, completed in 2021 with a Ps. 1.071 billion investment - The company completed a new distribution center in Q1 2021 with a total investment of Ps. 1.071 billion. This project was financed partially by long-term loans, which were prepaid in 2021 with proceeds from a sustainability bond216 Sustainability Highlights Betterware's sustainability strategy, including a Ps. 1.5 billion bond, eco-friendly campus, and gender equality initiatives - In 2021, the company obtained Ps. 1.5 billion through a Sustainable Bond Program to finance projects with environmental and social impact220 - The new "Campus Betterware" distribution center, an investment of Ps. 1.071 billion, was built with sustainable practices, using ~90% recyclable materials and energy-efficient systems, earning a Fitwell certification228230235241 - The company is committed to gender equality, with women representing 70% of the sales force and 41% of the permanent workforce in 2021. It aims to add two women to the Board of Directors by 2025238240 Operating and Financial Review and Prospects Analyzes financial performance, liquidity, and key trends, including revenue growth, expense increases, and the JAFRA acquisition Operating Results Details 2021 operating results, showing significant net revenue and net income growth, alongside increased administrative and selling expenses Financial Performance Comparison (2021 vs. 2020) | Financial Metric | 2021 (Ps. thousands) | 2020 (Ps. thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Net Revenue | 10,039,668 | 7,260,408 | +38.3% | | Cost of Sales | 4,399,164 | 3,290,994 | +33.7% | | Gross Profit | 5,640,504 | 3,969,414 | +42.1% | | Administrative Expenses | 1,247,436 | 664,677 | +87.7% | | Selling Expenses | 1,264,581 | 853,355 | +48.2% | | Net Income | 1,800,884 | 338,361 | +432.2% | EBITDA Reconciliation (Non-IFRS) | In thousands of Mexican Pesos | Dec 31, 2021 | Jan 03, 2021 | Dec 31, 2019 | | :--- | :--- | :--- | :--- | | Net Income for the period | 1,800,884 | 338,361 | 472,142 | | Add: Total Income Taxes | 824,454 | 542,768 | 232,692 | | Add: Financing Cost, net | 39,370 | 1,239,230 | 107,411 | | Add: Depreciation and Amortization | 82,122 | 43,688 | 38,394 | | EBITDA | 2,746,830 | 2,164,047 | 850,639 | - The significant decrease in net financing cost from Ps. 1.24 billion in 2020 to Ps. 39.4 million in 2021 was primarily due to the absence of the Ps. 851.5 million loss on warrant valuation recorded in 2020279 Liquidity and Capital Resources Discusses liquidity, cash flow from operations, the Ps. 1.5 billion sustainability bond issuance, and impacts of supply chain disruptions - On August 30, 2021, Betterware issued a two-tranche sustainability bond for Ps. 1.5 billion, using the proceeds to prepay long-term debt with Banamex and BBVA291297 Cash Flow Summary (2021 vs. 2020) | Cash Flow Activity (Ps. thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Net Cash from Operating Activities | 1,465,597 | 1,822,256 | | Net Cash used in Investing Activities | (320,378) | (631,401) | | Net Cash used in Financing Activities | (619,841) | (754,732) | - The COVID-19 pandemic continued to affect the business in the second half of 2021, causing a higher-than-average churn rate for associates and supply chain disruptions, including increased sea and air freight costs307308 - In 2021, the company paid total dividends of Ps. 1.4 billion, compared to Ps. 830 million in 2020295 Trend Information Outlines key trends, including commercial strategies to mitigate COVID-19 impacts, sustainability focus, and the strategic JAFRA acquisition - Commercial strategies in 2021 included a 12% price increase, increasing the number of catalogues from 9 to 12 per year, and focusing on recruitment and retention of distributors309 - The acquisition of JAFRA is a key strategic move to diversify by category (beauty) and geography (entering the U.S. market) and to accelerate JAFRA's digital transformation314 - The issuance of a Ps. 1.5 billion sustainability bond reflects a long-term commitment to financing initiatives with positive environmental and social impacts311 Directors, Senior Management and Employees Details leadership, compensation, board structure, and employee numbers, including the Audit and Corporate Practices Committee Compensation Covers executive compensation, totaling Ps. 42.2 million in 2021, and the share-based incentive plan for management - In 2021, aggregate compensation for top management was approximately Ps. 38.6 million, plus Ps. 3.6 million in bonuses, for a total of Ps. 42.2 million337 - The company has a share-based incentive plan to reward executives and directors. As of December 31, 2021, 731,669 shares had been delivered to Campalier under this plan338 Board Practices Describes the Audit and Corporate Practices Committee's structure, independence, and responsibilities in governance and oversight - The Audit and Corporate Practices Committee consists of three independent members and is responsible for corporate governance, audit oversight, and reviewing related-party transactions339341347 Employees Provides an overview of the company's employee base, primarily in operations, with total numbers for recent years Number of Employees by Year | | Dec 31, 2021 | Jan 03, 2021 | Dec 31, 2019 | | :--- | :--- | :--- | :--- | | Operations | 977 | 962 | 296 | | Sales and marketing | 167 | 148 | 263 | | Finance, admin, HR, IT | 128 | 184 | 115 | | Total | 1,272 | 1,294 | 674 | Major Shareholders and Related Party Transactions Discloses the company's ownership structure, with Campalier S.A. de C.V. as the controlling shareholder Major Shareholders | Shareholder | Ordinary Shares Beneficially Owned | Percentage (%) | | :--- | :--- | :--- | | Campalier S.A. de C.V. | 19,919,793 | 53.38% | | Cede & Co. | 17,396,753 | 46.62% | Financial Information Confirms inclusion of financial statements, notes minor legal proceedings, and absence of a formal dividend policy - The company is involved in a legal proceeding with the Mexican Tax Administration Service (SAT) regarding its 2010 income tax filing. Management does not expect this to result in a significant liability371 - The company has not implemented a formal dividend distribution policy as of the date of the report372 Additional Information Provides details on corporate governance, including anti-takeover provisions, and U.S. federal income tax considerations for shareholders - The company's bylaws include anti-takeover protections requiring Board of Directors' approval for any change of control or transfer of 20% or more of the company's shares. An approved transaction would trigger a tender offer for 100% of the shares406408 - The company believes it was not a Passive Foreign Investment Company (PFIC) for its 2021 taxable year and does not expect to be one in the foreseeable future, but this status is determined annually434 Quantitative and Qualitative Disclosures about Market Risk Discusses market risks, primarily foreign exchange and interest rate fluctuations, and the use of derivatives to manage these exposures - The company's primary market risks are exchange rate risk (MXN vs. USD) and interest rate risk. It uses derivative instruments like foreign exchange forward contracts to manage these exposures447449 Net U.S. Dollar Position (in thousands) | | Dec 31, 2021 | Jan 03, 2021 | Dec 31, 2019 | | :--- | :--- | :--- | :--- | | Financial assets | US$ 10,686 | US$ 29,559 | US$ 1,331 | | Financial liabilities | US$ (35,148) | US$ (49,570) | US$ (16,095) | | Net position | US$ (24,462) | US$ (20,011) | US$ (14,764) | - A sensitivity analysis indicates that a 10% strengthening of the Mexican Peso against the U.S. Dollar would result in an increase in net income of Ps. 50.19 million for 2021454455 - Credit risk is considered low as no single customer represents more than 10% of sales, and the customer base is large and geographically diverse466 PART II Controls and Procedures Discloses ineffective disclosure controls and material weaknesses in internal control over financial reporting, with remediation efforts underway - Management concluded that the company's disclosure controls and procedures were not effective as of December 31, 2021, due to material weaknesses in internal control over financial reporting486 - The independent registered public accounting firm (Deloitte) issued an adverse opinion on the company's internal control over financial reporting as of December 31, 2021498500 - The identified material weaknesses include: (i) ineffective control activities to review, analyze, record and disclose financial information, including complex accounting matters, and (ii) certain IT general and application controls were not fully implemented or did not operate effectively for a sufficient period495506 - Remediation efforts have begun, including the design and implementation of an Internal Control over Financial Reporting (ICFR) program aligned with the COSO framework509 Principal Accountant Fees and Services Details fees paid to Deloitte for audit and other services, and the Audit Committee's pre-approval policy Fees Paid to Principal Accountant (in thousands of MX$) | Fee Type | For the Year Ended Dec 31, 2021 | For the Year Ended Jan 03, 2021 | | :--- | :--- | :--- | | Audit fees | 6,945 | 8,975 | | Audit related fees | 2,258 | 3,811 | | Other fees | 2,064 | 1,642 | | Total | 11,267 | 14,428 | - The Audit Committee is responsible for pre-approving all audit and permissible non-audit services provided by the independent auditors519 PART III Financial Statements Presents audited financial statements, auditor's opinions, and key notes on debt, equity, and the JAFRA acquisition Report of Independent Registered Accounting Firm Auditor issued an unqualified opinion on financial statements but an adverse opinion on internal controls, highlighting critical audit matters - The auditor issued an unqualified opinion on the consolidated and combined financial statements540 - The auditor issued an adverse opinion on the Group's internal control over financial reporting as of December 31, 2021, because of material weaknesses540 - Critical Audit Matters identified were: 1) Impairment of Goodwill and Brand Intangible Asset, due to significant management estimates in the discounted cash flow model, and 2) Assessment of the allowance for credit losses (ECL) on accounts receivable, due to significant judgment required in estimating recovery546549 Consolidated and Combined Statements of Financial Position Presents the financial position, showing growth in total assets, liabilities, and stockholders' equity driven by debt issuance and net income Statement of Financial Position Highlights (in thousands of Mexican pesos) | Account | As of Dec 31, 2021 | As of Jan 03, 2021 | | :--- | :--- | :--- | | Total Assets | 5,304,541 | 4,413,760 | | Total Current Assets | 3,472,059 | 2,906,570 | | Total Non-current Assets | 1,832,482 | 1,507,190 | | Total Liabilities | 3,997,542 | 3,491,867 | | Total Current Liabilities | 2,420,503 | 2,867,397 | | Total Non-current Liabilities | 1,577,039 | 624,470 | | Total Stockholders' Equity | 1,306,999 | 921,893 | Consolidated and Combined Statements of Profit or Loss Details the income statement, showing significant increases in net revenue, gross profit, operating income, and net income for 2021 Income Statement Summary (in thousands of Mexican pesos) | Account | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net revenue | 10,039,668 | 7,260,408 | 3,084,662 | | Gross profit | 5,640,504 | 3,969,414 | 1,803,833 | | Operating income | 2,664,708 | 2,120,359 | 812,245 | | Net income for the year | 1,800,884 | 338,361 | 472,142 | | Basic earnings per share (pesos) | 48.81 | 9.93 | 15.63 | Notes to the Financial Statements Provides detailed explanations of financial statements, including accounting policies, debt structure, equity changes, and the JAFRA acquisition - The company issued a two-tranche sustainability bond for a total of Ps. 1.5 billion on August 30, 2021, with maturities of 4 and 7 years. Proceeds were used to prepay existing long-term debt with Banamex and BBVA (Note 15)778780782 - In 2021, the company declared and paid four separate dividends totaling Ps. 1.4 billion from retained earnings (Note 21)887888889891 - Subsequent to year-end, on January 18, 2022, Betterware agreed to acquire 100% of JAFRA's operations for US$255 million. The acquisition was consummated on April 7, 2022, financed by a US$225 million syndicated loan and US$30 million in operating cash (Note 28)927 - As of January 3, 2021, all outstanding warrants from the DD3 merger had been redeemed, resulting in a recognized loss of Ps. 851.5 million in 2020 from the change in fair value (Note 18.2)833