Business context and reporting period
Betterware de México, S.A.P.I. de C.V. filed this Form 20-F for the fiscal year ended December 31, 2019—not a standalone fourth-quarter report. The audited financial statements are combined statements for Betterware and BLSM, prepared under IFRS and presented in Mexican pesos. Unless otherwise noted, amounts below are MX$ millions. Betterware sells home-organization and related products in Mexico through a catalog-based distributor and associate network.
The DD3 business combination and Nasdaq offering closed on March 13, 2020, after year-end. BLSM became Betterware’s wholly owned subsidiary, and the company began presenting consolidated financial statements following closing; historical combined results should therefore be distinguished from the post-transaction structure.
Financial performance and position
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net revenue | 3,084.7 | 2,316.7 | +33.1% |
| Gross profit | 1,803.8 | 1,358.2 | +32.8% |
| Operating income | 812.2 | 551.7 | +47.2% |
| Net income | 472.1 | 299.3 | +57.8% |
| Operating cash flow | 605.4 | 338.2 | +79.0% |
| Cash and cash equivalents at year-end | 213.7 | 177.4 | +20.5% |
Gross margin was approximately 58.5% versus 58.6%; operating margin was 26.3% versus 23.8%; and net margin was 15.3% versus 12.9%. Management-defined, non-IFRS EBITDA was MX$850.6 million (27.6% of revenue), compared with MX$577.7 million (24.9%) in 2018. Adjusted EBITDA was also MX$850.6 million in 2019; 2018 adjusted EBITDA was MX$573.6 million. EBITDA and adjusted EBITDA are not IFRS measures.
Investing cash outflow was MX$175.6 million, principally reflecting construction of a new headquarters and distribution center; capital expenditures were MX$182.6 million. Financing cash outflow was MX$393.5 million, including MX$343.0 million of dividends paid. Cash increased MX$36.3 million during the year.
Year-end borrowings were MX$677.7 million, up from MX$653.5 million, comprising MX$148.1 million current and MX$529.6 million non-current. Cash less borrowings implies net debt of approximately MX$464.0 million. Current assets of MX$880.7 million were approximately equal to current liabilities of MX$878.4 million. Supplier payables were MX$529.3 million. Total assets were MX$1,789.7 million, including goodwill of MX$348.4 million and intangible assets of MX$311.0 million.
Material changes and management commentary
- Revenue growth reflected a larger distributor-and-associate network, increased unit volumes, and higher average selling prices. The reported network reached 437,872 in 2019, compared with 342,867 in 2018.
- Cost of sales rose 33.6%, slightly faster than revenue; its share of revenue increased to 41.5% from 41.4%. The filing attributes pressure partly to peso depreciation because most products are purchased in U.S. dollars. Selling expenses grew 21.4% but declined as a share of revenue, to 17.9% from 19.6%.
- Operating cash flow improved alongside higher cash receipts and working-capital changes. Inventory days fell from 104 to 88, payable days rose from 95 to 135, and receivable days declined from 22 to 20.
- The company began construction of a new distribution center in Guadalajara. Estimated total investment was MX$581 million; MX$165 million had been paid by year-end, and completion was expected in the fourth quarter of 2020.
- No formal numerical 2020 guidance is provided. As of the report date, management said COVID-19 had not interrupted operations, suppliers had resumed normal activity, and inventory covered about 13 weeks of sales. Sales in weeks 1–16 of 2020 were reported higher year over year, but promotions and U.S.-dollar appreciation had pressured gross margin. Management cited foreign-exchange forwards and a focus on higher-margin products as mitigations; the future pandemic impact remained uncertain.
Risks, contingencies, and unusual items
- Material weaknesses in internal control over financial reporting remained unremediated at December 31, 2019, across COSO control components. Disclosure controls were deemed ineffective. Remediation was underway; the filing says the weaknesses had not caused a restatement. As an emerging growth company, Betterware did not include an auditor attestation on internal controls.
- Supply is concentrated: Chinese manufacturers supplied products associated with approximately 89% of revenue, and about 90% of purchases were imported from China. Distributor retention, product acceptance, competition, Mexican economic conditions, and currency movements are also significant risks.
- A tax dispute relating to the 2010 tax year remained in litigation. Management did not expect a liability; maximum estimated exposure was MX$14.0 million. The company reported no other legal proceedings expected to have a material adverse effect.
- After year-end, Betterware repaid the MCRF term loan in full on April 27, 2020, following a MX$258.8 million prepayment. It also drew MX$74 million and MX$100 million on Banamex facilities in March and April 2020, respectively. These subsequent transactions affect the interpretation of year-end debt and liquidity.
- The 2019 statements adopted IFRS 16, recognizing lease assets and liabilities; the filing reports a MX$16.9 million reduction in 2019 profit from related depreciation and finance costs. The 2019 financial statements received an unqualified audit opinion. The filing’s cover page appears to mark “No” for having filed all required reports and submitted all required interactive data files; investors should verify these check-box responses against the filed document.
Important facts for investors to verify
- Confirm 2019 results and growth against the audited IFRS statements, and obtain separate fourth-quarter figures if Q4 performance is the focus.
- Assess the sustainability of margins amid foreign-exchange exposure, promotional activity, and dependence on Chinese suppliers.
- Review the status of internal-control remediation and subsequent disclosures on control effectiveness.
- Reconcile year-end debt with the post-year-end MCRF repayment, Banamex draws, and any later financing or covenant changes.
- Review the distribution network’s growth and retention, the new facility’s completion and final cost, and the potential dilution and ownership effects of the business combination, offering, and warrants.