Genomma Lab Internacional SAB de CV

BMV:LABB

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Genomma Lab First Quarter 2022 Results Conference Call.

[Operator Instructions] A replay will also be available shortly after the conclusion of the call. I'll now turn the call over to Barbara Cano of the InspIR Group. Please go ahead.

[Barbara Cano;InspIR Group]

Thank you, and Good morning. We'll begin today's discussion with remarks from Jorge Luis Brake, Genomma Lab's Chief Executive Officer; followed by Antonio Zamora, Chief Financial Officer. Our call will include projections and other forward-looking statements, and it's important to note that actual results could differ materially from those projected. Genomma undertakes no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events or other factors. Investors are urged to carefully review various disclosures made by the company, including the risk and other information disclosed within the company's filings with the Mexican Stock Exchange. With that, I'll now turn the call over to Mr. Jorge Brake.

[Jorge Brake Valderrama, executive]

Thank you, Barbara, and thank you to everyone joining today. Coming into this quarter, our objective for the year were clear, led by continuous strong execution of our strategic pillars as first quarter's results show, we are delivering on these objectives with net sales and EBITDA -- net sales of MXN 4 billion, an EBITDA of MXN 826 million, respectively, for the first quarter of 2022, and more than 13% and 11% year-on-year increase, which represented a record quarterly sales and profit, high for our company with continued sequential growth throughout Latin America. In particular, I would like to highlight our results for the U.S. market, where Genomma's net sales increased by 22% compared to a year ago to MXN 412 million.

The investments we have made, the capabilities we have built and the power of our new team within this market resonated in the first quarter's performance as we benefited from prior interventions and strategies, which positioned us to continue our growth momentum. We delivered solid results across all 3 business segments, OTC, personal care, and beverages, throughout all key U.S. geographies, with a particularly strong performance in Puerto Rico and California and within all key retail pharma chain customers such as Walgreens, CVS, and Walmart.

Suerox our healthy zero calorie, and sugar-free hydration beverage showed outstanding growth during the quarter, reflecting record sell-out behind increased consumer trials via in-store demos and tastings increased point of sale, enhanced display and distribution gained by direct store delivery partnerships across all trains and channels. The strong sales were also a reflection of our e-commerce efforts which is now 10% of our business in the U.S., determinately within Amazon, with whom we doubled the business versus previous year. Further, it's important to note that Suerox is outpacing competitors in the mainstream U.S. consumer market beyond the expanded demographic.

Turning to new product innovation, this continues to be an important competitive advantage for our company to differentiate and diversify our brands and strengthen our relevance with consumers. We began the year with robust performance and [ product ] innovation initiatives, particularly line extensions in several products and with new category performance supported by aggressive external media campaigns and in-store marketing. Along these lines, Genomma saw exceptional overall e-commerce sales products for the quarter through online retailers, including Amazon. During the quarter, we also strengthened our in-store media performance with a strong commercial strategy execution, to reflect and increase distribution within the traditional channel.

To touch upon highlights by region. In Mexico, first quarter sales increased 3% year-on-year despite of the industry's global commodity sourcing and supply chain challenges, which hampered Genomma's ability to take full advantage of the cough and cold and infant formula demand surge during the quarter. However, our differentiated strategies and new marketing campaigns, such as for Tio Nacho, Groomen as well as Cicatricure Gold Lift introduction into the serum segment successfully mitigated some of these headwinds. Our Mexican industrial cluster progressed nicely during the quarter too. Genomma's personal care manufacturing plant's shampoo and ointment lines began production during the first quarter, reaching approximately 500,000 bottles of shampoo and 400,000 units of ointment produced per month in addition to the 7 million bottles produced within the plant's isotonic beverage manufacturing line, which achieved an 85% efficiency level during the first quarter of 2022.

Genomma's pharma semisolids manufacturing line achieved an 85% efficiency also during the quarter, running at more than 5,000 tubes per hour rate of production. Genomma's Latin America's first-quarter 2020 net sales grew 20% on year-on-year with a 23% EBITDA margin. We saw solid top line growth and margin growth in Argentina, Colombia, Chile, Brazil, and Peru, driven by successful product launches and line extensions in these markets with a strong e-commerce channel performance, as I have described previously. With that, let me turn our call over to Antonio, who will review first quarter financials with related discussions.

[Antonio Zamora Galland, executive]

Thank you, Jorge, and good morning, everyone. As Jorge noted, first-quarter results reflect the continuation of the strong performance we delivered for the prior year. We have maintained our focus on growth, operational execution, and on the pillars, which have driven our success. Starting with the enterprise as a whole, first quarter 2022 consolidated net sales reached MXN 4 billion, a 13.2% year-on-year increase. However, these results were partially offset by macroeconomic headwinds with local currency depreciation.

First-quarter EBITDA increased by MXN 102 million year-on-year to reach MXN 827 million with a 20.6% margin. That represents a 20 basis point year-on-year increase due to increased operating leverage through increased sales, a favorable product mix effect, and our continued focus on cost and expense controls. During the quarter, we continued to successfully pass through cost increases to mitigate the inflationary pressures, Genomma and other peers continue to see throughout our markets in the world.

Turning to Mexico, as Jorge has described, first quarter 2022 Mexico net sales increased by 3% year-on-year to close at MXN 1.6 billion with a 20.2% EBITDA margin for the quarter. Onetime investments we made during the quarter to increase in-store visibility to support new product launches, soften this margin expansion, but were again partially observed this quarter by decreased nonrecurring expenses at Genomma's new industrial cluster. As Jorge commented, fourth-quarter U.S. net sales increased by 22.5% to reach MXN 413 million with strong beverage performance at a more than double year-on-year increase in sales for the quarter. As noted, first quarter 2022, U.S. sales also benefited from strong e-commerce channel sales. Latin America net sales for the quarter grew by 20.4% year-on-year to MXN 2 billion, while successful product launches and line extensions with strong digital channel performance in Argentina, Chile, Brazil, and Peru led our strong quarter for this market. Local currency depreciation in some of these countries where we operate, partially offset these results.

Turning to profitability, first quarter 2022 gross profit decreased by 15.3% to MXN 2.5 billion with a healthy 110 basis points year-on-year increase in gross margin, again due to a favorable sales mix and with a higher operating leverage resulting from incremental sales. Working capital was adjusted during the first quarter 2022, and the cash conversion cycle ended at 99 days at the end of this quarter. Genomma closed the first quarter 2022 with a leverage ratio of 1.2x net debt to EBITDA, again 1.2x net debt-to-EBITDA and MXN 1.6 billion in cash and cash equivalents at the quarters end. This is a 15% year-on-year decrease in financial leverage as we continue paying down our debt during the first quarter of the year. Net financial debt amounted to MXN 3.7 billion as of March 31, 2022, and that represents a MXN 647 million year-on-year decline.

During the quarter, we repurchased 2,208,940 shares, which represents an investment of approximately MXN 43 million. As our results demonstrate, we continued our solid momentum heading into this year, setting the stage for a strong outlook despite potential headwinds that remain challenging to predict at this moment. Finally, you'll note within our press release that in light of recently disclosed event at our Marzam affiliate, Genomma has recognized a retrospective noncash impairment in its investment in Marzam for the 2018 to 2020 period. This is directly aligned with our unwavering focus on transparency and our prudent accounting approach to ensure the relevance and validity of information contained within the company's financial statements. Information related to sale impairment can be found within the detailed notes linked to the earnings results press release, which we disseminated yesterday after the market closed. With that, let me turn the call over to your questions.

[Operator]

[Operator Instructions] Our first question is from Alvaro Garcia with BTG.

[Alvaro Garcia, analyst]

Two questions on my end. The first, on your cash position, your net debt EBITDA improved significantly quarter-over-quarter. You're down to the low one's now. Congrats on that, by the way. And I was just curious how we should think about after having seen the dividend at the end of last year, how we should think about your plans for that cash going forward, whether we should expect more dividends, maybe some more buybacks, et cetera. My second question is...

[Jorge Brake Valderrama, executive]

Hello, Alvaro.

[Alvaro Garcia, analyst]

Yes, go for it.

[Jorge Brake Valderrama, executive]

Okay. Thank you for your question. I will make a quick comment and then allow Antonio to go more into detail. But one thing that I'd like to highlight and that we highlighted with our -- in our Board meeting a couple of days ago is that from a cash situation from also our progress is remarkable. I think that our cash situation is very healthy. It continues to improve, and that has allowed us, as you said, to pay debt significantly in 2021 and also pay dividend for the first time in the history of the company. And that is something that we should continue seeing in the foreseeable future given the projections we have for the continued growth of the business and the continued improvement in the way we managed all the different key drivers of cash. Antonio?

[Antonio Zamora Galland, executive]

Thank you, Alvaro, for your question. And building on Jorge's comments, you are totally right. The company has shown particularly this quarter, but as you very well pointed out, we paid a dividend on December MXN 400 million, and when we did that, we also announced that most likely there was going to be another dividend this year. And what was shown during this quarter is that we were able to generate cash, lower financial leverage, pay debt. And most likely, there's going to be another dividend, there's going to be more buybacks. The company's CapEx is going to be significantly lower. Basically, the plant is almost finished. Just a couple of fine-tuning and commissioning of certain lines. But as you've seen during the quarter, the CapEx required is very low. So that's an excellent question. I would say, yes, expect dividends, buybacks, and obviously, investment in our organic growth and new categories. And so I think that's good news, and thank you so much for bringing that question to us.

[Alvaro Garcia, analyst]

Great. Yes. Just one second one on Marzam. I understand it's a noncash impact. It was a significant move downward. I was just wondering and it is what it is, right? I was just wondering if you could remind us what sort of relationships exist today between Genomma and Marzam, if there's any sort of intercompany debt, any outstanding debt with them that you're worried about, how your relationship stands today? It would be very helpful to understand potential sort of risk with this asset.

[Jorge Brake Valderrama, executive]

A quick comment before Antonio gives you more details. And this is an overall comment that I have been making in the last 3.5 years of my tenure with the company. One of our key missions, one of my key missions is to take this company, as you have heard me say it to the next level. But the next level means not only in sales, profits, and innovation in culture, in productivity but also in transparency. Also in adopting the best practices to do always the right thing for our investors and for our employees and our partners. So this is one step one additional step into that direction and Antonio will explain to you more details...

[Antonio Zamora Galland, executive]

Thank you, Alvaro, for this question. First of all, we must address -- talking about the relationship between Marzam and Genomma many years ago, many years ago, the company realized in a more important manner with selling to pharma wholesalers, especially in Mexico, many, many years ago. Today, we are a multichannel company. As you know, we've developed e-commerce and the traditional channel via our business partners. We sell to pharmacies. We sell to a -- we sell to multi-channels. So reliance on major pharma wholesalers has -- it's not what it used to be, it's very limited. And that's also the case in Marzam.

So that's from a relationship point of view. Marzam is another client, just like many others. And from an intercompany point of view, there is no intercompany debt whatsoever. There are no guarantees or on any loan that we have not provided any financing to them. Marzam is basically a passive investment that we have, but there are no liabilities or financial support whatsoever. I don't know if this answers your question.

[Alvaro Garcia, analyst]

Yes, that's very clear.

[Operator]

Our next question is from Vanessa Quiroga with Credit Suisse.

[Vanessa Quiroga, analyst]

I have a follow-up on Alvaro's question about use of cash given the healthy balance sheet that you're having. What's your preference in terms of EBITDA and distribution versus share buyback? And the other question I have is about Mexico, what led to the relatively soft growth this quarter? And what do you expect needs to happen -- what do you think needs to happen for the next quarters to accelerate? And any outlook on pricing strategies?

[Jorge Brake Valderrama, executive]

Let me take the second question. Thank you, Vanessa, and you will take the first. On Mexico, as I said in my remarks, Mexico grew 3% despite of 2 factors, 2 factors that are part of the crisis we are living on a global basis from a supplier standpoint. The surge in consumption in cough and cold, that actually was short cough and cold season, by the way, in both the U.S. and in Mexico. The cough and cold season basically ended in late January, much shorter than normal.

The fact that we had a search, a big search versus previous 2 years in which due to COVID, the consumption of cough and cold product was very low. We were not able to go with the increase in demand because as we were doing in the past, you could correct your forecast and request and produce more product, et cetera, et cetera, quickly. This time, we couldn't do it because the supply chain, the global crisis, the scarcity of some materials do not allow you to react as fast as we used to react in the past. And this applies to all industries and all companies. So cough and cold could be much better.

And together with that, the same issue affected the supply of infant formula. Europe is being affected by like raw material issues, supply issues in many industries and in many fronts, and in particular, the infant formula products have different ingredients that have been issued in the last couple of months. That also affected, specifically in Mexico, as Novamil is now a big part of our business too, a more relevant and important part of our business, too.

So there is nothing else. It's basically that our -- on an overall basis, our business continues to be very solid in Mexico. All other categories, including personal care and beverages, grew double-digit. We continue growing shares in most categories, too, at the same time. I would say that our position in Mexico, it has not been as solid as it is today, and we will continue making progress in the year. So I feel confident that as we go away from these particular issues regarding the season of cough and cold and the Novamil thing, we will be back to the high single digits, which is our goal. Antonio?

[Antonio Zamora Galland, executive]

Thank you, Vanessa, for your question. It's a very interesting question about -- now that Genomma is going to be regenerating more cash. What is our preference? And when you're talking about preferences, there's always -- it's a complex question because some investors, we know that some investors like cash dividends. And the reason they like dividends is that it shows that the company has discipline, obviously, prudent management and that we are focused on cash. So because some investors value that cash dividend, we are going to be paying cash dividends to reward those investors that prefer cash dividends. Personally, I think that the share price is very attractive.

And as everybody knows, we've been buying shares for quite a while, and we'll continue to do that because we think that's very attractive. But again, we think that it's prudent to pay a cash dividend for those investors who prefer cash and also to do buybacks for those investors who think that's more attractive and also to lower the financial leverage. I know that some people may say, you are at a very attractive 1.2x net debt to EBITDA. That's right. But on the other hand, we know that interest rates are going higher. So if we lower our financial leverage, we can continue expanding net income for a while.

And also, we want to take as we have this prudent approach to finance internally our organic growth, which has been -- as you've seen, for 13 consecutive quarters, really good and entering new categories sometimes requires money, especially in terms of inventories, account receivables, et cetera. So we will continue funding that and also consider some inorganic growth or strategic partnerships for the future. So I would say it's a combination of a little bit of everything. So that again, we reflect that we are a more prudent -- a more mature company and that we have reached that milestone of -- at the end of the completion of the manufacturing facility we said that the CapEx will be lower and we would be generating more cash. So we want to reward our investors for their patience and their trust of the company. I don't know if I was able to answer your question, Van.

[Vanessa Quiroga, analyst]

Yes, Tony, very clear. Just a follow-up on Mexico, Jorge. Do you have any comment on pricing strategies going forward?

[Jorge Brake Valderrama, executive]

Yes. That's a very important point, too, very relevant based on the current situation. As we discussed in the last few weeks when we met, we have been very disciplined and responsible with our pricing strategy in different fronts. As all of us know, the cost of raw materials and the cost of commodities and everything is impacting the inflation numbers we are seeing, and we are not an isolated company, so we are going through the same issues that all companies are going through. And we have been taking pricing up accordingly. For instance, in February, we took price increases also to make sure that we continue following up the trends in cost increases, and we are doing that in all countries. And I say disciplined approach because we are very disciplined in following up, what is going on with the costs, trying to negotiate, trying to buy ahead of time or reflecting in pricing what is happening with costs.

On the other front, this is not necessarily affecting the business because of 2 reasons, I would say. One is everybody is doing it. So in overall terms, all competitors and all companies are going through the same. So they also have to be aggressive taking periodical price increases. That is not only once a year, it's probably 1 to 3 times a year. And second, because I would say that Genomma brands are much better prepared than in the past to face these type of issues. We have, today, better brands, better quality in our products, better communication, better images, better equities, which is basically something that protects us or protects our brands from being affected by pricing moves because the consumer appreciates what we have done with the brands and is more open and flexible in terms of their preferences vis-a-vis pricing.

[Operator]

Our next question is from Rodrigo Alcantara with UBS.

[Rodrigo Alcantara, analyst]

One follow-up on Marzam debate here. Just curious here, I mean, clearly not an asset that it's priced by the market as a potential asset for sale. And just curious on the passive investment [indiscernible] you mentioned, Antonio. Is it fair to seeing this perhaps we could be seeing you selling the remaining that you have at Marzam and paying that asset EBITDA. Is that a possible realistic scenario for 2022 and 2023. That would be my first question. And I have another one for Jorge.

[Jorge Brake Valderrama, executive]

I would say that in the case of Marzam, just 2 seconds that all options are open, Rodrigo, because, as you know, we are business people, and we are smart business people, we believe. And based on what we have been doing in the last few years, as you know very well, after recognizing what we are recognizing from several years ago, the company would be -- or these would be readier or any option that makes sense in the short and the midterm. So we are assessing all of them. Antonio?

[Antonio Zamora Galland, executive]

Thank you, Rodrigo, for your question. I think that what we need to highlight, as we did in the technical note and the press release, Marzam is a nonstrategic investment for the company. We don't manage that company. We don't operate it. We're just a passive investor. So in that regard, I think your question basically says, is that the best investment that you would have to create shareholder value? And the answer is no. Of course, as Jorge was saying, we should analyze all alternatives and all options to maximize shareholder value. So what you mentioned is a possibility. Yes, it's a possibility. It could happen, but there are other options as well. So for the time being, I mean, we just need to say that it's a passive investment. It's not strategic. We are mostly focused on the strategic pillars on the 6 pillars, and Marzam is not one of them. So it's something to consider, to analyze, and it's something that we are working on, on the different alternatives. So we'll keep you posted as things evolve.

[Rodrigo Alcantara, analyst]

Sure. Yes. Well, thanks for that -- and my second question here would be for Jorge on the market share trends. You mentioned Suerox gaining share. What is causing [indiscernible] on the Groomen side gaining share from the big companies. So just curious, Jorge, based on your experience with P&G, I'm just curious on the possibility of -- which other categories is Genomma gaining market share from the large -- from these big companies that perhaps an example that you can highlight during the quarter? That would be my question.

[Jorge Brake Valderrama, executive]

Yes. Very good question, Rodrigo, because we just discussed this in the board meeting a couple of days ago and of course, with our people. We are very pleased with the results of those 3 businesses in which we just entered or growing aggressively, although not new for everyone, but for us, it's kind of new because we are expanding the brand for the first time ever after a few years of success in Mexico. I will leave you with a few samples on those 3 quickly.

To answer your question, Groomen, you mentioned Groomen. We are very pleased with what we are doing with Groomen. And we're very pleased with the way we have been competing against the big guy in the last year and half, more or less that we have introduced the brand. Actually, '21 was the first full year for the brand. And to give you an idea, maybe you remember that we decided from a strategic standpoint to and the first, the systems segment. The systems segment is the traditional resource that is now sold everywhere in the modern channel.

So our decision was, let's start with in the system segment only in the modern channel, which means big retailers in Mexico only. And there, we have already achieved the market share we want to achieve in 3 years, we have done it year and half. A outstanding result by the work that we have been doing in that segment. We are a clear #2 brand now in that segment based on the choice we made, as I said, out of 4 or 5 brands that are in the market. We are #2 now in the modern channel with a share level very close to double digits, which is the one -- the goal that we had for 3 years.

Now based on that success, -- as I think I said a quarter ago, we decided to continue expanding the portfolio. So going beyond systems through disposables in the traditional channel and to other key SKUs that are pending like disposals and replacements. So we are -- you are -- as we speak, we are completing the portfolio and expanding more aggressively into other channels, including the traditional channel, the pharmacy channel, et cetera, et cetera, so with that said, that is a brand that is very promising despite of the fact that we are competing against a superb competitor, as you know. We also decided to go to Chile. In Chile, we've been selling the brand for 6 to 7 months and is doing even better. So the decision of expanding the portfolio in Chile, we are making it quicker than in Mexico, and we'll continue doing so in other countries, as you can imagine.

Novamil is the other new brand or key strategic alliance that is doing very well in Mexico. We had an excellent 2021. Unfortunately, now, the supply chain issues in Europe are affecting us a little bit. We don't think that, that will be an issue for the year, but we had an excellent '21. Based on that result, based on the preference of the pediatricians and the mothers now we are also going to be expanding to the Andean region, mainly as the first next step.

And finally, Suerox which is kind of a combination of the big brand that we had in Mexico, but a new brand for Chile and the U.S. is also doing very well. Our main issue with Suerox is that we need to build more capacity -- manufacturing capacity now. We are restricted by that, and we are working on that very, very quickly. You will see, hopefully, our announcement in a few weeks of a plan to expand that capacity with some key partners. But to tell you the truth, what we are doing in the U.S. is amazing, especially in Amazon and other key retailers and the traditional channel. We will continue growing.

In Chile, the brand is doing very well, too. That's another pile of markets that we have. Based on those resources, we will continue expanding the brand to other countries.

[Rodrigo Alcantara, analyst]

That's very interesting and congrats on the sales growth report that...

[Jorge Brake Valderrama, executive]

Rodrigo yes, just to close the comment, that's why we included a new pillar in our strategy. As you know, the new pillar that is core strategic alliances because alliances from an innovation R&D standpoint, from a manufacturing standpoint, alliances from all of those different fronts that make sense to take advantage of the capabilities we offer and putting them together with the capabilities that these partners bring to the table, produces the one plus one equal 3 without working capital investment from our front. So that's something that is proven to be -- to make sense and it's proven that as a pillar that will be key for our growth in the future.

[Operator]

Our next question is from Ulises Argote with JPMorgan.

[Ulises Argote Bolio, analyst]

Just one quick one on my side. So I was wondering if you can give us some color on what's behind that other income that you reported of MXN 61.2 million.

[Antonio Zamora Galland, executive]

Thank you, Ulises. That is a one-time income, which is a one-timer. We won a lawsuit. So that was worth MXN 55 million. So that's what it's. Now, what did we do with that money? We reinvested back that money into the market in point-of-sale activities, more furniture basically to expand our presence and to build capabilities. So it was reinvested back. It was a one-time income, and we also made a one-time investment during the quarter that offsets that. I don't know if this answers your question, Ulises.

[Ulises Argote Bolio, analyst]

Yes, that's perfect.

[Operator]

Our next question is from Bernardo Malpica with Compass Group. Please proceed.

[Unknown]

My question is regarding margin and a little bit more about the one-time expense. I understand the margin was somehow affected by the one-time investment to increase in-store visibility. But now if we hypothetically took this investment out, would we have had an EBITDA margin more similar to the fourth quarter of last year? Just to understand a little bit more what we can expect in EBITDA margin going forward?

[Antonio Zamora Galland, executive]

So thank you for your question. Well, as I said, it was a onetime gain that we have during the quarter. So we invested that onetime gain basically almost in the same amount. Now having said this, it's important to know that due to the labor reform that was enacted in Mexico last year there were a little bit of additional costs in -- basically in payroll, but it's not significant. So I just want to be very clear. It's not going to be exactly the same number as last year, but it's going to be very close. Where we are -- I mean, obviously, what we are working this year is on expanding margins. Part of the plant is helping us on that, but there's also another -- a number of initiatives that are helping us to become more productive. But at the same time, I must -- we must address the fact that commodity inflation is there. It's for everybody. It's in every country. So we are coping with it as well. But to be very specific with your question, if we take the onetime gain with the onetime investment, it would be very close to what we used to have previously.

And regarding margin expansion, obviously, there's COGS inflation. And obviously, we are taking pricing when needed. And obviously, we are also working very strongly on expanding margins. But it's -- all of those cycles have to be taken into account to answer your question. I don't know if I was able clear to answer your question.

[Unknown]

Yes, that's very clear. Just one more question. I mean, I don't know if you have a specific number, but do you have a number as to what percentage of your sales come from e-commerce and how the channel has evolved throughout the last period? I mean I know it has been growing significantly, but do you have a specific number of how many of your sales end up through this channel?

[Jorge Brake Valderrama, executive]

Yes. Bernardo, 2 points there very quickly. One is just the background is that you will remember that 3 years ago, our sales in -- 2 years ago, our sales in the e-commerce channel were basically nil. We have started aggressively supporting this new distribution channel quote, unquote in 2020 -- in early 2020, we have developed our business from almost 0% to about 6% of our total business today. And it depends on the category. That is company-wide. If you think about OTC, OTC doesn't have that attraction with consumers to buy via e-commerce. So OTC is a little lower than that, while personal care and Suerox are closer to 10%. There are some countries like the U.S., Chile and Colombia that are already at 10% of the total business, total company total country. So -- and that's our notes.

Our goal in the next couple of years is to take the company to those levels overall with probably OTC close to 10% and personal care and beverages developing much higher than that. So we continue to support in this channel. We truly believe that this is one of the things that still will bring additional business to the company as the traditional channel is doing as other new channels that we have been entering in different countries are doing.

[Operator]

Our next question is from Ben Wulfsohn with Lazard.

[Ben Wulfsohn, analyst]

I just want to get an update on your 2 newest manufacturing plants, the OTC and the Personal Care. How far are we to full year utilization on these plants. Also back in 2018, when we were first talking about these new plants, you had mentioned an expectation of about 700 bps EBITDA improvement from synergies, of which maybe a few hundred of that would be returned through reducing prices in order to increase market share. I wanted to get an update on that guidance that you had given 4 years ago, if you still stand by that, if you think things have changed?

[Jorge Brake Valderrama, executive]

Antonio?

[Antonio Zamora Galland, executive]

Yes. Thank you, Ben, for your question. Yes, the guidance that was provided as the business case for the manufacturing facilities, it's exactly that, the 700 gross. And we would reinvest back around 50% of that. So between 300 to 350 basis points of margin expansion are expected once the manufacturing facility is complete and running at full capacity.

Now obviously, we have 2 different plants. One is the personal care one. The other one is the pharma one. In the case of the Personal Care, there are 5 lines there. The first line, which is the isotonic beverage is fully operational, running between 88% to 92% efficiency. So it's quite good at this moment. And the savings are very much in line with what you described, actually a little bit better in the case of that line. So that's encouraging because that means that -- that's good news. Obviously, there are other 4 lines in that plant. There are 2 lines that we have already started to manufacture the first batches. We are beginning this ramp-up in the learning core, very much in the same fashion as the isotonic beverage. So it's going to take 4 to 5 months to reach the efficiency level for those 2 lines. It's just the typical learning curve and ramp-up period. And then there's 2 other lines that the commissioning will end, most likely during this second quarter.

So savings from the personal care will be -- you will start to see that somehow during the second half of this year, depending on the ramp-up progress on each line. I just need to say as a caveat that the savings initially, when we considered this, nobody thought about this commodity inflation that we are facing in the world. So we need to take that into account. Part of the productivity that we are achieving is helping us cope with that inflation so that we don't need to raise prices as much and we can gain more volume and market share. But generally speaking, I would say, that's a time-line for the personal care. Before I go into the other parts of the manufacturing facility, I don't know if this answers your question for the personal care plant, Ben?

[Ben Wulfsohn, analyst]

Yes, that's fine, please.

[Antonio Zamora Galland, executive]

Excellent. Then we have the distribution center, which has been operating for a number of months, and the savings are being achieved. We used to lease some facilities. We don't do that anymore. So the savings are there. Obviously, that's -- that's a small amount of the investment, but I just wanted to highlight that as well. And in the case of the pharma plant, as you've seen in the pictures that we've shown about the progress, the plant is basically there. It's complete. It's more of a regulatory -- the regulatory barriers and administrative processes that are not allowing us to produce the volume levels that we want. As you know, we have -- we already have GMP or good manufacturing processes, the certificate for solid and semi-solid for that plant for Mexico only. So we are producing and we are selling to -- in the domestic market, but we need to harmonize those GMPs with those of other countries where we are exporting. And for that, we need to allow those authorities to come down to Mexico, visit the plant, and grant those GMPs as well.

So that's a process that needs to take place, and we rely on the timing of these authorities to come and visit the plant. The good news is it's taking -- it's going to be a lot faster than what it took us to get the GMPs for Mexico, but still that process needs to happen. And on top of that, we also need to get GMPs for the liquids line, the oral and the coating line and the number of product lines, those permits or those certificates, we are basically relying on the Mexican authorities and the time, it's taking longer. So this year, I think that the impact from OTC is going to be more limited. We rely on the timing from the authorities. We expect some progress to be reported probably by the end of Q3 on this regulatory front. But unfortunately, this is something that is not totally under the company's control. But as soon as we get that, the production is going to be there.

Having said all of this, it's important to highlight that the fixed expenses of the pharma plant are already embedded in our financials. So once we start operating there, the marginal cost increase, it's going to be raw materials, a little bit of energy, and not that much because most of the fixed expenses are already there. So it's going to be a driver for margin expansion, but we need to wait, unfortunately. And that's the state for the pharma plant, Ben.

[Ben Wulfsohn, analyst]

So just to clarify, the GMP, the license you received last year is not for everything. It's only for certain product lines, and you need some more in order to progress.

[Antonio Zamora Galland, executive]

That is correct. We received for solids, basically to manufacturer pills, semi-solids -- it's creams and ointment, obviously pharma-grade, -- we have the GMPs for those lines. We don't -- we still don't have the GMPs for the topical liquids and the oral liquids. And for the coating line, which is again pills, but those pills are coated. And it's frustrating for us as much as it is for you. But we rely on the authorities and that's it. This is one of the reasons why pharma profitability is higher because there's this kind of barriers to entry. It's not so easy for everybody to enter. But I mean, we are making progress, but not at the pace that we would like to have.

[Operator]

Our next question is from Rahi Parikh with Barclays. Please proceed.

[Rahi Parikh, analyst]

So some questions have been answered. But the general question is, given the global supply chain cost challenges, could you talk about maybe more color on the benefits or the benefits of early stage -- for you for early stage for kind of lowering your third-party suppliers, more color around like the recent announcement you guys had last year on that?

[Jorge Brake Valderrama, executive]

Antonio?

[Antonio Zamora Galland, executive]

Yes. I mean, yes, that's a good question. As most of you know, we used to rely in a very -- in a highly fragmented supplier base. We used to have more than 300 suppliers, third-party contractors for the different categories where we participate. And sometimes for a specific product or categories we used to have 3 or 4 or even 5 different companies who would supply us. And the implication from that is obviously low economies of scale.

So each one of those suppliers would buy small quantities of raw materials or et cetera, by consolidating the supply chain into fewer, more efficient suppliers, contractors and to the plant, obviously, we aim to achieve economies of scale. That is the -- that is the rationale or one of the benefits from the plant, and that was part of the business case. But while we do that, obviously, there's some transition process that needs to take place.

And that's where we are depending on each category. For example, in the case of beverages, we -- initially, we thought that we were going to in-source a big portion of the -- of the production for Suerox, -- the good news is that Suerox is, as we say, it's flying, it's growing double digit, very, very, very fast. So we could not in-source all the capacity. Actually, we run our own capacity. So we currently have our third-party contractors on our own manufacturing line running at a very high levels of utilization and we need to expand. So that's good news. That's good news, but that's the specific of that category. I don't know if I was able to answer your question or do you want me to go into it.

[Rahi Parikh, analyst]

Yes. No, that was perfect.

[Operator]

Our next question comes from Juan Ponce with Bradesco BBI.

[Juan Ponce, analyst]

I have a general one. How has the relationship been with the health authorities now with your new plants, the approval process, et cetera? Are they willing to work with you guys? How has that relationship been?

[Jorge Brake Valderrama, executive]

I can tell you that much better than in the near past. As perspective, you may recall that the management team of COFEPRIS, the health authority in Mexico, was changed twice in 2 years, starting of COVID and after the COVID. The new management that has been in place for a few months, I would say, in my opinion, is much better than the previous ones. It's much more professional. They are trying to do their best in terms of optimizing how COFEPRIS works, automizing many of the processes, trying to accelerate the response to the industry in overall terms. So I see a much better situation in the health authority and relationship with us also much better. We have -- we are in much closer contact through associations, pharma associations. Also as a company by itself, we have an open channel of communication with top management there. So I would say that much better than in the past. Yes. I think that was the last question.

[Operator]

Yes. There are no more questions at this time. Mr. Brake, I'll hand it back to you for closing remarks.

[Jorge Brake Valderrama, executive]

Thank you to all of those joining in the call today. This quarter's diversified results reflect consistent progress against the teams and pillars we have established as our guidepost for sustainable growth. Our focus on execution across our business will continue to drive our performance as we build upon this strong start to 2022. Thank you very much, and have a great weekend.

[Operator]

Ladies and gentlemen, that concludes Genomma Lab's First Quarter 2020 Results Conference Call. We would like to thank you again for your participation. You may now disconnect.