Genomma Lab Internacional SAB de CV

BMV:LABB

Earnings Call Transcript 2024-Q1

[Operator]

Greetings, ladies and gentlemen. Thank you for joining Genomma Lab's First Quarter 2024 Earnings Conference Call. As a reminder, this meeting is being recorded and will be available for replay from the Investor Relations section of Genomma's website following the call. I will now turn the call over to Christianne Ibanez, Genomma's Head of Investor Relations. Please go ahead.

[Unknown Executive]

Thank you, and welcome, everyone. On today's call are Marco Sparvieri, Chief Executive Officer; and Antonio Zamora, Chief Financial Officer. Before we get started, I'd like to remind you that the remarks today will include forward-looking statements, such as the company's financial guidance and expectations, including long-term objectives and forecasts as well as expectations regarding Genomma's business, assets, products, strategies, demand and markets. These statements are subject to risks and uncertainties that could cause actual results to differ materially. They are also based on assumptions as of today, and the company undertakes no obligation to update them as a result of new information or future events. Let me now turn the call over to Mr. Marco Sparvieri.

[Marco Sparvieri, executive]

Thank you, Chris, and good morning, everybody. I am excited to announce strong results for the first quarter of 2024. The highlight of the quarter is that we grew EBITDA margin to 22.3%. That is 153-basis points increase versus a year ago. These results are driven by efficiencies in our manufacturing plant in San Cayetano, and the result of the productivity initiatives that I will discuss in more detail in this presentation. We remain committed to our margin expansion plans, and I believe these levels of margins are sustainable in the future. In terms of sales, we grew 9.7% in like-for-like terms, in Mexican pesos, sales are up 5.8%. And when we include Argentina, we grew 0.5%. Our business remains healthy across the majority of the brands and regions. However, the strong Mexican peso and Argentina's economic crisis are impacting our sales results in the reported currency. Net income grew 3.9%, impacted by noncontrolled subsidiaries negative results and EPS is up 6.8%, reflecting the cancellation of 20 million shares in Q2. The cash conversion cycle saw an improvement of three days and the free cash flow amounted to EUR 1,780 million over the past 12 months, up 51% versus the previous period. The following chart shows the performance of core brands and categories during the period. As you can see, with the exception of skin care, we showed healthy levels of growth across the board. In the case of hair care, we were affected by a supply issue that is already solved with no impact in Tio Nacho's sellout. I would like to remind everybody of our two-pillar strategy that we presented in February 2023. The first pillar is focused on growing top line with a strong focus on our core brands, selling or divesting the noncore. The second pillar is focused on driving MXN 1,800 million in productivity initiatives that are already identified, of which 40% has been executed. More on this topic further in this presentation. This chart simply shows graphically what we already discussed in terms of brands and category performance. Asepxia and Cicatricure remain a challenge. We have a clear plan to turn around Asepxia by the third quarter, and we are working on a turnaround plan for Cicatricure. And the same chart, but now showing country's performance. During Q1, we faced headwinds in Peru and Chile. Both markets are expected to turn around and be on the green side by Q2. In the case of the U.S., when excluding our flu season brand Tukol, we grew double digits. Not a good winter in the U.S. this year, but nothing to worry about this market's performance. Let's now switch gears to the category review. We continue to see a strong performance in SueroX after growing 42% in 2023. We are growing 14% in Q1. We have already launched SueroX in more than 10 countries. We expect to finish the rollout of the brand to all markets in 2024. As mentioned before, the decline in Tio Nacho has to do with a supply issue that is already solved and had no impact in the brand's sellout. Nothing to worry about Tio Nacho. It continues to perform strongly across regions. Groomen continues to perform well in Chile and Mexico. The launch of disposables and cartridges is helping the share. Analgesics also had a strong quarter, growing 13% after a strong 2023, growing 24%. All brands are performing well in this category, and we continue to grow share. The chart on the screen shows how well we continue to do it in Colombia, where X-Ray has reached double-digit share levels, positioning as the #3 brand in the category. In Cough & Cold, we also did well in Q1 with the exception of Tukol in the U.S. that declined due to a milder winter persistence, all the other brands and regions are performing strongly. In Gastro, we had a phenomenal quarter growing 27% behind the relaunch of all the brands with the new image and a new communication comparing. Derma OTC performed well, growing 7% for the quarter. The relaunch of Silka in Mexico has performed well, and we are planning to roll out this initiative to the balance of the market throughout the year. Novamil continues to be a star, growing 50% for the quarter after growing 44% in 2023. All variants are growing market share in their respective segments. And finally, in skin care, I am happy to announce that we have a strong plan to relaunch Asepxia in the third quarter, and I personally believe that it is going to be a total success, still working on plans to turn around Cicatricure.Let's now talk about how we are going to continue to grow margin. Our productivity initiatives. As I mentioned before, we are committed to deliver MXN 1,800 million in cost savings coming from specific identified productivity initiatives. As of Q1 2024, we have completed the execution of the initiatives for a total of 40% of the MXN 1,800 million.Let me now talk about the initiatives that account for the MXN 711 million I just mentioned. The first one is an improvement of MXN 207 million in our cost to serve our customers. It includes a reduction in terms, more efficient promotions and more productive go-to-market programs. In 2023, we continued a full reengineering of the SueroX product. We worked on efficiencies coming out of the bottle, the label, and the sleeves. This work amounted a total of MXN 100 million in annual cost savings. Another very large project was the reengineering of the Vanart product as well as in SueroX, we worked on making more efficient the manufacturing process, the bottle, the caps, and the formula. This work is worth MXN 93 million in annual cost savings. As mentioned in other calls, we have signed a contract manufacturing agreement with a large bottler in Mexico. By doing so, we created MXN 63 million in annual cost savings for SueroX. During 2023, we implemented a new logistics programs in which we optimize the parameters such as minimum order quantities and mix of products. This new logistics program accounted for a total annual savings of MXN 45 million. By moving from 23 supplies of carton folding packaging to only 2 and from 72 SKUs to only 12, we optimize our packaging to create a total annual cost savings for a total of MXN 25 million. Same as we did with our packaging in the case of labels, we moved from 16 suppliers to only 2 optimizing our cost for a total of MXN 22 million in annual cost savings. In January 2024, we started the operation of our own loading equipment to Tio Nacho bottles. This project amounted for a total of MXN 12 million in annual cost savings. During Q1, we continued a global bidding for our forwarding process. In this bidding, we selected three top global suppliers, and we lowered the cost by MXN 11 million in annual cost savings. During Q1, we simplified our OTC aluminum packaging by eliminating the color printing. This project will deliver a total annual cost savings of MXN 10 million. With that, we finish the business review. Let me now turn it to Antonio Zamora, our CFO.

[Antonio Zamora Galland, executive]

Thank you, Marco, and thank you, everyone, for joining us today. As Marco described, Genomma delivered a strong start of the year, reflected in a significant increase in our consolidated EBITDA margin for the first quarter, both sequentially and year-on-year as tangible progress towards our target of achieving a 23% to 24% EBITDA margin as provided in our guidance. We also continue to capture market share in many markets and categories, as Marco described earlier. And during the quarter, we also advanced toward our 2027 productivity targets that Marco explained before. Let us then highlight some relevant areas of our first quarter results. First quarter consolidated 2024 net sales reached MXN 4.2 billion, 0.5% year-on-year increase. And it's important to mention that when we exclude the hyperinflationary subsidiary, sales for the first quarter of 2024 increased by 5.8%, which also includes the adverse impact of a significant strengthening of the Mexican peso that we have seen for many quarters already. As noted, first quarter consolidated EBITDA reached MXN 936 million with a 22.3% EBITDA margin and I'm very happy to mention 22.3% consolidated EBITDA margin, which is an 8% year-on-year increase and a significant 150-basis point margin expansion year-on-year that was achieved through the successful productivity initiatives that Genomma has been implementing, as Marcos described earlier. Gross profit for the quarter increased by 6.9% to reach MXN 2.7 billion compared to MXN 2.6 billion for the first quarter. SGM&A expenses represented 43% for the first quarter of 2024. Now this is a chart that we used last quarter, and we will continue presenting this as the last page of our report, which is an exercise where we are presenting the figures excluding IAS 29 and IAS 21, which as we all know, it's a proxy representation of our consolidated financials, very close to what it would be like if we were reporting on the U.S. GAAP. As you can see here, in this exercise, net sales and EBITDA would have resembled what has been reported following IFRS rules. Importantly, this also means that Genomma is successfully and progressively mitigating the Argentina headwinds. Net income, as you can see here, would be higher when we exclude the IAS 29 and the IAS 21 effects because as we all know, there's an extra line under IFRS, which records a noncash expense, which is the effect of inflation in that subsidiary. On the U.S. GAAP, that is not included, so our figures would have been higher. But as you can see, very healthy numbers, even if we exclude these impacts.Now let's move on to the regions. Mexico, we're very proud of Mexico. Mexico operations increased by 15% year-on-year to reach MXN 2 billion, driven by the key categories, including beverages and infant nutrition. The EBITDA margin for the first quarter increased by 460-basis points. And again, this is a result of all the productivity savings and initiatives that Marco described earlier. And they are the results are just there. The number is beautiful. Also, we need to provide some context in terms of macros. Unfortunately, the Mexico peso keeps on strengthening. So, this impacts our results from the international subsidiaries. Let's start with the U.S. In the case of the U.S., other EBITDA margin reached 14.1%, which is a 500-basis point year-on-year expansion. Net sales when expressed in U.S. dollars grew by 0.5%. We all know that we have a milder a very mild flu season in the U.S., and this situation decreased demand on the Cough & Cold syrup categories and SKUs. If we exclude the impact of the Tukol brand, which is very strong in Cough & Cold syrup, the U.S. market sales would have increased by double digits.In the case of Latin America, again, the Mexican peso has been strengthening as we can see here against most of the South American subsidiaries, and we all know what happened in Argentina. So even despite all these macro events, net sales in the region increased by 8.8% in the like-for-like terms, obviously, excluding Argentina, and this was led by Colombia, Brazil and Caricam. The EBITDA margin decreased reached 24%, which is a 220-basis point decrease due to a positive onetime that we had in the base and that we may be able to comment later if needed. During the quarter, the cash conversion cycle ended at 103 days, which is a 3-day improvement as compared to the previous year. And days of consolidated accounts receivables amounted to 94 days, which is a 6-day year-on-year increase. Moving on to our financing, we remain focused on refinancing Genomma's debt to reduce our financing costs and improve our maturity profile. We successfully issued MXN 450 million in short-term debt during the first quarter. All of these issuances have been oversubscribed and enabled us to reduce our total cost of capital. We are also actively negotiating new long-term loans to further strengthen Genomma's maturity profile with very competitive cost of finance. Genomma ended the first quarter with a leverage ratio of 1.4x net debt to EBITDA. We ended the quarter with more than MXN 1.1 billion in cash and equivalents after paying some debt and also reinvesting in the business to boost sales. Free cash flow for the last 12 months ended March 2024 increased by 51% when compared to the same period of time in 2023. We also reported just 2.9 million shares during the first quarter ended March 31, 2024, investing MXN 42 million, and we also have proposed the cancelation of 20 million shares, as Marcos described, which is expected to be approved at Genomma's 2024 Annual Shareholders' Meeting. In March, we also made our seventh dividend payment in the amount of MXN 200 million, again, reflecting the strength of our business, of our cash flow generation. And as we mentioned, we intend to continue paying dividends on a quarterly basis as proposed within Genomma's recently posted proxy documents for the Annual Shareholders Meeting. Regarding ESG, we are pleased to note that during the quarter, Genomma increased our MSCI ESG rating from BBB to A. This is the third time in the last four years that we have an improvement in the rating and this reflects our continued progress related to the company's sustainability goals. So as Marco mentioned, productivity is key, but we also wanted to do it in a very sustainable way, as you can see here and thank you, MSCI for acknowledging this for us. Before we end, we just wanted to present or to remind everybody work has been the positive evolution of our EBITDA margin. These are historical figures as you know that you can see. There's a clear evolution of our margin. And as Marco has mentioned, given our productivity initiatives that we are on target. We aim to reach the 23% to 22% EBITDA margin by the end of the year. Finally, and pending approval at the Annual Shareholders' Meeting, we are really honored and pleased to announce that [indiscernible] are joining our Board of Directors, four of them have a brilliant career and experience that we are sure will add a lot of value to the company. In closing, we began the quarter on a very strong footing with results that again underscore the strength of our strategy with an EBITDA margin of 22.3% margin. And with that, we are now ready for Q&A.

[Operator]

Thank you, Antonio. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Froylan Mendez with JPM.

[Froylan Mendez, analyst]

Could you give us a little bit more details on the turnaround plan that you have for Asepxia? And what is the timing of seeing this reflected in the results?

[Marco Sparvieri, executive]

It's a little bit confidential because we don't want to reveal this information to our competitors, but it's a total redesign of the product positioning, communication, manufacturing, everything. I cannot give more details on that, sorry.

[Froylan Mendez, analyst]

No, that's perfectly fine. And could you give us a little bit more details on that one-off that led to better margins on the Latam (ex Argentina) numbers.

[Antonio Zamora Galland, executive]

Thank you for your question, Froylan. This is Antonio Zamora. You might remember that in previous calls and previous quarters, we mentioned that there is a line there in the other income other expenses that had a positive one line last year, and that represented distribution business that we have in South America. At the moment, we were still evaluating whether that business was interesting for us to continue that as part of the ongoing business. So, the accounting rules basically say that when you are in that situation, all of the impact from that business needs to be recorded under one line. And that's the other income other expenses. The distribution business has been very successful for us, adding value, creating margin. And obviously, we are leveraging the time of our people distribution network, basically the infrastructure that we think that's a good business for our shareholders, for the company. And this year, we decided that it's going to be part of the company. So, the way the accounting works this year is that the full P&L gets recorded. So, we report sales, cost of goods sold, expenses all the way down to EBITDA as opposed to last year where we under the accounting rules, we only reported the impact of the business. But if you look at last years impact, it was an interesting business. It was adding EBITDA. It was adding profitability. So, we decided to include it. And that's the reason why you see that difference. But again, it's something positive. It's something that a few other multinational companies are doing as well. And I mean it's a no-brainer because we are now investing in new assets, in more people, in more experiences. We are -- it's ideal for us.

[Froylan Mendez, analyst]

Maybe I didn't just understand completely. So, let's say, inflated a little bit the margin of last year as opposed to this year.

[Antonio Zamora Galland, executive]

Yes. And it's interesting, your comment for [indiscernible] but because if we were doing this on an apples-to-apples basis, the margin improvement of the first quarter 2024 would have been even higher okay? So again, I mean we are repeating the productivity initiatives we are working very hard on that. The results everybody can see them, and we are very proud of what we are achieving. But yes, what you said is right.

[Operator]

We will continue with Jorge Gerdau with BTG.

[Unknown Analyst]

Congrats on the solid results and for the space for making questions. Could you please share some color on where you are in terms of the potential sale of non-core brands? And what could be the use of excess cash if some of these transactions materialize?

[Marco Sparvieri, executive]

We are in the process of bidding, who is going to be our partner to actually execute the sale. So, we are advancing solidly in the process. And in terms of the cash, it's going to be a -- we don't have a specific definition right now on what's going to be the use of that cash, but it could be stocks, buyback, cancellations. It could be M&A, it could be anything. But we don't have a definition right now.

[Antonio Zamora Galland, executive]

This is Antonio expanding on Marco's comment. I think that what's very important is behind this strategy of selling the noncore brands, it's an even larger strategy, which is focusing on the core brands [indiscernible] the larger businesses. And Marco has been very successful in that. If you look at the performance of the larger categories, they are performing double-digit growth, accelerate the growth, etc. So yes, I mean, we will have the positive impact of the sale of the noncore brands. But more importantly, we will -- our bandwidth will be focused on the larger parts of the business on the larger categories, and that will obviously accelerate growth. Thank you so much, Jorge, for your question.Regarding Vidal Lavin, question from BlackRock, I think there are some technical questions, but we get his question here via e-mail. And he's asking about what is the capital allocation for the company in the future? So, thank you, Vidal. It's a great question. And as everybody can see here, the EBITDA margin is expanding. We also have certain initiatives to improve the flow through all the way down to the net income. Cash flow has always been a priority. So, the question is what are we going to do with all that cash? And as we have mentioned before, it's going to be a combination of cash dividends, which will continue on a quarterly basis. Buybacks and share cancellation as you heard today, both from Marco and myself. 20 million shares will be canceled provided that the all shareholders approved at the AGSM, which we hope is going to be. And if you read the proxies -- by the way, Genomma has one of the best practices in terms of AGSM because we are one of the few companies that publish the proxies in the Mexican market. As you can see there, in one of the proxies, we are signaling that we will be canceling up to 100 million shares in the future as we do more buybacks. Besides that, we will be -- and this is obviously fundamental. We will be reinvesting in the business to grow categories. And as Marco mentioned in the previous call, there's going to be selective M&A that will strengthen specific categories that will again accelerate our growth. So, it's going to be a combination of all of these aspects, paying down debt a little bit. I mean, obviously, our financial debt is low. But since [DA] is very high, it's also another way to improve the net income. So, it's going to be a combination of all of this, depending on what makes more sense to increase shareholder value for the short and the long-term run. And thank you, Vidal for your question.

[Operator]

Thank you. This concludes first quarter's conference call. Thank you for your attention.

[Marco Sparvieri, executive]

Thank you, everybody, for participating, and see you guys in the next quarter.