Genomma Lab Internacional SAB de CV

BMV:LABB

Earnings Call Analysis

Genomma Lab's Strong Q2 2024 Performance Driven by Margin Expansion

Genomma Lab announced robust Q2 2024 results with a gross margin of 64%, up by 7.1 points over the past 1.5 years. EBITDA margin increased to 22.9%, a 186 basis points rise from last year, driven by efficiencies and productivity initiatives. Net income grew by 50.1% to MXN 631 million with EPS up by 53.1% to MXN 0.63. Sales rose by 6.4% in Mexican pesos, with a sustainability outlook for the future. The company reiterated its Q4 2024 EBITDA margin guidance of 23%-24% and completed strategic acquisitions to bolster its core brands.

Strong Profitability Growth Amidst Strategic Initiatives

During the second quarter of 2024, Genomma's Lab showcased remarkable financial results, with net income escalating by 50.1% to MXN 631 million, while earnings per share (EPS) rose by 53.1% to MXN 0.63. The gross margin reached an impressive 64%, up 7.1 percentage points, signaling significant operational efficiency improvements, particularly from the San Cayetano manufacturing plant. The leadership believes this margin level is sustainable and plans to achieve a target EBITDA margin of 23% to 24% by the end of 2024.

Sales Growth and Sector Resilience

The company reported overall sales growth of 6.4% in Mexican pesos, with a like-for-like growth of 5.8%. This stability across regions and brands indicates a strong market position, despite some fluctuations in specific categories like Cough & Cold, affected by seasonal contractions. The ongoing positive performance in markets like Mexico, where sales rose by 5.7% year-on-year, reflects effective brand initiatives and a resilient consumer base.

Expansion of Cash Conversion Cycle and Financial Management

The cash conversion cycle lengthened to 122 days, primarily due to a strategic reduction of supplier days by 16 days, a move designed to counteract raw material shortages linked to COVID-19. Excluding Argentina's hyperinflationary impacts, accounts receivables improved, showcasing the company's liquidity management amidst broader economic challenges.

Healthy Regional Performance and Strategic Acquisitions

Net sales in key markets revealed varied growth; while Genomma's U.S. segment grew by 6.2% in Mexican peso terms and showcased a remarkable 720 basis point improvement in EBITDA margins to 13.7%, Latin America experienced a 3.3% growth. Strategic mergers and acquisitions were highlighted, including the acquisition of two isotonic beverage brands in the U.S. and the leadership position gained in the Argentinian analgesics market via the acquisition of the IBU 400 brand.

Focus on Productivity and Cost Savings

The company is progressing toward its goal of MXN 1.8 billion in productivity savings by 2027, having achieved 41% of this target. Recent investments in production flexibility are expected to yield substantial savings, exemplifying Genomma's commitment to operational efficiency. The goal here is not just margin expansion but also reinforcing the company’s competitive positioning.

Future Outlook and Market Expectations

Looking ahead, Genomma anticipates continued growth in sell-out levels, with expectations of low double-digit increases in the second half of 2024. The recent resurgence of COVID-19 cases is expected to further boost the OTC business. Moreover, the company acknowledged potential macroeconomic headwinds in certain markets such as Chile and Peru but remains optimistic about recovery signs in these regions.

Strategic Divestitures and Shareholder Value

As part of its strategic transformation, Genomma has initiated a process to divest non-core assets, including segments of its operational geography. The recent shareholder meeting sanctioned the cancellation of shares to bolster stock value, accompanied by an eighth consecutive dividend payment of MXN 200 million. With a focus on enhancing shareholder returns combined with the anticipated completion of asset divestitures, Genomma aims to build shareholder confidence.

Earnings Call Transcript 2024-Q2

[Operator]

Greetings, ladies and gentlemen. Thank you for joining Genomma's Lab's Second Quarter 2024 Earnings Conference Call. [Operator Instructions] 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'll now turn the call over to Christianne Ibañez, Genomma's Head of Investor Relations. Please go ahead.

[Christianne Ibañez, 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 to 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 Marco.

[Marco Sparvieri, executive]

Thank you, Chris. Good morning, everyone. I'm excited to announce strong quarter 2 2024 results. The highlight of the quarter is the profitability results with improvements across the P&L. Starting with the gross margin that reached a very healthy level of 64%, that is 7.1 points of improvement over the past 1.5 years. EBITDA margin grew to 22.9%, a 186 basis points increase versus last year. Net income grew 50.1% to MXN 631 million, and EPS grew by 53.1% to MXN 0.63.

These results are driven by efficiencies in our San Cayetano manufacturing plant and productivity initiatives across the company. We remain committed to our margin expansion plans and believe these levels of margins are sustainable in the future. Our plans are on track to deliver the guidance of 23% to 24% margin in Q4 2024.

Sales grew by 6.4% in Mexican pesos. And on a like-for-like basis, sales are up 5.8%. Our business remains healthy across most brands and regions. The cash conversion cycle extended to 122 days, including Argentina, and 105 days, excluding Argentina. This change is due to 2 effects: number one, a minus 16 days reduction in supplier days to mitigate raw materials and API shortages, aiming at COVID uptrend; and number two, Argentina's hyperinflationary accounting. Without Argentina, accounts receivables decreased by 3 days year-over-year. Antonio will expand on this last topic in his presentation.

The following chart shows the performance of core brands and categories during the period. As you can see in the second column, we showed healthy levels of growth across the board. In the case of Cough & Cold, selling was affected by a category contraction during the flu season in the U.S. and Mexico, but we were able to grow share. In the case of Blades & Razors, the issue is related to sell-in, but sell-out remains healthy.

This chart simply shows graphically what we already discussed in terms of brands and category performance year-to-date. Skincare remain a challenge, but showing signs of turning around in Q2. Cough & Cold and Blades & Razors should not be a problem going forward. And the same chart, by the way, now showing country's performance. During Q2, we faced headwinds in Peru and Chile. Both markets are expected to turn around and be on the green side by Q3.

This chart shows how we have grown gross margin, an impressive plus 7.1 points. We improved our gross margin from 57% to 64%, a testament of the impact that our productivity initiatives and manufacturing capabilities are having in the business. We firmly believe that this improvement in gross margin is sustainable.

Let's now take a look at how this improvement in gross margin is translated into EBITDA. In the chart, you can see how we grew 3 points of EBITDA over the past 1.5 years. Around half of the gross margin gains were already translated into EBITDA growth, and the balance was reinvested in the business to continue accelerating top line growth in the core categories.

A variable that is becoming a central focus of our leadership team is ROIC. In the chart, you can see the evolution of Lab's ROIC over the past 3 years. As you can see, we have already improved the ROIC by plus 2.1 points, mostly behind the margin expansion. Divesting non-core assets continue to expand margin, and improving our cash conversion cycle will remain the core focus to improving ROIC going forward.

In this chart, you can appreciate the impact of improving our cash conversion cycle, expanding margin and divesting non-core assets. We have the potential of adding plus 6.4 points of ROIC in the coming years.

Let's now switch gears to some exciting news, fresh from the oven. In Q2 2024, we completed a series of M&As that were very strategic and will add on the growth we are seeing in our core brands. In total, we spent MXN 25.6 million, for a total of past 12 months sales of MXN 22 million. I am convinced that with our power of marketing and point-of-sale execution, these new brands will more than double in the coming years.

The first acquisition has to do with Suerox USA. We acquired 2 isotonic beverages, Suero Repone and Suero Oral. With this strategic move, Genomma owns the Suero brand in the U.S., a concept that is very powerful among Hispanics. Additionally, these 2 new brands will add incremental distribution to Suerox, and Suerox to these 2 brands. The plan in the midterm is to change the name of the new brands to Suerox.

The other acquisition is in Argentina. As shown in the pie chart, 47% of the Analgesics category is sold as paracetamol, where we lead with Tafirol, holding 80% of the segment share. 33% of the category is sold as ibuprofen. We have acquired IBU 400, the second player in the ibuprofen segment. With this acquisition, Genomma becomes the absolute leader in the Analgesics category in Argentina.

Let's now switch gears to productivity. We continue to make progress against the MXN 1,800 million in productivity savings. As of Q2 2024, we completed 41% of the MXN 1,800 million in savings.

And finally, I want to share with you the latest acquisition in the productivity arena, which is a [ flexible ] machine to produce our own Suerox labels. This machine is in fast testing and will deliver total savings of MXN 30 million per year, with an invested -- an investment of MXN 18 million. The repayment period is less than 1 year.

Tonio, over to you.

[Antonio Zamora Galland, executive]

Thank you, Marco, and thank you, everyone, for joining us today.

As Marco has described, Genomma delivered solid second quarter results with consolidated net sales reaching MXN 4.652 billion, a 6.4% year-on-year increase. Adjusted to constant currency and excluding the hyperinflationary subsidiary, second quarter sales increased by 5.2%, reflecting healthy growth in 6 of Genomma's 9 core categories.

Further, as Marco also noted, most of our markets delivered strong local currency top line growth. However, this was again mitigated by macroeconomic headwinds, including the strengthening of the Mexican peso.

Genomma's second quarter EBITDA margin increased substantially, reaching 22.9%, a record which represents more than 180 basis point year-on-year increase, primarily attributed to the improved cost efficiencies we've achieved through our productivity initiatives and also with continued progress towards our target of delivering MXN 1.8 billion in annual cost savings by 2027, as Marco presented earlier.

The demonstrated success of Genomma's productivity initiatives have also enabled us to retain -- to remain on target to reach our targeted 23% to 24% EBITDA margin by year-end. This quarter's EBITDA margin reflects continued positive evolution of Genomma's EBITDA margin, again, 22.9%.

Gross profit for the quarter increased by 11.7% to reach MXN 2.978 billion compared with MXN 2.665 billion for the second quarter of 2023. SG&A represented 41.2% for the quarter.

Moving to our results by region. Second quarter net sales for Genomma's Mexico operations increased by 5.7% year-on-year to almost MXN 2.2 billion, led by key brand sales initiatives, including Lomecan, Teatrical, [ Bana ], and obviously, Suerox.

Mexico EBITDA margin for the second quarter closed at 22.6%, a 320 basis point increase, again benefiting from cost control and productivity project efficiencies.

Our U.S. EBITDA margin closed at 13.7%, which is a 720 basis point year-on-year expansion, and net sales grew by 6.2% in Mexican peso terms and by 7.4% in U.S. dollar terms with double-digit increases in 4 brands, including Tukol, Bufferin, Next and obviously Suerox. Continued Mexican peso strength relative to the U.S. dollar impacted also our results.

So before we go into the rest of the regions, we need to remind everyone that we are still in a highly volatile macro environment. And although the Mexican peso weakened a little bit versus the U.S. dollar, during the quarter, FX still impacts our figures in countries like Chile and Brazil, which are, of course, representative in terms of sales on our consolidated figures.

Regarding our Latin American operations, net sales increased by 3.3% in like-for-like terms, with a strong Genoprazol, Tukol, Tafirol and Suerox brand performance. The EBITDA margin for Latin America reached 25.2%, with the strong cost and expense controls, which help us to offset raw material inflation and FX depreciation during the quarter.

In the second quarter, our cash conversion cycle extended to 122 days, but I want to highlight that there are hyperinflationary accounting effects that I will explain in a minute. So let's explain what happened with the cash conversion cycle. First, the short-term increase in cash conversion cycle was primarily due to a 16-day decrease in supplier terms. And this is because we made a strategic decision to safeguard the company against potential raw material shortages and APIs shortages also in the market during the quarter. As we all know, the COVID uptrend is creating a lot of pressure in certain molecules and APIs, so we wanted to avoid any future disruption.

Now going into DSA, there's a -- DSO, sorry. There's a distortion that was caused by IAS 29 and IAS 21 effects on the Argentina last 12 months sales. If you remember, in Q4, in just the way the accounting works, our Argentina subsidiary happened to have negative sales in Mexican peso terms, although they were extremely high in terms of Argentinian peso terms. If we exclude the hyperinflationary effects, actually, the business performed really well. So we had an improvement of 3 days in terms of cash conversion cycles. Again, it's an illusion or it's an accounting effect just from the formula. And as we take the last 12 months, this is -- this effect is probably going to be repeated in the third quarter and in the fourth quarter. It's just an accounting formula. That's why we are presenting the true performance, excluding those effects.

So as we -- Genomma ended the second quarter with a leverage ratio of 1.4x net debt to EBITDA and more than MXN 1.2 billion in cash and equivalents. This is a nearly 10% year-on-year decrease due to paying down our debt and, obviously, the M&A opportunities that Marco mentioned before.

We remain focused on refinancing Genomma's debt to reduce our financing costs and improve our maturity profile. Earlier this week, we announced that Genomma successfully secured a 10-year credit line for MXN 1.5 billion to further support our growth plans. These funds have been disbursed during the second and third quarters, enabling us to refinance short-term debt and higher-cost financial liabilities that we have.

We also made a voluntary prepayment at the end -- a voluntary prepayment of the final tranche of the loan that we contracted with IFC for MXN 101.1 million, including principal and accrued interest, corresponding to the outstanding balance contracted with the IFC for the plant's construction. This is allowing Genomma to consider approximately 180,000 square meters of land adjacent to the plant for our strategy to sell non-core assets.

Genomma shareholders approved the cancellation of 20 million shares at our last annual shareholders' meeting held on April. And also, during the same shareholders' meeting, it was authorized to cancel up to 100 million shares more for the next years.

Further, in June, we made our eighth consecutive dividend payment, again, in the amount of MXN 200 million or in this case, MXN 0.20 per share, which is a 2% increase relative to the dividend per share paid for the first quarter of 2024, also resulting in the cancellation of related shares. This quarter's payment further underscores our confidence in the value of Genomma's shares and our continued focus on shareholder value to sustain quarterly dividends.

Finally, you'll note the strengthening of Genomma's shares in the markets in quarter's end. So far year-to-date, we had a performance or a return of more than 35%, so thank you for your trust. And with that, let us turn to our Q&A.

[Operator]

[Operator Instructions] Our first question comes from Antonio Hernandez with Actinver.

[Antonio Hernandez, analyst]

Congrats on your results. Very, very positive. Just a quick one regarding Chile and Peru that you mentioned that these 2 countries were being challenged. I mean, you're not the first company telling that to the market, so just wanted to hear a little bit more on your side. You mentioned that you expect them to improve soon, if you're seeing any gradual improvement or recovery?

[Marco Sparvieri, executive]

Yes. The 2 cases for us, I don't know for the other companies, but for us are very different. In the case of Chile, what we're seeing is a massive consumption contraction in most of the categories where we compete. But in this quarter, we started seeing that, that contraction is easing off a little bit. So I expect that the next quarter results are going to be either on the green side or very close to the green side.

And in the case of Peru, we had an impact from the government from a policy that was approved last year in which they are -- before, they would pay for only Rx medicines to the public. And a year ago, they have approved a policy in which the payments, the full payments on medicines, extends also to OTC products. And that has impacted us big time in the OTC segment. But we are reaching our base next quarter. So I also expect Peru to start turning around also with other initiatives that we put in place. I don't know if that clarifies.

[Antonio Hernandez, analyst]

Yes, that's very helpful. Just could you please remind us, Chile, how much of sales they represent?

[Marco Sparvieri, executive]

We cannot disclose that information.

[Operator]

Our next question will be from Álvaro García with BTG.

[Alvaro Garcia, analyst]

Congrats on results. Two questions. On Argentina, we saw 17% revenue growth in pesos. There was, obviously, a lot of noise because of the hyperinflationary accounting. But I was wondering if you could maybe expand on what you saw from a volume standpoint in some of your key brands.

And then on the M&A in Argentina, how is this funded? Is this capital that you're maybe taking from abroad and plugging that into Argentina? Or is that being funded with cash that you already have from your operations in Argentina?

[Marco Sparvieri, executive]

Okay. I'm going to take the first question. Argentina, in a short answer, is that we are seeing a -- I mean, in the past 2 -- in the past quarter, actually, Q4 2023 and Q1 2024, we saw a massive contraction in consumption, okay? And this past quarter, what we're seeing in terms of volume is that it's turning around dramatically for us. And we're also gaining share in most of the categories. But also, a big portion of the recuperation of Argentina and the 17% increase in Mexican pesos has to do with the recuperation of the volume on the categories where we compete. I don't know if that clarifies.

[Alvaro Garcia, analyst]

Yes. I think it makes sense to -- at least logically, it makes sense that Tafirol would bounce back after a couple of weak quarters with just lower elasticity than in other consumer products.

[Marco Sparvieri, executive]

That's right.

[Antonio Zamora Galland, executive]

Álvaro, thank you for your question. This is Antonio Zamora. Your second question was regarding how did we fund the M&A of the 2 pharma brands in Argentina. We are funded locally with the resources from the subsidiary and a little bit of debt in that country as well. This is obviously positive because we are exchanging Argentine pesos, which we know what's going on for intangible assets. Basically, that allows Genomma to enter a very important category in Analgesics, where we didn't have any presence.

So it's obviously strategic, and we believe that all shareholders would appreciate that we're exchanging Argentine pesos for intangibles and the possibility and the opportunity to lead in the ibuprofen category as we have done in the past in paracetamol with our Tafirol brand.

[Alvaro Garcia, analyst]

I'd ask another one, if that's okay.

[Marco Sparvieri, executive]

Go ahead, Álvaro.

[Alvaro Garcia, analyst]

Sure. On the M&A in the U.S., I was just wondering if maybe you could expand on sort of the strategic rationale in the U.S. I'm assuming that there's third parties that produce these products. They're probably smaller brands. Is the idea to eventually maybe produce this in Mexico? What sort of synergies do you see? What type of product is it? I don't know the product that well, so any sort of color on that would be helpful.

[Marco Sparvieri, executive]

Yes. I mean there's several synergies. First of all, these are isotonic beverages, electrolyte beverage, so it adds and fits perfectly with our focus on Suerox. The plan, as I mentioned, in the midterm is to switch the names of these brands to Suerox, so they will become Suerox, okay?

The synergies we are seeing are the following: number one, we are planning to switch production to Mexico, so the COGS will be reduced more than half of where it is today. Number two, they are distributed mostly in the East Coast. And we, with Suerox, we are mostly distributed in the West Coast in the state of California and Texas.

So we see that this is a very quick way to win distribution, which normally takes a long time in the U.S., and also to win distribution in the West Coast for the new brands that we have acquired. So we see it very strategic.

[Operator]

Our next question is from Fernando Herrera with Compass Group.

[Fernando Herrera, analyst]

First of all, congrats on the strong results. Here, I was just wondering if you can provide any more color regarding the brands that have been lagging? And what are your expectations going into second half with these categories?

[Marco Sparvieri, executive]

The one category -- thank you, Fernando, for your question. The one category that is lagging right now is, as I explained, is mostly Skincare. And for Skincare, we have very solid plans to turn around one of the brands, which is Asepxia. It's a brand that has been declining for 3 years now. And we have a plan that is very, very solid, and we expect these plans to hit the market in Q4. And I am very positive that business will turn around with this plan.

And then in the Skincare category, we also have Cicatricure, which is a brand that is -- it's been kind of like with mixed results across markets. In some markets, declining. In others markets, flat. Some new markets, growing. And we are still working on the plans. I cannot say right now that we have a very solid plan as we have with Asepxia. But we are working really hard to turn that business around soon. And the rest of the categories, they are all very healthy.

[Fernando Herrera, analyst]

Okay. Perfect. So we should start to see something of that impact going to 4Q, right?

[Marco Sparvieri, executive]

Yes. Correct.

[Operator]

Our next question will be coming from [ Bruno Ramirez ] with JPMorgan.

[Fernando Froylan Mendez Solther, analyst]

This is actually Froylan Mendez from JPMorgan. We got confused there on the registration. Regarding the sale of non-core brands, can you remind us where we are? How much is left? And when can we see additional portfolio cleanup, let's say?

[Marco Sparvieri, executive]

Yes. Thank you, Froylan. We are advancing steadily in the process. We have already signed the contract with the bank that is going to be managing the transaction. And we are like very much advanced in valuations and putting together the pitch. We have already contacted -- the bank has already contacted some potential buyers. So we are advancing steadily and firmly on this transaction. It's not -- we're not backing off of this.

[Fernando Froylan Mendez Solther, analyst]

Any time line that you can share?

[Marco Sparvieri, executive]

That's a hard question to answer. I mean it could be a very short-term period. If someone appears with a very good offer, we'll wait to make sure that we make a good sale.

[Antonio Zamora Galland, executive]

Froylan, this is Antonio, expanding on your question. Initially, during the Investor Day last year, we said divesting non-core brands. But actually, the strategy is larger than that. It's divesting non-core assets. Obviously, brands are somewhat intangible assets, but the strategy is even more important.

And including those non-core assets, we provided 2 examples today. One is, as you know, the -- we have 180,000 square meters adjacent to the plant. So this is land that is next to our plant that is now -- that considered as a non-core asset that we could monetize later on. So that's one.

And as we reported in a press release last quarter, we are also divesting our investment in the affiliate company. And you can see that on the balance sheet statement as asset available for sale, which is also there. So the strategy is divesting non-core assets. Obviously, brands is one component, but there are other non-core assets as well.

[Operator]

[Operator Instructions]

[Antonio Zamora Galland, executive]

There's a question from Miguel Ulloa, and he's having trouble with the -- from BBVA. He is having trouble with the microphone. He is basically asking if we have a reference price for the value of the land. The answer is no. We've just announced this, and it's a different project.

It's just -- what we're disclosing today basically is that we have that non-core asset that is available for sale, and that will help us improve our ROIC in the future once we sell it. But at this moment, we don't have a price for that.

[Operator]

Our next question will be coming from Sara Maldonado with Santander.

[Sara Maldonado, analyst]

Congrats for the results. My question is about Mexico. If you can share about your outlook for the second half of the year? Historically, do you see some slowdown in the electoral year? And what have you seen for the first part of the third quarter?

[Marco Sparvieri, executive]

Thank you, Sara, for your question. We expect to stay in the levels of growth in terms of sell-out that we have seen in the first half, which has been low double digits. We have not seen a slowdown. What you're seeing is maybe a slowdown in sell-in in the second quarter. But when you look at the sell-out data for Mexico, we still -- we're still growing in the range of 11% to 12%.

So now I mean, obviously, most of it will depend on how strong the winter season comes in the second half, but we are expecting to have a strong winter season. Plus, we are seeing COVID cases up trending lately, and that helps a lot our OTC business. So right now, if you ask me, I would say that we should be staying in the levels of 11% to 12% growth in sell-out.

[Operator]

[Operator Instructions] This concludes our second quarter results conference call. Thank you for your attention.