Genomma Lab Internacional SAB de CV

BMV:LABB

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Genomma Lab Third Quarter 2019 Earnings Call. My name is Donna and I'll be your conference operator today. [Operator Instructions] Please be advised that today's conference is being recorded.

I'll now turn the conference over to Enrique González, Head of Investor Relations of Genomma Lab. Please go ahead, sir.

[Enrique González, executive]

Thanks, Donna. Good morning, everyone, and thank you for joining us today in our third quarter earnings call. We'll begin with remarks from Jorge Brake, CEO; and Antonio Zamora, our CFO. We will then close with your questions.

As a reminder, today's presentation contains projections and other forward-looking statements. Actual results could differ materially from those projected. The company undertakes no obligation to update or revise publicly any forward-looking statement, whether because of new information, future events or other factors.

It is now my pleasure to turn the call to Mr. Jorge Brake. Jorge, please go ahead.

[Jorge Brake Valderrama, executive]

Thank you, Enrique. Good day, everyone, and thanks for joining us today. Our solid third quarter and year-to-date results reflect the successful execution of our strategies and a strong engagement of our employees throughout the organization. We have driven robust revenue growth as well as EBITDA margin expansion during the quarter, while we optimize our business volume from different angles and continue to broaden our reach through adjacent categories, which will fuel future growth.

This quarter, we again made progress related to the 4 pillars of our transformational growth and innovation strategy, as we drive shareholder value and return Genomma to a steady and constant and growth.

To repeat, these are: first, innovation and portfolio optimization throughout all countries in which Genomma has a presence; second, best-in-class go-to-market initiatives; third, world-class manufacturing and supply chain capability development; and fourth, creating a corporate culture focused on consumers, employees and internal talent.

Let me review related progress during the quarter, beginning with our exciting mid-September announcement that we signed an exclusive license agreement with UP International to market UPI's full range of Novamil and Novalac brand infant nutrition products within Mexico.

UPI has the fourth largest infant nutrition market share in Mexico and represents a significant transition for our company and an exciting new frontier. This is an opportunity for us to expand market share within Mexico and to then potentially replicate our success to the other markets in which Genomma has a presence. Genomma's marketing, advertising and best-in-class go-to-market capabilities were important criteria when UPI chose Genomma over a long list of highly reputable pharma names competing for this partnership opportunity.

Further, this is valuable endorsement for our company, positioning us at a different level for future licensing agreements as we build out our innovation pipeline. During the third quarter of 2019, we made continued progress strengthening heritage Genomma brands to be more relevant and on trend.

This year, we began modernizing the look and feel, while improving the formula of our Teatrical line of facial treats. In the third quarter, we further optimized Teatrical price positioning and improved marketing and communications surrounding this product. Results have been outstanding and the initial almost 2x growth rates we are seeing is an example of Genomma's brands' outstanding potential when the right value creation is fully optimized. A few months ago, we relaunched Teatrical in Argentina and have begun relaunching this and other brands throughout all countries in which Genomma has a presence, leveraging our best-in-class distribution and go-to-market strategies.

We intend to continue this successful model to expand quickly and efficiently with many more Genomma products, for which potential is yet to be fully optimized. Further aligned with the second pillar of our strategy, Genomma's best-in-class go-to-market capabilities and our obsessive focus on the consumer and shopper, we continue our point-of-sale expansion in Mexico within the traditional channel, targeting nearly 500,000 points of sale by year-end 2020.

We are also replicating this model to the other countries in Latin America. For example, while performance in Argentina is not achieving its true potential due to the macroeconomic situation in this country, I would like to note that Genomma's products, including Teatrical, Tafirol and Asepxia are showing a strong performance in this market, which grows in line or above current inflation rates and are among the highest margins in the company.

Further, Argentina complements Mexico as an important OTC and Personal Care innovation hub for Genomma Lab, where we benefit from economies of scale from which we can quickly and efficiently expand product rollouts to smaller countries within Latin America. We're taking advantage of the current environment to innovate in Argentina enabling us to increase our market share, while many of our peers have chosen a more conservative approach. We are, therefore, enthusiastic about the strong pipeline in this market, having successfully navigated the storm today with benefit of a deep understanding of key drivers within this market.

Along these lines, I would like to touch upon success during the quarter related to consumer communication. Consumer demand and expectations are changing rapidly. What they want, need, expect and value has changed. To effectively meet these changes, Genomma gained a deep understanding of the consumer to develop new competencies and strategies to reach them in all of our markets.

One of the ways that we are accomplishing this is by creating Genomma's Instagram channel, enabling us to communicate directly with our millennial and generation Z consumers about their health and well-being in a different way, while we will efficiently balance our media spend.

Our Insta channel has reached 1 million followers throughout Latin America in less than 6 months, leveraging the strength of the Genomma brand to drive market excitement not only through new innovations but also with the influencers and celebrities who are using our products.

Our team is in the midst of building a robust, compelling digital ecosystem that gives consumers' exceptional experience, however, whatever and whenever they want to engage with us, developing a sharper focus on these rapidly changing customers so we can meet their needs.

Turning to Genomma's world-class manufacturing and supply chain capability development. As you know, we were granted our sanitary license by COFEPRIS in Mexico, which is the regulatory organization in the country, in last July, enabling OTC production operations to begin early in 2020. Further, we began the formal filing process to obtain GMP certification for the initial solid pills and semisolid ointments manufacturing line in Mexico, which we would expect to receive also during the first months of 2020.

Along these lines, I would like to take this opportunity to discuss our relationship with third-party suppliers in light of these developments. I recently met with the top 20 suppliers with whom Genomma has chosen to maintain a relationship, to have signed the strategic contracts for future commitments at service levels that are aligned with our production needs, particularly as we ramp up to appropriate efficiency range at our own facility.

We, therefore, have a strong and favorable relationship with these suppliers built on transparency and clarity. And they are as excited as we are about Genomma's innovation as a sign of future growth ahead, which they will be part of.

Also related to manufacturing and supply chain excellence, during the quarter, we launched our new supply global model, reflecting our redefined supply chain structure. Today, this new model is being integrated, unifying not only the plant itself but also ensuring more accurate demand planning to yield important improvements in cost, efficiency and service that will be reflected in a strengthened COGS line. We have already announced the team leaders associated with this new structure, where we will be promoting from within, whenever possible, aligned with strengthening Genomma's corporate culture.

Finally, along these lines, results from our employee service shared very positive feedback on the exciting initiatives we have launched thus far related to career development, quality of life and employee nutrition. Further, our success in de-niching the company and creating clusters rather than silos tears down the previous artificial barriers and sometimes the insulation which impeded our team's success.

This enables our employees to see opportunities at a higher level and in a way not previously possible. We are now able to share practices and ideas more quickly, capturing important synergies and momentum, while bringing our people together in a way that is clearly resonating on their experience as reflected in the feedback we received. Our associates within the organization and across the system are responding to the cultural changes we are driving.

In conclusion, we continue energizing our purpose and power and make a positive impact on the lives of our consumers. Thank you for your attention.

Let me now turn the call over to Antonio, who will share more color specific to our regional performance and highlights on our third quarter financial results. Antonio, go ahead, please.

[Antonio Zamora Galland, executive]

Thank you, Jorge, and good morning, everyone. I will now take a deeper dive into our business segments and financial results for the third quarter.

I'm pleased to comment that we, again, saw strong operational performance, serving us well in this dynamic external environment. Third quarter consolidated net sales reached MXN 3.1 billion, a 12.5% year-on-year increase despite continued currency challenges we're seeing in certain geographies in which we are present today.

Mexico net sales increased by 14.1% during the quarter to reach MXN 1.5 billion. This strong performance, again, reflects our improved go-to-market and in-store visibility initiatives, as Jorge has described before. It also reflects the company's new S&OP system and an additional points of sale resulting from Genomma's renewed relationship with one of the largest pharmacy chains in Mexico as well as an increased presence within a number of traditional channel outlets.

Third quarter 2019 Mexico EBITDA reached MXN 283 million, with a 19% margin. This is a 300 basis point increase again due to the healthy double-digit top line increase we saw during this quarter. This was partially offset by the expenses related to our manufacturing facility during the third quarter.

In the U.S., net sales increased by 0.7% to MXN 315 million, a 2.2% decrease when expressed in U.S. dollars. As Jorge has mentioned, our U.S. operations continue to be in the midst of a turnaround. The detailed review we conducted in the second quarter optimized our product portfolio and narrow our focus to a select few large retailers. This quarter, we reconfigured our U.S. go-to-market and in-store visibility strategy and are optimizing our overall marketing strategies. Third quarter results were, therefore, adversely impacted by this reconfiguration, in addition to the onetime retailer returns of expired SKUs that affected our U.S. operations.

The new American-led team, which we solidified in the second quarter are some of the most experienced experts in the industry, charged with reigniting growth and expanding Genomma Lab's presence throughout the U.S. During the quarter, the team revisited our U.S. strategy and have reengineered our focus to 4 clearly defined consumer segments. We believe the clearly defined strategy and organizational structure will make a meaningful impact on this business.

As a comment, this modernized focus leverages the new digital initiatives, which Jorge has described before, as we continue strengthening our digital presence in the U.S. market. The new team is pursuing a deliberate thoughtful plan. As we continue to reposition the business, we are learning a great deal about the consumer and continue to test ways to drive sales growth in the U.S. and optimize our profitability in this market. Please stay tuned for continued updates on the U.S.

Turning to our Latin America operations. Net sales increased by 14% in Mexican pesos. As can be expected, the region was again impacted by ForEx headwinds during the quarter, particularly the devaluation of the Argentinian peso, while also local currency in Colombia, Uruguay and Paraguay also depreciated relative to the Mexican peso.

EBITDA margin contraction during the quarter can also be attributed to macro headwinds and local currency devaluation. Argentina continues to be a very strong and successful market for Genomma with benefits of the economies of scale and economies of scope, which Jorge has described before. We also saw a continued trend of strong performance in our Andean markets, Central America as well as in Brazil.

Reviewing key financials for the quarter, gross profit increased by just under 8% year-on-year to almost MXN 2 billion in the third quarter of 2019 compared to MXN 1.8 billion reached during the third quarter of last year. This quarter, gross margin decreased by 2.7 percentage points to close at 64 gross margin -- 64% sorry. Gross margin contraction for the quarter was primarily driven by a short-term product mix effect, as certain higher cost SKUs made a significant contribution to the company's top line results in the quarter and to a lesser extent, the increased input cost associated with foreign exchange impact when consolidating the various currencies, which depreciated during the quarter.

Net income for the third quarter 2019 amounted to MXN 233 million compared to MXN 224 million for the same period last year. The MXN 9.7 million increase is mainly due to the MXN 46 million year-on-year increase in income before taxes.

Between June and September, Genomma Lab have repurchased a total of almost 1.6 million shares, a total investment of MXN 27 million as part of our share buyback program.

Finally, during the quarter, Genomma successfully placed, for the first time in its history, MXN 600 million through 4 short-term unsecured local bonds in the Mexican Stock Exchange. These placements were oversubscribed in each tranche. Further, on September 30, we announced that the company had successfully prepaid a total amortization of our local LAB 14 bond, which was scheduled to mature in January 2020, adding the accrued interest to the principal and further strengthening our operational and financial fundamentals.

So in summary, we're pleased with the momentum we have in the business. We remain very focused on raising the performance bar everywhere to capture the opportunity available to us. Our focus on innovation-led growth and the ongoing execution of brand initiatives were key drivers to this success, the 4 pillars of our strategy that Jorge has continuously shared with the market.

At this point, I'd like to thank you again for your attention. We'd like to conclude our prepared remarks to open up the phone lines for your questions, after which we return again for some brief comments at the end. Donna, please go ahead.

[Operator]

[Operator Instructions] Our first question is coming from Antonio Gonzalez of Crédit Suisse.

[Antonio Gonzalez, analyst]

I just have 2 quick ones, if I may. The first one is on working capital and cash conversion cycle. We saw the number of -- in your cash conversion cycle basically stable quarter-on-quarter. And you pointed out in previous occasions that obviously, you are reigniting growth, et cetera. So the number is perhaps not fully comparable with what we were seeing a year ago or 2. But I was just wondering if you can -- given all of the moving pieces, right, the new product launchings and the manufacturing facility and this new growth stage, do you think you are in a position now where you can share with us some guidance as to what would be the normalized fee, or, let's say, 12 or 24 months from now? Or is it still moving quite a lot? That's my first question.

[Jorge Brake Valderrama, executive]

Antonio, could you take that one, and I will complement what you would say?

[Antonio Zamora Galland, executive]

Yes, certainly. Antonio, this is Antonio Zamora. Thank you for your question. You made a very good summary of how the cash conversion cycle metrics work. And as we all know, when you're growing fast, there are some distortions in these metrics. When you are declining fast, it is the same thing. In our case, Genomma is growing really fast.

So let me go into the components. As you've seen in absolute terms, our accounts receivables improved. We're collecting faster. There was a very detailed initiative to accomplish that, and we will continue on doing so. In terms of inventories, in absolute terms, they went higher for a number of reasons. Some of them, you just pointed them out. As we all know, during this quarter, we launched a number of brands and products in certain markets in Peru, Colombia, Ecuador, Central America, Chile. So when you are launching new products and you are successful, obviously, you need to build up some inventory ahead of the product launch, which is something that we did, okay?

We are also accumulating new types of inventory that we didn't have in the past like raw materials, packaging materials that the plant will require in the future. So that's part of the reason why the, in absolute terms, inventory went a little bit higher.

Now if you do the math in terms of days of inventory, we remain flat. So we were able to launch innovation and to build this inventory that are required for the next year without increasing the base of inventory. This is something that is going to happen and perhaps to understand what are the impacts for next year, as the plant will start operations, there will be some inventory buildup of raw materials, of packaging materials as well as finished products that we acquire from our third-party manufacturers because our priority is to serve the market. So we don't want to have stock outs in the market. And when you are deploying and starting operations of a new manufacturing facility, there are some cautions that you need to take and there might be some hiccups that we want to avoid.

Now once the plant is up and running and has stabilized, obviously those safety stock levels will go down significantly and Genomma will experience a significant improvement in their cash conversion cycle because of that. But we're going to go into this transition phase of the plant and as we launch new products, we also need to build up inventory.

Furthermore, and this is something that is going to happen starting Q4, we all know that the Novamil business, the infant milk nutrition, has just been started, and we need to build up inventory of that product category as well. The product is sourced from Europe, France, Germany and a couple of other places in Europe, and there's a long lead time so that we get the product. And there is a transition taking place today from the company that was distributing these products in the past. So that's also a reason why inventories will go a little bit higher.

In the meantime, and as we are optimizing our sales and operations planning, we want to streamline our inventory of our existing SKUs. So we are trying to offset as much as we can, the impacts that I described before, but 2020, you will see some viability of this. And as the plan is up and running, the -- we reach full steam with manufacturing, then you will see the improvement.

I think there's a number of moving parts that make it a little bit harder to provide a guidance in terms of working capital. The only guidance that we can provide -- yes, I was just going to -- yes, the only guidance that we can provide is that we are working with the team to streamline our supply chain as much as possible so that we can offset some of the short-term impact of these increases.

Jorge, go ahead, please.

[Jorge Brake Valderrama, executive]

Yes. I just wanted to complement to your answer, providing a little different angle to the answer. Hi, Tony, how are you today? I think we mentioned this in our previous meetings, but we started a journey last January. And as part of that journey, we had a plan with priorities, clear priorities in what were the things that we wanted to focus first and next. So this is now that we have been able to restructure and fix some of the processes or create or develop new processes to operate on a more efficient way. This is the right moment to start focusing more closely into cash flow and cash conversion cycles because we have other things that are related and that are going to contribute already in place.

So having said that, one thing that is going to be very important that is starting, as we speak next year, i.e., in 2 months, is that we have included in our organizations, metrics for performance and for variable compensation, the metric of cash and cash conversion cycle. So starting now in addition to the sales revenues, operational or EBITDA margin, we will be measuring all our operations by country also on cash conversion cycle in the metrics they are responsible for, including accounts receivables and inventory. So we should be able -- behind the improvement in the systems, the process and now the organizational reward system, a big jump ahead improvement starting in 2020.

[Antonio Gonzalez, analyst]

This is very clear. And just very quickly, if I may. Is there any quick comment, you can share in terms of your Instagram account, right? Congrats by the way on the numbers that you've achieved. How do you see the project overall at the moment? Do you see more like a feeding stage, where you are still investing in gaining scale, right? Or do you feel you are closer to actually monetizing the effort and you can start tracking what's the impact on sales from the products that are advertised on the account?

[Jorge Brake Valderrama, executive]

Yes. Very good question. As you know, because we also talked about this last time we met, we launched this just a few months ago as a pilot and this is within our -- one of our key pillars and one of our strategies to start building a more balanced media investment platform. We want to make sure that we are very efficient from now on, to looking out to the future, in how we invest our funds in terms of media. And we've been learning from different pilots on TV advertising and now in digital. And this pilot is proving to be very successful. As you know, achieving 1 million followers in just 3, 4 months is outstanding. And if you have been able to look at the Genomma channel in Instagram, we're basically focusing, therefore, on providing tips, providing recommendations. You've seen celebrities that are working for us through this channel to the consumer so that they can improve their lives in terms of health and well-being.

For the time being, we will continue doing the same behind the Genomma brand name. We will continue expanding the followers. We are going to participate in other programs that we continue strengthening what we're doing in Instagram. And to your question, I think 2020 will be the year in which we are going to start connecting this effort to other things that will help us truly make it more tangible in terms of the effect of the brand businesses and so forth and so on.

[Operator]

Our next question is coming from Nicolas Larrain of JP Morgan.

[Nicolas Larrain, analyst]

I wanted to ask a bit about the GMP. So I was just wondering if you had any updates there overall on the front of permits and GMP, if you could give us an update there.

[Jorge Brake Valderrama, executive]

Yes. Of course, very quickly, as you know, just going back a little bit in time, we got the license -- the operational license from the Mexican authority back in July. At that point, we have started the next phase, which is basically the process to obtain the GMPs. We started producing in the plant the best lots of product. That is going very well. We are going to be completing those tests in the next 2 or 3 weeks, and we're expecting the next visit from COFEPRIS in Mexico to check and examine those tests or lots in late November. And when that happens and everything goes fine, as we expect because we are doing our own tests and everything is looking good, then we will have to wait for the authority to give us their opinion in terms of timing and approvals or questions. So late November will be actually the start of the last phase of the GMPs.

[Antonio Zamora Galland, executive]

Yes, Nicolas. Just want to complement on Jorge's point. As we all know, we are doing everything we can to expedite the process, but just to be completely transparent and everybody knows this, but I just wanted to highlight it again, we are -- we depend on the government to grant the license. So we have scheduled that for November, but it's something that -- the GMP is something that we don't fully control ourselves. Just wanted to give that additional comment; we rely on the government.

[Nicolas Larrain, analyst]

Perfect. And if I may follow-up super quickly on when you guys were doing these test batches, like anything -- I mean, did everything work nominally, any surprises, anything worth sharing or everything worked out just fine?

[Jorge Brake Valderrama, executive]

Everything is going well. I just checked with my -- our people at the plant a couple of days ago and everything is under control and going as expected.

[Operator]

Our next question is coming from Rodrigo Alcantara of UBS.

[Rodrigo Alcantara, analyst]

Just to clarify on the timing. So regarding the deal with UP, so we should expect inventories to increase a bit by the end of 4Q as you build out inventories, right? But when would be fair to assume that you will start distributing, selling the product? That would be my first question.

And on the second one, based on this license agreement, what's the potential you see to replicate this in other brands or in other countries? That would be my 2 questions.

[Jorge Brake Valderrama, executive]

Okay. And help me, Antonio, if I forget something. But going to your 2 points, actually, we are starting sales as we speak, in this month of October in Mexico. We have already had meetings with the key accounts, key partners in Mexico, including drug chains and supermarkets and all other channels and the reception has been very, very positive. They rely on Genomma's capability to be able to truly put the product in every outlet where it should be. That is a huge opportunity for the brand. We increase distribution or physical presence of the product in all 3 channels. That would be a big improvement versus the past, and we represent a big driver for the brand growth in the short and midterm. So we expect the first shipment also in the next few days to those accounts and continue on a more regular, normal basis starting November.

This is a great opportunity, as you said, for us because we are going to be closing plans also in the month of November to introduce the brand in several different countries in Latin America. That is going to be part of our 2020 budget as part of the plan behind the brand. So that is real. It's going to happen in the next few weeks and the execution will start in Q1 of 2020, basically in South America and Central America.

And the model, as you asked, the model, I think is re-applicable. The model is re-applicable to other potential opportunities that we may have in the future. As you know, as part of our innovation pillar, pillar 1 of our strategy, we continuously are looking for not only improve our current portfolio but also to explore new opportunities, and this one came up from that exercise. So we are currently assessing other opportunities that will be very important for our future and will be totally aligned with our current strategy.

[Antonio Zamora Galland, executive]

Just to complement, Rodrigo, on Jorge's remarks. We're extremely excited. As Jorge mentioned, the market is extremely excited. Our customers are eager to receive our products. So everything is going according to plan. However, because I know you make this question to update your model and everybody's on what's going to happen in Q4. At this moment, the constraint that we have for Q4 is that the transfer of goods that the previous distributor had has been significantly slower than what we anticipated, okay? So we need to get the products first in order to sell. We have the purchase orders from our customers, but we don't still have the product from the previous distributors. And there's also a backlog of orders that were placed some months ago.

So the main impact of Novamil will take place, I mean, moving the needle in 2020. And as Jorge's saying, we are accelerating as much as we can, but there is a constraint. I mean we cannot sell the product that we don't have in our warehouse yet, and we're trying to expedite the transfer from the previous pharma company, who used to have this license in Mexico, but that's going slower than what we wanted. So just wanted to highlight that.

[Operator]

[Operator Instructions] Our next question is coming from Richard Dolhun of Westwood International Advisors.

[Richard Dolhun, analyst]

My first question is about the United States. You mentioned some return of expired SKUs. As you can probably appreciate, people who've been investors in Genomma Lab for a long time will be sensitive to inventories and expiries and returns and that kind of thing. Is this done with in the third quarter? Or should we expect more returns in the fourth quarter?

And sticking with the United States, you've mentioned in the past that part of the objective there is to go from targeting not just Latin Americans, who have immigrated to the United States, but looking at second generation and third generation of peoples as well. Can you elaborate on how that initiative is going, please? And then I do have a second question.

[Jorge Brake Valderrama, executive]

Antonio take -- you just take part one, I will take the part two.

[Antonio Zamora Galland, executive]

Okay. Yes. Thank you, Richard, and thank you for your continued support over the years. And I want to say this because this is something that Richard always told us that he would like Genomma to have 3 consistent quarters of good news, and this is something that we just achieved this quarter.

Going to your U.S. question about inventories, yes, it was a cleanup of some excess inventory that we have there. I think we are done. We are done. So we don't expect much of this. It just happened. We are renewing the strategy, complementing the strategy. There's a lot of opportunities that will take place in the U.S. with the new team. Perhaps the biggest change is we used to have Latinos running the U.S., and Latinos were very efficient for first generation. Now we have Americans, who have strong ties to Latin America, but they are Americans. And second and third generation Hispanics are -- behave differently, their needs are different, Puerto Ricans are different, people in Texas have different. Texas is -- the economy of Texas is -- just Texas is the size of Mexico. So there is a lot of opportunities that perhaps Jorge would like to expand a little bit more.

The portfolio needs to be streamlined and needs to be upgraded. That's something that Jorge identified on day 1 for the U.S. and -- but I think this is going to be good news because we are expanding and serving more consumer needs than we had in the past.

Obviously, this is not a fast process. We need the team to set the strategy, to start the dialogue, et cetera. But Jorge, I don't know if you would like to complement a little bit more on the U.S. outlook for the...

[Jorge Brake Valderrama, executive]

Yes. And as you may remember, we in Q1, the first time that I mentioned that we have agreed that the opportunity that we had in the U.S. needed to be addressed in a different way and that was based on the first month of my team's analysis of the opportunity. The U.S. is a huge country. It's a huge market, but we needed a different model to be able to be successful there more rapidly.

So at that point in Q2, we have started that process that I have also explained to some of you in the past few months, by which we reassessed what we were doing. We reassessed our business model, we reassessed the portfolio of products we have in the U.S., where we have said, how we were meeting the needs of different consumers in the country. And we found, not surprisingly, a lot of opportunities.

So based on that, in Q3, just recently finished Q3 and now as part of our budget sessions for 2020, we finally have a very solid strong plan for the U.S. that I feel very comfortable with versus what I saw 9 months ago, 10 months ago.

We are going to launch, as Antonio was saying, a new team that is in place already. We are going to divide the business in a different way. We acknowledge that a country of the size and complexity of the U.S., we cannot pretend to go and try to capture the whole country in 1 bite. We're going to do it by bite, and we have divided the business in 4 different business units. So I'm not going to go in detail, but those 4 business units have the potential to truly make a big difference into how we manage our business in the country.

So 2020 will be year 1, in which we will be implementing and starting to see some fruits from this effort. But I foresee that in the next 2 or 3 years, we will be very pleased with what we are doing in the U.S. right now.

[Richard Dolhun, analyst]

Understood. My second question, this is probably for Antonio. You quoted 14% revenue growth in Latin America, in Mexican peso terms. When I go back to the third quarter 2018 presentation, you had quoted MXN 1.397 billion as your revenues, but they have been restated to MXN 1.111 billion in this presentation now and that's what shows the 14% increase. Is this due to IFRS, the inflationary accounting being applied retroactively to the third quarter 2018?

[Antonio Zamora Galland, executive]

Yes, Richard. That's exactly the point. As you know, during the third quarter of last year, we had -- the conditions were set so that our Argentina subsidiary would need to report on the hyperinflationary accounting, that's IAS 29. And when those resources get converted into Mexican pesos, we also need to apply IAS 21, which basically says that we need to use the ForEx rate of the last day of the quarter or of the year and restate everything. So that's -- we provided a press release last year, and it's available on our web page, to explain all of these impacts of IAS 29 and IAS 21 so that people will try to follow the complex hyperinflationary accounting of Argentina. So that's the reason why the numbers are the way they are, but this is something that we need to comply with under IFRS and it will continue to be this way for Argentina at least until 36 months -- the last 36 months of Argentina's inflation goes below 100%. As of today, it's higher than 100%. So we keep on reporting Argentina on the hyperinflationary accounting. That's the reason of the impact in our Latin America numbers.

[Richard Dolhun, analyst]

Understood, Antonio. So if I could just follow…

[Antonio Zamora Galland, executive]

Having said -- yes, go ahead.

[Richard Dolhun, analyst]

Sorry to cut you off. Please continue.

[Antonio Zamora Galland, executive]

No. Having said this, something that is very noteworthy is that the profitability in Argentina is still above the average of the company and the top line in Argentina is growing faster than inflation in that country. So it's as we said, Argentina is a key center of innovation. There's innovation that was generated in Argentina, and it's now being deployed and exported to other countries like Chile, Peru, et cetera. So unfortunately, there is a macro situation in that country, but our team is one of the strongest and our performance in the country is doing really well. Unfortunately, when we convert the Argentinian results from Argentinian pesos into Mexican pesos, that's what drives the numbers down, but performance-wise, it's a very, very strong team. It's a very strong business.

Go ahead. You were going to make another question.

[Richard Dolhun, analyst]

Yes. Just a follow-up to that. So to help us see through the accounting and the inflation in Argentina, what would you say volume growth is in the country?

[Antonio Zamora Galland, executive]

Well, what I can tell you is that our top line -- remember that we don't disclose Argentina as an individual country, but our top line grows faster than inflation, okay? And we price in line with inflation. So we are growing volume not much, not much because the macro situation is very tough, but we're growing. When we compare the Argentina results against the industry, both the OTC industry as well as the Personal Care industry, we are growing faster than our competitors and the industry, which is a way to see a country like this when it's in the middle of a crisis. In absolute terms, volume -- yes, Jorge?

[Jorge Brake Valderrama, executive]

Yes. One thing that I wanted to add just to add perspective to your answer is that as you were saying, we're growing at a higher rate than inflation, which is in line with our price increases obviously, in the country. If you think that we are in the middle single digits in terms of volume growth, which is an estimate in a general basis, and the markets are contracting in volume terms because of the recession in the country, probably between -- depending on the category, in OTC or Personal Care, but in our -- our last review in Argentina just last month, we saw that the markets in which we compete are contracting between 5% and 15%. So if you just take that into account, that means that thanks to our very strong performance in our key categories, we are building share, which is something that is very positive within the context because when the crisis goes away, and that will happen but because that's Latin America, our position in the market will be much stronger.

[Operator]

Our next question is coming from Álvaro García of BTG.

[Alvaro Garcia, analyst]

I have 2 questions. My first question is on your equity income line, which is primarily Marzam. I was wondering, we saw it was slightly negative for the quarter and I was just wondering what was going on there?

And then my second question is we've seen a lot of successful innovation from you guys over the last 12 months, but I'd like to say particularly on the Personal Care side of things whether it's Revie in Brazil, or vanart or Tio Nacho, Cicatricure in Argentina. So my question is as you think about innovation and growth between Personal Care and OTC, would you say there's a greater affinity or ease to working with Personal Care brands in your portfolio versus OTC or is this is not necessarily the case?

[Jorge Brake Valderrama, executive]

Yes. Very good question. It's not necessarily the case. Our vision continues to be to foster growth in both pillars, in both large categories. What happens now is something that is based on real life; real life means that in Personal Care meaning skin care or health care, et cetera, et cetera. The possibility of accelerating our growth via innovation is much more open because you don't need to comply with many of the different things that you have to do to be able to introduce or to innovate in an OTC product because of regulations and compliance and all of those things.

However, thus as I said, that does not change our vision, which is to continue focusing today. Our business is basically 50-50, 48-52. We want to continue that way because we want to grow disruptively in OTC. What we can say today is that as we finish 2019 and we complete our budget sessions in the next 2 weeks that will be finalized, we will have a very strong plan for the midterm, 3- to 5-year plan in OTC that will make a difference because in OTC, you need to plan ahead because of all these situations that are different in other type of categories. So you will be able to see, based on this plan, some initial interventions that we are going to be making to start innovating in 2020, but you will see a stronger pipeline of OTC products as we go during the following 3 to 5 years. And this is a process that we have implemented that will be rolling. So every year, we will review our 5-year plan so that we will always have a pipeline of products in OTC.

[Antonio Zamora Galland, executive]

Álvaro, just the other part of your question, could you just repeat it just to make sure that I understood it well?

[Alvaro Garcia, analyst]

Sure. For the first time in several quarters, we saw a negative print in your associated company line, your equity income line, which I believe is mainly Marzam. So I was just curious as to what was going on this particular quarter?

[Antonio Zamora Galland, executive]

Yes. Okay. Yes. Perfect. Yes. As you very well point out, the associated company is 50% of the net income of Marzam, which this quarter was negative. The prior quarter was very positive. It was $19.7 million positive. On a cumulative basis, in the year, we are positive $26 million. What Marzam did this particular quarter is they did a number of investments in distribution and a number of initiatives that they are taking. It's a minor negative result this quarter, nothing really meaningful. And as I was saying, the total -- the 3-quarter cumulative result is positive. But -- and the prior quarter, we have a very positive result of $19 million, but it's -- it shows that they are investing. They have seen an opportunity in expanding their network. They see growth opportunities in the wholesale distribution market and they did some extraordinary investments this quarter. But other than that, there is nothing special.

[Operator]

Our last question today is coming from Jeronimo de Guzman of INCA Investments.

[Jeronimo de Guzman, analyst]

I had a couple of follow-ups. One was on the media spend, where you've talked about working on balancing that. And I just wanted to just get a sense of where you stand now? I mean what's the mix right now, the digital versus traditional? Are you kind of comfortable with where you are right now? And also in terms of the magnitude of the spend, do you feel like you're at the level where you need to be going forward?

[Jorge Brake Valderrama, executive]

No. I would say that we are still learning and piloting different approaches and options to get to the final goal, which is making sure that we optimize our media investment. As I said, you may recall that in our previous meetings also we had mentioned several times that for us media investment now includes traditional, meaning TV, digital and truly exploiting what we can do to connect with consumers in the digital platforms and the Instagram channel is one example of one of our first projects on that, but also the store. The store for us is a media vehicle, and we are going to continue also expanding our investment at the store level.

So the combination of those 3 should be, in the short term, I would say, 2020 will be a year in which we will be testing a new approach in terms of how we invest in those 3 different channels. But as I said, the store has proven to us that store with good communication vehicles at the right moment with the right brand or product or size can produce 15%, 20% sales increase. And that's something that we know very well. So to your question, no, we are not yet where we want to be, but 2020 will be a big improvement in terms of optimizing investment.

[Jeronimo de Guzman, analyst]

Okay. And another follow-up I had was on just the Novamil, Novalac. Just wondering do you have an order of magnitude of how much can this have an impact on sales kind of once you're fully up and running in 2020?

[Jorge Brake Valderrama, executive]

Okay. That's a difficult one. We are finalizing our budget sessions, as I said, in the next couple of weeks. So we will have a better grasp on the potential of this business for us by country because that is the exercise that we are finalizing up by country. So probably in our next meeting, we will be able to give you a better perspective. However, what I can say is that this is a category that is larger than $1.5 billion in Latin America. So just imagine what it can represent for our business if we do well in the next few years.

[Antonio Zamora Galland, executive]

So complementing on Jorge's point, as we all know, as of today, the exclusive license agreement covers only Mexico, okay? We are working with UPI, as Jorge was describing, to expand this agreement and cover other geographies. But at this moment, it's only Mexico. So we are working on that, and we expect to bring good news to the market as the conversations with UPI develop. But at this moment, I mean, again, for your model, it's only Mexico and the total potential is very large, as Jorge described. It's more than $1.5 billion across Latin America.

[Jeronimo de Guzman, analyst]

Okay. That's very helpful. And then just one extra question, which we still haven't addressed which was the gross margin. You mentioned the pressure. You've been talking about these product mix impacts, but I've seen some of these impacts for quite some time when I look at the trend over the last, let's say, 3 years as we've seen contractions there. So I just wanted to get a better sense of what exactly has been lingering in terms of these product mix impacts? And how do you think about it going forward, kind of maybe isolating the plant effect because obviously, you'll have better margin with the -- when you shift to own production, but isolating that, why is product mix continuing to hurt your gross margin? And how can we see that reverting going forward?

[Antonio Zamora Galland, executive]

Yes. As we have mentioned, one of the reasons is product mix, another reason is innovation. When you launch new products, sometimes you need to provide specific offers to the market. But as we all know, the -- one of the reasons why we decided to invest in the plant was to help us improve COGS. Not only that, that's one key factor, that's 1 of the 4 pillars that Jorge has described in the past, but we have also established long-term strategic alliances and agreements with key suppliers, with our main suppliers so that we are going to get some efficiencies. But let us not forget that there has been also pressure, FX pressure in some countries. Besides Argentina, Colombia, Peru, there were a couple of countries that also had an impact on that. So COGS is a pending homework that we have. It's more related to the plant and obviously, as we are growing really fast in certain categories like isotonic beverages, our gross margin as a percentage is not as good as in other categories. So we are putting a lot of effort in developing the more profitable categories as well.

But as we see opportunities, we must capture those opportunities. I mean there are segments where profitability is higher, but you do require sanitary registries and there are some regulatory constraints to make those opportunities -- to capture those opportunities. And there might be some other categories where you don't have those constraints, but the opportunity is there, and we want to capture and generate and create value as fast as we can. So yes, there is a strategy and there are initiatives to improve the gross margin, but at the same time, we -- one of the key strategies and the key components of generating value to shareholders is growth. So if we find some categories that may not have the best gross margin at the moment, but we can capture and grow and gain market share and gain a stronger presence at the point of sale and strengthen our relationships with the customers, we are going to do it.

We would love to expedite and speed up innovation with higher margins. That's part of the things that Jorge and I, Cesar, Marco, the whole team works continuously, but it takes a little bit longer for that improvement to come. It will come. That's something that we are working on, but it's not as fast and the plant obviously, is key for that.

[Operator]

Thank you. At this time, I would like to turn the floor back over to management for any additional or closing comments.

[Jorge Brake Valderrama, executive]

Yes. Thank you, everyone, for your questions and for participating in today's call. Genomma is solidifying its position as leader in OTC and Personal Care, differentiated by a strong and advantaged portfolio, which continues to drive growth in today's evolving environment.

Together, we are building on our success with new ideas, innovation and purpose. With a relentless focus on growth, performance and people, we continue to execute and build shareholder value. I'm pleased with our success this far. As we enter the last quarter of the year, I'm confident we are well positioned to deliver strong 2019 and 2020.

If you have any further questions regarding today's information, please do not hesitate to reach out to our team. Thank you very much.

[Operator]

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time, and have a wonderful day.