Genomma Lab Internacional SAB de CV

BMV:LABB

Earnings Call Analysis

A Promising Third Quarter Performance

In the third quarter of 2024, Genomma Lab demonstrated strong operational metrics with consolidated net sales reaching MXN 5.93 billion, reflecting a notable 16% increase year-on-year. The company reported a net income surge of 78.1%, attributed to enhanced operating income and favorable foreign exchange results. Key growth drivers included robust sales from major markets like Mexico and the U.S., alongside a recovery in Argentina's consumer market after previous economic difficulties.

Increased Margins and Cost Efficiency

Genomma's gross margin improved significantly by 7.3 percentage points to 64.3%. This improvement was largely due to productivity initiatives and manufacturing efficiencies. The EBITDA margin also expanded to 23.7%, up 245 basis points year-over-year, aligning closely with the company's target margins of 23% to 24% for the year. Furthermore, the cash conversion cycle was reported at 117 days, but adjusting for hyperinflation-related accounting impacts, it effectively stood at 95 days, a five-day reduction compared to the previous year, indicating enhanced operational efficiency.

Regional Performance Highlights

In the third quarter, Genomma's operations in Mexico saw net sales rise by 13% to MXN 2.4 billion, driven by a seasonal winter strategy that boosted demand for cough and cold remedies. The EBITDA margin in Mexico reached 24.1%, reflecting a 70 basis point improvement. Meanwhile, the U.S. operations reported net sales growth of 12% in U.S. dollar terms and 25.8% in Mexican pesos, largely due to successful market execution. Noteworthy sales growth in this segment was seen for products like Suerox and Derma OTC.

Strategic Acquisitions and Future Outlook

Genomma has recently strengthened its portfolio through strategic acquisitions, including the IBU 400 and Treg brands, which are positioned in the analgesics market. The acquisitions were made at a favorable valuation of 1.2 times their sales. Looking ahead, the company expressed optimism about continued sales recovery in Argentina and expects improved market conditions through more favorable regulations.

Guidance on Future Performance and Capital Allocation

Management maintained a cautiously optimistic outlook, predicting average EBITDA margins to be around 24% in the medium term, suggesting slight quarterly fluctuations around this figure. The company's focus will be on reinvesting excess margin improvements to drive revenue growth. Capital allocation priorities include maintaining dividend payments, pursuing share buybacks, reinvesting in business growth, and potentially reducing debt. The regular dividend of MXN 200 million or MXN 0.20 per share reflects a commitment to shareholder value amidst robust cash flow generation.

Earnings Call Transcript 2024-Q3

[Operator]

Greetings, ladies and gentlemen. Thank you for joining Genomma Lab's Third 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 Ibáñez, 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 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]

Good morning, everyone, and thank you, Chris. I am thrilled to share our strong Q3 2024 results. This quarter, we have seen substantial progress across all key metrics, surpassing last year's results, previous periods and our internal targets. Sales increased by 15.9%, driven by excellent performance in major markets such as Mexico, Brazil, Argentina and the U.S. Gross margin improved by 184 basis points, reaching 64.3%.

EBITDA expanded by 245 basis points, reaching 23.7%, fueled by our productivity initiatives and manufacturing efficiencies. Net income surged by 78.1% and earnings per share EPS grew by an impressive 81.6%. Our cash conversion cycle reached 117 days. And when adjusted for inflationary accounting in Argentina, it stands at 95 days, reflecting a 5 days reduction year-over-year. Cash flow generation over the past 12 months hit a record high of MXN 2,404 million, representing a 68.1% increase. Our business remains healthy with 73% of our sales maintaining or gaining market share and 92% of sales outpacing inflation.

The following chart shows the performance of core 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 skin care we continue to face challenges that we expect to solve by Q2 2025. In the case of blades and razors, the issue is related to sell-in, but sellout remains healthy with Mexico growing double digits. This chart simply shows graphically what we already discussed in terms of category performance. Isotonic beverages, infant nutrition and all the OTC categories are driving the portfolio's growth.

In the same chart, but now showing countries' performance. During Q3, Mexico and the U.S. exceeded expectations. Key markets in Lat Am, such as Brazil, Colombia, Argentina and Central America performed well. We also faced headwinds in Peru and Chile. This chart shows how we have grown gross margin an impressive 7.3 points. We improved our gross margin from 57% to 64.3%, 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 3.8 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. I expect this trend to continue.

The following chart shows how the improvement in operating margin, gross margin and EBITDA is possibly impacting earnings per share, which grew from MXN 0.23 to an impressive MXN 0.66. In this chart, we are showing how our company is delivering on CapEx efficiency. You can appreciate how margin is expanding and less CapEx is needed. This is resulting in a much better ROIC, a variable that is becoming a central focus for our leadership team. 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 3 points, mostly behind the margin expansion, divesting noncore assets, continuing to expand margin, and improving our cash conversion cycle. It will remain the core strategies to improve ROIC going forward.

As you have already seen in the press release issued a few weeks ago, we are very excited to announce that the health authorities in Mexico have granted the GMPs for the pending forms at our plant in San Cayetano, oral liquids, topical liquids and coating for the Mexican market.

Let's now switch gears to productivity. We continue to make progress against the MXN 1,800 million in productivity savings. As of Q3 2024, we completed 42% of the MXN 1,800 million in savings.

The latest acquisition in the productivity arena is a polypropylene injection unit. This unit will be used to manufacture [ theatrical ] jars and caps, delivering a total savings of MXN 16 million in annual savings. I will now turn the call over to Tonio.

[Antonio Zamora Galland, executive]

Thank you, Marco, and thank you, everyone, for joining us today. As Marco described, our third quarter performance was the result of consistent solid execution. Genomma is making tangible progress against key operational objectives and delivering on what we have promised earlier. We continue to see strong portfolio performance, as Marco discussed. We continue to see sustained EBITDA margin evolution, and we continue to see a decrease in CapEx, which is directly aligned with Genomma's overarching culture around productivity. The entire company is focused on the disciplined execution of this new productivity culture. And this is reflected in the MXN 757 million in productivity projects that we have identified.

Needless to say, we are encouraged by the momentum that has been building across our results year-to-date. We are focused on what is within our control and are also pleased with the momentum behind our third quarter performance. Genomma delivered MXN 5.93 billion in consolidated net sales, a substantial 16% year-on-year increase, reflecting strong sales growth in Mexico and the U.S. and also supported by a favorable ForEx effect on Mexico's international operations during the quarter. Third quarter consolidated sales show sales recovery in Argentina as its economy is showing signs of a consumption rebound, particularly in the consumer sector after a difficult start of the year.

Net sales on a like-for-like basis, when adjusted for constant currency and excluding the hyperinflationary subsidiary, increased by 5.6% for the third quarter. Importantly, this quarter's results reflect sustained healthy growth in 6 out of 9 core categories. Q3 EBITDA margin again increased substantially year-on-year, reaching 23.7%, which is a significant 245 basis point year-on-year increase, again, 245 basis point year-on-year increase, reflecting the continued benefit Genomma derives from manufacturing cost efficiencies and continued positive evolution towards our targeted range of between 23% and 24% EBITDA margin by the year-end.

Net income for the fourth quarter increased by 78% due to increased operating income, a favorable FX environment I've described, and the classification of the associated affiliate as noncore assets available for sale aligned with IFRS 5. Our third quarter cash conversion cycle was 117 days, impacted from the effects of IAS 29 and IAS 21 on the trailing 12-month sales of Argentina. Without these effects, the cash conversion cycle would represent only 95 days, which is more -- should be more accurate or reflecting the true performance of our business. Receivables increased by 7 days year-on-year and days payable outstanding decreased by 7 days in the third quarter due to advanced purchases we made to successfully mitigate potential raw materials and API shortages.

Moving to our results by region. Third quarter net sales for Genomma's Mexico operations increased by 13% to reach MXN 2.4 billion, driven by the successful execution of the winter sales strategy, which Marco described earlier, and a significant increase in demand for our cough and cold and analgesic products during the quarter. Mexico EBITDA margin increased to 24.1%, a 70 basis point expansion related to productivity gains within this quarter -- within this market.

The Mexican peso depreciated 11% against the U.S. dollar. As a result and during this quarter, ForEx is no longer a headwind as we had experienced over previous quarter with what we have called the Mexican super peso. But that headwind is not there anymore. Net sales in the U.S. increased by 12% in U.S. dollar terms and a 25.8% in Mexican pesos, led by successful execution and an extended summer season. Notably, Suerox and Derma OTC third quarter sales grew by double digits year-on-year.

EBITDA margin for Genomma's U.S. operations reached 15%, which is a 440 basis point increase, a 440 basis point increase in EBITDA margin, reflecting productivity gains and also a favorable ForEx.

Moving to Latin America. While ForEx was still a headwind in Argentina and Brazil, most of the other currencies in the rest of the markets appreciated against the Mexican peso, as you can see in this chart. Genomma's Latin American operations net sales increased by 17% in Mexican peso terms for the third quarter of this year. And while we also saw very strong performance in key markets such as Brazil and Colombia, results were a little bit impacted by weaker personal care sales in Chile and an overall contraction in Peru's pharma category, not only OTC, all pharma categories in that quarter.

On the other hand, it's important to note that Genomma's brands continue to gain share within most of the markets where we compete. Argentina net sales increased 59% in Mexico peso terms, favored by a recovery in consumption and a positive inflation effect in that country. Suerox increased share of market with doubling demand volume in Argentina. And additionally, the newly acquired IBU 400 and Treg brands began to increase their respective market share during the quarter. Genomma ended the third quarter 2024 with a leverage of just 1.2x net debt to EBITDA, historical low financial leverage for the company. And 80% of our debt is now in long term.

As you can see in this chart, Genomma continues its efforts to improve the duration of the company's financial debt, while at the same time optimizing the average interest rate spread. Additionally, the company obtained the authorization from the CNBV to renew our frequent issuer program for short-term as well as long-term bonds. This dual program will allow the company to efficiently participate in the fixed income capital markets, and there will be news in the coming weeks and months for that optimization.

Free cash flow for the last 12 months ended September 30, 2024, increased by 68% year-on-year. Genomma converted 13.8% of the trailing 12-month sales into free cash flow. And also in September, we made our ninth consecutive dividend payment, again, in the amount of MXN 200 million or MXN 0.20 per share. We remain focused on ensuring value for Genomma shareholders, and our sustained quarterly dividends underscore our confidence in Genomma's strength and positive expectations around future earnings growth.

In summary, and as Marco showed earlier, the company has committed to generate 700 basis points in gross synergies. During the past 6 quarters, Genomma delivered 730 basis points, more than what we had promised. The company also committed to reinvest 50% of those synergies and flow through the P&L around 350 basis points. During the past 6 quarters, Genomma delivered 380 basis points, which is more than 50% of the gross synergies captured. The company also committed CapEx investments to be reduced once the plant was finished. During 2024 and beyond, Genomma's CapEx will be focused on maintenance and innovation only. Finally, this new culture that Marco brought around productivity will generate additional margin improvements and cash flow generation during 2025. With that, let's now turn to your Q&A.

[Operator]

[Operator Instructions]

Our first question comes from Alejandro Fuchs from Itaú.

[Alejandro Fuchs, analyst]

Congratulations on the super strong results. I have 2 quick ones on my side. The first one regarding Suerox. The product continues to see material growth and demand. I wanted to know if you can share with us a little bit your thoughts about Suerox outside of Mexico. How do you see the positioning of the product, the growth prospects for the future, especially in the U.S. and in Lat Am? I know that you said that in the U.S., it's growing strongly, but maybe you can share with us a little bit about the strategy going forward. And then the second is on Argentina, also very strong results despite the macro headwinds. So I was wondering if you can maybe share with us how do you see the business developing in Argentina towards next year?

[Marco Sparvieri, executive]

Thank you for the question. On Suerox, we now have already completed the 100% of the expansion of the brand in Latin America. So every market has already launched the brand and the early results that we are seeing are very optimistic, okay? We have markets where the brand has been for a little bit longer like Brazil -- sorry, like Chile. And in the case of Chile, we have already achieved almost 20% of market share. So we are expecting that the same level of success in the rest of the markets such as Argentina, Brazil, Colombia, Central America and so on and so forth.

And in the U.S., we have been present in that market for now around 3 to 4 years. And we are seeing very optimistic levels of growth, and the upside potential in that market is obviously huge. And we have stronger plans for next year, so we are very positive about the continued performance of Suerox.

On Argentina, let me say that we -- in terms of consumption, we have seen a very poor quarter in quarter 1, a bad quarter in quarter 2. And in quarter 3, we are starting to see a consumption picking up in the different categories. So we are pretty optimistic with the new regulations in Argentina and how that is going to impact the business going forward. I don't know if that responds your questions.

[Alejandro Fuchs, analyst]

Yes, it was very clear.

[Operator]

Our next question is from Luis Pardo with Compass Group.

[Luis Pardo Figueroa, analyst]

Great. Do you guys hear me?

[Marco Sparvieri, executive]

Yes.

[Luis Pardo Figueroa, analyst]

Okay. Great. First of all, congrats once again, outpacing even the most optimistic of estimates. So thanks and great, great job, Tonio and Marco. The question I have is more because if I look at how you're driving these productivity initiatives, until when should we expect continued sequential improvement in margins? Should we continue to see it for all of 2025, maybe 2026? I know you don't like to give long-term guidance. But help me in modeling -- help me with the model because it's hard to keep up the pace with you, guys. You're always beating my numbers.

[Marco Sparvieri, executive]

Thank you, Luis. The answer -- straight answer to your question is the following. You should expect an average of 24% of EBITDA. That means that some quarters, we're going to be slightly below 24%. And some other quarters, we're going to be slightly ahead of 24%. But on average, we think that 24% is the right level of margin for the company. We -- regarding productivity, we will continue to get savings from out of the productivity projects and manufacturing efficiencies. And everything that is above this average of 24% will be reinvested in the business to drive top line. So in the short term, you should expect that Q4 for this year is going to be in the range of anything between 23% and 24% as we have already committed. And you should expect that by the end of 2025, we'll be in the range of 24% to 25% of margin.

[Luis Pardo Figueroa, analyst]

Perfect. And just one quick follow-up. You're generating a ton of cash. Could you remind us of your priorities for capital allocation?

[Antonio Zamora Galland, executive]

Thank you, Luis, for your question. This is Antonio. Thank you for your trust. Thank you for your questions. They are very good questions as well as Alex before.

In the capital allocation, as we had mentioned, we will continue paying dividend, the cash dividends. That's -- and I'm not saying this in any particular order. I'm just saying, we will keep on paying dividends. We will continue doing buybacks and canceling shares. Obviously, shareholders need to approve on that. We also will be reinvesting in the business. And this is why we have this guidance for, as Marco said, all the way from here to the end of 2025 and not beyond that because one of the things that we want to do is reinvest in the business. We think that that's important for the sustainability and long-term growth of the business, whether that's organic or whether we do some bolt-on acquisitions. That's the third aspect of the capital allocation.

And the fourth one is we may also reduce down debt. So it's going to be a mix of all these 4 different aspects. And in each particular quarter, we decide what's best. If we find bolt-on acquisitions as we found in the previous quarter, the valuation multiple was excellent, 1.2x sales. Well, we will do acquisitions in that quarter and not so much buybacks. If we sell the noncore brands, well, we may pay some more debt or a special dividend, et cetera. But generally speaking, it's those 4 strategies that I described, and the company will be deciding on each quarter what's best for that moment. Obviously, the cash dividend will continue at MXN 200 million a quarter.

[Operator]

Our next question will be from Antonio Hernandez with Actinver.

[Antonio Hernandez, analyst]

Congrats on the very solid results. Could you provide a little bit more light on the recent isotonics acquisitions that you made and this type of bolt-on acquisitions? Like maybe if there's any specific category or region where you're -- that you're targeting?

[Antonio Zamora Galland, executive]

Antonio, yes, we -- I mean, as we mentioned in the previous quarter, we acquired 2 brands, 2 for Suerox, the brands Suero Repone and Suero Oral, and 2 pharma brands in Argentina, IBU 400 and Treg. Interestingly enough, we're going to be entering a new segment in the ibuprofen sizable submarket of the analgesics category. And we paid, as we said, 1.2x sales multiple for those acquisitions. So if we can do more of those, we will keep on doing those type of acquisitions.

The target, this is not -- these transactions are not out there. Just pick and choose. But obviously, our main focus, as Marco has mentioned many times, is on our core categories, just on the core categories. And we see a lot of opportunities in the U.S., in Brazil, but that doesn't mean that there couldn't be any opportunities in other markets.

[Marco Sparvieri, executive]

To add a little bit of color on what Antonio just mentioned, we will continue to seek for opportunities like the ones that were just acquired. And they will have to meet a certain criteria, and number one is brands that will strengthen the core categories. Number two, that the multiple makes sense for us as a company. Number three, that improves our margin and that there are synergies after the acquisitions. But you might continue to see some of these in the future if they fit that criteria.

[Operator]

Our next question will be from Andres Radin with Rohatyn Group.

[Andres Radin Borrajo, analyst]

Congratulations on another solid quarter. Two questions on my end. The first one is we saw a very good performance in the U.S. even when taking into account the FX. Maybe you can give us some color what kind of strategies you are implementing there? And what can we expect for the next year? And the second question is what sort of additional benefits can we expect from the approval of the GMP permits in Mexico?

[Marco Sparvieri, executive]

Sure. Thank you, Andres. On the U.S., we are basically following the same strategy that we are following for every market, which is focus on the core categories. We reduced significantly the number of SKUs that we are focusing in the U.S. And going forward, I think that you will see continued expansion of the Hispanic brands such as Tio Nacho, Cicatricure. But also, you will see some of our brands entering and being more and more successful in the general market like Suerox, SILKA and Tukol. So we are pretty confident that we'll continue to see the same levels of growth in the U.S. that you have seen in the past behind those strategies. I don't know if that provides the perspective you needed?

[Andres Radin Borrajo, analyst]

Yes. Great. Thank you.

[Antonio Zamora Galland, executive]

On the GMP, your question about the GMP is a very good question. We are -- the guidance that we provided earlier for this year and for next year, as everybody recalls, it's a guidance that was not dependent on the approval of the GMPs, okay? So the guidance will stay the same. Obviously, when you get the permits, it's positive. Everybody was expecting that. But we need to do the work in terms of synchronizing the supply chain. Some of the APIs and excipients have long lead times, and we need to do the planning for that. So obviously, there's going to be upside. Yes, there's going to be upside definitely. But for the time being, we will keep the guidance, as Marco described earlier, and we'd rather underpromise and, if possible, overdeliver. So for the time being, that would be my answer for the GMPs. Andres, it's a great question, but we need to keep it like that for the time being.

[Operator]

Our next question will be from Jorge Izquierdo from BTG Pactual.

[Jorge Izquierdo Lobato, analyst]

Congrats on the results. As you show in the presentation, hair care, blades and skin care categories are underperforming the rest of the portfolio. So I was wondering if you could share more details on what is affecting each of these categories, please? Thank you, and congrats again.

[Antonio Zamora Galland, executive]

Thank you, Jorge, for your question. And I'd just like to do a very brief introduction. And then obviously, Marco will give you more color. But the brief introduction is when you have 10 core categories and you have 18 markets, so that's a matrix of 10 times 18, so that's 180 sales. There's always in each quarter, in each month that some of them may be really good, some of them not so good. And some of them, there's going to be some underperformance. Regardless of that, again, because it's 180 components of that matrix, there's always going to be a few of these examples like the question that you're making.

But the important thing about Genomma is we always find a way to offset whatever underperformance is one or 2 markets or a specific country, et cetera. And as you can see on these quarters and the past 6 quarters results, that's the way we've been managing the company, and this will continue. So it was just more of an introduction. And obviously, on the specifics of this question, Marco will provide more color.

[Marco Sparvieri, executive]

Yes. Thank you, Jorge, for the question. I would say that of the 3 categories you just mentioned, the one that were suffering and that we are actually putting a lot of work into finding ways to turn it around is skin care, mostly behind Asepxia and Cicatricure, and we have made tons of progress that I obviously cannot reveal in this forum. But we've done tons of progress in terms of putting together new plans for Asepxia and putting together new plans for Cicatricure.

In the case of hair care, it was more of an issue related to fill rate. We've had some issues with some of the raw materials at the plant. And in the case of blades and razors, it's mostly an issue of sell-in. Sell-out in the largest market of blades and razors, which is Mexico, is growing double digits. So the one that is really hurting is skin care. The other 2 are just specific issues that are easy to solve.

[Operator]

Our next question will be from Martin Zetzsche with Fundamenta Capital.

[Martin Zetzsche, analyst]

I have 2. My first question is regarding the other current liabilities. We saw MXN 700 million increase on that line. My question is basically what's the effect there? And what explains it? And the second one is regarding the other acquisitions line. The almost MXN 600 million we see in the cash flow statement, are those payments made for the purchases of brands made in Argentina? Or what's there?

[Antonio Zamora Galland, executive]

Thank you, Martin. Yes, remember that we acquired recently 2 brands in the isotonic categories, 2 of them were in the U.S., Suero Repone and Suero Oral, and 2 brands were in Argentina, IBU 400 and Treg. So that's it. The total amount is what you see in the cash flow statement for the 4 brands. And as I said before, the multiple that we paid was just 1.2x trailing 12-month sales. And let me repeat, trailing 12-month sales. That is the sales that these brands had in the past, not under the Genomma management, not under the Genomma model. So if you think that the model will be different, obviously, the multiple that we paid is highly attractive. So that's regarding the second question.

And then in the first question, there are some -- as you know, and this is accounting rules, in that account, we have some deferred taxes and deferred VAT. And it's basically those items that make that line, I would say.

[Operator]

[Operator Instructions] This concludes the third quarter results conference call. Thank you very much for your attention.