Genomma Lab Internacional SAB de CV

BMV:LABB

Earnings Call Transcript 2021-Q4

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Genomma Lab Fourth Quarter 2021 Results Conference Call. [Operator Instructions]

I'll now turn the call over to Barbara Cano with the InspIR Group. Please go ahead, Barbara.

[Barbara Cano]

Thank you, and Good morning. We'll begin today's discussion with remarks from Jorge Brake, Genomma Lab's Chief Executive Officer; followed by Antonio Zamora, Chief Financial Officer, and we'll close with a question-and-answer session.

Our call will include projections and other forward-looking statements, and it's important to note that actual results could differ materially from those projected. Genomma undertakes no obligation to update or to revise publicly any forward-looking statements, whether because of new information, future events or other factors. Investors are urged to carefully review various disclosures made by the company, including the risk and other information disclosed within the company's filings with the Mexican stock Exchange.

With that, I'll now turn the call over to Mr. Jorge Brake. Jorge?

[Jorge Brake Valderrama, executive]

Thanks, Barbara, and thank you to everyone joining today. I am pleased with our fourth quarter performance and our results for the year. As you read in yesterday's press release, Genomma achieved historic levels of both growth and profitability in 2021.

We also continued to prepare and adapt to the changing needs of our customers, and at the same time, focus on delivering strong results for our shareholders. We ended the year announcing a new strategic pillar as we are unleashing the next evolution of our strategy, with an evolved view of health and well-being for the future by leveraging partnerships with leading global companies to enter new categories when we take our partners' brands to the next level in our regions.

Genomma is a health and well-being company that is leveraging or truly understanding manufacturing, marketing and commercialization capabilities to expand our position beyond the traditional Personal Care and OTC company. As the result for the year and for the final quarter demonstrated, we will continue to leverage Genomma's innovation strengths with line extensions and new product launches through our reinforced supply chain, the strong network economics and robust product offerings.

However, new alliances such as Genomma's recently announced partnership with Oramed's subsidiary Oravax enabled us to expand beyond our traditional scope. This new inorganic component to our growth strategy, therefore, takes further advantage of our strength in building and distributing brands within the market we know well and partnering with global companies that have outstanding products, to grow beyond what's possible through organic growth alone.

Needless to say, the opportunities are exciting and we look forward to making further related announcements in the near future.

Let me now discuss our very solid results for 2021. Genomma's third consecutive year of double-digit growth and profits, which are growing faster than sales in absolute terms. Full year 2021 net sales reached more than MXN 15 billion, a more than 11% year-on-year increase. EBITDA for the full year increased by more than 10%, with a 21% margin driven by consistent execution of our strategy, with benefit of the main interventions we made throughout our organization.

We continue to see performance of innovation initiatives, particularly line extensions and a strong new category performance supported by aggressive external media campaigns and in-store marketing. To comment on just a few examples, our Tio Nacho shampoo with new environmentally sustainable recycled and recyclable packaging, which we unveiled last quarter, saw a double-digit increase in sales during the fourth quarter of 2021 as a result of this initiative. The new Karboon by Groomen razors launched in the third quarter saw a growing share in Mexico, boosted by the Groomen testimonial advertising campaign, which has increased second half 2021 sales by more than 50% year-on-year.

We have since also launched Karboon Groomen in Chile, with a favorable initial response. These are only a few examples of the power of Genomma brand value coupled with outstanding advertising and consumer messaging launched through Genomma's media initiative, media produced in-house.

2021 sales growth, while tempered by the well-known headwinds of higher inflation, exchange rates and broad-based global supply challenges, was strong in most of our markets. We have also been successfully managing inflation pressures with disciplined pass-through of our cost increases. Antonio will discuss this in detail shortly, but I'm very proud of how our teams managed costs related to these volatile -- volatility.

A strong execution combined with effective pricing actions across both segments mitigated FX to a large degree. Further, Genomma's supply chain was meaningfully bolstered by prior interventions. With a new team in place for the last 1.5 years and a fully redesigned supply chain model, our enhanced demand forecasting procurement has resulted in improved fill rates and service levels that are supported by our new sales and operations model, too. Both the processes and related cost reductions have improved, resulting in a lower cost and higher quality finished products, particularly compared to Genomma third-party suppliers.

Genomma's Latin America operation ended the year maintaining prior quarter's momentum with net sales again reaching almost MXN 2 billion, a 12% year-on-year increase versus the 2020 results, supported by double-digit growth in the whole South America. Innovation and expansion strategies as well as increased points of sales supported these results, which were partially offset by a negative exchange rate impact in some countries where Genomma operates.

In Mexico, fourth quarter 2021 net sales increased by 26% year-on-year, with initiatives which drove increased market share within key categories as well as new core brand line extensions, including the example [indiscernible]. This was supported by a slight recovery of cough and cold product demand in December as Omicron symptoms were similar to the common cold for many.

During the quarter, we made solid progress on our Mexico industrial cluster. Our Personal Care and beverage manufacturing plant is up and running. The Suerox, shampoo, ointment line have completed the initial production phase, reaching roughly 6.5 million bottles of Suerox, 470,000 barrels of shampoo and 22,000 bottles of ointments produced per month.

OTC will begin shortly, and we continue making progress on expanding with an eye towards exports and diversifying product formats, which improved overall profitability for our Personal Care business.

Turning to our U.S. operations. Fourth quarter 2021 net sales increased by just under 2%. While we further advanced the U.S. market business model restructuring processes that we began in 2020, also with a new team in place, we continued to face Omicron headwinds, delaying our full implementation. However, we believe we've reached an inflection point with increased consumption expected for the spring and better sell-out and sell-in optimization.

Suerox at this point is performing extremely well in the U.S., expanding its points of sales in Puerto Rico among other markets, including California, as reflected in Suerox's fourth quarter 2021 product sales. Suerox can be found in major retailers in these states where we are a leading brand compared to competitors like Powerade and Pedialyte.

Genomma's e-commerce presence increased during 2021, approaching 6% of total fourth quarter '21 sales. You will recall, we targeted between 10% and 15% of Personal Care sales for 2022, noting the general limitations that OTC product sales have through e-commerce.

Finally, ESG is an important and long-standing pillar of Genomma's growth strategy. Genomma was one of the 10 Mexican companies recognized for its environmental, social and corporate governance, practices through our inclusion reaching the 2021 -- 2022, I'm sorry, S&P Global Sustainability Yearbook for the first time. The 2022 addition assessed more than 7,500 companies across 61 industries globally and showcases the best performing companies among industry peers and in terms of financially material ESG metrics.

We were also included within the Dow Jones Sustainability MILA Pacific Alliance Index for the second consecutive year. And Genomma Lab's MSCI rating was also upgraded to BB from B in 2021.

In closing, while the environment in 2021 remained challenging, it also proved to be transformative for Genomma. We are advancing our strategic plan while adapting to a changing environment to capture exciting opportunities.

Before I turn our call to Antonio for a discussion of our financial results, I would like to recognize the incredible and dynamic work of all our associates and teams through continued volatility in 2021. This was indeed Genomma Lab's year of our people.

With that, I will turn you over to Antonio, our CFO. Antonio?

[Antonio Zamora Galland, executive]

Thank you, Jorge, and Good morning, everyone. 2021 was an important year for Genomma. We exceeded our financial goals, we advanced our strategy, and we brought greater value to our customers.

Genomma ended a strong 2021 with another strong quarter, entering 2022 with favorable momentum. As Jorge noted, Genomma's successful growth strategy implementation throughout the regions where we operate brought an 11.5% year-on-year increase in consolidated net sales to reach MXN 15.5 billion for the full year 2021.

Fourth quarter net sales increased by 17% year-on-year to reach MXN 4.1 billion due to successful innovation initiatives such as line extensions, strong new category performance as well as aggressive external media campaigns with solid in-store marketing for Mexico and Latin American operations. To a lesser extent, increased sales were driven by a slight recovery of the cough and cold category beginning in late December.

Full year EBITDA reached MXN 3.2 billion with a 20.8% margin, a 30 bps year-on-year decrease primarily due to FX headwinds, raw materials and commodity inflation and nonrecurring expenses related to new product launches and e-commerce platform investments. To a lesser extent, margins decreased due to a negative product mix effect with increased sales of lower margin products as well as investments made to begin Genomma's industrial cluster operations in Mexico.

Fourth quarter 2021 EBITDA increased MXN 170 million as compared with the same audited period of 2020 to MXN 890 million due to operational leverage resulting from increased sales, a favorable product mix effect as well as operating efficiencies. Additionally, EBITDA margin improvement was driven by price increases implemented during the fourth quarter 2021.

Along these lines, we have been managing inflationary pressures in all countries where we are present through disciplined and also strategic pass-through of cost increases, notably delivering on our aim of passing through inflation to the end consumer. An example of this is Argentina, where we're seeing roughly 50% inflation a year. Yet, Genomma has been able to raise prices in line or even above inflation where possible with double-digit unit volume growth as well, expanding market share and profits above company averages.

Turning to Mexico. We closed 2021 with fourth quarter net sales of MXN 1.9 billion, just short of 26% -- 26% -- and let me repeat that, 26% year-on-year increase. It's a very important number. This MXN 376 million increase was due to initiatives, which drove increased market share within key categories as well as new core brand line extensions as well as slight cough and cold product demand recovery during December due to the Omicron variant common flu symptoms.

Mexico EBITDA for the fourth quarter 2021 reached MXN 423 million, with a 22.6% margin, reflecting a 110 basis point year-on-year improvement, benefiting from higher operating leverage, successful cost and expense controls, price increase strategies to recover macroeconomic headwinds and to a slight decrease in nonrecurring expenses associated with Genomma's new industrial cluster.

As Jorge mentioned, fourth quarter U.S. net sales increased by just under 2% to MXN 327 million. This was supported by an increased e-commerce presence, strong Suerox performance in Puerto Rico as well as new product launches both in Puerto Rico and California.

Our U.S. performance was adversely impacted by fourth quarter innovation strategies being delayed due to continued COVID-related pressures.

Latin America net sales for the quarter grew by 12.5% year-on-year to MXN 1.9 billion. Strong performance was partially offset by a negative ForEx impact in some countries where Genomma operates, notably Argentina, Chile, Colombia, Brazil and Uruguay.

Fourth quarter 2021 EBITDA reached MXN 452 million with an EBITDA margin just below 24%, a 90 bps year-on-year increase with benefit of cost and expense control and price increases to mitigate macroeconomic headwinds.

Regarding our profitability, fourth quarter 2021 gross profit increased by almost 19% to MXN 2.6 billion. The 90 basis point year-on-year gross margin increase for the fourth quarter was due to favorable sales mix with the slight cough and cold category recovery that I mentioned before, offset by ForEx-related increases on certain input costs as well.

Working capital was adjusted during the fourth quarter 2021 and the cash conversion cycle improved by 4 days since the end of September 2021 to reach 109 days. Strengthened collections and other successful initiatives during the quarter decreased our days of consolidated accounts receivables by 6 days to 100.

As Jorge mentioned, Genomma's improved S&OP system benefits on controls and operations strengthens our supply chain, which reflected a 24-day decrease in days of inventories that reached 130 days as of December 31, closing at MXN 2.1 billion at year end.

Genomma closed the fourth quarter 2021 with a leverage ratio of -- a little bit less than 1.5x net debt-to-EBITDA and MXN 1.3 billion in cash and equivalents at the quarter's end, a 40% year-on-year decrease due to debt repayment throughout the year.

During the quarter, we repurchased a little bit over 2.8 million shares during the 3 months ended December 31, 2021, which represents an investment of approximately MXN 53 million.

Finally, Genomma paid a cash dividend for the first time in the company's history. This decision signaled the conclusion of Genomma's manufacturing plant investment phase, coupled with strong cash flow generation and no significant near-term cash investments expected.

As Jorge mentioned, 2021 represented the company's third consecutive year of sustained growth since implementing Genomma's new strategy back in January 2019.

In closing, our 2021 operating performance underscored the strength of our business model, the value of our products and capabilities and the resilience of our employees. We have demonstrated that we have been able to successfully manage the pressures and did so again in the fourth quarter as we did in 2020 and all of 2021. And we expect to do the same in the future and coping with inflationary environments using our pricing strategies and other levers that we have to fully offset cost pressures over time.

With that, let me turn the call over to your questions. Operator?

[Operator]

[Operator Instructions] Our first question today is coming from Rodrigo Alcantara from UBS.

[Rodrigo Alcantara, analyst]

Congratulations on the quarter. I have 2 questions here. The first one that caught my attention on the reported growth that you mentioned in the press release on your boost category of Tio Nacho in Mexico of double digits, which may suggest some market share gains here. So my question to you is to what extent the production of the plant is responsible and to what extent is the addition of point of sale or innovation responsible of this result? That will be my question regarding the growth you said on -- you reported on the initial boost as far as Mexico.

And the second one, just -- I just needed to ask here about the U.S. If you can comment a bit about what is missing there? I mean, you mentioned about this initiatives being delayed under COVID. But if you can comment a bit more on what is left to be done? Or what should we expect as investors about the U.S. for 2022? Could it be actually where we see more stability there in those operations? Or any directional comment you can give about the U.S. would be really helpful.

[Jorge Brake Valderrama, executive]

I'll answer a couple of -- I'll go ahead and make a couple of comments, and then Antonio will complement as usual. On the shampoo business in Mexico, as we mentioned, we had a very good strong quarter. And I would say there's behind 2 or 3 very important things. One is the market. We are impacting the market via innovation. And that is a very good example in the case of shampoos because Tio Nacho is part of that.

And as you know, we didn't go through these initiatives with a lot of detailing in the last call. But now the new Tio Nacho, 100% recyclable and recycled, is our first 100% sustainable brand and that is also behind our 2025 commitment in terms of sustainability. It's out there. It started shipments in Mexico exactly starting in the last quarter of the year. And now it's being rolled out in other countries, too, as we continue expanding manufacturing, production capacity for the new version.

So that also has to do with what we are doing in the plant. As you know, the plant started in early last year with Suerox, but implemented the shampoo lines also in the last few months of 2021. And that's another factor that allows for more flexibility, for more effective delivery of product, better logistics, better customer service, and a couple of times, generally tries to get to the market to the point of sale.

As you know, we have a very strong go-to-market commercial model, which allows us to -- with the help now of the plant, allows us to be much more efficient in the whole chain. So that's another factor that worked out very well.

And finally, the consumer is reacting very, very nicely to the Tio Nacho, being the -- I think the only shampoo in Mexico. I mean, it will be in Latin America. That is 100% sustainable. It's going to be very attractive not only for the traditional consumer of Tio Nacho, but now we are, hopefully -- and we are already seeing a little bit of this -- we are attracting younger consumers, which is part of the strategy behind this launch. So that would be my comments in terms of the categorization boost.

Before going to the U.S., Antonio, anything else to add?

[Antonio Zamora Galland, executive]

Yes, Jorge. I think that the other impact that it's worth mentioning is that for the first time, at least in a couple of years -- and this is something that Jorge and I mentioned during our remarks -- cough and cold is back, which is great for our business. And it's also a sign that the world is becoming more normal. Fortunately, Omicron resembles a lot the common cold. So -- looking into the future, we hope and -- we hope, again, that the world will be more normal.

What we are seeing in the first weeks of 2022 is a very strong performance in that category, and that's something that help us also in Q4. And for Genomma, that's a very important category not only in terms of sales, but also in terms of profitability. So we're very happy about that, especially because the world is becoming more normal and that category's strength is also good for us.

With that, let me turn the mic back to Jorge for the U.S.

[Jorge Brake Valderrama, executive]

Yes. And one comment just on the last point you made, Antonio, is that we are very pleased -- as we continue developing our portfolio, we're very pleased by the fact that it's a diversified portfolio. Now we will -- we had an excellent 2020 in the middle of the pandemic. We had an excellent 2021 despite of the fact that at the beginning of the year there was no cough and cold season because the other brands in our portfolio shot up in terms of market presence, et cetera, et cetera.

And 2022 is looking very good, by the way. We have just started 2022. But as I've said and as Antonio said, given that this cough and cold season is back to normal and given the inertia of the several initiatives in other categories that we have launched in the last few months and we will continue launching this year, in addition to the improvement -- continuous improvement that we are going to be seeing in the supply chain, including the manufacturing plant, I'll say we are very bullish about what we can see in 2022.

My 2022 comment includes the U.S. As I said in my comments, we think we are in a very important relevant moment in the history of our new strategy in the U.S. You may remember that in 2019, we decided to analyze and redesign the strategy in the U.S. In early 2020, we implemented a new strategy focused on key states with a new restructured team and with an improvement in the portfolio of products that we were offering in the market.

Now towards looking for younger Hispanics, not only the traditional Hispanic consumer, and going to some general market consumers in a few key selected states.

And that during -- 2020 was a difficult year. As you remember, 2021 was a better year in terms of the implementation of that strategy. And it is working. You don't see it in the total U.S. numbers, but if you would go and see Puerto Rico, for instance, where we have a specific focus behind the new strategy, with a focused dedicated team, with a dedicated country manager, we're booming in Puerto Rico. We are gaining market share in all the categories in which we compete. Now we started doing the same thing in California in 2021, and we'll continue doing the same thing in other states.

But the number in '21 is kind of impacted by the base, unfortunately, but that's gone now. The base -- I meant there was no cough and cold in '21. That was a big issue versus early 2020, what's a regular cough and cold season. And the antibacterial gels also that are in the base in 2020, which sales really decreased a lot as a category as a whole in 2021 because consumers are not using gels as they were using it in the middle of the pandemic.

So those 2 truly affected the base. However, as I said, that's gone. And without having specific numbers, that the first 2 months of 2020 are being great months for the U.S. You will see that when we close the quarter. But sell-out, as we measure it also -- sell out is in the very high double digits for the first 7 weeks of the year. And that's a clear sign that our strategy is working and will be seen in terms of results in 2022.

[Operator]

[Operator Instructions] We've reached the end of our question-and-answer session. I'd like to turn the floor back over to Mr. Brake for any further or closing comments.

[Jorge Brake Valderrama, executive]

Okay. Thank you, operator, and thank you, everyone, for joining us today. As we noted, 2021 was marked by strong operating performance across all of our businesses with very good progress and continued evolution of our strategy. We're entering into 2022 well positioned to capture opportunities with very powerful momentum. Thank you very much.

[Operator]

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.