Genomma Lab Intl Sab Ord

Greetings, ladies and gentlemen. Thank you for joining Genoma Lab's first quarter 2024 earnings conference call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. As a reminder, this meeting is being recorded and will be available for replay from the investor relations section of Genoma's website following the call. I'll now turn the call over to Cristian Ibáñez, Genoma's Head of Investor Relations. Please, go ahead.

Thank you and welcome, everyone. On today's call are Marcos Barbieri, 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 Genoma's business, assets, products, strategies, demand, and markets. These statements are subject to risks and uncertainties that could cause actual results to differ materially. They are also based on assumptions as of today, and the company undertakes no obligation to update them as a result of new information or future events. Let me now turn the call over to Mr. Marcos Parvieri.

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

Thank you, Marco, and thank you everyone for joining us today. As Marco described, Genoma delivered a strong start of the year. reflected in a significant increase in our consolidated EVDA margin for the first quarter, both sequentially and year on year, as tangible progress towards our target of achieving a 23 to 24% EVDA margin as provided in our guidance. We also continue to capture market shares in many markets and categories as Marco described earlier. And during the quarter, we also advanced toward our 2027 productivity targets that Marco explained before. Let us then highlight some relevant areas of our first quarter results. First quarter consolidated 2024 net sales reached 4.2 billion pesos, 0.5% year on year increase. And it's important to mention that when we exclude the hyperinflationary subsidiary, sales for the first quarter of 2024 increased by 5.8%, which also includes the adverse impact of a significant strengthening of the Mexican peso that we have seen for many quarters already. As noted, first quarter consolidated NBDA reached 936 million pesos with a 22.3% EBITDA margin. 22.3% EBITDA margin. And I'm very happy to mention 22.3% consolidated EBITDA. every day margin, which is an 8% year-on-year increase and a significant 150 basis point margin expansion year-on-year that was achieved through the successful productivity initiatives that Genoma has been implementing, as Marco described earlier. Gross profit for the quarter increased by 6.9% to reach 2.7 billion pesos compared to 2.6 billion pesos for the first quarter of 2023. SGM&A expenses represented 43% for the first quarter of 2024. Now, this is a chart that we used last quarter, and we will continue presenting this as the last page of our report, which is an exercise where we are presenting the figures excluding IAS 29 and IAS 21, which, as we all know, it's a proxy representation of our consolidated financials, very close to what it would be like if we were reporting on the U.S. gap. As you can see here in this exercise, net sales and EVDA would have resembled what has been reported following IFRS rules. Importantly, this also means that Genoma is successfully and progressively mitigating the Argentina headwinds. Neringom, as you can see here, would be higher when we exclude the IAS 29 and the IAS 21 effects, because as we all know, there's an extra line on the IFRS, which records a non-cash expense, which is the effect of inflation in that subsidiary. On the US GAAP, that's not included, so our figures would have been higher. But as you can see, very healthy numbers, even if we exclude these impacts. Now let's move on to the regions. Mexico, Mexico, we're very proud of Mexico. Mexico operations increased by 15% year on year. to reach 2 billion pesos, driven by key categories, including beverages and infant nutrition. The NVDA margin for the first quarter increased by 460 basis points. And again, this is a result of all the productivity savings and initiatives that Marco described earlier. And, you know, the results are just there. The number is beautiful. Also, we need to provide some context in terms of macros. Unfortunately, the Mexico peso keeps on strengthening. So these impacts are results from the international subsidiaries. Let's start with the US. In the case of the US, our margin reached 14.1%. Sorry, no. In the case of the US, sorry, there's a typo here, the everyday margin reached 14.1%, which is a 500 basis point year-on-year expansion. Net sales, when expressed in U.S. dollars, grew by 0.5%. We all know that we had a milder, a very mild flu season in the U.S., and this situation decreased demand on the cough and cold syrup categories and SKUs. If we exclude the impact of, you know, the Tucol brand, which is very strong in cough and cold syrup, the U.S. market sales would have increased by double digits. The case of Latin America, again, the Mexican peso has been strengthening as we can see here against most of the South American subsidiaries, and we all know what happened in Argentina. So even despite all these macro events, net sales in the region increased by 8.8% in like-for-like terms, obviously excluding Argentina. And this was led by Colombia, Brazil, and CARICAM. The ABDA margin decreased, reached 24%, which is a 220 basic points decrease due to a positive one-timer that we had in the base and that we may be able to comment later if needed. During the quarter, the cash conversion cycle ended at 103 days, which is a three-day improvement as compared to the previous year. And days of consolidated accounts receivables amounted to 94 days, which is a six-day year-on-year increase. Moving on to Moving on to our financing, we remain focused on refinancing GenomasDev to reduce our financing costs and improve our maturity profile. We successfully issued 450 million pesos in short-term debt during the first quarter. All of these issuances have been oversubscribed and enabled us to reduce our total cost of capital. We are also actively negotiating new long-term loans to further strengthen Genoma's maturity profile with very competitive cost of financing. Genoma ended the first quarter with a leverage ratio of 1.4 times net debt to EVDA. We ended the quarter with more than 1.1 billion pesos in cash and equivalents after paying some debt and also reinvesting in the business to boost sales. Free cash flow for the last 12 months ended March 2024, increased by 51% when compared to the same period of time in 2023. We also repurchased 2.9 million shares during the first quarter, end of March 31, 2024, investing 42 million pesos. And we also have proposed the cancellation of 20 million shares, as Marco described, which is expected to be approved at Genoma's 2024 Annual Shareholders Meeting. In March, we also made our seventh dividend payment in the amount of 200 million pesos, again, reflecting the strength of our business, of our cashflow generation. And as we mentioned, we intend to continue paying dividends on a quarterly basis as proposed within Genomas recently posted proxy documents for the annual shareholders meeting. Regarding ESG, We are pleased to know that during the quarter, genomic increase are MSCI ESG rating from triple B to A. This is the third time in the last four years that we have an improvement in the rating, and this reflects our continued progress related to the company's sustainability goals. So as Marco mentioned, productivity is key, but we also wanted to do it in a very sustainable way, as you can see here. And thank you, MSCI. for acknowledging this for us. Before we end, we just wanted to remind everybody what has been the positive evolution of our EBITDA margin. These are historical figures that you know, that you can see. There's a clear evolution of our margin, and as Marco has mentioned, given our productivity initiatives that we are on target, we aim to reach the 23% to 22% EBITDA margin by the end of the year. Finally, and pending approval at the annual shareholders meeting, we are really honored and pleased to announce that Joaquin Ley and Simona Pistosova are joining our board of directors. Both of them have a brilliant career and experience that we are sure will add a lot of value to the company. In closing, We began the quarter on a very strong footing with results that again underscore the strength of our strategy with an EVDA margin of 22.3% margin. And with that, we are now ready for a Q&A.

Thank you, Antonio. We will now begin the question and answer session. To ask a question, you may raise your hand using the icon Raise Your Hand located at the bottom of your screen. To withdraw your question, press the same icon at any time. This will be required in order to allow you to turn on your microphone and ask your questions. One moment, please, while we hold for questions. It is now time for the question and answer session. And if you want to ask a question, you may raise your hand by using the icon, raise your hand, located at the bottom of your screen. This will be required in order to allow you to turn on your microphone and ask your questions. Let's hold for questions. Thank you. Our first question is from Fraulein Mendez with JPM. Please turn on your microphone and proceed with your question.

Hello, guys. Can you hear me?

Yes, Freeland, we can hear you well.

Perfect. Thank you so much for taking my question. Could you give us a little bit more details on the turnaround plan that you have for Asepsia? And what is the timing of seeing this reflected in results? Thank you so much.

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

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

Yes. Thank you for your question, Roland. This is Antonio Zamora. You might remember that in previous calls and previous quarters, we mentioned that there's a line there in the other income or expenses that had a positive one-timer last year. and that represented distribution business that we have in South America. At the moment, we were still evaluating whether that business was interesting for us to continue that as part of the ongoing business. So the accounting rules basically say that when you are in that situation, all of the impact from that business needs to be recorded under one line, and that's the other income, other expenses. That distribution business has been very successful for us, adding value, creating margin, and obviously we're leveraging the time of our people, distribution network, basically the infrastructure that we have. So we think that's a good business for our shareholders, for the company. And this year, we decided that it's going to be part of the company. So The way the accounting works this year is that the full P&L gets recorded. So we record sales, cost of goods sold, expenses, all the way down to every DA, as opposed to last year, where we, under the accounting rules, we only recorded the impact of the business. But if you look at last year's impact, It was an interesting business. It was adding, you know, EVDA. It was adding profitability. So we decided to include it. And that's the reason why you see that difference. But again, it's something positive. It's something that a few other multinational companies are doing as well and uh i mean it's a no-brainer because we're not investing in new assets in more people in more experiences we are um it's it's it's ideal for us i don't know if we want to answer um just maybe i didn't just uh understand completely so it let's say uh inflated a little bit the margin of last year as opposed to this year okay that's correct yes perfect yes thank you so much And it's interesting your comment for 11, but because if we were doing this on an apples to apples basis, the margin improvement of the first quarter 2024 would have been even higher.

Yeah.

Okay. So again, I mean, we're repeating the productivity initiatives. We're working very hard on that, the results. Everybody can see them, and we are very proud of what we are achieving. But yeah, what you said is right.

Thank you so much.

Thank you, Fraulein.

Thank you. Our next question comes from Vidal Lavin with BlackRock. Vidal, please turn your microphone on and proceed with your question. Vidal, feel free to turn your microphone on to proceed with your question. Okay, while we sort out any technical issues, we will continue with Jorge Izquierdo with BTG. Please turn on your microphone, Jorge, and proceed with your question.

Hello, can you hear me well?

Yes, Jorge, very well.

Thank you. Good morning, everyone, and congrats on the solid results and for the space for making questions. Could you please share some color on where you are in terms of the potential sale of non-core brands and what could be the use of excess cash if some of these transactions materialize thank you very much and congrats again Thank you.

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

Okay. Thank you very much.

Jorge, this is Antonio expanding on Marco's comment. I think that what's very important is behind this strategy of selling the non-core brands, it's an even larger strategy, which is focusing in the core brands, focusing in the larger business. And Marco has been very successful in that. If you look at the performance of the larger categories, they are performing double-digit growth, accelerate the growth, et cetera. So, yeah, I mean, we will have the positive impact of the sale of the non-core brands, but more importantly, we will, our bandwidth will be focused on the larger parts of the business, on the larger categories, and that will obviously accelerate growth. Thank you so much, Jorge, for your question.

Thank you, Antonio.

Regarding Vidal Lavin, question from BlackRock. I think there's some technical questions, but we got his question here via email. And he's asking about what is the capital allocation for the company? in the future i don't know if you want to take that or i'll take it okay so uh thank you vidal it's a great question and as everybody can see here uh the avda margin is expanding uh we also have certain initiatives to uh in improve the flow through all the way down to the net income Cash flow has always been a priority. So the question is, what are we going to do with all that cash? And as we have mentioned before, it's going to be a combination of cash dividends, which will continue on a quarterly basis, buybacks and share cancellation. As you heard today, both from Marco and myself, 20 million shares will be canceled. provided that all shareholders approve at the AGSM, which we hope is going to be. And if you read the proxies, by the way, yeah, Genoma has one of the best practices in terms of AGSMs, because we are one of the few companies that publish the proxies in the Mexican markets. as you can see there, in one of the proxies, we are signaling that we will be canceling up to 100 million shares in the future as we do more buybacks. Besides that, we will be, and this is obviously fundamental, we will be reinvesting in the business to grow our categories. And as Marco mentioned in the previous call, there's going to be selective M&A that will strengthen specific categories that will, again, accelerate our growth. So it's going to be a combination of all of these aspects, paying down debt a little bit, I mean, obviously our financial debt is low, but since TA is very high, it's also another way to improve the net income. So it's going to be a combination of all of these, depending on what makes more sense to increase shareholder value for the short and the long-term run. And thank you, Vidal, for your question.

Thank you. One moment, please, as we hold for any further questions. Okay, this concludes first quarter's conference call. Thank you for your attention.

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