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spk03: Ladies and gentlemen, thank you for joining Genoma Lab's second 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 Christian Ibanez, Genoma's Head of Investor Relations. Please, go ahead.
spk00: 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 Marco.
spk07: Thank you, Chris. Good morning, everyone. I'm excited to announce Strong Quarter 2 2024 results. The highlight of the quarter is the profitability results with improvements across the P&L, starting with a gross margin that reached a very healthy level of 64%, that is 7.1 points of improvement over the past one and a half years. EBDA margin grew to 22.9%, a 186 basis points increase versus last year. Net income grew 50.1% to 631 million pesos. And EPS grew by 53.1% to 0.63 pesos. These results are driven by efficiencies in our San Cayetano manufacturing plant and productivity initiatives across the company. We remain committed to our margin expansion plans and believe these levels of margins are sustainable in the future. Our plans are on track to deliver the guidance of 23 to 24% margin in Q4 2024. Sales grew by 6.4% in Mexican pesos and on a like for like basis, sales are up 5.8%. Our business remains healthy across most brands and regions. The cash conversion cycle extended to 122 days, including Argentina, and 105 days, excluding Argentina. This change is due to two effects. Number one, a minus 16 days reduction in supplier days to mitigate raw materials and API shortages, aiming at COVID uptrend. And number two, Argentina's hyperinflationary accounting. Without Argentina, accounts receivables decrease by three days year over year. Antonio will expand on this last topic in his presentation. The following chart shows the performance of core brands and categories during the period. As you can see in the second column, we showed healthy levels of growth across the board. In the case of cough and cold, CELINE was affected by a category contraction during the flu season in the US and Mexico, but we were able to grow share. In the case of blades and razors, the issue is related to CELINE, but CELOUT remains healthy. This chart simply shows graphically what we already discussed in terms of brands and category performance here today. Skincare remain a challenge, but showing signs of turning around in Q2. Cough and cold and blades and razors should not be a problem going forward. And the same chart, but now showing countries' performance. During Q2, we face headwinds in Peru and Chile. Both markets I expect to turn around and be on the green side by Q3. This chart shows how we have grown gross margin, an impressive plus 7.1 points. We improved our gross margin from 57% to 64%, a testament of the impact that our productivity initiatives and manufacturing capabilities are having in the business. We firmly believe that this improvement in gross margin is sustainable. Let's now take a look at how this improvement in gross margin is translated into EBITDA. In the chart, you can see how we grew three points of EBITDA over the past year and a half. Around half of the gross margin gains were already translated into EBITDA growth, and the balance was reinvested in the business to continue accelerating top-line growth in the core categories. A variable that is becoming a central focus of our leadership team is ROIC. In the chart, you can see the evolution of LABS ROIC over the past three years. As you can see, we have already improved the ROIC by plus 2.1 points, mostly behind the margin expansion. Divesting non-core assets, continue to expand margin and improving our cash conversion cycle will remain the core focus to improving ROIC going forward. In this chart, you can appreciate the impact of improving our cash conversion cycle, expanding margin and divesting non-core assets. We have the potential of adding plus 6.4 points of ROIC in the coming years. Let's now switch gears to some exciting news, fresh from the oven. In Q2, 2024, we completed a series of M&As that were very strategic and will add on the growth we are seeing in our core brands. In total, we spent 25.6 million for a total of past 12 months sales of 22 million. I am convinced that without our power of marketing and point of sale execution, These new brands will more than double in the coming years. The first acquisition has to do with Suerox USA. We acquired two isotonic beverages, Suero Repone and Suero Oral. With this strategic move, Genoma owns the Suero brand in the US. a concept that is very powerful among Hispanics. Additionally, these two new brands will add incremental distribution to Suerox and Suerox to these two brands. The plan in the midterm is to change the name of the new brands to Suerox. The other acquisition is in Argentina. As shown in the pie chart, 47% of the analgesics category is sold as paracetamol. where we lead with Tafriol holding 80% of the segment share. 33% of the category is all as ibuprofen. We have acquired Evo 400, the second player in the ibuprofen segment. With this acquisition, Genoma becomes the absolute leader in the analgesics category in Argentina. Let's now switch gears to productivity. we continue to make progress against the 1,800 million in productivity savings. As of Q2 2024, we completed 41% of the 1,800 in savings. And finally, I want to share with you the latest acquisition in the productivity arena, which is a Flexo machine to produce our own syrup labels. This machine is in fact testing and will deliver total savings of 30 million pesos per year with an investment of 18 million pesos. The repayment period is less than one year. Tonio, over to you.
spk08: Thank you, Marco, and thank you everyone for joining us today. As Marco has described, Genoma delivered solid second quarter results with consolidated net sales reaching 4,652,000,000 pesos, a 6.4% year-on-year increase. Adjusted to constant currency and excluding the hyperinflationary subsidiary, second quarter sales increased by 5.2% reflecting healthy growth in six of Genoma's nine core categories. Further, as Marco also noted, most of our markets deliver strong local currency top-line growth. However, this was again mitigated by macroeconomic headwinds, including the strengthening of the Mexican peso. Genoma's second quarter EVPA margin increased substantially, reaching 22.9% a record, which represents more than 180 basis point year-on-year increase, primarily attributed to the improved cost efficiencies we've achieved through our productivity initiatives, and also with continued progress towards our target of delivering 1.8 billion pesos in annual cost savings by 2027, as Marco presented earlier. The demonstrated success of Genoma's productivity initiatives have also enabled us to remain on target to reach our targeted 23 to 24 percent EBDA margin by year-end. This quarter's EBDA margin reflects continued positive evolution of Genoma's EBDA margin Again, 22.9%. Gross profit for the quarter increased by 11.7% to reach 2,978,000,000 pesos compared with 2,665,000,000 pesos for the second quarter 2023. ACM&A represented 41.2% for the quarter. Moving to our results by region, second quarter net sales for Genomas Mexico operations increased by 5.7% year-on-year to almost 2.2 billion pesos, led by key brand sales initiatives, including Lomecan, Teatrical, Banar, and obviously, Sueros. Mexico EVDA margin for the second quarter closed at 22.6%, at $320 basis point increase, again, benefiting from cost control and productivity project efficiencies. Our U.S. everyday margin closed at 13.7%, which is a 720 basis point year-on-year expansion. And net sales grew by 6.2% in Mexican peso terms and by 7.4% in U.S. dollar terms, with double-digit increases in four brands including Tukor, Buffering, Next, and obviously, Suerox. Continued Mexican peso strength relative to the US dollar impacted also our results. So before we go into the rest of the regions, we need to remind everyone that we are still on a highly volatile macro environment. And although the Mexican peso weakened a little bit versus the US dollar, During the quarter, FX still impacts our figures in countries like Chile and Brazil, which are, of course, representative in terms of sales on our consolidated figures. Regarding our Latin American operations, net sales increased by 3.3% in like-for-like terms with strong Xenoprasol to call Tafirol, and Suerox brand performance. The EVDA margin for Latin America reached 25.2% with a strong cost and expense controls, which help us to offset raw material inflation and FX depreciation during the quarter. In the second quarter, our cash conversion cycle extended to 122 days, but I want to highlight that there are hyperinflationary accounting effects that I will explain in a minute. So let's explain what happened with the cash conversion cycle. First, the short-term increase in cash conversion cycle was primarily due to a 16-day decrease in supplier terms. And this is because we made a strategic decision to safeguard the company against potential raw material shortages and APIs a shortage also in the market during the quarter. As we all know, the COVID uptrend is creating a lot of pressure in certain molecules and APIs, so we wanted to avoid any future disruption. Now, going into DSA, there's a distortion that was caused by IAS 29 and IAS 21, you know, the effects on the Argentina last 12 months sales. If you remember in Q4, just the way the accounting works, Argentina subsidiary happened to have negative sales in Mexican peso terms, although they were extremely high in terms of Argentinian peso terms. If we exclude the hyperinflationary effects, actually the business performed really well. So we had an improvement of three days in terms of cash conversion cycles. Again, It's an illusion or it's an accounting effect just from the formula. And as we take the last 12 months, this effect is probably gonna be repeated in the third quarter and in the fourth quarter, it's just an accounting formula. That's why we are presenting the true performance, excluding those effects. So as we... Genoma ended the second quarter with a leverage ratio of 1.4 times net debt to EVDA and more than 1.2 billion pesos in cash and equivalents. This is a nearly 10% year-on-year decrease due to paying down of debt and obviously the M&A opportunities that Marco mentioned before. We remain focused on refinancing Genoma's debt to reduce our financing costs and improve our maturity profile. Earlier this week, we announced that Genoma successfully secured a 10-year credit line for 1.5 billion pesos to further support our growth plans. These funds have been dispersed during the second and third quarters, enabling us to refinance short-term debt and higher-cost financial liabilities that we have. We also made a voluntary prepayment at the end, a voluntary prepayment of the final franchise of the loan that we contracted with IFC for 101.1 million pesos, including principal and accrued interest, corresponding to the outstanding balance contracted with the IFC for the plant's construction. This is allowing Genoma to consider approximately 180,000 square meters of land adjacent to the plant for our strategy to sell non-core assets. Genoma shareholders approved the cancellation of 20 million shares at our last annual shareholders meeting held in April. And also during the same shareholders meeting, it was authorized to cancel up to 100 million shares more for the next years. Further, in June, we made our eighth consecutive dividend payment, again in the amount of 200 million pesos, or in this case, 20 Mexican cents per share, which is a 2% increase relative to the dividend per share paid for the first quarter of 2024, also resulting in the cancellation of related shares. This quarter's payment further underscores our confidence in the value of HENOMA's shares and our continued focus on shareholder value through sustained quarterly dividends. Finally, you'll note the strengthening of HENOMA's shares in the markets in the quarter's end. So far, year to date, we have a performance return of more than 35%. So thank you for your trust. And with that, let us turn to our Q&A.
spk03: 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. Thank you. Our first question comes from Antonio Hernandez with Actinver. Please, Antonio, turn on your microphone and proceed with your question.
spk05: Yes. Hi, good morning. Thanks for taking my question and congrats on your results. Very, very positive. Just a quick one regarding Chile and Peru that you mentioned that these two countries were being challenged. I mean, you're not the first company telling that to the market. So just wanted to hear a little bit more on your side. You mentioned that you expect them to improve soon if you're seeing any gradual improvement or recovery. Thanks.
spk07: Yeah. The two cases for us, I don't know for the other companies, but for us are very different. In the case of Chile, what we're seeing is a massive consumption contraction. in most of the categories where we compete. But in this quarter, we started seeing that that contraction is easing off a little bit. So I expect that the next quarter results are going to be either on the green side or very close to the green side. And in the case of Peru, we had an impact from from the government from a policy that was approved last year in which they are before they would pay for only RX medicines to the public. And a year ago, they have approved a policy in which the payments, the full payments of medicines extends also to OTC products. And that has impacted us big time in the OTC segment. But we are reaching our base next quarter. So I also expect Peru to start turning around also with other initiatives that we put in place. I don't know if that clarifies
spk05: yes that's that's very helpful just could you please remind us how much of sales they represent uh we cannot disclose that uh information okay perfect thanks a lot thanks a lot and have a nice day yep
spk03: Thank you. Our next question will be from Alvaro Garcia with BTG. Please turn on your microphone and proceed with your question.
spk02: Hi, guys. Thanks for the space for questions, and congrats on results. Two questions. On Argentina, we saw 17% revenue growth in pesos. Obviously, a lot of noise because of the hyperinflationary economy, but I was wondering if you could maybe expand on what you saw from a volume standpoint. uh in some of your key brands and then on on on the mna in argentina how is this funded is this capital that you're maybe taking from abroad and plugging that into argentina or is that being funded with cash that you already have uh from your operations in argentina thank you okay i'm gonna take the hi alvaro how are you i'm gonna take the first question uh
spk07: Argentina in a short answer is that we are seeing a, I mean, in the past quarter, actually Q4 2023 and Q1 2024, we saw a massive contraction in consumption, okay? And this past quarter, what we're seeing in terms of volume is that it's turning around dramatically for us. We are also gaining share in most of the categories. but also it's a big portion of the recuperation of Argentina and the 17% increase in Mexican pesos has to do with the recuperation of the volume on the categories where we compete. I don't know if that clarifies.
spk02: Yeah, I think it makes sense to, at least logically, it makes sense that Tafirol would bounce back after a couple of week quarters with just lower elasticity than other consumer products.
spk08: That's right. Thank you for your question. This is Antonio Zamora. Your second question was regarding how did we fund the M&A of the two pharma brands in Argentina. We funded locally with resources from the subsidiary and a little bit of debt in that country as well. This is obviously positive because we are exchanging Argentine pesos, which we know, you know, what's going on for intangible assets. Basically, that allows Genoma to enter a very important category in analgesics where we didn't have any presence. So it's obviously strategic, and we believe that all shareholders will appreciate that we're exchanging Argentine pesos for intangibles. and the possibility and the opportunity to lead in the ibuprofen category as we have done in the past in paracetamol with Artafirol brand.
spk01: Great. Very clear. Thank you.
spk03: Thank you. One moment, please, while we hold for questions.
spk02: i'd ask another one if that's okay sure um on on the mna in the u.s um i was just wondering if maybe you could expand on sort of the strategic rationale in in the u.s you know i'm assuming that there's third parties that produce These products, they're probably smaller brands. Is the idea to eventually maybe produce this in Mexico? What sort of synergies do you see? What type of product is it? I don't know the product that well, so any sort of color on that would be helpful.
spk07: Yeah, I mean, there's several synergies. First of all, these are isotonic beverages, electrolyte beverage. So it adds, you know, and fits perfectly with our focus on Xerox. The plant, as I mentioned, in the mid-term is to switch the names of these brands to Suero, so they will become Suero, okay? The synergies we are seeing are the following. Number one, we are planning to switch production to Mexico, so the COGS will be reduced more than half of what it is today. Number two, they are distributed mostly in the East Coast, And we, with Suerox, we're mostly distributed in the West Coast, in the state of California and Texas. So we see that, you know, this is a very quick way to win distribution, which normally takes a long time in the US. And also, you know, to win distribution in the West Coast for the new brands that we have acquired. So we see it very strategic.
spk01: Great. Thank you.
spk03: Thank you, Eduardo. Okay, thank you. Our next question is from Fernando Herrera with Compass Group. Please, Fernando, turn on your microphone and go ahead with your question. Fernando, are you able to turn on your microphone? Can you hear us? Go ahead with your question.
spk06: Yeah, yeah, I can hear you. Sorry, I think that my micro had something going on. But first of all, congrats on the strong results. Here I was just wondering if you can provide any more color regarding the brands that have been lagging and what are your expectations going into second half with these categories?
spk07: The one category, thank you, Fernando, for your question. The one category that is lagging right now is, as I explained, is mostly skincare. And for skincare, we have very solid plans to turn around one of the brands, which is Asepsia. It's a brand that has been declining for years. three years now. And we have a plan that is very, very solid. And we expect these plans to hit the market in Q4 And I am, you know, very positive that business will turn around with this plan. And then in the skincare category, we also have a Cicatricure, which is a brand that is, you know, it's been kind of like with mixed results across markets, in some markets declining, in others markets flat, some few markets growing. And we are still working on the plans. I cannot say right now that we have a very solid plan as we have with Asepsia, but we are working really hard to turn that business around soon. And the rest of the categories, they are all very healthy.
spk06: Okay, perfect. So we should start to see something of that impact going to 4Q, right?
spk07: Yes, correct.
spk06: Perfect. Thanks. Congrats once again.
spk07: Thank you, Fernando.
spk03: Thank you. Our next question will be coming from Bruno Ramirez with JP Morgan. Please, Bruno, turn on your microphone and go ahead.
spk04: Hi, guys. This is actually from JP Morgan. We got confused there on the registration, but thank you for taking my question. Regarding the sale of non-core brands, can you remind us where we are, how much is left, and when can we see additional portfolio cleanups, let's say?
spk07: Yes, thank you, Florian. We are advancing steadily in the process. We have already signed the contract with the bank that is going to be managing the transaction. And we are very much advanced in valuations and putting together the pitch We have already contacted, the bank has already contacted some potential buyers. So we are advancing steadily and firmly on this transaction. We're not backing off of this.
spk04: Any timeline that you can share?
spk07: That's a, that's a hard question to answer. I mean, it could be a very short term period. You know, someone appears with a very good offer or, uh, we'll wait to, to, to, to, to, uh, to make sure that we make a good sale. Excellent.
spk04: Thank you so much.
spk08: This is, this is Antonio expanding on your question, you know, initially during the investor day last year, we said divesting non-core brands. But actually the strategy is larger than that. It's divesting non-core assets. Obviously brands are some intangible assets, but the strategy is even more important. And including those non-core assets, we provided two examples today. One is, as you know, the... We have 180,000 square meters adjacent to the plant. So this is land that is next to our plant that is now considered as a non-poor asset that we could monetize later on. So that's one. And as we reported, in a press release last quarter, we are also divesting our investment in the affiliate company. And you can see that on the balance sheet statement as asset available for sale, which is also there. So the strategy is divesting non-core assets. Obviously, brands is one component, but there are other non-core assets as well.
spk04: Thank you.
spk03: Thank you. Please hold while we wait for a few more questions.
spk08: There's a question from Miguel Ulloa from BBVA. He's having trouble with the microphone. He's basically asking if we have a reference price for the value of the land. The answer is no, we've just announced this and it's a different project. What we're disclosing today basically is that we have that non-core asset that is available for sale and that will help us improve our ROIC in the future once we sell it. But at this moment, we don't have a price for that.
spk03: Okay, our next question will be coming from Sara Maldonado with Santander.
spk09: Sara, go ahead. Yes, thank you for taking my question. Congrats for the results. My question is about Mexico. If you can share about your outlook for the second half of the year. Historically, do you see some slowdown in the electoral year? And what are you seeing for the first part of the third quarter? Thank you.
spk07: Thank you, Sarah, for your question. We expect to stay in the levels of growth in terms of sellout that we have seen in the first half, which has been lost double digits. um we have not seen a slow down uh what you're seeing is maybe a slow down in celine in the second quarter but when you look at the sellout data for mexico we still we're still growing in the range of 11 to 12 percent uh so now uh i mean obviously Most of it will depend on how strong the winter season comes in the second half, but we are expecting to have a strong winter season. Plus, we are seeing COVID cases uptrending lately, and that helps a lot our OTC business. So right now, if you ask me, I would say that we should be staying in the levels of 11% to 12% growth in sellout. Very good. Thank you very much. One moment while we hold for questions.
spk03: Okay, this concludes our second quarter results conference call. Thank you for your attention.
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