Genomma Lab Intl Sab Ord

Greetings, ladies and gentlemen. Thank you for joining Genoma Lab's third 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.

Thank you and welcome, everyone. On today's call are Marcos Carvieri, 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 call over to Marco.

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%. EVDA 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 five days reduction year over year. Cash flow generation over the past 12 months hit a record high of 2,404 million Mexican pesos, 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 world. 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 sell-out 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. And the same chart, but now showing countries' performance. During Q3, Mexico and the US exceeded expectations. Key markets in Latam, 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 EBDA. In the chart, you can see how we grew 3.8 points of EBDA 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. I expect this trend to continue. The following chart shows how the improvement in operating margin, gross margin, and EDA is possibly impacting earnings per share, which grew from 0.23 to an impressive 0.66. In this chart, we are showing how our company is delivering on capex efficiency. You can appreciate how margin is expanding unless 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 Labs ROIC over the past three years. As you can see, we have already improved the ROIC by three points, mostly behind the margin expansion, divesting non-core assets, continuing to expand margin, and improving our cash conversion cycles. 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 healthy authorities in Mexico have granted the GMPs for the pending forms at our plan in San Cayetano, oral liquids, topical liquids, and coding for the Mexican market. Let's now switch gears to productivity. We continue to make progress against the $1,800 million in productivity savings. As of Q3 2024, we completed 42% of the $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 cups, delivering a total savings of 16 million in annual savings. I will now turn the call over to Tony.

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. Genoma 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 EVDA margin evolution, and we continue to see a decrease in CAPEX, which is directly aligned with genomics overarching culture around productivity. The entire company is focused on the discipline execution of this new productivity culture. And this is reflected in the 757 million pesos in productivity projects that we have identified. Needless to say, we are encouraged by the momentum that has been building across our results here today. We are focused on what is within our control and are also pleased with the momentum behind our third quarter performance. Genoma delivered 5 billion and 93 million pesos in consolidated net sales, a substantial 16% year-on-year increase, reflecting strong sales growth in Mexico and the US, 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 to 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 six out of nine core categories. Q3 EBDA margin, again, increased substantially year on year, reaching 23.7%, 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 genoma derives from manufacturing cost efficiencies and continued positive evolution towards our targeted range of between 23 and 24% ABDA margin by the year. Net income for the fourth quarter increased by 78% due to increased operating income favorable FX environment I've described and the classification of the associated affiliate as known for asset available for sale aligned with IFRS 5. Our third quarter cash conversion cycle was 117 days impacted from the effects of IES 29 and IES 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 seven days year on year, and days payable outstanding decreased by seven 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 Genomas Mexico operations increased by 13% to reach 2.4 billion pesos, 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 EVDA margin increased to 24.1%, a 70 basis point expansion related to productivity gains within this market. The Mexican peso depreciated 11% against the US dollar. As a result, and during this quarter, Forex is no longer a headwind as we had experience over previous quarter with what we have called the Mexican superpeso. But that headwind is not there anymore. Net sales in the US increased by 12% in US 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. Every day margin for genomics US operations reach 15%, which is a 440 basis point increase, a 440 basis point increase in every day margin, reflecting productivity gains and also a favorable points. 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. Genomic Latin American operations net sales increased by 17% in Mexico 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 country. On the other hand, it's important to note that Genomas 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 recovering consumption and a positive inflation effect in that country. Zoetrox increased share of market with doubling demand volume in Argentina. And additionally, the newly acquired Evo 400 and Treg brands began to increase their respective market share during the quarter. Genoma ended the third quarter of 2024 with a leverage of just 1.2 times net debt to EVDA. Historical low financial leverage for the company. And 80% of our debt is now in long term. As you can see in this chart, Genoma 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 CNBD 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. Pre-cash flow for the last 12 months ended September 30th, 2024 increased by 68% year on year. And OMA, converted 13.8% of the trailing sales into free cash flow. And also in September, we made our ninth consecutive dividend payment again in the amount of 200 million pesos or 20 Mexican cents per share. We remain focused on ensuring value for Canoma shareholders and our sustained quarterly dividends underscore our confidence in Genoma's strength and positive expectations around future earnings growth. In summary, and as Marco showed earlier, the company have committed to generate 700 basis points in gross synergies. During the past six quarters, Genoma delivered 730 basis points, more than what we have promised. The company also committed to invest 50% of those synergies and flew through the P&L around 350 basis points. During the past six quarters, Genoma 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, Genomas 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.

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 Alejandro Fuchs from Itao. Please turn on your microphone and proceed with your question.

Thank you. Hola, Marcos, Antonio, Christian, and team. Congratulations on the super strong results, and thank you for the space for questions. I have two 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 sweat ox outside of mexico how do you see the the positioning of the product the growth prospects for the future especially in the us and in latam i know that you said that the us is growing strongly but maybe you can share with us a little bit about the 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?

Thank you. Thank you for the question on Xerox. 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. 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 US, we have been present in that market for now um, around three to four years. And we are seeing, you know, uh, very optimistic levels of growth and the upside potential in that market is obviously huge. Uh, and we have stronger plans for next year. So we're very positive about, about the, you know, continuing, um, performance of swirls on Argentina. Let me say that in terms of consumption, we have seen a very poor quarter in quarter one, a bad quarter in quarter two, and in quarter three, 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 to your questions.

Yes, it was very clear. Thank you very much, Marco.

Thank you. Thank you. Our next question is from Luis Pardo with Compass Group. Please turn your microphone on and proceed with your question.

Great. Do you guys hear me? Yes. Okay, great. First of all, congrats once again, now pacing you in the most optimistic direction. 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 this 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 modeling. Help me with the model because it's hard to keep up the pace with you guys. You're always beating my numbers. Thank you, Luis.

The straight answer to your question is the following. You should expect an average of 24% of EVDA. That means that some quarters were going to be slightly below 24% and some other quarters were 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, you know, in the short term, you should expect that, you know, 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 margins.

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

Thank you, Luis, for your question. This is Antonio. In the capital allocation... Hola, Luis. Gracias. Thank you for your trust. Thank you for your questions. They're very good questions, as well as Alex before. In the capital allocation, as we have mentioned, we will continue paying dividends, the cash dividends. 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 for the business, whether that's organic or whether we do so Bolton acquisition that's the third. aspects of the capital allocation and the fourth one. is we may also reduce down debt. So it will be a mix of all these four different aspects. And in each particular quarter, we decide what's best. If we find Bolton acquisitions as we found in the previous quarter, you know, the valuation multiple was excellent, you know, 1.2 times sales. Well, we would do acquisitions in that quarter and not so much buybacks. If we sell the non-core brands, well, we may pay some more debt or a special dividend, etc. But generally speaking, it's those four strategies that I described and the company will be deciding in each quarter what's best for that moment. Obviously, the cash dividend will continue at 200 million pesos a quarter.

Great. Super clear. Thank you, guys, and congrats again. Thank you, Luis.

Thank you. Our next question will be from Antonio Hernandez with Actimber. Please, Antonio, turn on your microphone and proceed.

Hi, good morning. Thanks for taking a question and congrats on the very solid results. Could you provide a little bit more light on the recent isotonic acquisitions that you made and this type of Bolton acquisitions, like maybe if there's any specific category or region that you're targeting? Thanks.

Hi, Antonio. Yeah, I mean, as we mentioned in the previous quarter, we acquired two brands, two for Suero, the brand Suero Repone and Suero Aran, and two pharma brands in Argentina, Aibu 400 and Treg. Interestingly enough, we're going to be entering a new segment in the Aibu-proof and sizable segment So market of the energy six category and we paid, as we said, 1.2 times sales multiple for those acquisitions. So if we can do more on those, we will keep on doing those type of acquisitions. The target, you know, it's 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 US, in Brazil, but that doesn't mean that there couldn't be any opportunities in other markets.

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. Number one is brands that will strengthen the core categories. Number two, that the multiple makes sense for us as a company. Antonio Alvarez- Number three that improves our margin and that there, and that there are synergies a after the acquisitions. Antonio Alvarez- But you might you might continue to see some of this in the future if they fit that criteria.

Thanks again have a great day.

Thank you, Antonio.

Thank you. Our next question will be from Andres Radin with Rojatin Group. Please, Andres, turn on your microphone and proceed with your question.

Hi guys, congratulations on another solid quarter. Two questions on my end. The first one is we saw a very good performance in the US, even when taking into account the effects. 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? Nan, thanks. Sure. Thank you, Andres.

In 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 Teonacho, Cicatricure, but also you will see some of our brands entering and being more and more successful in the general market like Suerox, Silca, 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.

Yeah, great. Thank you.

Yep. The GMP, your question about the GMP is a very good question. 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 permit, 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 with rather under promise and if possible over deliver. 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. Thank you.

Great. Thank you. And again, congratulations.

Okay, thank you. Our next question will be from Jorge Izquierdo from BTG Pactual. Please, Jorge, turn on your microphone and proceed with your question.

Hey, Marco, Toño, hope you're well and 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.

Thank you, Jorge, for your question. And I 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 cells. 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, you know, a few of these examples, like the question that you're making. But the important thing about genomics, we always find a way to offset whatever underperformance is one or two markets or a specific country, et cetera. And as you can see on these quarters and the past six 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.

Yeah, thank you Jorge for the question. I would say that of the three categories you just mentioned the one that we're suffering and that we are actually putting a lot of work into finding ways to turn it around is skin care mostly behind asepsia and cicatric cure 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 asepsia and putting together new plans for psychiatry cure. In the case of hair care, it was more of an issue related to field 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 selling. Sellout in the largest market of blades and razors, which is Mexico, is growing double digits. So, you know, the one that is really hurting is skincare. The other two are just, you know, specific issues that are easy to solve.

Great. Very clear. Thank you.

Thank you, Jorge.

Thank you. Our next question will be from Martin Zetsche with Fundamenta Capital. Please, Martin, turn your microphone on and proceed with your question. Please Martin, are you able to turn your microphone on to proceed with your question.

Hello. Yeah, sorry. I was muted on the microphone, but didn't click the call. Sorry. Hi, Marco Antonio. Thanks for taking the question. I have two. My first question is regarding the other current liabilities. We saw 700 million Mexican pesos 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 600 million Mexican peso we see in the cash flow statement, are those payments made for the purchases of brands made in Argentina or what's there? Thank you.

Thank you, Martin. Yeah, remember that we acquired recently two brands in the isotonic categories. Two of them were in the US, Suero Rapone and Suero Oral, and two brands were in Argentina. IVU 400, and TREC. So that's the total amount is what you see in the cash flow statement for the four brands. And as I said before, the multiple that we paid was just 1.2 times 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 genoma management, not under the genoma 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's 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. Okay, great. Thanks. Thank you, Martín.

Thank you. One moment please while we hold for more questions. Okay, this concludes the third quarter results conference call. Thank you very much for your attention.