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Edited Transcript of LABB.MX earnings conference call or presentation 27-Feb-19 5:00pm GMT

Q4 2018 Genomma Lab Internacional SAB de CV Earnings Call

Mar 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Genomma Lab Internacional SAB de CV earnings conference call or presentation Wednesday, February 27, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Antonio Zamora Galland

Genomma Lab Internacional, S.A.B. de C.V. - Executive Vice-President of Finance & Administration

* Enrique González

Genomma Lab Internacional, S.A.B. de C.V. - Head of IR

* Jorge Luis Brake Valderrama

Genomma Lab Internacional, S.A.B. de C.V. - CEO

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Conference Call Participants

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* Álvaro García

Banco BTG Pactual S.A., Research Division - Research Analyst

* Antonio Gonzalez Anaya

Crédit Suisse AG, Research Division - Senior Analyst of Latin American Equity Research

* Jeronimo de Guzman

* Luis Rodrigo Willard Alonso

GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst

* Martha Virginia Shelton

Santander Investment Securities Inc., Research Division - Research Analyst

* Nicolas Larrain

JP Morgan Chase & Co, Research Division - Research Analyst

* Rodrigo Alcantara

UBS Investment Bank, Research Division - Associate Analyst

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Presentation

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Operator [1]

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Good morning, my name is Omar, and I'll be your conference operator today. At this time, I would like to welcome everyone to Genomma Lab's Fourth Quarter and Full Year 2018 Earnings Conference Call. Please note that today's conference is being recorded and will be available for replay. I will now turn the conference over to Enrique González, Head of Investor Relations. Please go ahead, sir.

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Enrique González, Genomma Lab Internacional, S.A.B. de C.V. - Head of IR [2]

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Thanks, operator, and good morning, everyone. Welcome to Genomma Lab Fourth Quarter 2018 Earnings Call. The press release with related details was issued yesterday and has been posted on our website at genommalab.com.

Participating on today's call are Jorge Brake, our Chief Executive Officer; and Antonio Zamora, our Chief Financial Officer. At the conclusion of our remarks, we will open the call up for questions and Antonio and I will be available later for any follow-up conversations.

Before we begin, let me remind you that the discussion during the call today contains forward-looking statements. Forward-looking statements are statements other than those which are historical in nature. All forward-looking statements are therefore subject to significant uncertainties and actual results may differ materially from those suggested by those statements.

With that, it is my pleasure to now hand the call over to our CEO, Jorge Brake. Jorge, please go ahead.

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Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. - CEO [3]

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Thank you, Enrique, and good morning, everyone. Thanks for joining us. As usual, today's release -- or yesterday's release, we delivered a strong fourth quarter from a top line and operational perspective. In 2018, we faced considerable external headwinds, which developed during the course of the year and, specifically, pressure from inflation and exchange rates in our second largest market. Importantly, despite these challenges, the strength of our team, business structure, products and marketing strategy clearly resonated in both our fourth quarter and full year results.

We also ended 2018 with substantial achievements against clear strategic benchmarks that, today, position us to focus on the second transformation phase of our business geared towards accelerating profitable growth.

In joining the company in early September, I have delved into each part of Genomma's business and that, as you know, our leaders and teams, some who I had privilege of working with in prior organizations. My aim was also to assess what are the near and longer-term opportunities like. As a result, we swiftly made a series of important changes to our organization, starting with a focus on strengthening our corporate culture, evolving to a growth mindset while leveraging our best talent in a way that ensures we work together as a cohesive team.

Transforming groups of colleagues into a single team is key to achieving our admissions growth, plans and strategy, while becoming a major international focused on health and well-being. Over the last 3 months, I have been also formulating Genomma's strategy statement and 3-year strategic plan. This plan clearly [demonstrates] our purpose as a company, our business objectives and identified physician-focused areas for outstanding execution. We began by grasping Genomma's mission, which is to empower our customers to lead their best lives through excellent health and well-being. In this sense, we believe it is Genomma's responsibility to educate and empower our customers to make the best choices.

This mission statement, the first in Genomma's history as a company, serves as a foundation for everything we do and our 3-year plan. In mid-December, we unveiled this strategic plan to our entire team across Latin America and in the U.S., and immediately began implementing and executing it in January. This morning, I would like to share the 4 key elements, which have starting to be reflected in our fourth quarter success and the steps we have taken as we embark on Genomma's next phase of growth.

To begin, innovation will be a key driver of our plan's success. We have begun streamlining Genomma's product portfolio with an eye to optimizing our current product offering. This is evident in the initiatives already achieved in 2018, an excellent example of which is our TUKOL cough syrup, where a slight reformulation and repackaging has extended this product's appeal from what previously was a very narrow reach of [heavy] smokers and those with acute cough to a much broader group of consumers. This has resulted in a substantial increase in sales over the last 3-month period.

[Internalizing] our product portfolio eliminates unnecessary complexity, enabling us to market these products more efficiently and drive top line growth. As I've said in this area, it runs parallel to future success in new product innovation, which will be triggered when our new production facility is fully operational.

The second pillar of our strategy is driven by an obsessive focus on the consumer and the shopper, where we leverage Genomma's deep understanding of our consumers and the markets in which we operate. This quarter, I have been focused on revamping Genomma's marketing team, led by Cesar Jaramillo, our CMO hired at the end of 2017 and building our company's internal market research capabilities and business intelligence to levels that have not existed in our [other] company to date. This will enable us to gain a uniquely [embedded] understanding of our customer and consumer and our strengths. Today, we are now able to obtain real-time feedback through digital focus groups, considerably expanding our reach, providing the invaluable opportunity to understand our target audience and fine-tune our product development, branding, pricing and market accurately and also scientifically, which considerably increases the chances of a given product's success.

Our initiative pillars led to our [research], which will better leverage Genomma's [independent] go-to-market capabilities to take full advantage of our exceptional strength in this area. We are in the process of reviewing important relationships with key retail channels having already secured 2 new additional retail partnerships in Latin America. We expect to pursue other important channels which we continue to be non-pharma white spaces, exploring further opportunities in the traditional channel and recalibrating and expanding our platforms to broaden our consumer reach.

Our best-in-class manufacturing capabilities will accelerate this process and enable us to remain highly competitive. Finally, and in the process of building a winning culture in our [internal] organization, it will be achieved ensuring Genomma attains best-place-to-work status. It also will require a focus on strengthening our functions to better align our strategy and operations, centralizing key services like payroll, for example, and better leveraging our best-in-class technology to optimize Genomma's operations.

In that context, we are very optimistic about the future ahead on the next phase of the journey we began in 2015. I look forward to providing more details and updates in our first quarter results remarks. We are improving our execution and our results and we are hardwiring our operating plans to our key priorities and to our [real estate] objectives and practices throughout the organization to build up a [cohesive] culture of performance and operational excellence.

Let me now turn it over to Antonio, and I will then return for some final comments. Thank you very much. Antonio?

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Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. - Executive Vice-President of Finance & Administration [4]

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Thank you, Jorge. Good morning, everyone. Let me share some highlights from our financial results. As Jorge noted, Genomma ended the year with strong fourth quarter top line and operational results, despite a very challenging macro environment in Argentina. Our success in this regard was fueled by product innovation, strong, perfect store execution and particularly robust performance by our markets' products across the board and supported by aggressive TV campaigns and trade marketing activities to drive top line growth and defend our market share within Genomma's respective markets.

To a lesser extent, this increase was also supported by the application of IAS-29 hyper-inflationary accounting to our results in Argentina. We have described in detail on Page 8 of our results release, the impacts from the transition to hyper-inflationary accounting and currency translation on our full year results.

As soon as the 2018 audited results are available, we will publish our reference base, including the 2018 results per quarter, as we have reported on the hyper-inflationary accounting since January 1, 2018. We were pleased to report that consolidated net sales reached MXN 3.1 billion for the quarter, an 8.7% year-on-year increase, despite the meaningful currency devaluation and inflationary effects of Genomma's Argentina subsidiary.

Fourth quarter EBITDA in Mexico reached MXN 178 million with a 15% EBITDA margin, reflecting a 3.7 percentage point year-on-year contraction. This was impacted by pre-operating expenses related to our Mexico manufacturing facility coming on stream as well as the increased investments in television, advertising and in the trade, which I described before.

These investments were targeted at boosting Genomma's top line with a focus on positioning each store and point-of-sale as an important opportunity to drive visibility and traffic. I would like to note that the increased level of marketing spend towards the end of the fourth quarter will be extended into Q1 as part of the market testing that we are conducting at this moment. While the resulting trends look promising, we will be better able to assess the results toward the beginning of Q2 and make decisions on future levels of marketing investments once we have the results.

You will note that fourth quarter sell-out of our Mexico operations increased disproportionately to sell-in. This is an indication of the market's strong demand for Genomma's products and also of our company's tight control of inventories [when aligned] on conservative and judicious supply chain management. We invested just over MXN 389 million in Genomma's new manufacturing facility in the fourth quarter and include pre-operating and pre-production expenses in the amount of MXN 30.3 million.

To date, we have concluded the construction phase of our OTC plant, which includes a raw materials warehouse and the first solids OTC production line. We have now moved on to the permitting process and are on track to begin production of solid OTC products in the first half of 2019. There are some of these permits have been granted by the federal authorities.

Genomma's personal care plant is also on track, with expected completion during the second half of 2019. We delivered an 18.9% increase in net sales at our U.S. operations, which is 13.7% higher when conveyed in local currency, in U.S. dollars. Strong fourth quarter performance reflects a continued positive trend for this market, driven by new product innovation also with the [renovate] of expanded points of sales and marketing at the point of sale, as well as enhanced TV and digital advertising campaigns that we described in our earnings release reported yesterday.

These results were impacted by onetime expenses related to relocating Genomma's U.S. warehouses, enhancing our distribution and logistic efficiencies in the market. When expressed in local currency, Genomma achieved 14.8% increase in sales at our Latin American operations, which translates into 12.5% when expressed in Mexican pesos. This reflects particularly strong performance in Brazil, Colombia, Central America and Argentina, with outstanding innovation-heightened investments in advertising and exceptional go-to-market capabilities.

This quarter, we also benefited from Genomma's new agreements with 2 major retailers in the region. As can be expected, Genomma's results in Argentina were adversely impacted by the considerable effect of currency translation and the application of international standard IAS-29, as described of our earnings release reported yesterday. Despite this effect, the company's operations in Latin America reported a healthy 20.2% EBITDA margin for the fourth quarter 2018. The decreasing fourth quarter EBITDA and EBITDA margin is a reflection of the Argentinian-related headwinds but were also impacted to a lesser extent by increased the trade and advertising investments made over the quarter to defend our market share and to strongly position our products ahead of the winter season demand.

EBITDA was also impacted by MXN 30.3 million in pre-operating expenses associated with Genomma's new manufacturing facility as well as the one-offs we described in our release. Excluding all related onetime charges, fourth quarter 2018 EBITDA would have increased by MXN 125 million.

Turning to some highlights on our financials this quarter, gross profit increased by 11.9% to MXN 2 billion in the fourth quarter, with a 190 basis point improvement in gross margin for the quarter. This was driven by a favorable sales mix and reduced increase in COGS relative to an 8.7% year-on-year increase in sales. These results were impacted by the increase in certain input costs associated with foreign exchange impacts when consolidating the various currencies that depreciated during the quarter.

Briefly touching upon Genomma's financial position, we further optimized our working capital in the fourth quarter, decreasing our cash conversion cycle by 18 days year-on-year. We've made investments in the amount of MXN 1.2 billion during 2018, mostly related to the construction of the company's new manufacturing facility located in the state of Mexico. Net financial debt therefore increased slightly during the fourth quarter due to these significant investments as well as to the company's share buyback program, which was in effect throughout the quarter. Our net debt-to-EBITDA was 1.8x.

As I stated before, we are targeting to remain below 2.5x net debt-to-EBITDA in the coming future. So in 2018, Genomma repurchased 8.2 million shares, representing a total investment of MXN 132 million. We remain confident in the strong underlying value of our company. Free cash flow from operations reached just under MXN 241 million for 2018. However, it's important to note that, when excluding investments made in the company's new manufacturing facility and the acquisitions that we made throughout the year, free cash flow would have reached MXN 1.47 billion during the year.

Finally, as we solidify and put into action the 3-year strategic plan which Jorge has just described, we expect to go into further detail when -- with you on each of its components. As Jorge noted, we have entered a new phase for the company focused on accelerating profitable top line growth. At this point, I would like to thank you again for your attention. We'd like to conclude our prepared remarks to open up the phone lines for your questions. After which, we'll return again for some brief closing remarks by Jorge. Operator. Please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Antonio Gonzalez, Crédit Suisse.

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Antonio Gonzalez Anaya, Crédit Suisse AG, Research Division - Senior Analyst of Latin American Equity Research [2]

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So I just have 2 quick questions. The first one, I guess, we appreciate your strategy and how it's shifting more towards top line as opposed to cost-cutting, but in terms of the timing on how you execute that strategy, you mentioned, on one hand, accelerating TV, digital and trade efforts but, on the other hand, obviously, we have discussed, in recent quarters, some disruptions in the supply chain, fill rates that are suboptimal. Obviously, we are waiting for the final stage of the approvals on the manufacturing plant in Mexico. So I was curious to hear your thought process, how will you choose the brands where you can effectively step up the marketing efforts but without jeopardizing that fill rates suffer even more? So that's my first question. I have a second, more a technical question, but perhaps I can stop here for the first one.

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Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. - CEO [3]

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Okay. Thank you for your question. It's a good question because that has been part of our thinking process during the last 5 months, my first 5 months in Genomma, of course. There are so many opportunities, as I mentioned in our previous conversations, that one of the key processes that we had to follow is to make sure that we are putting the right priorities behind each of the opportunities and the right timing in terms of how to address them as part of our strategic plan. So you were right when you said that there are some basic areas of opportunities that we had to address first like our supply chain, our fill rate, our out-of-stocks in the market and that is one of the things that is, as part of the global strategy that we have just launched, is being addressed as we speak.

So in addition to the plant that we will start operating sometime in the near future, we are making some interventions to other areas of key processes within the company to make sure that everything works well in the whole supply chain model. For instance, we launched -- we relaunched our sales and operating planning process, that famous S&OP, that's now in place starting to -- we launch it and implement it in late December. And that is bringing together all the key players and key functions of the company together as it is typical in this type of processes, define demand, define internal interventions, define [righting the ROIs], et cetera, et cetera. And in addition to that, we are connecting our key customers to that digital collaborative [sense] and operations planning process. So those are key things that we have to have fixed as we start operating the new plant.

We have already started seeing good results from this effort, especially in the last weeks of January and February, where our fill rates are already improving. So we want to make that consistent and continuous, of course. But that's a basic thing of ensuring that [we did not risk] will help us with achieving the healthy fill rates that I consider above 90% in the near future. So together with that, the question of advertising and how we choose brands to put our investment behind them, this is decided together with the progress I just mentioned in terms of improving our supply chain. So in this, it's in the team meeting that we now have every 2 weeks, we discuss together, all the key players and teams, that what are the brands with the right inventories, with right fundamentals, with the right fill rates so that they can be part of whatever our additional investment we do on -- not only on our advertising standpoint but also on a trade standpoint.

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Antonio Gonzalez Anaya, Crédit Suisse AG, Research Division - Senior Analyst of Latin American Equity Research [4]

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And secondly, if I may, just very quickly, perhaps for Antonio. Could you be able to comment on the extraordinary proceeds that you mentioned you captured during the quarter from your distribution capabilities in LATAM? Is it possible to elaborate on those?

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Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. - Executive Vice-President of Finance & Administration [5]

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Yes. This is Antonio Zamora. As we knew that we were going to experience a couple of onetime charges, negative charges, during the quarter. We wanted to offset those negative impacts with opportunities, selective opportunities during the quarter to offset those negatives. So we implemented a couple of actions in a couple of markets to leverage our distribution network opportunistically, okay. So this is something that we did during the quarter trying to offset the negatives. And I think it worked well and that's it. I think I wouldn't like to comment on the specifics because, as I was mentioning, those were opportunistic, happened during the quarter, helped us offset the negatives and basically have a better platform for 2019, but it's basically leveraging some logistics in certain countries with certain customers. Minor things, but the good news is that, as I mentioned before, it helped us offset some of the negative one-timers that we had.

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Operator [6]

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Our next question comes from Álvaro Garcia, BTG Pactual.

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Álvaro García, Banco BTG Pactual S.A., Research Division - Research Analyst [7]

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Two questions. First for Jorge. I was wondering, this is sort of piggybacking on Antonio's previous question. I was wondering if you can provide your impression on the effectiveness of your TV advertising on your sales across your different geographies, particularly in Mexico. We know it's a big part of your past TV advertising and you've seen very solid conversion from TV advertising. I was wondering how it might fit in your strategy going forward? Is it something we should see more of or not? That's my question for Jorge. My question for Antonio is on the increase in payables we saw. I was wondering if you can give us a little bit more color on that aspect of your cash conversion cycle.

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Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. - CEO [8]

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This is Jorge. On the TV impact of our investment, I know it's a very good question. As you know, Genomma has been a company that has been very effective in the way we invest on TV to connect and communicate our key messages to our customers. And this case, talking about Q4, we decided that we wanted to test a few new things, a few new ideas in terms of our key brands taking advantage of the winter season, and that's what we did. We partnered with some key TV stations, in mainly Mexico, as you said. We selected a group of brands that are appropriate for the winter season. We made sure that we got the right inventories and supply chain process so that we will be able to service the market as needed. And we put some very attractive, effective content behind the key advertising that we put on air starting mid-December and that will basically end in the next couple of weeks. Initial results of that campaign are very encouraging. As I said, we are testing. So we are -- have several PPIs that we are following up. So by mid-March, we will be able to finalize our whole assessment behind this investment. But as I said, initial results are showing double-digit growth for the key participating brands in this campaign.

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Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. - Executive Vice-President of Finance & Administration [9]

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We still -- sorry, we still need to answer Álvaro's second question. This is Antonio Zamora. Regarding the increase on payables and inventories, let me explain a little bit of what happened in the quarter and what is it that we can expect for the coming future, okay? So one of the issues we've had in the past, everybody knows about this, is the fill rate issues that we've had. So with the new sales and operations planning process that we are starting, one of the things that we decided to do is to increase inventories of finished products, so that we would have -- we would be able to have a successful winter season. So that's why you see inventories are little bit higher on Q4. That is helping us drive top line growth in -- at least in the first weeks of Q1, you will see that, hopefully, next quarter. So that's one of the reasons why inventories went up.

You will see in the coming quarters that inventories will also be increasing because, as we start operations with the plant, we need to buy raw materials, buy packaging materials, as well as we will have our work-in-progress inventories. So that KPI is going to be higher for a while. And as the plant reaches full steam and the learning curve is achieved, the level of inventories will go down, basically, because we wouldn't need to have such a high level of finished product inventories as we do today. Today, our safety stocks are significantly higher than what they should. And the reason for that is that as we have an unreliable supply chain today because we rely on a highly fragmented supplier base, we need to have higher levels of inventory. So again inventories are going to go high for a while then they will come down and become more efficient.

So what happened then with payables? Well, payables is -- basically follows whatever happens with inventories. As we buy more inventories of finished products or raw materials, we have more payables. As we decrease inventories, we would have fewer payrolls in the future. So that's part of the reason why it went higher, Álvaro. The other reason is that, as you know, we have some contractors for the construction of the plant, and that also increases the base payables outstanding. As we finish construction for both the OTC and the personal care plant, that is going to start coming down. I don't know if I was able to answer your question.

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Operator [10]

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Our next question comes from Rodrigo Alcantara, UBS.

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Rodrigo Alcantara, UBS Investment Bank, Research Division - Associate Analyst [11]

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I have 3 quick ones, if I may. Just a follow-up on your advertising strategy, I was wondering if you could share the allocation of your budget in -- to be online and point-of-sale advertising. And the second what would be, as a percentage of sales, how much of the increase in SG&A could be attributed to these incremental advertising expenses?

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Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. - Executive Vice-President of Finance & Administration [12]

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Rodrigo, this is Antonio. As you know, our investment in media, whether it's TV, digital or point-of-sale marketing is something that we have never disclosed. This is something very strategic for us. As everybody knows, we are probably the most efficient company in terms of media buying, at least in Latin America. So that's why we keep that confidential, and this is obviously to protect the interest of our shareholders. Because, in this call, since this is a public call, some of our competitors might be hearing and many of the 34 -- sorry, 39 different networks with whom we do business with are hearing as well, and they want that information to be kept confidential. So the only thing that we can say at this moment, Rodrigo, is that we are measuring the returns on all kinds of marketing, whether that's the traditional TV, whether it's digital, whether it's trade marketing activities. And as you know, we invested significantly over the last couple of years in visibility, in shelves, et cetera. And we are also investing heavily on digital, and we are placing our bets where we get the better returns. This quarter, Q4, we decided to invest in visibility, in shelves more than we used to because we want to prepare for a very good 2019 year, number one. We also wanted to test the top-line-growth elasticity of investing more TV, and this is in the remarks that I provided, we say that we invested more in Q4 on TV. We will invest more in Q1 also on TV, and we are going to assess how effective that was versus other options that we have, and we'll have that information in Q2. And depending on that, we will be placing our investments. So sorry for not giving you a more detailed information, but it's in the best interest of all our shareholders and also the company not to provide [full on this one] disclosure. But conceptually, I think it's good. I don't know, Jorge, perhaps you want to expand a little bit on this.

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Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. - CEO [13]

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I just want to -- this is Jorge. I just want to build from what Antonio has been explaining because I'd like to expand the concept of [who we are] and advertising and connecting with our consumers. As we have said, Genomma is very agile, is powerful and we know how to optimize these investments [and ad penetration on] TV. One of the things that we are already working on also is to expand the scope of how we invest to connect with the consumer, which we are starting with [this piece assessing] options to also balance our investments in digital platforms, digital media, which is another key vehicle that we want to start working on in an attempt to balance the way -- and optimize the way we invest in media. And the third pillar would be the store. As I mentioned, we have a great go-to-market model that has proven very successful in impacting sales and impacting the consumer's decision at the point of sale. So having the right investment in the store with the right content, with the right strategy at the right time is also another key pillar in our whole advertising media program. So think about those 3 becoming a very powerful addition for the near future in terms of optimizing how we connect with consumers.

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Rodrigo Alcantara, UBS Investment Bank, Research Division - Associate Analyst [14]

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Thank you very much for your explanation. Just a final quick one. Regarding your CapEx, what should we expect for this year? How much of it would be maintenance once you have the manufacturing plant fully operating?

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Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. - Executive Vice-President of Finance & Administration [15]

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Yes. Thank you, Rodrigo. This is Antonio again. Maintenance CapEx is not going to be relevant for 2019, and it's not going to be significant for 2020, et cetera. The reason for that is, as everybody knows, the plant will be brand new, okay, state-of-the-art equipment. So there is going to be very, very minimum maintenance CapEx. At this moment, as everybody knows, the total budget for the CapEx is MXN 1.4 billion, okay, and we continue with that budget, okay? So what you should expect is that, throughout the year, we'll invest the remaining part of the investment that is still pending. Now if, in the meantime, we decided that we want to expand or change the project because we see new opportunities, whenever that happens, if that happens, we would of course disclose that to the market. But at this moment, that is what you should be expecting in terms of CapEx.

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Rodrigo Alcantara, UBS Investment Bank, Research Division - Associate Analyst [16]

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Okay. So just to confirm, so base case now is for CapEx is just the remainder of the investments regarding the plant, right?

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Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. - Executive Vice-President of Finance & Administration [17]

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That is correct.

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Operator [18]

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Our next question comes from Martha Shelton, Santander.

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Martha Virginia Shelton, Santander Investment Securities Inc., Research Division - Research Analyst [19]

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I just had a question regarding your philosophy towards share buybacks in 2019 and recognizing that you're 1.8x net debt-to-EBITDA, if you'd be willing to perhaps get your leverage ratio up a little bit to take advantage of the share price at current levels?

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Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. - Executive Vice-President of Finance & Administration [20]

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Thank you, Martha. It's an excellent question. As I mentioned before, we are strongly committed to our buyback program, but we are also strongly committed to be a very prudent company financially speaking. That is, yes, we could increase leverage a little bit, but we want to be very prudent. Because, as you know, we -- the investment of the plant is -- I mean, the use of cash is now going basically to the plant. We also have some debt commitments. We have to pay a local bond by the end of -- actually January 2020. So before we'll go into more buybacks, first, we need to secure refinancing of the outstanding debt that we have. Once we secure that, we would consider definitely expanding our buyback program. We believe that the valuation at this moment is very attractive. Yes, we could increase our buybacks now, but again, as we said, we want to be prudent. We don't want to increase leverage just to take advantage of the opportunity at this moment. We think that there is significant value that is going to be created. And once we secure the long-term financing of our outstanding debt, then it would be a much easier conversation, but your thinking is right, our intention is exactly what you just mentioned. We just need to secure long-term financing first.

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Operator [21]

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Our next question comes from Luis Willard, GBM.

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Luis Rodrigo Willard Alonso, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [22]

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I was going to ask about the inventory levels. Thank you, Antonio, for the clear explanation. Maybe just a follow-up on that side. I mean, I know you've been preparing for the last, I don't know, for the whole year maybe to say face these challenges of buying products -- or raw materials, specifically, for the production plant. So I would just ask if you've had any -- I don't know, what has been the experience so far on facing new risks in terms of purchasing raw materials or exposure to PET prices, to plastic prices that you previously didn't have when you -- on the previous business model? Maybe that would just be my question.

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Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. - Executive Vice-President of Finance & Administration [23]

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Thank you, Luis. Again, this is Antonio. Although we didn't have a manufacturing facility ourselves, we did have extensive conversations with our very large base of contract manufacturers because it's part of the day-to-day business if negotiating price increases for the finished products. So during those conversations, we always discuss about what's happening with carton, aluminum, plastics, PET, et cetera. So there has always been a lot of discussions about that. As we started this project about the plant and we have many conversations in the [world trade for] like CPhI, et cetera. And we've had conversations and negotiations with the manufacturers of the actual raw materials or the APIs, et cetera, we are much more confident and -- in terms of the pricing, the price levels and the process. I think that what is going to be new project [development], it's not so much on the prices or the impacts on ForEx, et cetera. It's more on the planning process. Some of these APIs have long lead times. You need to order them in some certain period in advance, and that is something that is going to drive our inventory line higher for a while because we would need to store some of these raw materials and packaging materials. So there's going to be a short-term impact on working capital, on our cash conversion cycle because of that. But other than that, I think that it's business as usual for the people in our procurement department obviously with new challenges because now we need to face -- now we need to negotiate with our contract manufacturers as well as some suppliers of raw materials. And what we are prioritizing at this moment, Luis, is the market, top line. So we'd rather have a little bit more inventory, mainly raw material and finished products, but trying to avoid any stock-outs or shortages in the supply chain. I mean, top line growth is very much important. And eventually, everything will get more optimal and more efficient.

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Operator [24]

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Our next question comes from Nicolas Larrain, JP Morgan.

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Nicolas Larrain, JP Morgan Chase & Co, Research Division - Research Analyst [25]

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I wanted to touch a little bit on Mexico trends here. Last year, you had this negative one-off of the system blackout, which impacted sales. I know in these quarters, you managed to expand sales by close to 2%. So I wanted to get your thoughts on how we should look at the Mexico market during this year, and overall, how we are seeing the outlook.

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Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. - CEO [26]

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This is Jorge. Thank you for your question. I'll provide some perspective and then Antonio can complement me. But we are positive about the outlook of the markets in Mexico in 2019. And I say this because we are well positioned with our products and category. We are in OTC pharmaceuticals and personal care products and brands. But our [world] position in the market price in terms of pricing, for instance, and the value equation that you offer to the consumers. And the current government and the new government in Mexico is also announcing some new ideas that some of which are being implemented as we speak that will also be positive for consumption in the country. I'll give you a couple of examples. One is, the government raising the minimum wages, that's one thing. Although it doesn't affect us from a cost standpoint because we don't have that many people at minimum salaries, it would put more money in the pockets of the lower socioeconomic classes. The second thing that they are announcing is that this program by which the government is associating with companies with -- like Genomma because we are going to participate by which we offer training and jobs to young people that are, today, not working, not studying, and that has been assigned to us by the government. And those are 2-year programs that will bring to the labor force millions of young people that today do not produce, and those will be new consumers for companies like us. So those are the type of -- they are increasing the pensions for their older people, too, at the same time, and they are financing all of this basically by being very austere or reducing costs in any government or public offices and bureaucracies and fighting corruption. That's the way they are positioning this. So having said that, we are positive about the outlook for our company, given what we know from this new government up to now.

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Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. - Executive Vice-President of Finance & Administration [27]

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Thank you, Jorge. Perhaps just -- and Nicolas, 1 additional comment, this is Antonio, is that, as we want to be a very prudent company and we were increasing inventories, we didn't have the sell-out data at the closing of the quarter. Had we known that sell-out was going the way it was, probably, we would have pushed a little bit more on sales. So that didn't happen in Q4, but now that we have the data, the performance is that we are facing in Q1 is so much better. So again, we perhaps wanted to be prudent because of the inventories were going up. So we wanted to not push too much selling at the end, but as I mentioned that the trend is positive at least for the first half or the first portion of Q1 in Mexico. I'm talking about Mexico.

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Operator [28]

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Our next question comes from Jeronimo de Guzman, INCA Investments.

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Jeronimo de Guzman, [29]

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I was wondering, Jorge, if you could dig deeper into the strategic plan you mentioned on the 4 elements. Specifically, I guess, on innovation, I was wondering if you could mention -- if you could talk a little bit about where you see the biggest opportunities, kind of what you weren't doing before that you see the Genomma Lab can really focus on to take this innovation to the next level. Then on marketing, just a little bit more details. I mean you mentioned the media investments, increasing those and making them more effective, but is there anything else that's part of this pillar? And then on the go-to-market, are there -- what are the -- you mentioned some new channels that are kind of on tap. So I just wanted to hear what -- where are the biggest opportunities? And then finally on the alignment of strategy and operations, if you could talk a little bit more about what that means? I mean, are you making other organizational changes, changes in compensation, changes on how you work, et cetera?

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Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. - CEO [30]

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Thank you for your question. This is Jorge. I'll address these, [form the umbrella], which is the innovation section or part and then go into other pieces that you just mentioned including go-to-market. To me, it's a large market in compensation and organizational design, of course, very briefly. Innovation in my view, and everybody around me agrees with this, is key. Innovation has to become the key driver for growth for this company. And as you know better than me, we haven't had big ideas or new things coming out in the last few years. So that's a key one that we are addressing as part of our new strategy. One of the key pillars of the strategy is exactly to go after innovation in our product portfolio. And that is something that we already started executing and I will tell you how. Because innovation is something that many companies would like to have, but the challenge is that you have to organize in a way that you are really reproducing innovation on a consistent basis, and you have to impact the culture of the company and the organization, also, to be ready for a constant flow of innovation.

So what we have done is we have designed a new innovation model for Genomma. We are adapting whatever is well known in the market, adapted to our company situation and needs, the specific needs. And we've built around that a few, as we call it, Centers of Innovation. We call it COI, Centers of Innovation. We have structured 9 Centers of Innovation in the company. They just -- we launched them in early January already as part of the strategy, too. And these are small groups of people, 5 or 6 people each group that are focused on specific topics. There are 9 topics and 9 small teams. And this is what we call [the right call] the informal organization that adds to the formal structure of the company, another perspective, another angle by which small teams of people from different functions, different areas, different countries, different levels of expertise and experience fit together on a constant and continuous basis to discuss new ideas, new proposals for their topic, for the topic they have been assigned to.

So I'll give an example. We have one of the centers of innovation is focused on OTC portfolio, the other one is focused on PC portfolio. There are other ones that are focused on other topics not only product like to become a more effective and productive company as a multinational, how can we continue evolving the culture of the organization, how can we disrupt the way -- the impact our consumers at the store level, et cetera, et cetera. So there are 9 of those, and they present their ideas on a monthly basis to our innovation committee that I head, together with my VPs and Rodrigo. And based on their ideas, we agree or not on proceeding with the analysis, assessment of the ideas or the project to finally decide in 2 or 3 months if the project is going to be assigned resources financially and from a people standpoint.

So this is something that is going to produce a breakthrough in the company, I'm sure. I've done this before, this company has not done this before and already has started. We already have had 2 meetings, January and February, of the committee. We already are assessing several great ideas that are coming from our people and from external people, too. So as I said, I explained that a little bit more because I wanted you to understand what we have an innovation [final or] model, as I said, by these Centers of Innovation which will produce tangible innovation that is consistent and is ongoing in the company, not only in products but in different other key areas of our operations.

So TV and go-to-market, TV advertising, media and marketing, per se, are embedded into this model. So they are part of these Centers of Innovation, as I said, example of what we do at the store level, that's part of the go-to-market. How we expand our presence in the traditional stores, that's another topic of [recent] innovation. So both key areas, go-to-market, TV and other things or productivity and efficiency are included as part of those -- of our innovation model. And finally on the compensation and organization design, yes, we have relaunched our compensation program as of January of this year by which we have done 2 very important things. One is the key leadership team of the company is now part of the -- of a variable compensation program similar to mine, by which, they will be accessing [biannual] compensation on a yearly basis based on results on sales, EBITDA and free cash flow. And those 3 metrics are the same for my team and for me. And also we have funded -- the second point, we have funded a different program, but it's also a variable compensation program through the whole organization in all our countries, by which, our people are -- can make a certain range of salaries if their countries or the corporation achieve a specific number in those 3 variables, too.

So now we are working on optimizing our organization design so that we want to make sure -- and we won't make huge changes in the short term on that front, that there are some points you need to be done that we are announcing and implementing actually next week -- as of next week because, mainly, we want to make sure that our structure is ready for innovation. So we are intervening in some marketing roles to make sure that we have marketing support for our key franchises or brands on a corporate or global basis, not only on a local basis. We are also intervening in the way we work in the regulatory front so that we can truly make that front an area that supports innovation on a very consistent and efficient basis. And finally, we want also to create a robust product development innovation function that follows up on all the ideas that will be brought by the innovation groups on a day-to-day basis.

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Jeronimo de Guzman, [31]

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Great. Just had a quick follow-up, and I think it's related to some of the initial questions. Just, I mean, it seems like there is a lot of interesting initiatives to accelerate the top line, but what I struggle with still is how much can we see already -- start seeing an acceleration in top line before you have the plant operational? I mean, is it pretty much dependent upon that? Or do you think that you're able to start getting results ahead of that?

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Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. - CEO [32]

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Yes. It's more dependent upon the plant. The plant is very -- [it's changed] to start, but it's not dependent on that. We already -- I mentioned an example of our cost [initiative] in my script, and those are resource of which we starting seeing since late November, early December and continue the positive trend. And we have 2 other brands that have been part of this repositioning. It's a very basic thing that we're repositioning, we truly expanded the scope of the way our brand competes. And with those initial interventions, we are already seeing something. So the go-to-market, the increase [in] fill rate, the reduced out-of-stocks in the market that are serviced, some of integrations that we have done with the position in the plant, some integrations we optimized in the way we invest behind media, as I mentioned, in the tests we are running. In this case, with a mega [out] as we call it, for a couple of months. All of those things are already producing results regardless of the plant.

And one other thing that I'd like to mention there is that, in the last 2 months, we have closed a formal agreement with our top suppliers that represent, currently, more than 80% of our sales to make sure that we're in the condition, which is mostly 2019, we will have the right inventory, the right supply at the right time all the time. Because we are going to grow our top line, as I said, regardless of the plant start-up, the transition process. And I am hoping that I will be able to tell you that -- a little more of that story in our next quarter call in April.

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Operator [33]

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Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back over to Jorge Brake for closing remarks.

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Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. - CEO [34]

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Thank you for joining our call today. We are very pleased with our operational performance in 2018 and especially in Q4. I would also like to thank our senior management team and all of our Genomma Lab associates around the world as we -- as well as our key stakeholders, including the investment community, for your support. We are looking forward to a successful year in 2019 and continuing our pursuit of the strong financial performance and pervasive growth behind innovation. More importantly, we are excited about the actions we have taken to position us for future consistent success. I look forward to sharing more of our plans and results with you in the next quarter. Thank you.

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Operator [35]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.