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Edited Transcript of LABB.MX earnings conference call or presentation 25-Jul-19 4:00pm GMT

Q2 2019 Genomma Lab Internacional SAB de CV Earnings Call

Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Genomma Lab Internacional SAB de CV earnings conference call or presentation Thursday, July 25, 2019 at 4:00:00pm 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 VP & CFO

* Enrique González Casillas

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

* 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, and welcome, everyone, to Genomma Lab's Second Quarter 2019 Earnings Conference Call. My name is Devon, and I'll be your conference operator today. (Operator Instructions) Please note that today's conference is being recorded, and we -- available for replay.

I'd now like to turn the call over to Enrique Gonzalez, IRO of Genomma Lab. Please go ahead, sir.

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

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Thank you, operator. Welcome, everyone, to our company's reviews of business results for the second quarter of 2019. Joining me on today's call are Jorge Brake, our Chief Executive Officer; and Antonio Zamora, our Chief Financial Officer. At the conclusion of our prepared remarks, we will open the call for your questions.

Please note that management will make forward-looking statements that are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. These statements include, but are not limited, to statements regarding the future performance of Genomma Lab, including expected financial results for the third quarter and full year 2019 and the future growth of our business. Our actual results may differ materially from those discussed on this call for various reasons. You can find more information about risk, uncertainties and other factors that could affect our operating results in our most recent filings with the Mexican Bolsa.

With that, let me turn the call over to our CEO, Mr. 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. Good day, and thank you, everyone, for joining us today. As you have read in our press release, we again delivered strong operational results for the second quarter of 2019, posting solid top line growth on just over 12% of growth in sales and 13% in EBITDA versus year ago, and increasing sales by more than 8% year-to-date. We've made forward progress transforming the culture, processes, thinking and momentum within Genomma. We also continued significantly strengthening and refreshing the leadership of the company's operation. This quarter, adding other highly-experienced and talented members to the team to shore up certain areas of our business. Today, we have the right team in place to execute our plan. At the same time, we continue reevaluating all aspects of our go-to-market strategy; leveraging our strengthened relationships in key retail chain accounts; and Genomma's obsessive focus on the consumer to expand our mega brands to other countries, improving our consumer value proposition and revitalizing our product innovation program.

The second quarter was also time of promise for Genomma Lab. I would like to begin our conversation today with a brief discussion of the significant news we announced last week. As you can appreciate, the importance of receiving our COFEPRIS sanitary license cannot be overstated, particularly in light of the challenging context in which we were able to achieve this. The COFEPRIS sanitary license enables us to continue with the regulatory process and obtain initial GMP for solid and semisolid production and commercialization for the Mexican market. In the meantime, we will also be applying for GMP certification from the national regulatory body of each respective export market.

Today, we are, therefore, empowered to improve our future profitability and strengthen our margins. We are completing the pyelograms at Genomma's manufacturing plant and expect to begin initial production launch before the end of the year. Our finished product warehouse and the personal care production facility are in the process of laying a concrete floor during the second quarter of 2019 and continue making related investments related to lay the super flat flooring in the next few months.

As I had commented, we are pleased with our progress in the second quarter of 2019, both financially and in deploying our profitable growth and innovation strategy. The MXN 353 million consolidated net sales increase during the quarter is a strong affirmation that the growth strategy we established towards the end of last year is yielding tangible results. Our strategy is clear and remain unchanged, and we are making steady progress against it. We are, therefore, successfully growing sales at steady and prudent base while maintaining sustainable margins.

Antonio will share more color on results specific to our regions as well as key financial highlights.

So let me again take this opportunity to review this quarter's progress related to implementing the remaining 4 strategic pillars of our profitable growth and innovation strategy as we drive shareholder value and return Genomma to a steady and consistent growth. To reiterate, these are: first, innovation and portfolio optimization throughout all countries in which Genomma has a presence; second, best-in-class go-to-market initiatives; third, world-class manufacturing and supply chain capability development; and fourth, creating a winning corporate culture focused on employees, internal talent, sustainability at the societies where we operate.

To begin, in January 2019, we created Centers of Innovation or COIs as we call them to generate the transformational ideas, which will drive sustainable growth and enable us to expand our footprint to win in existing and new key categories and markets. We also implemented our innovation model led by our innovation board comprised of top management to review and discuss initiatives with feedback that guides the ideas through the innovation funnel. This quarter, certain teams were consolidated were necessary to streamline the process and encourage more targeted results. To date, we are assessing a pipeline of more than 30 potential projects for the near future. We will continue to make progress and expect to see results during the next 1 to 3 years.

Turning to the second pillar of our strategy, Genomma's best-in-class go-to-market capabilities and our obsessive focus on the shopper. On the OTC side during the quarter in the LATAM region, the expansion of brands like Teatrical, Tio Nacho and Asepxia achieved double-digit growth rates in each of the geographies, as did the introduction of the new Cicatricure Gold Lift line of day cream. Additionally, in Brazil, Genomma introduced our new Revie premium shampoo line through an exclusive agreement with Lojas Americanas retail chain. Lojas Americanas has hundreds of stores within all Brazilian geography. The initial response to Revie has been very positive.

In Chile, the relaunch of our Tio Nacho brand has doubled Genomma's share within this market. Finally, during the quarter, we modernized the look and feel while improving the formula of [on shower] Teatrical facial cream and are relaunching it through target Latin America countries and the U.S. We have seen [a strong] end-user reception that has surpassed our expectations as the products have hit the shelves, supported by balanced TV and digital advertising investment and an outstanding value equation being offered to our consumers.

We couldn't be more pleased with the progress so far, and this launch is a powerful example of how we are creating demand by trusting the value of our brands, marketing them more on change with the scale innovation that attracts the current and the next generations.

And as a final update related to this important pillar, our strong digital marketing programs again contributed significantly to second quarter growth. To support these initiatives, during the quarter, we also made important investments in market research across the different regions.

Third, on the supply chain front, in addition to the manufacturing capability progress already discussed, we are focusing our efforts on developing a strong model in the whole supply chain, including purchases, logistics and demand planning so that we optimize our resource, service, cost and cash in the near future.

And finally, we remain focused on strengthening Genomma's corporate culture and look forward to results from the survey we are conducting for employee feedback. We are already launching exciting initiatives related to career development, quality of life and employee health and nutrition in addition to the renewed principle and values program already launched.

I'm really pleased with the collaboration and renewed enthusiasm that I'm seeing as I travel amongst our offices.

In conclusion, you can see that 2019 is a year of execution and innovation, and we are off to a good start. And our first half year results provide us with good momentum and additional flexibility to execute and deliver this year. I underscore that our strategy is clear and remains unchanged. We are focused on innovation and execution and have demonstrated our success in strengthening our operations through our efforts to improve, streamline and modernize our brand's approach. Further, we are continuing to lean into the external environment to emerge as a stronger company.

Let me now turn it over 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 VP & CFO [4]

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Thank you, Jorge, and good day to everyone. As Jorge reviewed, we again delivered strong operating performance for the second quarter 2019 where we remained focused on investing for the future.

Our strong line -- our strong top line trend continued with second quarter consolidated net sales reaching MXN 3.3 billion, a 12.1% year-on-year increase despite some residual challenges we continue to see in certain geographies in which we are present.

Mexico's net sales also increased by 12.1% during the quarter to reach MXN 1.4 billion, a MXN 155.4 million increase. This strong performance again reflects Genomma's success in the area of brand portfolio enhancement, point-of-sale visibility and go-to-market execution. The company's new S&OP system also enable Mexico fill rates to continue improving. Renewed presence at pharmacy chains and access to additional points-of-sales through our relationship with 1 of the largest pharmacy chains in Mexico also favorably contributed to Mexico's results during the quarter. Mexico EBITDA expanded by 480 basis points in the second quarter 2019, with an 18.7% margin due to the operational leverage effect on fixed expenses related to top line growth achieved during the quarter. Expense related to our manufacturing facility and to market research partially offset second quarter EBITDA for our Mexico operations.

Turning to our U.S. operations, net sales decreased by only 0.4% during the quarter to MXN 23.6 million or a year-on-year increase of 1.6% when expressed in U.S. dollars. EBITDA for the quarter amounted to MXN 43.8 million, with a 13.5% margin as of June 30, 2019. The year-on-year EBITDA margin contraction is primarily due to the significant increase in distribution expenses related to higher freight costs from the ongoing trucker shortage in the U.S. It is important to note that Genomma's U.S. operations remain an area of our focus.

As we look to shore up our U.S. business, we took the following steps during the second quarter of this year. First, we began implementing our recovery plan, which we expect to favorably impact our second half of the year. This includes a detailed review to better optimize our U.S. product portfolio and our overall footprint. We've presented our findings to a select group of key accounts, and thus far, their response has been excellent. Along these lines, we have narrowed our focus to a select few large retail accounts in order to build and nurture these relationships while ensuring optimal performance and visibility of these outlets. Further, we are strengthening our digital presence in the U.S. market. And finally, as you have noted in our press release, since January, we have been revisiting our U.S. operations talent with an eye towards ensuring we have the best team in place in terms of sales, market research and market understanding. Today, the U.S. team is complete with some of the most experienced experts in the industry who have now been charged with reigniting growth and expanding Genomma Lab's presence throughout the country.

Turning to our Latin America operations, when expressed in local currency, Genomma achieved a 27.1% top line increase. 27.1% top line increase. The region was impacted by ForEx headwinds during the quarter. We have significant Argentinian peso devaluation, while local currency in Chile, Colombia, Brazil, Uruguay and Paraguay also depreciated relative to the Mexican peso.

It is important to note that the Argentinian devaluation effect will diminish in the quarters ahead, and that we did note an improvement in consumer demand in that market during the later part of the quarter. However, we remain cautious based on the outcome of the coming elections in Argentina.

As Jorge noted, Genomma was able to successfully weather this crisis, and we expect to emerge as a stronger company. We saw a continued trend of strong performance in Central America as well as Brazil, reflecting expanded marketing communication and brand positioning strategies, including the successful exclusive launch of Revie through Lojas Americanas, as Jorge had described earlier.

Reviewing key financials for the quarter. Gross profit increased by 9.4% year-on-year to MXN 2.02 billion (sic) [MXN 2.09 billion] in the second quarter of 2019 compared to MXN 1.91 billion reached during the second quarter of 2018. Second quarter 2019 gross margin declined by 160 basis points to close at 63.7% primarily due to a short-term product mix effect as certain higher cost SKUs made a more significant contribution to the company's top line results during the quarter as well as to ForEx headwinds that impacted our cost of goods sold.

Second quarter net income amounted to MXN 243 million compared to MXN 304 million in the second quarter of last year. This MXN 61 million decrease in net income is mainly due to the MXN 56.6 million decline in income before taxes during the second quarter of 2019 as compared with the same period of last year and to a MXN 4.5 million year-on-year increase in income tax expense. The net income during the quarter was mainly impacted by ForEx headwinds recorded in our all-in cost of financing as well as the fiscal negative effect from the Argentina operations that resulted in a higher effective tax rate. We made investments for MXN 81 million during the second quarter 2019, mostly related to the construction of the company's new manufacturing facility located in Central Mexico.

Our net-debt-to-EBITDA ratio reached 2x. We, therefore, again successfully remained below our estimated target for the year until we direct our cash generation to deleveraging the company in the coming quarters. During the 3 months ended on June 30, 2019, the company repurchased 772,677 shares, representing a total of MXN 12.1 million.

Finally, on Monday, we obtained authorization by the Mexican Security Exchange Commission, the CNBV, to institute our recurring debt issuer program. This new issuance program enables Genomma to engage in short term as well as long-term corporate local bond issuances. Further, Fitch Ratings assigned an F1+ and HR Ratings assigned HR1 national short-term ratings for Genomma Lab. These ratings are a reflection of the strongest intrinsic capacity for timely payment for up to 12 months of Genomma's corporate local bond.

To conclude, Genomma's financial results demonstrate that remaining focus on prudent and responsible growth while we continue the investment for our company's future. The team is leveraging our strong portfolio of brands, product revamps and innovation and commercial actions to produce above-market growth. We are pleased with our second quarter results, which demonstrate continued progress on the key strategic initiatives that Jorge described earlier.

We look forward to reporting on our progress in the quarters to come. At this point, I'd like to thank you again for your attention. We'd like to conclude our prepared remarks to open up the phone lines for your question. After which, we'll return again for some brief closing comments. Devon, 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 the line of Antonio Gonzalez with 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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Jorge, Antonio and Enrique, I just have 2 quick ones. The first one has to do with working capital. Obviously, the cash conversion cycle have deteriorated quarter-on-quarter or year-on-year because you are reigniting growth, right, which is, I guess, very fair and easy to understand. I guess the question that I wanted to ask you, Jorge, is how do you decide at this stage how much capital you want to commit in this resumed growth strategy? Is there a metric that tells you how much you invest in order to reignite growth, perhaps net debt-to-EBITDA not going beyond certain level? Or are you tracking return on invested capital and you have a minimum amount that you will ask from your team? How do you keep track of these variable not overextending, I guess? So that's question #1. And then, question #2, is there any, I guess, qualitative color at this stage that you could share on the GMP approval, right, for the manufacturing facility in Mexico? Qualitatively, how do you expect this to evolve? Is there any time frame that you can share with those? And any incremental color on this process after having received the first sanitary license from COFEPRIS? Congratulations on the results.

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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. This is Jorge. I'm going to take the GMP question and then Antonio will take the working capital one. On the GMPs, as I said, that is the next step. We are already working on that because as we received the license about 10 days ago, we already started because the plant was ready. As you know, we started with the production launch for tests and pilots. With that, we are planning to ask for the authority visit so some time in the month of August, probably around late August, and the obvious result of that visit should be the approval of the first GMP for the first line some time before the end of the quarter. That's our expectation and we are working towards that. If that is the case, then we will continue working for the GMPs for the next lines on the following line. And also, as you know, we are -- after getting the first GMP for the first line in Mexico, we will immediately start with the GMP authorization process for the remaining country. And having the first GMP from COFEPRIS in Mexico definitely will make the processing in the rest of the countries much more easier given the reputation and the respect that all the authorities in the region have for COFEPRIS. So having said that, I would say that end of first quarter, we should be early -- at the beginning of next quarter, we should be ready with the line, first line of the GMPs and continuing with the following with periods or cycles of 3 to 5 weeks, and in parallel, starting with the GMPs for the country. So by the end of the year, we should have all the GMPs for the manufacturing plant in Mexico and be very advanced with GMPs of several of the countries in Latin America so that in the first half of 2020, [start-up] process fully completed.

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Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. - Executive VP & CFO [4]

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Thank you, Jorge. This is Antonio. Let me respond to Antonio Gonzalez' first question. I just have one quick comment on what Jorge mentioned regarding the GMPs. Our plan is exactly what Jorge described. The actions that we are taking are exactly what he mentioned recently. I just want to let everybody know that it is not on Genomma's hand to get the GMP. It is on the government's hands in the end, so our expectation is what Jorge mentioned. But we need to be cautious because we depend on the government authorities for the GMP approvals. We think it is going to be according to the timing that Jorge mentioned but, again, you'll never know. So I just wanted to add that piece of caution there.

Going back to the first question (foreign language) regarding the working capital, first of all, we need to let everybody know again that Genomma is following a prudent financial approach in everything that we do. This started in Q4 2015. So one of the first things that we track is sell-in and sellout. So the growth that you see in our numbers are clearly related with our sellout figures. So we don't load the channel. We don't do those kind of things. Maybe there are other companies that today they still do that. We don't do that. So sell-in and sellout, our growth rates are clearly in line. There may be some short-term opportunities like, for example, for the isotonic beverage, you start supplying the channel a little bit ahead of the summer. And we do the same for the cough and cold season. But those are seasonal events. So first of all, we remain and we will continue to be a very prudent company in terms of working capital, number one. Sell-in and sellout must be consistent short term, mid-term, long term. That's something that I see. But that's also something that Jorge himself tracks. Every 2 weeks, we monitor that. And Marco Sparvieri, our COO, does that every week. So number one, I just wanted to tell everybody about this.

Second, as everybody knows, there has been a number of opportunities that Genomma has not captured in the past because we used to have fill-rate issues. We didn't have an S&OP program, which we do today. We have worked extensively with the third-party manufacturers, and we have been able to improve significantly our fill rates. And therefore, part of the demand that was unsatisfied because we were not able to fulfill their customer orders are now being filled. So our growth is organic. It's solid. It's sustainable. So that's one.

Now the other thing that is important is the following: if you look at the typical cash conversion cycle metrics or the DSO, the days sales outstanding or days of inventory, usually a formula takes the ending balance of the quarter divided by the sales or the cost of goods sold over the previous 12 months. When a company is growing very fast or if another company is declining very fast, those metrics are not accurate, and they don't reflect accurately what's happening with the company. Obviously, we report in our earnings release with the formula that everybody uses, so that is consistent with everybody's analysis. But if you took the past 3 months, the quarter sales, as a measure of the new level of Genomma's business and compare that to our inventory levels or our accounts receivables, you will see that the days of sales outstanding or days of inventory are pretty much in line with what we have expected. So the business is growing. It's growing in a mature, prudent way. It is true that when you grow and when you have these situations, you need to invest in working capital, which is what we are doing. But at the same time, you can see that we are not taking risky decisions. Look at our net debt-to-EBITDA. It's still at 2x even after investing in the plant. Obviously, the plant is consuming cash, but we are still at 2x net debt-to-EBITDA even with all this growth.

Basically, the philosophy is the following: if there's an opportunity in certain categories, if there are opportunities with new clients that we are now serving and we didn't serve in the past and we can generate internally the cash, the resources that we need for that growth, we're going to do it. So everything that we do is more oriented or is more based on the opportunities in the market, in what the consumer requires; in the innovation that, as Jorge was describing, we are developing; in the needs of our customers for many quarters in the past we have not been able to fulfill. So those are great news. I think that perhaps Jorge would like 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 [5]

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I just want a couple of minutes to provide a personal touch on this topic because, as you know, I have many years of experience in the business world. I'm very principle-based manager in everything I do. And that is one of the things that we are doing now in Genomma since my arrival. We are going to be winning in the markets. We are going to be growing profitably based on specific principles of operation that are nonnegotiable, and that is what our team here and in the countries are very clear on. And that is exactly what Antonio just explained. We are tracking the progress of our business. I can tell you on a daily basis that I personally meet every 2 weeks, and this is kind of a religion here. Every 2 weeks, Monday morning, we are still reviewing how is it going, sell-in, sellout by trade channel, by category, by brand, inventories, working capital and all the key metrics that you can imagine to manage a complex consumer pharma business like ours. So I want to assure you that we will continue doing that because that is the way I work. There is no other way in my head -- or in my mind.

One more thing that I'd like to add here is that all our key leaders have their compensation programs connected to sales, EBITDA and cash flow. In the case of our country managers, cash flow reflected in inventory levels and accounts receivable. So the whole system is connected to the key metrics that we want to continue delivering on a sustained basis.

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Antonio Gonzalez Anaya, Crédit Suisse AG, Research Division - Senior Analyst of Latin American Equity Research [6]

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This is very helpful. If I may just super, super quickly, Antonio, as you were explaining, these leverage level of around 2x net debt-to-EBITDA, is that the feeling that you would be willing to accept at the moment? Or if there are exciting growth opportunities with new clients or brands or [else], would you be willing to go a little bit higher as you invest in this future growth?

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Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. - Executive VP & CFO [7]

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As we have mentioned in the past, due to our investment in the manufacturing facility, we have expected net debt-to-EBITDA to go a little bit higher than where we are today. Actually, it should be higher right now. But because of the great EBITDA results and increase in sales, et cetera, we remain at 2. So yes, it is going to be a little bit higher because we are investing in the plant then it is going to reverse. We are going to start deleveraging once the plant -- once we have the GMPs and we start generating savings and we don't need to invest more in the plant, we will be deleveraging. But in any case, I would say that the most important thing is we are an investment-grade company. We want to remain investment grade so we are -- we want to be prudent in that regard. So a little bit higher, yes, but a little bit. And as long as we remain investment grade. And, as I was saying, in 2020, we would start deleveraging the company as the business generates more cash and as we don't need to invest in the planned CapEx as we are doing today.

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Antonio Gonzalez Anaya, Crédit Suisse AG, Research Division - Senior Analyst of Latin American Equity Research [8]

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Very clear. Congrats again on the results.

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Operator [9]

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Our next question comes from the line of Nicolas Larrain with JPMorgan.

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Nicolas Larrain, JP Morgan Chase & Co, Research Division - Research Analyst [10]

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I had a follow-up on the working capital, Antonio. If you could maybe shed some light on how we should be looking at the cash conversion cycle once more in the short term, let's say, when the plant is up and running and things are running at a more nominal speed. And also, another question in the U.S. The sort of weakness we saw on top line, was this mainly due to your operations being, let's say, modified or at least reorganized on your part? Or was there something else on the demand side that you could comment that affect sales as well?

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Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. - Executive VP & CFO [11]

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Thank you, Nicolas. Good question. Good follow-up question. In terms of working capital, this is the typical finance theory that we get in our MBA classes. When a company is growing, obviously investments need to be made in working capital to finance growth. Obviously, you are financing your clients, and you need to add inventory basically to service those clients. So as we are growing, you would probably see a higher level of, in absolute terms, of inventories and accounts receivables, but very much in line with the level of growth that we are achieving, okay? This is normal, and this is what you will see in the coming quarters. As we get the plant up and running and as we get savings, there's going to be efficiencies that we are going to get. For example, in terms of inventories, in the short term, we may have to invest in raw material inventories, work in progress inventories that the company didn't have in the past. So there is going to be a short-term increase in inventories. But as the plant ramps up and basically is working and operating at full speed, our inventory levels will go down significantly because we would be able to lower our safety stocks. We would be able to do the production planning by ourselves. We will control many more variables than what we do today. Remember, today, we have 315 suppliers, third-party contractors. Some of them are not as reliable as we would like them to be. So our inventory levels today are higher than what it would be once we have the plant up and running. So inventory levels will go down significantly once we have that.

And obviously, the growth rate that we are seeing today is very good. There's a number of innovation initiatives that we will be launching in the future. And as we enter new markets, develop new categories, you will see also investments in accounts receivable. Now the important thing is as long as our clients are paying on time, which is something that I personally monitor every single week, and as long as everybody is performing -- and if a client is not performing, we just stop shipping them, okay? Cash is king, and we know that's king. But if our clients are performing well, growth and investments will have a good return obviously. In the short term, you will see this kind of investment. Now some of you may be worried because there's other companies in Latin America that overinvest in inventories and accounts receivables and this kind of things, but they are not growing and they are just trying to present figures that are not sustainable. That's not what we want. We want to present sustainable growth and finance that growth with the cash that we generate, with the resources that we generate. We don't want to leverage the company to do that. But again, working capital or cash conversion cycle will improve once we have the plant up and running. You will see that. I don't know if I answered your question, Nicolas.

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Nicolas Larrain, JP Morgan Chase & Co, Research Division - Research Analyst [12]

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Yes. Perfectly. On my second one on the U.S., something -- or do you have any additional color on the top line performance?

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

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Yes. I'll take that one. This is Jorge. I just want to go back a bit to Q4 2018. You may remember that one of the things that I mentioned is that we were assessing our business volume in the U.S. When I started in the company, that's one of the things that we decided with my team: that we wanted to really assess, to make sure that we had the right plan for the future. We are still a very small company in the U.S , as you know. We want to make sure that we have all the drivers in place to foster growth, profitable growth on a consistent basis also in the U.S. market. So we did that. And one of the -- we decided to do 2 things in the U.S. One is what Tonio mentioned in his remarks. We started in early 2019 a complete review of our portfolio of products and brands in the U.S., the role of each of the brands, with each of the channels and key accounts vis-à-vis the consumer. And we also reviewed our organizational structure and talent. All of those things have been completed and basically the initial execution finished in Q2, meaning we have 3 key new managers in the U.S.: one leading the marketing function, one leading the market research function and one leading the sales operations function, that are experienced American-born business people that are taking the level of talent of our organization in the U.S. sort of levels above where we were. That team has been in charge to work with our corporate team, market research team and the marketing team in revising these top line portfolio. That had been completed, and we started presenting our renewed portfolio of products in early Q2 to our key accounts and all the major accounts in the U.S. with excellent response. We are starting shipments of those renewed products as of now. This Q3 will be key on that one. So we should be seeing improved results -- consistent improved results starting Q3, Q4 and especially 2020 in the U.S. operations.

So that was key for us, to make sure that we had the right to claim -- that we could win with the consumer through a better portfolio of products and with a platform in terms of our organization, our talent that could design and deliver those plans. So that's basically where we are. We are very, very -- looking forward, as I said, to the results of the next quarter because I think we will see a clear improvement very, very, very soon.

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Operator [14]

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Our next question comes from the line of Rodrigo Alcantara with UBS.

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Rodrigo Alcantara, UBS Investment Bank, Research Division - Associate Analyst [15]

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On the initial remarks, Jorge, you mentioned something about assessing more than 30 projects, I believe. So I was wondering if you could elaborate a bit more on this. Would this involve an acquisition of new brands, or just like the development of new products? And my second question would be regarding your stock repurchase, maybe that's for 2020. So once the manufacturing plant is realized by the end of this year, what should we expect for repurchase and dividends?

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Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. - CEO [16]

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Okay. Thank you for your questions. I will take the first one. As I said, as you said -- I said we have about 30 projects being assessed today. And this is a result of our innovation model, the new innovation model that we implemented in the company in January of this year. Let me tell you, there is great energy behind that. I think the way we have designed the model, the way the multifunctional teams are participating, focusing on different areas and fronts is improving month by month. As you know, we have monthly innovation meetings where our teams, multifunctional teams, multicountry teams bring ideas, propose ideas so that the innovation committee can assess them, analyze them, discuss them, provide feedback, approve them so that we could decide on resources, human resources and financial resources allocated to projects with specific delivery targets and dates. So that has been happening in the last 6 months. And lots of ideas and energy is coming. That's why we say we have about 30 projects coming from that.

And the other part of your question is I would say yes, we are assessing -- everything is possible within the limits of our strategy. Meaning we are facing business opportunities in all fronts, all of which are related to OTC and Personal Care. And we are confirming that there are lots of opportunities that Genomma can really address given our capabilities in the different markets. So I'm not going to be able to open up more information for obvious reasons, but I can tell you that starting next quarter, you will be learning about new businesses and new categories and brands that Genomma will bring to all our markets.

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Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. - Executive VP & CFO [17]

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Rodrigo, this is Antonio. Regarding the other part of your question about what to expect regarding future dividends, as we said some time ago, Genomma wants to pay dividends basically for the only reason that we want to pay our shareholders for their trust and to get them some income. And also, if you pay dividends, that shows our commitment to the management of cash, okay, because you have that commitment. Having said this, obviously we need to be very prudent. At this moment, the priority is the CapEx for the manufacturing facility. If we would be paying dividends now, we will need to leverage, financially leverage the company to pay dividends while we are investing in the plant. So we don't see that's prudent. So right now, the priority is investing in the plant. Then we also think of our shareholders. What do they want? Do they want a cash dividend, or would they prefer that the company is investing in growth and creating shareholder value? At this moment, with the kind of organic growth that we are having, investing in working capital has a very good return so that's something that we are going to be doing as well. Now having said this, once we have the manufacturing plant with the GMPs and as we capture the savings that we expect in COGS, we would be generating more cash and we won't have that level of CapEx in investments. So we want to leverage the company and, at the same time, we would consider paying dividends in that time. But we need to get to that point in time. And that I think -- what we have heard from many investors and shareholders is that that's a prudent way to go. I don't know if I answered your question, Rodrigo.

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Operator [18]

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Our next question comes from the line of Álvaro García with BTG.

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Álvaro García, Banco BTG Pactual S.A., Research Division - Research Analyst [19]

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Congrats on the results. My question is on Latin America. You mentioned good performance in Brazil and in other countries across the region. There are a lot of brand extensions and new rollouts. And I was just curious as to -- can you give us a little more detail on how those processes changed? These are things that have happened in the past, but there was not as much success. So what are some of the key processes that have changed under these new rollouts? That's my first question. My second question just quickly on Argentina. I'm wondering if you can provide an update. Do you know how Tafirol is positioned in today's consumer environment? And how you expect to do in the context of, perhaps, a better macro scenario. And specifically Argentina in the quarter and maybe through July, your readings on activity and whether or not we've seen an inflection point or not.

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Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. - CEO [20]

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Okay. This is Jorge. I will take your question on Latin America. It's very interesting. We are very positive also about Latin America despite the different challenges that we have in different countries. That is part of life. That is not going to change. We will always have issues somewhere. And that's the way we envision the future and that's the way we prepare for it. In overall terms, as you said, our business in Latin America is looking good in all geographies. If you think about the key markets there for us like Argentina, Brazil, Colombia, Peru, Chile, Central America, all of them are indexing double-digit growth year-to-date, and that's a very consistent number we see across the board. With some of them, obviously I cannot go in detail by country, but with some of them, even better than that.

What is behind that? Several things. Several things that are basically behind the organic growth and drivers that are helping us a lot this year. That will be complemented by more product innovation and new businesses coming in the near future, as I said. In general terms, it's a combination of portfolio completion. That's one. We are taking the brands that we have, sales, the brands that can be international, that have the right to win the consumer on a global or Latin American basis to all countries. And that is happening as we speak. We started with that basically in end of Q1, Q2 and we will continue. We have several quarters to go to be able to complete our portfolio based on our plan in all countries. And that is a key factor, a big factor that is producing, for instance, the fact that, as you said, Teatrical (sic) [Tafirol] is the leading brand in the pain segment in Argentina. And that project is now being expanded to other countries with different names, not necessarily with Tafirol, but could be Tafirol, like you will see in a couple of markets of Tafirol in the next few weeks. You will see it with a different brand name depending on the market also. So that's an example of a brand that is very successful in Argentina that is now being expanded to other countries.

Another example that I can give you is Tio Nacho. Tio Nacho is a brand that was basically a Mexican brand, as you know. Now, since early Q2, it's being expanded to other countries, making sure that we have the right brand fundamentals in the market at the right cost. A clear example that I can give you is that is now the leading shampoo brand considering all brands in Chile and Panama, for instance. So that's a proof that the brand has everything that is needed to be successful in other markets. We will be relaunching the brand in Mexico, too, as we continue making these restages and modernization of our brands.

And the third example that I can give you in the portfolio completion optimization front is Teatrical. Teatrical is a skin cream that was not growing, even in Mexico as you remember. But now it is growing. We have renewed, modernized and restaged the brand that is going to be launched every month in a different market. In the markets in which we have relaunched the brand, let me say Argentina again, Colombia and Peru now, the brand is flying off the shelves. It's not something surprising because when you have a brand that is well positioned in the market with the right value proposition, meaning performance versus the right price in a given market, then your chances are very, very high in terms of probability of success. And if you couple that with our go-to-market capabilities in all these countries and our marketing and digital advertising and consumer communication capabilities, that's why I always have said that Genomma is really well prepared to continue this growth path in the future.

Now the second factor for Latin America is the fact that we have come back to having very solid plans with the key retailers in Latin America. That was not the case in the last couple of years, I would say. That has gone to the next level. I have personally, with Marco Sparvieri, our COO, and our country managers and sales managers, been in every office of every key retailer general manager in Latin America, the U.S. and Mexico in my last 8 months, and we are making sure that we are not only present in their stores but also that we have joint business plans, not only for 2019 but also for the next 2 years. And that is delivering stronger partnerships on a commercial basis with these key retailers, all of them in key countries, with the obvious results because now our presence, our distribution, our visibility, our portfolio by key retailer or by key channel or store format is optimum and will be better in the next months in all of these countries. So, as I said, it's organic growth that is producing these results.

The third factor, I would say, the organizations that we have in the countries. As you may remember, we have improved the talent of our teams in most of these key countries, including the country general managers in the last 6 months, and that is also a key factor that is producing great strategic thinking, support through innovation and execution in all of these geographies.

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Operator [21]

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This concludes our question-and-answer session. And I would like to turn the call back over to Mr. Jorge Brake for closing remarks.

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Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. - CEO [22]

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Thank you, operator. To summarize, our performance this quarter was very encouraging as we contemplate prospects for the remainder of the year and beyond. With our sanitary license now in place, we are able to move forward with our strategy towards GMP certification to sell pharma-grade products and construction completion of our Personal Care plant and distribution center. We, therefore, are very excited about the prospects of our pipeline and the large market opportunities we are targeting. We believe that the products we are developing has the potential to influence thousands of lives as we empower people to have amazing health and wellness.

For the second half of the year, we'll be participating in non-deal roadshows to continue sharing our growth and innovation strategy. The first is during the first half of August. This is in New York, Boston and Toronto. The second is intended for the 3rd week of November in Europe. Please feel free to contact our Investor Relations team for further information.

Thanks for joining us today and for your interest in Genomma. We look forward to keeping you updated with our progress throughout 2019. Please enjoy the rest of your day. Thank you.

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Operator [23]

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This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.