Edited Transcript of LABB.MX earnings conference call or presentation 28-Jul-22 3:00pm GMT

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Q2 2022 Genomma Lab Internacional SAB de CV Earnings Call Sep 8, 2022 (Thomson StreetEvents) -- Edited Transcript of Genomma Lab Internacional SAB de CV earnings conference call or presentation Thursday, July 28, 2022 at 3:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Antonio Zamora Galland Genomma Lab Internacional, S.A.B. de C.V. - Executive VP of Finance & Administration and CFO * Jorge Luis Brake Valderrama Genomma Lab Internacional, S.A.B. de C.V. - CEO ================================================================================ Conference Call Participants ================================================================================ * Álvaro García Banco BTG Pactual S.A., Research Division - Research Analyst * Antonio Hernández Vélez Leija Barclays Bank PLC, Research Division - Research Analyst * Joaquín Ley Pinto Itaú Corretora de Valores S.A., Research Division - Research Analyst * Rodrigo Alcantara UBS Investment Bank, Research Division - Associate Analyst * Vanessa Quiroga Crédit Suisse AG, Research Division - Head of Mexico Equity Research & Co-Head of the Housing & Infrastructure in LatAm excluding Brazil * Barbara Cano;InspIR Group;Partner ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings, ladies and gentlemen, thank you for standing by. Welcome to the Genomma Lab's Second Quarter 2022 Results Conference Call. (Operator Instructions) A replay will also be available shortly after the conclusion of the call. I'll now turn the call over to Barbara Cano of the InspIR Group. Please go ahead. -------------------------------------------------------------------------------- Barbara Cano;InspIR Group;Partner, [2] -------------------------------------------------------------------------------- Thank you, and good morning, everyone. I want to thank you for listening to our remarks for Genomma's second quarter 2022 earnings. Joining me today are Jorge Brake, Chief Executive Officer; and Antonio Zamora, Chief Financial Officer. Before I hand our call over, let me first touch on a few items. On Genomma's website, you will find our press release that was posted yesterday after market close. Please note that today's remarks include forward-looking statements that are based on management's current views and assumptions. While management believes that its assumptions, expectations and projections are reasonable in the view of the currently available information, you are cautioned not to place undue reliance on these forward-looking statements and to carefully review all documents filed by Genomma with the Mexican Bolsa. Let me now turn the call over to Mr. Jorge Brake. Jorge? -------------------------------------------------------------------------------- Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. - CEO [3] -------------------------------------------------------------------------------- Yes. Thank you, Barbara, and thank you to everyone joining today. I would like to spend some time talking to you about some of the key actions we have taken within our key strategic pillars and measurable progress. Antonio, as usual, will then take a few minutes to update Genomma's second quarter financial results. As you read in our press release, we again reported a strong year-over-year operating performance. This is our 15th consecutive quarter of top line growth during the quarter that was still very much marked by currency related and supply chain headwinds which we have navigated. Our performance also represents a positive proof point for our successful execution in our strategic pillars. This was led by holistically applying the innovation to our business and portfolio during the quarter. Marketing, packaging and communications led innovation drove increased sales. We also again effectively replicated our strategy of expanding Genomma's strongest OTC brands and products or what we call our proven innovation in new countries and markets. To call out a few examples, we launched Suerox in Chile, the third country to which the brand has expanded, and we increased Suerox presence in the U.S., as human resource gained traction in Chile with a 15% increase year-on-year in sales. And early in the second quarter, our simultaneous Mexico, Chile and Costa Rica launch of a new environmentally sustainable Tio Nacho shampoo packaging was also well received. We introduced a new Tio Nacho shampoo format, targeting the traditional channel. Second quarter Tio Nacho sales in Mexico increased by a substantial 20% year-on-year. These examples of low risk innovation has a favorable risk relative to the return, which complements higher risk in product launches. Genomma has developed a deep knowledge of who is shopping and when, where, and why. We strengthened Genomma's brands presence within the traditional channel in all countries where we are present. As example, in Mexico, where we have aggressive exclusivity agreement on more than 550 sales routes. And our holistic approach to innovation during the quarter in the company not just a physical product, but the digital experiences that contribute to value wherever and however a consumer engages with our brand. During the quarter, we leveraged technology to invest and gain the digital and physical experiences that enhance the overall customer experience and drive sales. We invested in a range of customized advertising, Out-of-Home, local media and leveraging exclusive brand ambassadors, as well as brand activation marketing to drive product trial, ongoing usage and advocacy. Second quarter e-commerce sales reflect the most significant year-on-year increase to date of more than 10% of total Personal Care sales and are more than 10% of total Personal Care sales for the U.S., Argentina and Colombia. Total first half income increased by 66% as compared to last year. We expect to reach about 5% of our total 2022 sales to e-commerce as compared to 0 e-commerce sales just 2 years ago. Over the last several years, we have been navigating substantial headwinds, including the ongoing impact of supply pressures and rising level of inflation globally. The Genomma team has done a great job of managing the controllables. Our ability to identify new opportunities to optimize ingredients and packaging is fair, to increase affordability while ensuring a strong consumer experience drove margin improvements during the quarter. Genomma's sales numbers also reflect success in ensuring our value propositions are right for today's consumer in a uniquely challenging inflationary environment. Since 2019, our growth execution, optimized logistics and head count, coupled with the strengthened supply chain enabled us to limit the effects of COGS inflation in our headwinds and costs. We work with our retail department to deploy positive inflation-driven pricing effectively and profitably to ensure a minimum effect on the consumer volumes and sales. Genomma's results this quarter reflect this work. Margins have remained favorable while sales and absolute profits continue to expand. Pricing is just a part of our customer set of considerations, where we are collaborating closely with suppliers and remain vigilant of the pricing environment. There is a shift in calculating the prudent full year inflation as we believe health and wellness will always be consumers' priority. Turning to our markets. Mexico net sales grew just under 6% to reach MXN 1.7 billion. The MXN 96 million year-on-year peso sales increase was due to increased points of sale served and the core brand product innovation I have described led by sales of Suerox and Tio Nacho. Supply chain issues, natural gas pricing, overall inflation and geopolitical challenges have had a domino effect in Mexico and our Europe-based Novamil infant formula partner is dumping the Mexican second quarter results. However, the combination of pricing points, productivity improvements and cost savings initiatives I have described helped offset this effect. Mexico is a meaningful driver of Genomma's cash flow generation, which will be particularly relevant once our manufacturing facilities are fully operational and related investments have been completed. During the quarter, our Mexico Beverage and Personal Care manufacturing plant progress very well, achieving our commitment to full production on the Genomma's Suerox plant. In June, the plant produced 7.8 million bottles of Suerox, an 11% increase from our prior high as we continue to improve the plant's efficiency. This also resulted in important cost savings with COGS that are 10% lower versus our expectations for manufacturing Suerox. Our shampoo and pomade lines continued ramping up to reach nearly 2 million shampoo bottles during the second quarter. The pomade manufacturing line ramp-up reached a 45% utilization rate by the end of June '22. And our Body and Facial Cream lines will start operations next month. Genomma's Personal Care manufacturing process is, therefore, working well with no stock-outs expected and is running in line with our expectations. U.S. net sales increased by more than 13% compared to a year ago to reach MXN 361 million. Prior interventions and strategies, which today have been fully implemented are now originating on second quarter results for this market, which contributed significantly to Genomma's overall second quarter sales. To call out a few categories where we are demonstrating success, Suerox saw record U.S. sales during the quarter, 6 times that of last year's second quarter. We also saw solid performance within our own anchor market in Puerto Rico and California, which increased by 12% and 24%, respectively. It is important to note that we are seeing diversified category growth in the U.S., with double-digit growth of all Genomma key brands. This includes a 26% increase in Cicatricure sales, 40% increase in Tio Nacho sales, and a significant double-digits in Tukol sales. We will also note that we are seeing strong sales in different channels, including the wholesale channel, while Personal Care grew 17% year-on-year, including in accounts like CVS, Moody's and Walmart. Second quarter U.S. sales through Amazon doubled as compared to last year. Further, our productivity improvement and the benefit of continued cost savings initiatives helped mitigate a continuous inflationary environment in the U.S. market as well. Genomma's Latin America second quarter '22 net sales grew just under 17% with a 23.5% EBITDA margin. We saw a remarkable top line growth in Cough & Cold, Anti-flu, Gastro brands in all Latin America, as well as the launch of Suerox in Chile. Sales growth during the quarter was led by Colombia, Peru, Brazil commercial performance, which was partially offset by local currency depreciation in some countries where Genomma operates. Finally, as you read in Monday's announcement, Genomma was honored to be EDGE certified, and the only pharmaceutical plant in the Western Hemisphere to receive the certification related to water and energy use and carbon-dioxide emissions. EDGE is a green building standard and a global certification system of the International Finance Corporation, the private arm of the World Bank, that certifies the design and resource efficiency of green buildings. As further updates for the first half vis-a-vis '20 -- our '25 commitment we made in February, Genomma Mexico Industrial Complex achieved zero waste to landfill goal. And secondary packaging for all Genomma's products sold in Argentina, for instance, now have the Forest Stewardship Council certification, committing to responsibly managed forests that provide environmental, social and economic benefits. I would like to express my thanks and congratulations to Genomma's ESG Director, Maria Fernanda Aguilar and [Christine] for their outstanding progress on our 2025 ESG targets. With that, let me turn our call over to Antonio for a commentary on our second quarter financial results. Antonio? -------------------------------------------------------------------------------- Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. - Executive VP of Finance & Administration and CFO [4] -------------------------------------------------------------------------------- Thank you, Jorge, and good morning, everyone. As Jorge noted, we delivered solid growth in the second quarter across net sales, EBITDA and our EBITDA margin amidst persistent macro headwinds. Our focus remains on ensuring we leverage our enhanced efficiencies and optimize organization to further strengthen our position for sustained growth. Our first half 2022 performance positions us well to deliver on our objectives. Second quarter 2022 consolidated net sales reached MXN 4.3 billion, a 12% year-on-year increase, driven by the innovation that Jorge has discussed. However, these results were partially offset by supply chain and other related headwinds. Second quarter EBITDA increased by 15% to reach MXN 892 million with a 20.6% margin, a 50 basis points year-on-year increase due to successful target pricing initiatives, which offset cost inflation and ForEx headwinds in some of the countries where we operate. Second quarter 2022 Mexico net sales reached MXN 1.7 billion, a 6% year-on-year increase, largely due to increased point of sale and the product innovation Jorge has mentioned before. However, global supply chain challenges continued to adversely impact Genomma's Novamil infant formula category sales. Second quarter 2022 EBITDA was MXN 351 million with a 20.1% margin, reflecting a 10 basis point decrease, primarily due to inflation of certain raw materials, as well as time investments related to the manufacturing line ramp-up process at the Industrial Complex during the quarter. Moving to the U.S. Second quarter U.S. net sales increased by 13.2% to reach MXN 361 million, notably with continued strong Beverage performance and record Suerox sales for the quarter, double-digit year-on-year sales in key markets, such as Puerto Rico and California, with strong growth in Genomma's key brands. Going to Latin America, net sales for the quarter grew 17% year-on-year to just over MXN 2 billion also due to innovation and expansion strategies, as well as increased points of sale get partially offset by local currency depreciation. Genomma's Latin American EBITDA margin closed at 24%, a 70 basis point increase. This was primarily due to the positive price mix with increased operating leverage, resulting from increased sales, successful cost and expense control management and targeted price increases, which mitigated macroeconomic segments. Turning to profitability. Second quarter 2022 gross profit increased by 13.1% (sic) [11.1%] to reach MXN 2.6 billion. The 40 basis point gross margin decrease was due to a negative price mix and foreign exchange headwinds across all markets during the quarter. Second quarter working capital was adjusted and the cash conversion cycle ended June 30, 2022, are at 100 days. Genomma closed the second quarter with MXN 1.3 billion in cash and equivalents at quarter's end, a 7.8% year-on-year decrease as we continue paying down debt during the second quarter 2022. And we, therefore, have a very solid balance sheet with a considerably strong cash position and a net debt-to-EBITDA of just 1.2x despite prudently paying dividends to our shareholders and paying down debt. Important to note that this further reduces our interest expense, as well as Genomma's inherent business risks. We repurchased a little bit over 1.6 million shares in the second quarter, an investment that represents MXN 33 million. To conclude, we are encouraged by our strong quarter results as we continue to sharpen our focus and execute our strategic pillars. As a leader in Personal Care and OTC, Genomma strives to deliver outstanding health and wellness for our customers and clients. With that, let me turn over the call to your questions. Please, operator? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question is from Joaquin Ley with Itaú. -------------------------------------------------------------------------------- Joaquín Ley Pinto, Itaú Corretora de Valores S.A., Research Division - Research Analyst [2] -------------------------------------------------------------------------------- Jorge, Antonio, can you hear me? -------------------------------------------------------------------------------- Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. - CEO [3] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Joaquín Ley Pinto, Itaú Corretora de Valores S.A., Research Division - Research Analyst [4] -------------------------------------------------------------------------------- Hello? -------------------------------------------------------------------------------- Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. - CEO [5] -------------------------------------------------------------------------------- Yes, Joaquin. We can hear you. -------------------------------------------------------------------------------- Joaquín Ley Pinto, Itaú Corretora de Valores S.A., Research Division - Research Analyst [6] -------------------------------------------------------------------------------- Yes. I'm sorry. Okay. So you continue to release very solid operating results and growth rates, but there's -- there continues to be some noise below the operating line. And your EPS ultimately does not reflect what happens or the underlying trends of the business. So how should we think about your non-consolidated subsidiaries? I mean what the strategic sense does it make to keep Marzam in there or just maybe thinking about divesting even at a loss, right, and get that noise out of the way, which ultimately, I believe it would be a positive for your return metrics? And also the hyperinflation accounting impact on your cost of financing, is there a chance that eventually we can see a parallel accounting as some other companies with relevant exposure to Argentina have? I'm seeing a P&L excluding IAS-29. So we can have a better sense of what the real EPS of the company looks like? -------------------------------------------------------------------------------- Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. - CEO [7] -------------------------------------------------------------------------------- Antonio, would you take that? -------------------------------------------------------------------------------- Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. - Executive VP of Finance & Administration and CFO [8] -------------------------------------------------------------------------------- Yes, Jorge. Joaquin, thank you for both of your questions, excellent questions. Going to the first one, talking about the affiliated company, Marzam, that where Genomma owns 50% less 1 share. So we don't control it. We don't consolidate it for that reason. We don't manage that company. At this moment, Marzam is going on through a turnaround. The management, the Moench Cooperatief team that is managing and controlling the company, they're streamlining some expenses and some of the operations, things that we believe are the right things to be done at that company. So that's good. Obviously, when you do some turnarounds, there are some short-term impacts, especially some severance payments, et cetera. And that's what's driving some of the short-term negative effects of that -- of the affiliated subsidiary. Obviously, there's going to be savings in the future and the business is going to be a stronger one. So although we don't control Marzam, we think that the measures that they are taking are the right ones. Having said this, I'm going to a more strategic level of conversation, which is basically what you are bringing, Joaquin, thank you, again, for that is, is Marzam strategic for Genomma in the long-term, not necessarily. We are focused, as Jorge has always mentioned on providing health and wellness to our consumers. We're mostly focused on OTC and Personal Care. So we have that investment, and we are analyzing strategic options for the Marzam business. That would -- whenever that happens, would hopefully reduce that noise. And we can move forward with the investments in the categories where we are mostly present. So yes, this is something that we are thinking. We are looking at a number of alternatives. But for the time being, as I mentioned before, I think what's going on at Marzam is the right thing. Again, it's a short-term noise that obviously impacts our net income and has an effect on EPS, which is unfortunate. But again, as I said, this is short-term, and we are analyzing alternatives for the long-term. I don't know if I was able to answer your first question, Joaquin. I think we -- I think we lost Joaquin. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- Our next question is from Vanessa Quiroga with Crédit Suisse. -------------------------------------------------------------------------------- Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. - Executive VP of Finance & Administration and CFO [10] -------------------------------------------------------------------------------- No, just operator, operator, hold on one second, because I still need to answer Joaquin's second question, which was related to Argentina, the hyperinflationary accounting, IAS-29 and IAS-21, which is just a specific provision for hyperinflationary accounting. The IFRS rules are the ones that exist, we cannot change them, we may like them or not. The IFRS rules, IAS-21 and -- IAS-29 and IAS-21 basically require that we convert the hyperinflationary subsidiary using the official exchange rate, which is determined by the Central Bank. Well, we think that's right or not, because there's an free market exchange rate, that's obviously a lot of discussion. We had many discussions with the auditors, whether we should use the official exchange rate or the free market exchange rate. But I mean, from a personal point of view, I will use whatever is more -- the open market, the reality, but the accounting rules are the way they are. We take your suggestion about thinking of pro forma parallel kind of reporting. We'll analyze that, and we'll see what other companies are doing in this regard as well. And we'll see if there's a better way to communicate to shareholders and analysts, the potential impact of depreciation in that product. But again, this is something that we will analyze. Thank you for the suggestion, and we'll keep you posted. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- Our next question is from Vanessa Quiroga with Crédit Suisse. -------------------------------------------------------------------------------- Vanessa Quiroga, Crédit Suisse AG, Research Division - Head of Mexico Equity Research & Co-Head of the Housing & Infrastructure in LatAm excluding Brazil [12] -------------------------------------------------------------------------------- I want to ask about the new manufacturing plants. And if you could provide some color on how supply chain restrictions are affecting in any way the speed of the ramp-up of the plants? And your expectations regarding the ramp-up of the different lines that you are working on currently? -------------------------------------------------------------------------------- Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. - Executive VP of Finance & Administration and CFO [13] -------------------------------------------------------------------------------- Yes. Vanessa, thank you for your question, which I was -- I had some problems with the line. Would you please repeat it? -------------------------------------------------------------------------------- Vanessa Quiroga, Crédit Suisse AG, Research Division - Head of Mexico Equity Research & Co-Head of the Housing & Infrastructure in LatAm excluding Brazil [14] -------------------------------------------------------------------------------- Sure, Antonio. I would like to ask you to give some color on how supply chain restrictions are affecting the ramp-up of the new manufacturing plants in any way? And what's your expected ramp-up for the lines that you are working on currently? -------------------------------------------------------------------------------- Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. - Executive VP of Finance & Administration and CFO [15] -------------------------------------------------------------------------------- Excellent. Vanessa, thank you so much for your question. What I would say is that any new plant in any company and Genomma is not the exception, I've seen this in my career in different companies and Jorge as well. We have a lot of experience in terms of the startup of new plants, new facilities. There's always that period of time where you need to synchronize the supply chain. You need to get new suppliers, new materials, sometimes fine-tuning the specs and the supply chain model, et cetera. What I can tell you is we have not experienced anything unexpected or different from what we've seen in other experiences in our careers. So I think that the plant is going well. The ramp-up is going according to our expectations. Some of the initial hiccups that happened in any line, they are there. We are managing those. So yes, maybe today, there's a little bit of more difficulties in the world -- in the global supply chain networks, but I don't think that's impacting significant matter our ramp-up process. The Suerox line, we're already very, very happy with the efficiencies that we had a couple of months ago, where we reached 7 million bottles a month in terms of production. And right now, we are at 7.8 million bottles. So that's a significant productivity increase. And the cost per unit is even lower than what we had anticipated. So what we need to be in this process is we need to make it right. We need to do the ramp-up in the right way. There's always a learning curve that needs to happen. It's happening. Some of the other lines that we have, the shampoo line or the ointment lines, right now, I would say that they are at the 40% to 45% mark of the ramp-up process. So they are going well. And we expect the ramp-up process for each line to take between 5 months to 6 months, each one of them. Again, shampoos, I mean, Suerox, it's perfect. It's fine-tuned. It's delivering even more than what we had anticipated. Shampoos and ointment, very well according to the ramp-up cure, and facial creams and body creams will start operations in August. So I think that you will start to see -- we will start to see savings and synergies from the manufacturing facility. Obviously, the caveat is that there's COGS inflation everywhere in the world. Some of the COGS increases will be offset by these productivity gains that we will have in the plant, and that's a little bit of the process. So I think it's a right -- it's an excellent question, but we are not worried in terms of the Personal Care plant. In terms of the Pharma plant, that's a different story. We are still dependent on the permits and the GMPs from COFEPRIS basis, the story that we know. As we've mentioned the previous quarter, we think that it's going -- still going to take a couple of months. And in the case of the Pharma, the Pharma business or the Pharma manufacturing facilities, there's longer lead times for raw materials that need to be taken into consideration. But we'll get there when we'll get there. Hopefully, the COFEPRIS and the other permits from the other countries will come soon. But at this moment, that's something that we are dependent on the authorities. I don't know if I was able to answer your question, Vanessa. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- Our next question is from Álvaro García with BTG Pactual. -------------------------------------------------------------------------------- Álvaro García, Banco BTG Pactual S.A., Research Division - Research Analyst [17] -------------------------------------------------------------------------------- Jorge and Antonio, a couple of questions. One on infant formula. You mentioned it was a drag once again. I was wondering if you could maybe quantify that maybe within the OTC category in Mexico, we did see lower growth, if maybe you'd adjust for that? What type of growth we would be seeing there? And then my second question is on, maybe more for Jorge on sort of new line extensions and new product roll-outs. What are you most excited about into the second half of the year in terms of new line extensions or potentially new product roll-outs? -------------------------------------------------------------------------------- Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. - CEO [18] -------------------------------------------------------------------------------- Do you take the first one, I'll take the second. -------------------------------------------------------------------------------- Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. - Executive VP of Finance & Administration and CFO [19] -------------------------------------------------------------------------------- Yes. Thank you, Álvaro, for your question. The infant formula category is one of our fastest-growing categories. I think we are very happy with the performance of our commercial team and the acceptance of the products, they are indeed superior products that the market is accepting really well. As we mentioned last quarter, this is still happening today. Our partner, United Pharmaceuticals International, who manufactures Novamil in their 2 plants in France and what it used to be Eastern Germany, are experiencing some hiccups in terms of some raw materials, but especially energy. Germany supplied by natural gas, usually supplied by much natural gas from Russia. As we -- everybody has seen in recent (technical difficulty), there's been some disruptions there. And that's affecting the ability of UPI to source the kind of growth that we need. So there's probably a couple of percentage points that Mexico could have grown faster because we have the demand, the demand is there, we just simply were not able to cope with it because of this situation. Hopefully, this will be short-term. Now there's another aspect, another macro aspect that is happening, which is -- we all know that there were some major disruptions in the infant formula category in the U.S. And that is driving the U.S. to go out to the world for the first time ever and try to buy infant formula from everywhere, from Europe, from Australia, from New Zealand, et cetera. And that is also creating some pressures in the supply chain network because of that. That's a macro situation as well. Again, this is temporary. Eventually, things will get solved. Unfortunately, we didn't get all the products that we could have sold. And as I'm saying, the demand is there, the demand is strong, and our plans to expand the brand to other countries in Latin America is there. So it's unfortunate, but we have to leave for the time being with that. I don't know if I was able to answer your first question, Alvaro. -------------------------------------------------------------------------------- Álvaro García, Banco BTG Pactual S.A., Research Division - Research Analyst [20] -------------------------------------------------------------------------------- Confirm that growth there is below potential on the supply side of things, that's clear, and thanks for all the color. It's helpful for that first question. -------------------------------------------------------------------------------- Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. - Executive VP of Finance & Administration and CFO [21] -------------------------------------------------------------------------------- Excellent. So let's move to the second question with Jorge about the new -- what are the new line extensions that excites him the most. -------------------------------------------------------------------------------- Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. - CEO [22] -------------------------------------------------------------------------------- The second -- Álvaro, the second semester looks bright, too. And this is -- I would say that the main reason why we feel positive about it despite of what is happening around us everywhere, is that our growth is very solid and it's broad-based. If we were to get into a lot of detail in terms of where the growth is coming from and looking at the deep perspective, total company, I would have to say that it's coming from everywhere in terms of countries. All countries are growing very healthy, including now this year the U.S. that has had 2 very strong quarters in terms of building critical mass. And we see that, that will continue in the next few quarters, for sure, because we have the plans and we are proving that the plans are working. Latin America as a whole is also growing very healthy. And I'd like to mention, especially in Brazil and Colombia, which are coming very strongly this year, with Brazil growing almost double-digit, very healthy business, that is now being diversified. So -- and as far as in Mexico, it is in the high single-digits, and we'll keep in the high single-digits in the foreseeable future. So also in terms of categories and brands, we see a broad-based growth base actually. We pick up basically growth in all our categories, could be Personal Care, could be OTC or could be Beverages now. And Suerox continue to grow very healthy in all countries, including California and Chile, and we will continue expanding that. We see growth, very healthy growth in OTC, basically in all our key categories. And some of them that are related to Cough & Cold, of course, even better, given the situation -- the current situation in the world. And primarily, all our Personal Care led by Tio Nacho and Cicatricure, that are 2 of our top brands as a company that are growing also double-digit basically in most of the countries in which we operate. So in overall terms, we are very satisfied by the fact that the growth is very healthy coming from all key categories, all key countries and all key channels. And I want to reinforce what I said in my opening in terms of channels beyond the traditional channels and the supermarkets and the pharmacies, we're really growing very fast in the e-commerce platforms. As I mentioned, we grew 66% this last quarter over the same quarter of previous year as a total company. And we already have some countries with 10% of their business coming from e-commerce and others getting closer to 5%, and in the journey to get to 10% as a minimum goal that we have for the next 1 year to 2 years. So that's also a very healthy situation in terms of growing the e-commerce platforms. What is coming, I would say that more of the same because this is solid, this is behind solid plans that are -- have been built as we were making progress in the last few years, plus some additional expansions of some of these brands to other countries, including Novamil, including (inaudible), including Suerox, they will continue to expand to other countries because they are proving that their models are successful. So as we normally do it out with that growth, we expand to other countries. So that's something that is going to happen very, very quickly in the next few months. And finally, we -- at the beginning of this year, we agreed on a 5-year plan with our leaders, country managers and category leaders -- in a 3-year plan, that is basically '22, '23 and '24, that will take us to the next level, and you will be seeing that as we make progress quarter-by-quarter. But we continue very focused on our target, as I mentioned it in early 2019, of surpassing the MXN 1 billion sales mark with 24%, 25% EBITDA margin, that continues to be alive. We believe that we will get there in the next 2 years, 2.5 years, and we will keep you posted. As I said, we will rebuild and strengthen some of the plans at the beginning of this year to make sure that we get there. So was that helpful, Álvaro? -------------------------------------------------------------------------------- Álvaro García, Banco BTG Pactual S.A., Research Division - Research Analyst [23] -------------------------------------------------------------------------------- Yes, very complete. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- Our next question is from Antonio Hernández with Barclays. -------------------------------------------------------------------------------- Antonio Hernández Vélez Leija, Barclays Bank PLC, Research Division - Research Analyst [25] -------------------------------------------------------------------------------- Congrats on the results. My question is regarding the U.S. operations. I mean, you mentioned in your press release a new launch there. And just wanted to get a sense of the different brands that you're operating there in the U.S.? And what are your plans there for the country, especially as (technical difficulty). -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- One moment, I believe our analyst line has been disconnected. -------------------------------------------------------------------------------- Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. - Executive VP of Finance & Administration and CFO [27] -------------------------------------------------------------------------------- We do want to apologize with everybody for the communication issues that we are having. We discussed this with the vendor because this shouldn't be the case. And this is the second analyst that gets disconnected, operator. This is unacceptable. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- Yes, I understand. I'll move on to the next question while we wait for them to see if they dial back in. Our next question is from Rodrigo Alcantara with UBS. -------------------------------------------------------------------------------- Rodrigo Alcantara, UBS Investment Bank, Research Division - Associate Analyst [29] -------------------------------------------------------------------------------- Antonio, I hope I don't get disconnected. So the first question would be the CapEx is going to accelerate, right, regardless on the EPS. The cash EPS potentially was much higher than what you reported on an accounting basis. So just curious here on the outlook for dividends. I mean you already paid the second dividend, MXN 400 million dividend, right? Can we expect more active dividend policy for 2023? And my second question would be regarding the cash conversion cycle. I mean is it fair to say that, that improvement that you have seen, mainly on the receivables has been driven by the higher addition or the hyperinflation of the traditional channel? That would be my 2 questions. -------------------------------------------------------------------------------- Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. - CEO [30] -------------------------------------------------------------------------------- Antonio? -------------------------------------------------------------------------------- Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. - Executive VP of Finance & Administration and CFO [31] -------------------------------------------------------------------------------- Thank you, Rodrigo, for your questions. Yes, I think that -- and we've mentioned this that 2022 is an inflection year, especially in terms of cash flow generation, because as you very well pointed out, there's not much CapEx left to be done. I mean there's always a little bit of maintenance CapEx, and there's a little bit of the capital is required for the -- completing the commissioning of the lines that will start operations, but it's very minimal, it's very minimal. So there's not going to be significant CapEx anymore. We have enough capacity, more than enough capacity sufficient for the growth that the company requires. At the same time, as you very well pointed out, the cash conversion cycle is improving because we are putting a lot of effort in terms of that. The inventory -- the days of inventory is a challenge that we have to manage. As everybody knows, during the first months of the plant's operation, we do need to increase a little bit of inventory to -- because we are receiving raw materials because we don't want to create any disruption in the market where we transition from co-packers to our plant. So we are managing that, and we have been able to manage that. Some people have expected higher levels of inventories, but we are doing a very good work there. And in terms of the accounts receivables, you are right. The more that we sell to the traditional channels, the better it gets, because that's a channel that pays cash. We do provide some financing to certain distributors, business partners, but it's more efficient from a DSO point of view. So yes, that's right. But I wouldn't say that it's the only factor. Yes, it helps. But I think that the whole organization is putting a lot of effort in terms of collections and being very efficient. But at the same time, investing in clients, investing in -- when we launch new categories, you need to provide some financing, so that they put your products, the new products in their shelves and the business starts. And that is something where we invested in the right source in the infant formula. But as our customers get used to it and they see that this is a very interesting business, things get normalized. So I think it's a combination of everything that you've mentioned. And we're very proud of this higher and better cash flow generation. Going back to your other question about the dividend. There is not a formal dividend policy, and let me underscore policy. It's not a policy at this moment. It's a dividend practice. The difference between a practice and a policy that the policy is set on stone, and a practice is more of the way we do business. At this moment, our shareholders and the Board and management and everybody is committed to reward our shareholders as much as we can. So the dividend that we paid in December and the dividend that we paid in June, and more -- most likely, there's going to be more dividends coming in the near future, and it's going to look more like a policy. But if in the future, we find an interesting opportunity, where we need to source -- certain sources of financing, we may analyze it that needs to change. For the time being, as everybody knows and as you very well pointed out Rodrigo, we're generating cash. We hope that the plant will help us generate even more cash. And as such, I think that investors and analysts should expect a dividend stream in the future. And we are happy to reward our shareholders. As everybody knows, top management is -- I mean, we are shareholders as well, and we'd like to get some rewards as much as all other investors. So that's a little bit of what you can expect. But again, it's not something written on stone. We are a very dynamic company. We are always looking at opportunities. If there's a very good business where we should invest for the future, and there's a lot of organic growth initiatives taking place. Jorge was very clear in terms of innovation. When we talk about innovation, we have what is called a route to success on (inaudible), which is mainly the innovation that has been successful in some countries to the rest of the countries. I mean we see that there's a big opportunity there, we will invest in our organic business as well. So it's always going to be a combination of -- in terms of capital allocation, there will be dividends, there will be buybacks, but we will always, always continue investing in the business because we see that there's a lot of opportunities that may be captured. And as we capture them, we grow the business, we grow top line, EBITDA and cash flow that for the long-term is in the best interest of our shareholders. Was I able to answer your question, Rodrigo? -------------------------------------------------------------------------------- Rodrigo Alcantara, UBS Investment Bank, Research Division - Associate Analyst [32] -------------------------------------------------------------------------------- No, yes, that was great. And obviously, if you have not -- I mean, if you have already answered this, please simply go to the next one. If you can comment on the -- this exclusivity agreement strategy that you mentioned on Page 2, I found that interesting as well. -------------------------------------------------------------------------------- Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. - CEO [33] -------------------------------------------------------------------------------- I think he is referring to the strategic alliance, right, Antonio? -------------------------------------------------------------------------------- Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. - Executive VP of Finance & Administration and CFO [34] -------------------------------------------------------------------------------- Just wanted to clarify with Rodrigo... -------------------------------------------------------------------------------- Rodrigo Alcantara, UBS Investment Bank, Research Division - Associate Analyst [35] -------------------------------------------------------------------------------- Yes. It's the aggressive exclusivity agreement strategy, yes, on the 550 sales routes that you mentioned on Page 2. -------------------------------------------------------------------------------- Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. - Executive VP of Finance & Administration and CFO [36] -------------------------------------------------------------------------------- Well, there's many exclusivities that we have. As everybody knows, we have alliances with our business partners and that help us distribute products to the Mom & Pops to the more than 500,000 point of sale. And those are exclusive arrangements. They may only sell and carry Genomma's products, not the competitors'. So that's something that is working well, that we continue to do that, and that's been a very successful model. And it's a win-win situation, both for us and the business partners. On top of that, as Jorge was mentioning, we have exclusivity agreements with some of our strategic allies, like in the case of the infant formula or in the case of blades and razors and a couple of others that are coming, that as we said in the past, Genomma is becoming like the gateway to Latin America or certain categories for certain partners. And we lever our commercial and marketing strengths together with the strengths of our partners. So that's a strategic lever of growth, all of them, I mean exclusivity with the business partners for the traditional channel, as well as the strategic alliances that Jorge mentioned. -------------------------------------------------------------------------------- Rodrigo Alcantara, UBS Investment Bank, Research Division - Associate Analyst [37] -------------------------------------------------------------------------------- That's super helpful. -------------------------------------------------------------------------------- Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. - CEO [38] -------------------------------------------------------------------------------- Let me take quickly, Antonio reminded this question, and I didn't even answer because he got disconnected in the last couple of minutes. He asked about the U.S., and the brands that we were selling in the U.S., and what was our plans in the near future. Antonio, I'll mention quickly that we're very, very positive about what is happening in our business in the U.S., especially in the last 3 quarters, because I'm including last quarter 2021. Behind the plants that we launched in -- as you may remember, we launched in late 2020 after an analysis and an revision of our strategic focus in the country. And now we are seeing a widespread growth coming fortunately from different fronts. Our key brands there are Tukol, Cough Syrup, Cicatricure, Skin Care, Silka Medic, Tio Nacho, Hair Care, Shampoo, Suerox, Beverages among other brands, our key brands in the country. And all of them in the last 2 quarters have been growing double-digit, even much more than double-digit, in some cases, where Cicatricure, Tio Nacho, and Suerox, that have much higher growth than low double-digits. And that's behind specific plants and specific strategic moves in the brands. And Cicatricure is expanding their portfolio, Tio Nacho, with the relaunch of the sustainable line of products, and Suerox, that continues to be successful as a brand, preferred by the consumers whatever we put on the shelf. And now it's a program that we will continue expanding the brand as a general -- in the general market in the upcoming months. So it's very energizing to see a brand like Suerox that is proving what could be road to success, the Genomma's brand entering the general market in the U.S., and the potential is huge as you can imagine. And also, the category -- the market in which we have focus behind that, that reveal the strategy, especially California, which is, as you know, larger than any of the countries in Latin America, there we are growing 24%. And that is another proof that we can do it with a specific focus in some key markets. And you know, we will continue doing this in other key states in the U.S. as we go ahead like Texas and Florida, et cetera, et cetera. So it's a more targeted surgical type of approach that is delivering much better results than in the past. And finally, Amazon in the U.S. is a key partner of Genomma now, and we are basically doubling every quarter our business with them. And that's another key contributor to what we are seeing in the U.S. So we see positively the future because of all of these things that are very solid pillars behind the growth that we are seeing. And of course, we always continue assessing and exploring potential new businesses or new brands in the market to accelerate -- to further accelerate this. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- (Operator Instructions) Our next question is from Antonio Hernández with Barclays. -------------------------------------------------------------------------------- Antonio Hernández Vélez Leija, Barclays Bank PLC, Research Division - Research Analyst [40] -------------------------------------------------------------------------------- Yes. This is the question that you just... -------------------------------------------------------------------------------- Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. - CEO [41] -------------------------------------------------------------------------------- I just answered, Antonio. I don't think we have more questions. -------------------------------------------------------------------------------- Operator [42] -------------------------------------------------------------------------------- Thank you. This concludes the question-and-answer portion of today's call. I would like to turn it back over to Mr. Brake for any closing remarks. -------------------------------------------------------------------------------- Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. - CEO [43] -------------------------------------------------------------------------------- Okay. Thank you, operator, and to those joining our call today. This quarter's diversified results reflect consistent progress against the themes and pillars we have established as our guide for sustainable growth. Our consumer-centric model is working and will continue working. We are tracking well against all of our key milestones for this year and remain very optimistic about our long-term growth potential. Thank you to all, and have a great week. -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes Genomma Lab's second quarter 2022 results conference call. We would like to thank you again for your participation. You may now disconnect.