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Edited Transcript of LABB.MX earnings conference call or presentation 30-Apr-19 4:00pm GMT

Q1 2019 Genomma Lab Internacional SAB de CV Earnings Call

May 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Genomma Lab Internacional SAB de CV earnings conference call or presentation Tuesday, April 30, 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

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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* 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

* Richard Dolhun

Westwood International Advisors Inc. - Global Equity Analyst

* Rodrigo Alcantara

UBS Investment Bank, Research Division - Associate Analyst

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Presentation

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Operator [1]

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Good morning. My name is Hector, and I will be your conference operator today. At this time, I would like to welcome everyone to Genomma Lab's First Quarter 2019 Earnings Conference Call. Please note that today's conference is being recorded and will be available for replay.

I'll now turn the conference over to Enrique González, IRO of Genomma Lab. Please go ahead, sir.

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

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Thank you, Hector, and good morning, everyone. Welcome to Genomma Lab's First Quarter 2019 Earnings Call. The press release with related details was issued yesterday and has been posted on our website at genommalab.com. Participating on today's call are Jorge Brake, our Chief Executive Officer; and Antonio Zamora, our Chief Financial Officer. At the conclusion of our remarks, we will open the call up for questions and Antonio and I will be available later for any follow-up conversations.

I would like to take this opportunity to remind you that our remarks today will include forward-looking statements reflecting management's current forecast of certain aspects of Genomma's future. These statements are based on current information, which we have assessed, but which, by it's nature, is dynamic and subject to rapid and even abrupt changes. Actual results may differ materially from those contained in our -- implied by these forward-looking statements due to risks and uncertainties associated with our business, including those we have disclosed in our most recent filings with the Mexican Bolsa.

With that, I would like now to turn the call over to our CEO, Mr. Jorge Brake. Mr. Jorge, go ahead.

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

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Thank you, Enrique, and welcome, everyone, to our first quarter earnings call. We are gaining significant traction with our plans to profitably grow the business through our redesigned strategy with a focus on fixing the fundamentals, specifically through the right go-to-market strategies, putting the right people in place, on the ground and enhancing visibility of the point-of-sale as well as reigniting the innovation pipeline. The leadership team is focused on leveraging the significant opportunities in front of us, both over the course of 2019 and in the coming years.

And before going any further, I want to take a moment to express my sincere gratitude to our teams across 19 countries, who today are effectively working as a more cohesive company, which contributed to our progress this quarter in becoming a major, efficient and effective multinational-focused company, multinational focus on people's health and well-being.

As you have read in yesterday's release, Genomma achieved a strong operational results for the first quarter of 2019 with a 12.4% year-on-year top line increase, excluding Argentina with particularly strong execution in Mexico, where initial traction of our streamlined and enhanced brand portfolio to an excellent go-to-market execution is clearly resonating.

While external headwinds continue to challenge our performance particularly in Argentina, our results this quarter reflect tangible and quantifiable evidence of our success in implementing the renewed 4 strategic pillars of Genomma's growth and industrial integration strategy to drive profitable growth.

We also saw the positive effects of Genomma's aggressive company-wide program of establishing important relationships with key pharmacy chains and nonpharma retail outlets accounts in countries such as Mexico, Chile, Peru, Colombia and Brazil.

Therefore, despite certain variables, which remain outside of our control, Genomma is again on a growth path. One such factor that negatively impacted not only our business in the U.S., but also the reported comparable phase of major U.S. pharmacy chains was the weak cough and cold and flu season during the first quarter.

Antonio will later discuss our financial results in more detail. I would like to take this opportunity now to update you on the successful implementation of Genomma's growth and industrial integration strategy. To reiterate, this strategy is focused on 4 key pillars, which are, first: innovation and portfolio optimization through 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 corporate culture focused on consumers, partners and employees, while making sure we have the right talent everywhere.

To begin, I'm pleased to let you know that this quarter, we created our company's first centers of innovation or COIs, as we call them, which are key to Genomma's disruptive growth through product innovation, enabling us to expand our footprint to winning new key categories, while also accelerating our current base business. A COI is a team comprised of 5 to 6 Genomma employees from different areas, functions, levels and geographies, ideally who are experts in their respective topics or because of the individual's experience and perspective and who can contribute to innovation and idea generation. We have launched a total of 9 new COIs in Q1 2019 focused on creating disruptive ideas to secure new opportunities within the OTC and personal categories and in other key areas like go-to-market, culture, digital interventions, cash conversion cycles, et cetera.

On the OTC side, which continues to be our most profitable and competitive segment, Genomma's repackaged Tukol and Alliviax brands and develop a new communication strategy focusing on multisymptom effectiveness to gain market share within the mainstream category, which has reflected a double-digit growth during the first quarter of 2019. Again, favorably impacting first quarter sales as part of our streamlined product portfolios expanded reach. Standardizing our product portfolio eliminates unnecessary complexity, enabling us to market these products more efficiently and drive top line growth in all countries.

Our success in this area runs parallel to future success in new product innovation as we continue to explore other opportunities in adjacent categories.

Genomma currently is working on 14 (inaudible) related to innovation based on the model we implemented in January, which will be triggered when our new production facility is fully operational later this year. This quarter, we also began hiring country-specific OTC experts throughout our local markets to add the much needed expertise to advance in segment.

Turning to updates related to the second pillar of our strategy, Genomma's best-in-class go-to-market capabilities and our obsessive focus on the consumer and shopper, we deployed extensive digital market research during the first quarter, building on last quarter's success by further leveraging key social media outlets to gain a deep understanding of our customers' nuances and preferences. As we mentioned with our results release, our strong marketing programs contributed significantly to driving first quarter growth. At the end of 2018 and during the first quarter of 2019, we launched significant marketing tests in primarily through TV as part of our Mega Pauta campaign in both the U.S. and Mexico. While these exercise taught us quite a bit, we do not intend to continue this level of campaign in the coming quarters. We have also increased our effectiveness, and we will, therefore, extract more value out of each marketing dollar, optimizing our leading investment plan to effectively and efficiently connect with our consumers, both in store and through TV and digital media.

We continue to leverage Genomma's significant go-to-market capabilities to take full advantage of our exceptional strength in this area, best utilizing our internal and external resources to deliver Genomma's unique value proposition to customers and achieve a competitive advantage.

During the quarter, we developed new and exciting visibility on programs across all channels and markets. We are creating a loyalty program to build an independent pharmacy drive, for instance. Also, during the first quarter of 2019, we reestablished win-win partnerships with several key retailers throughout the countries in which we operate, 3 in Brazil, 1 in Colombia, 1 in Chile, 1 of the largest in Peru and 2 in Mexico, which I had mentioned previously.

Further, we are revamping our global manufacturing and supplying strategy to optimize costs and services, while we make sure we have the right portfolio by channel and market and continue to drive growth in Genomma's nonpharma channels.

Turning to the third pillar of our strategy, we have been revisiting third parties suppliers and local sourcing, while centralizing key services and processes where adequate to ensure that these 2 are optimized for profitability. And we have -- as we have discussed previously, we've made continuous progress on our manufacturing facility during the quarter. Our OTC facility is completed and expecting final approval from the local authority to begin operations as soon as possible. And 70% of our personal care facility construction phase has been completed to date with 90% of equipment acquisition. This facility is expected to begin operations during the second half of 2019. The finished product warehouse is also in the process of laying a concrete floor and is expected to be fully functional during the last quarter of 2019.

To conclude, as our results demonstrated this quarter, we saw continued success as we drive our corporate culture focused on consumers, employees and internal talent, while strengthening our functions to better align with our strategy and operations. We now have general managers -- new general managers in 5 countries and key talent with OTC experience. This strategy is clearly resonating. And today, we are successfully working together to transform groups into a single cohesive team.

Let me now turn it over to Antonio, and I will then return for some final comments -- 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. Good morning, everyone. Let me share some highlights from our financial results. As Jorge noted, Genomma ended the quarter with strong top line results, despite the continuation of a very challenging microenvironment in Argentina. We were pleased to report that consolidated net sales increased this quarter, reaching MXN 3.1 billion, which is up 4.2% year-on-year increase, despite the unfavorable impact of continued inflationary headwinds and currency devaluation at Genomma's Argentina subsidiary, which, as you know, is our second largest country based on sales. To quantify the impact of applying hyperinflationary accounting on Argentina's results, consolidated top line for the quarter, excluding Argentina sales would have increased by 12.4%.

Mexico performed exceptionally well in the first quarter, achieving an 18% a year-on-year increase in sales, an important reflection of the successful brand portfolio enhancement we begun implementing this quarter as well as continued point-of-sale visibility and go-to-market execution. Fill rates for Mexico improved from 80% to more than 90% during the quarter, primarily due to the implementation for -- of our new sales and operation planning or as we call it, S&OP. As Jorge mentioned, we have renewed our presence at the pharmacy chains with whom we haven't had a relationship for over 3 years in some instances, adding more than 2,000 additional point of sales already reflected in this quarter's results. The contraction in Mexico's EBITDA margin for the quarter is a result of expenses related to our manufacturing facility and to continued investments in advertising and marketing spend from the prior quarter as part of our marketing testing that we are conducting as we have described before.

Net sales at our U.S. operations decreased 6.9%, a decreased performance, as Jorge mentioned, is due to a weak cough and cold season in the U.S. from a shorter and warmer winter in that country and a difficult comparison to last year's record high results from a very robust winter season sale.

EBITDA for the quarter amounted to MXN 35.7 million with a 9.8% margin as of March 31, 2019. The 10.5 percentage points EBITDA margin contraction is mainly due to increased investments allocated to advertising publicity and visibility of the point-of-sale, which Jorge had described, particularly related to Genomma's winter season product portfolio in the U.S. Logistics expenses increased substantially during the quarter due to higher freight costs in line with the ongoing trucker shortage which has been very well-publicized in the U.S. The drivers shortage is already leading to the late deliveries and higher prices for goods that Americans buy everyday, and the APA predicts that this could get worse in the coming years.

Turning to our Latin America operations and as expressed in local currency. Genomma achieved an 18.5% increase in sales. We saw a continued trend of strong performance in Colombia and Central America and this quarter also in Chile and Ecuador reflecting the expanded market in communication and brand position in strategies described. First quarter EBITDA for Latin America, therefore, increased by 230 basis points when compared with the same period of 2018 with benefit of important SG&A efficiencies achievable in the quarter and the favorable year-on-year comparison to 2018 results which were adversely impacted by IFRS' IAS 29 and IAS 21, which are the standards for hyperinflationary accounting in our Argentinian subsidiary.

While the outlook on Argentina to date remains uncertain, it's important to know that Genomma has maintained stable unit sales. We continue to execute price increases in this country to partially offset the impact of inflation, while we also remain cautious not to impact consumers' capacity. Our long-term goal is to emerge from Argentina's crisis as a stronger company. Reviewing key financials for the quarter, gross profit decreased by 0.3% year-on-year to MXN 2.02 billion in the first quarter of 2019 compared to MXN 2.03 billion reached during the first quarter of 2018.

The decrease was related to product mix where high cost SKUs made a more significant contribution to the top line as well as to the impact from accruing raw material inventory and related costs to future in-house production. First quarter net income decreased by MXN 123 million year-on-year. This was due to a higher interest rate expense, the impact from exchange rate and

(technical difficulty)

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Operator [5]

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Ladies and gentlemen, thank you for standing by. We're just experiencing some technical difficulties. Standby, please.

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Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. - Executive VP & CFO [6]

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Sorry, we got disconnected. I think we missed the last lines of what I mentioned, I was saying that cash flow from operations for the quarter reached MXN 290 million, much of which were invested in the company's new manufacturing facility as we advance to the initial stage of OTC manufacturing.

And to conclude, Genomma's financial results demonstrate that we continue to perform well globally with an eye on building shareholder value. We are pleased with the strong operational results to start the year, and we have confidence in delivering our 2019 outlook and successfully deliver on these variables that we can control.

At this point, we'd like to thank you, again, for your attention and we'd like to conclude our prepared remarks to open up the line for questions, after which we'll return again for some brief closing remarks. Hector, 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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I just wanted to ask very quickly about the following. Jorge last quarter, you mentioned about these stepped up marketing effort, right, and so-called Mega Pauta. And please correct me if I'm wrong, but if I understood correctly, you tried and pushed some of these efforts through the first quarter, and now you are not continuing with that effort in the forthcoming quarters, right? Or for the most part, you will not continue with that effort.

So I just wanted to ask if you can share with us some, I guess, big picture thoughts on these efforts. First of all, is there any chance you share with us what were the specific metrics that you were looking for, was it around marketing return on investment or was it a specific sellout number? Or I don't know if you are looking at brand preference indicators, you're serving consumers directly. What were the specific metrics that you were looking for, which ones you didn't achieve and which learnings, I guess, do you get from these exercise going forward?

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

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Good question. Thank you. Yes, we -- back in November, we decided to do this, as we call it Mega Pauta, for many specific reasons. This -- as you know, this has been a company that has been basically focusing on TV as a main vehicle for advertising for our products. And there are many reasons that we don't have time today to explain what makes us truly question that in terms of the future and how Genomma should be focusing on investing in media to connect with our consumers to make it much more efficient and effective.

So with that context, we decided to implement the test that we called Mega Pauta that basically was for the month of January, not the full quarter, was the month of January, in which we prepared a model which we wanted to measure the effect of increased advertising with some specific guidelines in some specific brands or categories. And this was in Mexico, okay? This was only Mexico, partially in the U.S., but mostly Mexico during the month of January. In the rest of Latin America, we didn't do it. We, on the contrary, focused our efforts on the store and the go-to-market, and we wanted to measure what would happen among these different models and tests.

I'm not going to be able to share specifics, but we can -- what I can say is that we've learned a lot because our aim, vision and objective here is to make sure that based on these learnings and data and analysis we will be making the right decisions to truly optimize the way we invest not only in media, not only in 2019, but in the future, too. And that's why we called it our media investment programs will be focused on TV whenever and whatever makes sense. Based on these results, we know a lot more on how and what to do on that front. We will also be investing much more, proportionally speaking, in digital media and digital advertising, and you'll learn about what we will do there in the second semester. We have a very exciting and innovative program that we will be announcing in the next few months. So that it is clear that we are rebalancing the way we invest in media.

And third, the store. The store is a very important media vehicle for us. And based on our experience and our great interventions from the last few years and months, we are sure that we also can truly leverage what happens in the store impacting our consumers. So in overall terms that is the program. I will tell you that, yes, the metrics you mentioned were the metrics that were part of this return on investment, sellout and the sensitivity of GRPs on different specific models and strategies on specific brands and market shares, too. So very good -- for me, it was a great experience having done this in Genomma in this last few months because as I said and I'm just reinforcing the same point, it will help us a lot to be much more efficient and effective in how we invest in these 3 media vehicles going forward.

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

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I understand that. Obviously, I understand that you might not be able to share the specific numbers as they might be competitively sensitive but just conceptually, can you share with us where did the program didn't achieve the desired results? Was it more on the top line or the cost of the program was higher than expected? Is there anything you can share on that front?

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Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. - CEO [5]

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Yes. In general, Antonio, our main goal was to justify from our return on investment standpoint. The investments we had made with increasing top line sales. And that is the key measure we used. The increase expected -- minimal increase is expected in top line sales growth by brand, actually, because not all the brand participated with some selected group of brands vis-a-vis the investment that was being made in GRP during that specific period of time. And as you know, we can really and this is the very positive thing about Genomma's back office, I would say, and intelligence area, we can measure, we can monitor sales of the company -- sellout of the company with a big portion of the market almost live. So every week, we have the results of what is being sold to the final consumer, so we can truly have the final measurement of these tests very quickly in our hands.

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Operator [6]

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Our next question comes from the line of Richard Dolhun with Westwood International Advisors.

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Richard Dolhun, Westwood International Advisors Inc. - Global Equity Analyst [7]

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I wanted to follow on Antonio from Crédit Suisse's comments here in questions on the marketing and the sales spend in the first quarter here. The EBITDA margins contracted in Mexico and the United States more than I would have expected from these initiatives. I know you mentioned the cold and flu season, which is the large part of the U.S. and the weather not participate -- not being cold there. And you also mentioned some production costs that were -- that also hit the P&L in the first quarter in Mexico, but the production costs they were there in the first quarter of 2018 as well.

So any comment on now that these promotions and these sales, this marketing campaign is going to be stopped or reduced going forward, how much of this margin compression that was felt in this -- in the first quarter is going to come back going forward? Because yes, the top line growth of 4% and considerably larger than that, excluding Argentina, I think, 12%, that's nice. But there seems to have been a heavy price paid on the EBITDA margin. Can you comment on the specifics of, one, of the first quarter, please, in Mexico and the U.S.? And then give us maybe not guidance, but a sense of how these margins should trend going forward, please.

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Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. - Executive VP & CFO [8]

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Richard, this is Antonio. Excellent question. There's some additional aspect that we need to consider for this quarter particularly for Mexico, and I think that we'll get some benefits in the coming quarters, okay? And perhaps we were not that clear in the press release, which is the following. We are accruing some expenses in cost of goods sold during this quarter because we are incurring in some expenses that are needed for the new manufacturing plant when it'll start operations. As you'll remember, we implemented a very prudent financial policies back in the fourth quarter of 2015, okay?

So when we increased the amount of raw materials and packaging materials more than what we need in a quarter, some of those purchases get reserved or are -- we create a provision for that. And as we sell -- as the amount of raw materials and packaging is in line with sales, you don't see that much of a variation. In Q1, in Mexico, we have additional expenses related to cost of goods sold, it's just the way accounting works that are hitting us this quarter. And of course, we expect that to be reverted in the coming quarters as we use those raw materials and packaging materials. So that is specific, it's accounting.

Again, we keep on applying the prudent policies that we implemented 3 years ago, and that's an effect that we are facing right now. If you isolate that point, and you look at the SGM&A, you will see that there's efficiencies across the company. And of course, you don't have the data by region, but we are achieving efficiencies in specifically in Latin America and in South America trying to offset the huge impact of the Argentinian macro devaluation that we face. So I don't know if I was clear enough, but you are totally right. There's some expenses that are impacting our cost of goods sold line in Mexico that just hit this quarter and maybe reversed throughout the year.

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Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. - CEO [9]

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And I would like to build from what Antonio just said. To clarify the point of growth especially in Mexico and the Mega Pauta thing. Just want to be clear that the Mega Pauta impact on the 18% growth of Mexico is minor because we did for 3, 4 weeks and we did it in a few brands not in the whole business as a test. The major factors that truly impacted the 18% growth in Mexico, are basically factors that are here to stay and I will mention a few of them. As you heard me mentioning at the beginning of my remarks, we've renewed our partnership with several key accounts or retailers in Mexico that for many reasons were not working with Genomma.

This is not the time to go through those details, but we are back in a couple of key retailers in Mexico and that happened in February -- in the February, March period. So that's something that is new to the -- versus the base and will stay as part of our business based in the future. It's not a onetime thing. Another factor that played in our favor is what I also mentioned in my remarks. We have made a few interventions in some of our key categories and brands in Mexico that are delivering outstanding results. I mentioned examples of Alliviax and Tukol that has been -- both brands were repositioned during the quarter in terms of their participation -- the scope of their participation in their respective categories.

And that expansion in the scope of their participation in their categories is delivering more than 50% growth in both brands during the quarter. So those are the type of things that are truly behind and some effects in the base that we have to recognize, too. You'll probably remember that in first quarter of 2018 we were transitioning to SAP and we had some issues especially in January, we were out of TV also for a month, almost half of the quarter last year. Those are onetime effects that benefited the 18%, of course. But I would say, that in general terms I feel very comfortable with continue delivering and sustained results through the next quarter ideally close to the high single digits, but that will be probably something that is -- something that will be very achievable, but we'll continue pursuing the best possible results. Not at the cost of EBITDA, but making sure that we are growing efficiently, investing our money well, so that we can continue saying that we want to truly renew our top line sales profitability.

And in the case of Latin America, it's fundamentals, which is something that makes me feel very good, too, because the growth of Latin America, including Argentina was very, very positive in the first quarter, without Argentina we are in the high double digits in general terms. And those numbers are in all cases in Latin America, based on fixing fundamentals that will stay for the long run. Fixing fundamentals means going back to our relationships with some key retailers similar to the Mexican case, making sure that we have the right go-to-market. We've improved the portfolio we have in the countries, now expanded the portfolios within the portfolio -- Genomma's many brands. Many of them were not representing in some countries of Latin America, they are now. We are starting a process to correct that, includes the improvement of our local teams. It has a very good talent in all the countries today and the new general managers on 5 of those countries are truly making a difference. So those are the type of things that I just wanted to give perspective on because those are things that are fundamental that will stay in our base looking forward.

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Operator [10]

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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 [11]

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I wanted to double-click a bit on the plant, okay, now that it should come online during the second half of this year. I just wanted to understand if it does actually come online as in this time line, when would you expect the margin benefits to start showing up? And then I remember when you guys gave this sort of guidance on the margin gains that you expect on the plant, this was before Jorge's annual new plan for boosting top line. So I wanted to see if you had like any new sensitivities or any new color on the margin impact that we should have once the plant is up and running on nominal terms.

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Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. - CEO [12]

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Okay. Thank you. This is Jorge. I'll give you some perspective on where we are. As I said, the OTC facility is completed. It's now just in the final -- we are now in the final phase of the final approval for -- to start operations from the local authority, as you know. We've been through that process with them for almost a couple of months now. And as you said, we expect that this is the quarter in which this plant will start operations.

Let me give you a little more color on this on where we are, internally speaking. Actually, we -- as part of the process with the local authority months ago, we got some initial authorizations to start the transfer of technology, for instance. So thus we are gaining -- taking advantage of some time left before we get the license. So we have already started the transfer of technology from some of our suppliers to the plant. We have already raw material in the inventory, that was another authorization we got in March so that we can take advantage of the time. We already started some tests in the line -- the solid line. The first line that we started operations sometime this quarter already is working and we have some product already, placebo products, that have been produced as part of this preparation phase.

So in other words, as soon as we get the license sometime in the next week, we'll be ready to truly start operating almost immediately. And that's for the OTC plant, which requires the sanitary license and the GMPs, of course, that will immediately follow the license. In the case of the personal care plant, that is Phase 2, which would be mostly second half of 2019. And by the end of the year, we expect to start operations mainly for the liquids, drinks and shampoo lines. So together with the new distribution center already operating by the end of the year. So that's more or less how we are seeing this. We are very optimistic based on the initial tests that we are running in the plant, everything is going as expected. It's just finalizing, as I said, in this final phase of -- with the local authority. So this is the quarter in which we will -- we should be -- this facility starting the first phase of operations. And on the margin front, I will leave Tonio to answer that.

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Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. - Executive VP & CFO [13]

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Nicolas, this is Antonio. As you know the guidance that we have provided there about the potential synergies that the plant will have remains the same, that is when both the OTC and the personal care plants are up and running at full steam, we will have gross savings of around 700 basis points. Out of those, we will reinvest back in the market 250 to 300 basis points. So you will have a net effect of 400 to 450 basis points in EBITDA margin expansion. Now that, as I said before, when the plant will be running at full speed. So at this moment, there's a little bit of uncertainty with the approvals for the license, the GMPs, et cetera, then there's the ramp-ups of the solid line, the semisolid, the Personal Care, et cetera, that is going to be taken place during the second half of this year. But once everything is up and running, we as of this moment, we remain confident that what we have said before, will be achieved in terms of margin expansion.

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Nicolas Larrain, JP Morgan Chase & Co, Research Division - Research Analyst [14]

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Perfect. And just a small follow-up. So it should normally take maybe a semester to get the factory to full speed, you would say?

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Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. - Executive VP & CFO [15]

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That's for the manufacturing ramp-up. Yes, I mean we will begin operations up until July at full capacity, it's usually about 6 months maybe 1 month less, 1 month -- couple of months more depending on the type of equipment or the product that is being manufactured because this varies from product to product: solids, semisolid, liquids for OTC and in the case of the personal care plant, it's beverages, shampoos, et cetera. Each one has -- line has its own complexity.

But roughly speaking, yes, we can assume 6 months for the ramp-up of each type of line. The uncertainty here, as Jorge mentioned before, is the government approvals for the operating license and the GMPs. Once we get it, we can start the ramp-up for OTC, which is the most complex process. And as you know, the GMPs or the good manufacturing practices, you'll get that by country. So we will get the GMPs for Mexico. And once we get the GMPs for Mexico, we would start the regulatory approval for other countries as well. Fortunately, there's a number of bilateral agreements between Mexico and not all, but most of the countries in Latin America. So that process should not take long, but all of this needs to happen before we can actually start the manufacturing process and the ramp-up phase as well.

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Operator [16]

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(Operator Instructions) 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 [17]

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This is just kind of a follow-up, the sales growth you saw particularly in Mexico. So following this addition of this client you have during the quarter, I was wondering if you could give us any breakdown of the incremental sales generated by this client or if we exclude this client, what would -- could be in the sales growth you saw in the current existing channels?

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Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. - Executive VP & CFO [18]

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Thank you, Rodrigo. It's a good question, but as you know, we don't disclose the specifics on individual clients. It's very hard to measure what you want because in the end, consumers decide where to purchase our products. They could go to one store or the store which is the next by. So we know that we will be having our products in more than 2,000 stores. Some clients or some customers of theirs were used to not having our products in their stores. So there's going to be some incrementality there, but if you are trying to use a comparable like with the retailers or kind of like same-store sales or this and that, I don't think that's -- that wouldn't be perhaps the most accurate for Genomma because every quarter we add new point-of-sale.

As you know, we have an initiative to increase our presence in the traditional mom-and-pops in Mexico, but also in other countries. And as Jorge mentioned, I mean, it was remarkable for Mexico. But what the commercial team is doing very successfully is attracting new clients in other countries in Latin America as well. So this is going to continue and it's part of the strategy that was crafted and developed by Jorge. And unfortunately, we cannot provide any specific details of any specific retailer.

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Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. - CEO [19]

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One thing that I can add for perspective is that as I mentioned a few minutes ago, there are a couple of onetimers that were very favorable to us because of what's happen in the base, some implementation issues and some advertising issues in Q1 of 2018. If you ask me, that's probably just a few points of the 18% vis-a-vis the base, 4 or 5 points no more than that. The rest is growth behind all of these interventions that in general are adding up, that Tonio mentioned.

But one last thing that I'd like to mention, which is also important to highlight is that our selling numbers and our sellout numbers during the quarter match. So we continue very positively and behind the principle of maintaining a healthy level that is very safe in terms of the sellout. We are working very close to our -- with our key clients, our retailers all across all the countries in which we operate to make sure that we maintain healthy inventories in the supply chain. And we used sell-in and sellout numbers on a consistent basis to measure our results on that front. And for Q1, we're -- they match. So -- and we will continue doing so.

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Operator [20]

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(Operator Instructions) Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the conference 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 [21]

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Thank you, Hector, and thank you for your questions and for participating in today's call. Genomma is one of Mexico's and Latin America's leaders in pharmaceutical and personal care products, which was reflected in this quarter solid operational performance. Our broad and premium portfolio continues to drive growth with increasingly strong results in most of the key Latin American markets in which we have a presence. The steps we have already taken aligned with the 4 pillars of our new second transformational phase growth and industrial integration strategy position Genomma to compete in our industry with disruptive new ideas and purpose-driven innovation.

Our relentless focus on growth, profitability, overall performance, our people and the communities where we operate, while continue to make investments to fuel our growth will bring both the Genomma's of the future and shareholder value. Our purpose, as you I'm sure remember, as a company, is to empower people to have amazing health and wellness and we continue working to deliver that. Thank you for your time today to everyone and have a good day.

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Operator [22]

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