Greetings, ladies and gentlemen. Thank you for joining Genomma Lab's second quarter 2024 earnings conference call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. As a reminder, this meeting is being recorded and will be available for replay from the Investor Relations section of Genomma's website following the call. I'll now turn the call over to Christianne Ibanez, Genomma's Head of Investor Relations. Please, go ahead.
Thank you, and welcome, everyone. On today's call are Marco Sparvieri, Chief Executive Officer, and Antonio Zamora, Chief Financial Officer. Before we get started, I'd like to remind you that the remarks today will include forward-looking statements, such as the company's financial guidance and expectations, including long-term objectives and forecasts, as well as expectations regarding Genomma's business, assets, products, strategies, demand, and markets. These statements are subject to risks and uncertainties that could cause actual results to differ materially. They are also based on assumptions as of today, and the company undertakes no obligation to update them as a result of new information or future events. Let me now turn the call over to Marco.
Thank you, Chris. Good morning, everyone. I'm excited to announce strong quarter two 2024 results. The highlight of the quarter is the profitability results with improvements across the P&L, starting with the gross margin that reached a very healthy level of 64%. That is 7.1 points of improvement over the past one and a half years. EBITDA margin grew to 22.9%, a 186 basis points increase versus last year. Net income grew 50.1% to MXN 631 million, and EPS grew by 53.1% to MXN 0.63. These results are driven by efficiencies in our San Cayetano manufacturing plant and productivity initiatives across the company. We remain committed to our margin expansion plans and believe these levels of margins are sustainable in the future.
Our plans are on track to deliver the guidance of 23%-24% margin in Q4 2024. Sales grew by 6.4% in MXN, and on a like for like basis, sales are up 5.8%. Our business remains healthy across most brands and regions. The Cash Conversion Cycle extended to 122 days, including Argentina, and 105 days, excluding Argentina. This change is due to two effects: number one, a -16 days reduction in supplier days to mitigate raw materials and API shortages amid a COVID uptrend; and number two, Argentina's hyperinflationary accounting. Without Argentina, accounts receivable decreased by three days year-over-year. Antonio will expand on this last topic in his presentation. The following chart shows the performance of core brands and categories during the period.
As you can see in the second column, we showed healthy levels of growth across the board. In the case of Cough and Cold, Sell-in was affected by a category contraction during the flu season in the U.S. and Mexico, but we were able to grow share. In the case of Blades and Razors, the issue is related to Sell-in, but Sell-out remains healthy. This chart simply shows graphically what we already discussed in terms of brands and category performance year to date. Skincare remain a challenge, but showing signs of turning around in Q2. Cough and Cold and Blades and Razors should not be a problem going forward. And the same chart, but now showing countries' performance. During Q2, we faced headwinds in Peru and Chile. Both markets I expect to turn around and be on the green side by Q3.
This chart shows how we have grown Gross Margin, an impressive +7.1 points. We improved our Gross Margin from 57% to 64%, a testament of the impact that our productivity initiatives and manufacturing capabilities are having in the business. We firmly believe that this improvement in Gross Margin is sustainable. Let's now take a look at how this improvement in Gross Margin is translated into EBITDA. In the chart, you can see how we grew 3 points of EBITDA over the past year and a half. Around half of the Gross Margin gains were already translated into EBITDA growth, and the balance was reinvested in the business to continue accelerating top-line growth in the core categories. A variable that is becoming a central focus of our leadership team is ROIC.
In the chart, you can see the evolution of Lab's ROIC over the past three years. As you can see, we have already improved the ROIC by +2.1 points, mostly behind the margin expansion. Divesting non-core assets continue to expand margin, and improving our cash conversion cycle will remain the core focus to improving ROIC going forward. In this chart, you can appreciate the impact of improving our cash conversion cycle, expanding margin, and divesting non-core assets. We have the potential of adding +6.4 points of ROIC in the coming years. Let's now switch gears to some exciting news, fresh from the oven. In Q2 2024, we completed a series of M&As that were very strategic and will add on the growth we are seeing in our core brands.
In total, we spent $25.6 million, for a total of past 12 months sales of $22 million. I am convinced that without our power of marketing and point-of-sale execution, these new brands will more than double in the coming years. The first acquisition has to do with SueroX USA. We acquired two isotonic beverages, Suero Repone and Suero Oral. With this strategic move, Genomma owns the Suero brand in the U.S., a concept that is very powerful among Hispanics. Additionally, these two new brands will add incremental distribution to SueroX, and SueroX to these two brands. The plan in the midterm is to change the name of the new brands to SueroX. The other acquisition is in Argentina. As shown in the pie chart, 47% of the analgesics category is sold as paracetamol, where we lead with Tafirol holding 80% of the segment share.
33% of the category is sold as ibuprofen. We have acquired Ibu 400, the second player in the ibuprofen segment. With this acquisition, Genomma becomes the absolute leader in the analgesics category in Argentina. Let's now switch gears to productivity. We continue to make progress against the MXN 1,800 million in productivity savings. As of Q2 2024, we completed 41% of the 1,800 in savings. And finally, I wanna share with you the latest acquisition in the productivity arena, which is a Flexo Machine to produce our own SueroX labels. This machine is in fact testing, and will deliver total savings of MXN 30 million per year, with an investment of MXN 18 million. The repayment period is less than one year. Tonio, over to you.
Thank you, Marco, and thank you everyone for joining us today. As Marco has described, Genomma delivered solid second quarter results, with consolidated net sales reaching MXN 4,652 million, a 6.4% year-on-year increase. Adjusted to constant currency and excluding the hyperinflationary subsidiary, second quarter sales increased by 5.2%, reflecting healthy growth in six of Genomma's nine core categories. Further, as Marco also noted, most of our markets delivered strong local currency top-line growth. However, this was again mitigated by macroeconomic headwinds, including the strengthening of the Mexican peso. Genomma's second quarter EBITDA margin increased substantially, reaching 22.9%.
22.9%, a record, which represents more than a hundred and eighty basis point year-on-year increase, primarily attributed to the improved cost efficiencies we've achieved through our productivity initiatives, and also with continued progress towards our target of delivering MXN 1.8 billion in annual cost savings by 2027, as Marco presented earlier. The demonstrated success of Genomma's productivity initiatives have also enabled us to remain on target to reach our targeted 23%-24% EBITDA margin by year-end. This quarter's EBITDA margin reflects continued positive evolution of Genomma's EBITDA margin, again, 22.9%. Gross profit for the quarter increased by 11.7% to reach MXN 2.978 billion, compared with MXN 2.665 billion for the second quarter 2023. AC M&A represented 41.2% for the quarter.
Moving to our results by region, second quarter net sales for Genomma's Mexico operations increased by 5.7% year-on-year to almost MXN 2.2 billion, led by key brand sales initiatives, including Lomecan, Teatrical, Vanart, and obviously SueroX. Mexico EBITDA margin for the second quarter closed at 22.6%, a 300 basis point increase, again, benefiting from cost control and productivity project efficiencies. Our US EBITDA margin closed at 13.7%, which is a 720 basis point year-on-year expansion, and net sales grew by 6.2% in Mexican peso terms and by 7.4% in US dollar terms, with double-digit increases in four brands, including Tucol, Bufferin, Next, and obviously SueroX. Continued Mexican peso strength relative to the US dollar impacted also our results.
So before we go into the rest of the regions, we need to remind everyone that we are still on a highly volatile macro environment, and although the Mexican peso weakened a little bit versus the US dollar during the quarter, FX still impacts our figures in countries like Chile and Brazil, which are, of course, representative in terms of sales on our consolidated figures. Regarding our Latin American operations, net sales increased by 3.3% in like-for-like terms, with strong Genoprazol, Tucol, Tafirol, and SueroX brand performance. The EBITDA margin for Latin America reached 25.2%, with a strong cost and expense controls, which help us to offset raw material inflation and FX depreciation during the quarter.
In the second quarter, our cash conversion cycle extended to 122 days, but I want to highlight that there are hyperinflationary accounting effects that I will explain in a minute. So let's explain what happened with the cash conversion cycle. First, the short-term increase in cash conversion cycle was primarily due to a 16-day decrease in supplier terms, and this is because we made a strategic decision to safeguard the company against potential raw material shortages and APIs shortages also in the market during the quarter. As we all know, the COVID uptrend is creating a lot of pressure in certain molecules and APIs, so we wanted to avoid any future disruption. Now, going into DSO, sorry, DSO, there's a distortion that was caused by IAS 29 and IAS 21.
You know, the effects on the Argentina last 12 months' sales, if you remember in Q4, that's just the way the accounting works. Our Argentina subsidiary happened to have negative sales in Mexican peso terms, although they were extremely high in terms of Argentina peso terms. If we exclude the hyperinflationary effects, actually, the business performed really well, so we had an improvement of three days in terms of cash conversion cycles. Again, it's an illusion or it's an accounting effect just from the formula. And as we take the last 12 months, this effect is probably gonna be repeated in the third quarter and in the fourth quarter. It's just an accounting formula. That's why we are presenting the true performance, excluding those effects.
So as we Genomma ended the second quarter with a leverage ratio of 1.4x net debt to EBITDA and more than MXN 1.2 billion in cash and equivalents. This is a nearly 10% year-on-year decrease due to paying down our debt and obviously the M&A opportunities that Marco mentioned before. We remain focused on refinancing Genomma's debt to reduce our financing cost and improve our maturity profile. Earlier this week, we announced that Genomma successfully secured a 10-year credit line for MXN 1.5 billion to further support our growth plans. These funds have been disbursed during the second and third quarters, enabling us to refinance short-term debt and higher cost financial liabilities that we have.
We also made a voluntary prepayment at the end, a voluntary prepayment of the final tranche of the loan that we contracted with IFC for MXN 101.1 million, including principal and accrued interest, corresponding to the outstanding balance contracted with the IFC for the plant's construction. This is allowing Genomma to consider approximately 180,000 square meters of land adjacent to the plant for our strategy to sell non-core assets. Genomma shareholders approved the cancellation of, 20 million shares at our last annual shareholders' meeting held on April, and also during the same, shareholders' meeting.
It was authorized to cancel up to 100 million shares more for the next years. Further, in June, we made our eight consecutive dividend payment, again, in the amount of MXN 200 million, or in this case, MXN 0.20 per share, which is a 2% increase relative to the dividend per share paid for the first quarter of 2024, also resulting in the cancellation of related shares. This quarter's payment further underscores our confidence in the value of Genomma's shares and our continued focus on shareholder value through sustained quarterly dividends. Finally, you'll note the strengthening of Genomma's shares in the markets at the quarter's end. So far, year to date, we had a performance or return of more than 35%, so thank you for your trust. And with that, let us turn to our Q&A.
Thank you, Antonio. We will now begin the question and answer session. To ask a question, you may raise your hand using the icon, Raise Your Hand, located at the bottom of your screen. To withdraw your question, press the same icon at any time. This will be required in order to allow you to turn on your microphone and ask your questions. One moment, please, while we hold for questions. Thank you. Our first question comes from Antonio Hernández with Actinver. Please, Antonio, turn on your microphone and proceed with your question.
Yes, hi, good morning. Thanks for taking my question, and congrats on your results. Very, very positive. Just a quick one regarding Chile and Peru, that you mentioned that these two countries were being challenged. I mean, you're not the first company telling that to the market. So just wanted to hear a little bit more on your side. You mentioned that you expect them to improve soon, if you're seeing any gradual improvement or recovery. Thanks.
Yeah. The two cases for us, I don't know for the other companies, but for us, are very different. In the case of Chile, what we're seeing is a massive consumption contraction in most of the categories where we compete. But in this quarter, we started seeing that that contraction is easing off a little bit. So I expect that the next quarter results are going to be either on the green side or very close to the green side. And in the case of Peru, we had an impact from from the government from a policy that was approved last year in which they are before, they would pay for only RX medicines to the public.
A year ago, they have approved a policy in which the payments, the full payments on medicines extends also to OTC products, and that has impacted us big time in the OTC segment. But we are reaching our base next quarter, so I also expect Peru to start turning around also with other initiatives that we put in place. I don't know if that clarifies.
Yes, that's, that's very helpful. Just could you please remind us, Chile, how much of sales do they represent?
We cannot disclose that information.
Okay, perfect. Thanks a lot. Thanks a lot, and have a nice day.
Yep.
Thank you. Our next question will be from Álvaro García with BTG. Please turn on your microphone and proceed with your question.
Hi, guys. Thanks for, thanks for the space for questions, and congrats on the results. Two questions. On Argentina, we saw 17% revenue growth in ARS. So obviously, a lot of noise because of the hyperinflationary accounting, but I was wondering if you could maybe expand on what you saw from a volume standpoint in some of your key brands. And then on the M&A in Argentina, how is this funded? Is this capital that you're maybe taking from abroad and plugging that into Argentina, or is that being funded with cash that you already have from your operations in Argentina? Thank you.
Okay, I'm gonna take. Hi, Alvaro, how are you?
Hey.
I'm gonna take the first question. Argentina, in a short answer, is that we are seeing. I mean, in the past quarter, actually Q4 2023 and Q1 2024, we saw a massive contraction in consumption, okay? And this past quarter, what we're seeing in terms of volume, is that it's turning around dramatically for us. We are also gaining share in most of the categories, but also it's, you know, a big portion of the recuperation of Argentina and the 17% increase in MXN has to do with the recuperation of the volume on the categories where we compete. I don't know if that clarifies.
Yeah, I think it makes sense to. At least logically, it makes sense that Tafirol would, would bounce back after a couple weak quarters with just lower elasticity than in other consumer products. That's right.
Hi, Alvaro, thank you for your question. This is Antonio Zamora. Your second question was regarding how did we fund the M&A of the two pharma brands in Argentina? We funded locally with resources from the subsidiary and a little bit of debt in that country as well. This is obviously positive because we are exchanging Argentine pesos, which we know, you know, what's going on, for intangible assets. Basically, that allows Genomma to enter a very important category in analgesics where we didn't have any presence.
So it's obviously strategic, and we believe that all shareholders will appreciate that we're exchanging Argentine pesos for intangibles, and the possibility and the opportunity to lead in the ibuprofen category as we have done in the past in paracetamol with our Tafirol brand. So.
Great. Very clear. Thank you.
Thank you. One moment, please, while we hold for questions.
I'd ask another one, if that's okay.
Yeah. Go, go ahead, Alvaro.
Sure. On the M&A in the U.S., I was just wondering if maybe you could expand on sort of the strategic rationale in the U.S. You know, I'm assuming that there's third parties that produce these products. They're probably smaller brands. Is the idea to eventually maybe produce this in Mexico? What sort of synergies do you see? What, what type of product is it? I don't know the product that well, so any sort of color on that would be helpful.
Yeah. I mean, there's several synergies. First of all, these are isotonic beverages, electrolyte beverage, so it adds, you know, and fits perfectly with our focus on Sueros. The plan, as I mentioned, in the midterm, is to switch the names of these brands to Suero, so they will become Sueros, okay? The synergies we are seeing are the following: number one, we are planning to switch production to Mexico, so the COGS will be reduced more than half of what it is today. Number two, they are distributed mostly in the East Coast, and we, with Sueros, we're mostly distributed in the West Coast, in the state of California and Texas. So we see that, you know, this is a very quick way to win distribution, which normally takes a long time in the U.S.
Also, you know, to win distribution in the West Coast for the new brands that we have acquired, so we see it very strategic.
Great. Thank you.
Thank you, Alvaro.
Okay, thank you. Our next question is from Fernando Herrera with Compass Group. Please, Fernando, turn on your microphone and go ahead with your question. Fernando, are you able to turn on your microphone? Can you hear us? Go ahead with your question.
Yeah. Yeah, I can hear you. Sorry, I think that my micro had something going on. But first of all, congrats on the strong results. Here I was just wondering if you can provide any more color regarding the brands that have been lagging, and what are your expectations going into the second half with these categories?
Thank you, Fernando, for your question. The one category that is lagging right now is, as I explained, mostly skincare. And for skincare, we have very solid plans to turn around one of the brands, which is Asepxia. It's a brand that has been declining for three years now, and we have a plan that is very, very solid, and we expect these plans to hit the market in Q4 and, I am, you know, very positive that business will turn around with this plan. And, and then in the skincare category, we, we also have a Cicatricure, which is a brand that is, you know, it's been kind of like with mixed results across markets, in some markets declining, in other markets flat, some few markets growing.
And we are still working on the plans. I cannot say right now that we have a very solid plan as we have with Asepxia, but we are working really hard to turn that business around soon. And the rest of the categories, they are all very healthy.
Okay, perfect. So we should start to see something of that impact going to 4Q , right?
Yes, correct.
Perfect. Thanks. Congrats.
Sure.
Once again.
Thank you, Fernando.
Thank you. Our next question will be coming from Froylan Mendez with JP Morgan. Please, Bruno, turn on your microphone and go ahead.
Hi, guys. This is actually Froylan Mendez from JP Morgan. We got confused there on the registration, but thank you for taking my question. Regarding the sale of non-core brands, can you remind us where we are, how much is left, and when can we see additional portfolio cleanups, let's say?
Yes. Thank you, Froylan. We are advancing steadily in the process. We have already signed the contract with the bank that is going to be managing the transaction, and that we are, like, very much advanced in valuations and, you know, putting together the pitch. We have already contacted, the bank has already contacted some potential buyers, so we are advancing steadily and firmly on this transaction. It's not. We're not backing off of this.
Any timeline that you can share?
That's, that's a hard question to answer.
Okay. No, I understand.
You know, I mean, it could be a very short-term period if, you know, someone appears with a very good offer, or, we'll wait to make sure that we make a good sale.
Excellent. Thank you so much.
Froylan, this is Antonio. Expanding on your question, you know, initially, during the Investor Day last year, we said divesting non-core brands, but actually the strategy is larger than that. It's divesting non-core assets. Obviously, brands are some intangible assets, but the strategy is even more important. And including those non-core assets, we provided two examples today. One is, as you know, we have 180,000 square meters adjacent to the plant. So this is land that is next to our plant that is now considered as a non-core asset that we could monetize later on. So that's one.
As we reported in a press release last quarter, we are also divesting our investment in the affiliate company, and you can see that on the balance sheet statement as asset available for sale, which is also there. So the strategy is divesting non-core assets. Obviously, brands is one component, but there are other non-core assets as well.
Thank you.
Thank you. Please hold while we wait for a few more questions.
There's a question from Miguel Ulloa, and he's having trouble with the... From BBVA. He's having trouble with the microphone. He's basically asking if we have a reference price for the value of the land. The answer is no. We've just announced this, and, you know, it's a different project. It's just what we're disclosing today basically is that we have that non-core asset that is available for sale, and that will help us improve our ROIC in the future once we sell it. But at this moment, we don't have a price for that.
Okay, our next question will be coming from Sara Maldonado with Santander. Yeah. Sara, go ahead.
Yes. Thank you for taking my question. Congrats for the results. My question is about Mexico. If you can share about your outlook for the second half of the year. Historically, do you see some slowdown in the electoral year, and what are you seeing for the first part of the third quarter? Thank you.
Thank you, Sara, for your question. We expect to stay in the levels of growth in terms of sell-out that we have seen in the first half, which has been low double digits. We have not seen a slowdown. What you are seeing is maybe a slowdown in sell-in in the second quarter, but when you look at the sell-out data for Mexico, we still... we're still growing in the range of 11%-12%. So now, I mean, obviously, most of it will depend on, you know, how strong the winter season comes in the second half, but we are expecting to have a strong winter season. Plus, we are seeing COVID cases uptrending lately, and that helps a lot our OTC business.
So right now, if you ask me, I would say that we should be staying in the levels of 11%-12% growth in sell-out.
Very clear. Thank you very much.