Genomma Lab Internacional, S.A.B. de C.V. (LABB) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Thank you for joining Genomma Lab's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] 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, 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. Now let me turn the call over to Mr. Marco Sparvieri. Please go ahead.

Thank you, Chris, and thank you, everyone, for joining our second quarter 2026 earnings call. Let me open with the quarter highlights. First, the quarter came in line with our expectations and our growth initiatives are gaining traction. Mexico delivered a sequential sales improvement as we maintained or grew market share across all our business units, despite full market category contraction. The consumption environment remains challenging. Full market category contractions in Mexico continue to weigh on the company's sell-out and the United States remains pressured by Hispanic retail disruption and a weak cough and cold category. We are executing targeted actions on each front, and we expect a continued gradual recovery during the second half of 2026. Second, productivity remains a significant buffer against operational de-leverage and increased operational expenses. Our gross margin increased during the quarter, while SG&A expenses remained flat. All in all, EBITDA came in line with our expectations. And lastly, I would like to highlight that we remain confident in our strategy and in the path we are on. So we are beginning to see clear signs of recovery in the Mexican market. I want to thank our investment community for your continued trust. Turning to Mexico. Sell-in declined minus 4.4%, a sequential improvement from minus 8.6% in the first quarter of 2026 and minus 22% in the fourth quarter of 2025. Sell-out declined minus 4%, also a sequential improvement, while the sell-in to sell-out gap narrowed to 43 basis points, a sign that channel health is improving. Last quarter, we told you momentum would be [ build ]. This slide shows it's happening. With both curves converging, our reported sales now reflect real consumer demand, not inventory movements, though additional adjustments may be required if market weakness persists. This view shows the sellout recovery path across Mexican monitored retailers, reflecting the most demanding channel behavior for the company from minus 15.7% in April to minus 10% in May and minus 6.8% in June. We delivered a 9-point improvement within the quarter. And in the first 2-weeks of July, monitored sell-out turned positive at plus 2.4%, back to growth and 21 points above the low point of Q2 2025. This is not one good data point. It is a consistent month-by-month recovery showing through our most demanding channels. As the leading retailer, our largest client in Mexico, the recovery is ahead of the curve. Sell-out growth went from minus 7% in April to plus 4% in May and plus 5.2% in May (sic) [ June ] and accelerated to plus 15.3% in the first 2 weeks of July. That is a 34 points recovery from the low point of Q2 2025. This matters because it is a leading indicator. Not only does it show the recovery in our largest client in Mexico, it also shows we can replicate this performance across our other clients as we execute the same strategy with each of them. A key driver behind the acceleration is Suerox. This graph shows Suerox growing in a sustained double digit at the leading retailer in the last month, supported by our growth strategies and specific to this client. We will continue to support momentum through the second half of 2026. The share data confirms that, Suerox share at the leading retailer climbed to 12.2% in the second week of July, an historic high level, up 3.6 percentage points versus the first quarter of 2026. These are early weeks at a single retailer, so we remain measured, but the trajectory tells us that our strategy is pulling the brand up. Let me go deeper on Suerox economics in Mexico because they show our model is working. We moved pricing from MXN 25 to MXN 22 to stay competitive. We fully absorbed Mexico's new MXN 1 per bottle tax on non-caloric sweetened beverages, and we held market share at 6.9% at the full Mexican market level. And yet Suerox Mexico gross margin grew 11.7 percentage points year-over-year during Q2 2026 and is 2.8 points above pre-discount levels, a testament to the impact of our productivity initiatives and manufacturing capabilities. Suerox is one example of many productivity initiatives across the company that are funding our competitiveness without sacrificing profitability. Against that backdrop, it is important to size the market we are operating in. At the full market level for [indiscernible] and Nielsen data through May, every category where we compete in Mexico is contracting. Isotonic beverage is down minus 6.6%, OTC minus 6.3% and Personal Care, minus 1.4% and Infant Nutrition, minus 1.1% year-to-date. This is a full market headwind, and it continues to weigh directly on our sell-out. Within that contracting market, we maintained or increased year-to-date market share across all business units versus 2025 year-end levels. Isotonic beverages, OTC and Personal Care remained stable, while Infant Nutrition stepped up from 4.2% to 5.2%, up 1 full percentage point. These moves are modest, but they confirm our initiatives are working where it counts and defending market share today is what protects the company's value tomorrow. Turning to our consolidated results. Like-for-like sales declined minus 3.6% and net sales declined minus 6%, reflecting the ongoing recovery in Mexico, continued softness in the U.S. Hispanic market and a 10.8% appreciation of the Mexican peso during the quarter. Gross margin expanded 106 basis points to 64.6%, driven by productivity gains, partially offset by higher promotional investment. EBITDA margin declined minus 200 basis points to 21.8% on operational de-leverage with SG&A flat as productivity offset higher OpEx and inflation. And net margin expanded 93 basis points to 8.5%, driven by lower financial expenses and reduced foreign exchange losses. Let me be direct about the margin implication. Last quarter, we guided to EBITDA pressure over 3 to 6 months. As we prioritize market share, this quarter landed within that window. The choice to invest remains deliberate, and we expect operational leverage to improve as sales recover gradually in the second half of 2026. This view shows the geographic picture in gross sell-out on local currency. LatAm ex Argentina, 30% of the mix grew plus 5.6%, driven by Central America, and the Andean region with OTC and Beverage market shares gains in key markets and traditional channel expansion. Argentina, 15% of the mix grew 37.7%, outpacing inflation by 4.5 percentage points. The United States, 8% of the mix, declined minus 7.9% in local currency, pressured by Hispanic retail disruption and a cough and cold category weakness by 2 consecutive milder seasons. We are realigning our commercial footprint and distribution model to stabilize performance with Suerox sellout growing double digit and E-commerce expanding. All in all, LatAm is compensating, but the recovery works sits squarely on Mexico and the United States. Before I close, let me leave you with four messages that summarize how we see the path forward. First, Mexico performed in line with our expectations with a sequential sales improvement and monitored sell-out back to growth in early July. Second, we defended market share across our business units despite full market category contraction, which is the foundation every recovery is built on. Third, margins behaved as we guided. Productivity expanded gross margin held SG&A flat, while EBITDA contracted on operational deleverage within the window we communicated. Fourth, we expect a continued gradual recovery towards the second half of 2026, supported by four commercial levers, stronger in-store execution, competitive pricing, expanded digital and TV communication and E-commerce growth, reinforced by our innovation pipelines of OTC launches and Suerox ramp-up. To close, the quarter confirmed we are on the right path towards sales recovery. Momentum is rebuilding. Our initiatives are gaining traction and our fundamentals position us to emerge stronger as the consumption cycle recovers. I want to thank our team for their disciplined execution and our investors for your continued trust. Antonio, go ahead.

Thank you, Marco, and good morning, everyone. The second quarter showed the underlying dynamics we have been pointing to all year. Mexico is turning the corner as our growth initiatives gain traction. Latin America continues to compound solid growth, and the organization is converting discipline into margin, even as the operating environment in Mexico and the U.S. remained difficult. Productivity once again drove gross margin expansion, absorbing both higher promotional investment and the full quarter impact of Mexico's new IEPS tax on non-caloric sweetened beverages. Lower financial expenses and reduced FX losses supported net income growth, and we closed the quarter with a solid balance sheet and ample liquidity. Let me take you through the numbers. Net sales were MXN 4.397 billion, down 6% year-on-year. The headline decline is largely a currency story. The 10.8% appreciation of the Mexican peso against the U.S. dollar created a significant translation headwind in our international operations. Stripping that out, like-for-like sales declined 3.6% as the ongoing recovery in Mexico and 3.9% like-for-like growth in Latin America, led by the Andean region and Central America were not enough to fully offset continued disruption in the U.S. Hispanic retail channel. Gross margin expanded 106 basis points to reach 64.6%. Productivity gains once again more than offset both higher promotional spend and the fully absorbed impacts of the IEPS tax, a clear signal that our productivity program is structural rather than a 1 quarter effect. EBITDA totaled MXN 959 million with a margin of 21.8%, down 200 basis points year-over-year. The decline was driven primarily by operating de-leverage on lower volumes, not by a loss of cost control. SG&A was essentially flat as productivity savings offset both higher operating expenses and inflation. Net income increased 5.5% to MXN 375 million with a net margin expanding to 8.5%. Lower financial expenses and reduced FX losses more than offset a lower EBITDA margin and a higher inflationary loss on our monetary position in our hyperinflationary subsidiary. Going to Mexico, net sales declined 4.5%, continued to improve sequentially as growth in Beverages and Infant Nutrition partially offset continued softness in OTC and Personal Care. We maintained or grew year-to-date market share across every business unit despite broad category contraction in the market. Gaining share in a shrinking market is the clearest evidence our initiatives are working. Sell-out also improved sequentially, and the sell-in sell-out gap narrowed to only 43 basis points, reflecting healthier trade inventories. We were encouraged to see monitor retailer sell-out increase 2.4% during the first 2-weeks of July, an early signal that the recovery is carrying into the third quarter. The 10.8% appreciation of the Mexican peso, creating an FX headwind when we consolidated U.S. results into Mexican pesos. Local currency sales in the United States declined 21.3%, reflecting ongoing disruption in the Hispanic retail landscape and continued pressure in cough and cold following a milder season, compounded at the reported level by the 10.8% peso appreciation on consolidation as we described earlier. Even so, Suerox continued to grow at a double-digit rate, and our E-commerce channel kept expanding as we advance our commercial realignment strategy in that country. Going into LatAm, generalized FX depreciation against the Mexican peso also created a severe translation headwind for the region, as you can see in this chart. Like-for-like sales grew 3.9% in Latin America, led by strong performance in the Andean region and Central America, continued share gains in OTC and Beverages and expansion in the traditional channel despite the generalized ForEx depreciation against the Mexican peso, as described earlier. Regional EBITDA margin improved 41 basis points to reach 25.1%, a direct result of our productivity initiatives in that region as well. Our cash conversion cycle reached 129 days, 10 days increase versus the first quarter, reflecting a 4-day increase in receivables, 3-day increase in inventories and a 3-day decrease in payables. This was a deliberate build as we invested in inventory to support new product rollouts and innovation initiatives in Mexico during the launch phase. Trailing 12-month free cash flow totaled MXN 1.259 billion, down 53% versus the prior year, reflecting lower operating income and higher working capital requirements. We expect working capital to normalize as the innovation and product launches mature. We paid our sixteenth consecutive quarterly dividend of MXN 0.20 per common share, totaling MXN 200 million, a reflection of our consistent cash generation and our continued commitment to returning capital to shareholders. We remain committed to maintaining quarterly dividend payments in the future. CapEx totaled MXN 120 million, including MXN 102 million in a manufacturing plant and distribution center. Again, CapEx is required to drive the productivity programs that are driving these savings. Our balance sheet remains solid with net debt-to-EBITDA of just 1.38x and a debt service coverage ratio of 5.2x. Yesterday, after the quarter end, we further strengthened our capital structure by securing MXN 1.5 billion of amortizing term loan with a 10-year maturity, allowing us to refinance existing debt on more favorable terms and reinforcing our financial flexibility going forward. In summary, while market conditions remain challenging, we are encouraged by the sequential improvement in Mexico that Marco described earlier and by the continued strength of our productivity agenda in offsetting a difficult top line. We remain focused on executing our growth strategy, investing behind innovation and commercial execution, improving working capital as recent launches mature and preserving the financial discipline that underpins a strong balance sheet and long-term value creation. With that, I will hand the call back to the operator for questions.

[Operator Instructions] Our first question comes from Alvaro Garcia from BTG Pactual.

I have a couple of questions. One on accounts receivable in Mexico. I know you mentioned sort of new product rollouts, Antonio, in your prepared remarks in Mexico specifically, but it feels a little bit more aggressive than usual, I suppose. But yes, any color on accounts receivable would be helpful. And my second one on LatAm ex Argentina. It seems you're seeing sort of a pocket of your portfolio still seeing decent growth, especially in the sell-out chart you showed there. Sort of what products are you seeing the best results in or what categories that would be helpful to get some color on?

Yes. Thank you, Alvaro. I mean, in general, regarding to accounts receivables, the way I would put it is, as we said in the last two calls, we are moving into a phase of actually being more aggressive with our customers, playing harder in the seasons and be stronger with the execution of our new initiatives. This past quarter, we launched as you know, Suerox Mineral, which is a core initiative for the company, which is actually now driving the growth of the brand. So it's proving to be very successful. We are now seeing very strong growth of Suerox across the market where we launched Suerox Mineral. But in general, I mean, we are putting more products out there because we want to have larger displays at the stores. We want to have more presence than our competitors. We are playing harder in the seasons. We are being extremely aggressive commercially with the launch of Suerox Mineral, which launched at the end of of the quarter and represented a very large portion of the receivables that we are showing. But we were expecting this. It's a choice we are making. And I think it's working out for us because we are growing share in many brands. We are maintaining share and especially on innovation, the results are very, very strong.

I appreciate that the candid answer there.

And then on LatAm ex Argentina, there are several brands and actually segments that are driving the growth. I would say we have 2 brands in Andean and Central America, which are X Ray and Nikzon that are performing extraordinarily well. The whole expansion of our footprint in the traditional channel in Central America and Colombia is working really well as well. In the case of Brazil, we continue to see a strong performance of Tio Nacho. And Chile, we are seeing a very strong performance of OTC in general, while we're also starting to see an improvement in Personal Care, which was a problem in the past. So I think -- and then Suerox continues to perform extraordinarily well across the board. We have markets like Chile, for example, where we are almost reaching a 20% market share in that market. Argentina, we launched 2 years ago, and we are approaching almost 10 points of market share. We are at 9 plus points right now. In Brazil, Suerox continues to perform well. So I think that's kind of like the 80%.

Our next question comes from Alejandro Fuchs with Itau.

I have two quick ones, if I may. The first one in Mexico, Marco, I want to see if maybe you can elaborate a little bit how have you seen competition on the OTC segment under this tougher consumer environment? And the second one, and thank you for all of the detailed sell-out explanation. I thought that was very, very interesting. I wanted to see -- I want to ask you, Marco, maybe where are you more excited about for the second half of the year in terms of innovation? What's driving this sell-out improvement at these retailers? What part of the portfolio you think has more runway to recover faster? If you can elaborate a little bit more on your expectations.

Yes, absolutely. Well, I mean, this is not the first time we are going through a period of category contractions. In my case, not only my 12 years in this company, but also my almost 20 years at P&G. And when these things happen, so when you are competing in categories that are declining, it's a really tough environment. So in terms of behaviors, what you normally see and what we are seeing today across the board, not just in OTC, but in every single category is that competitors are trying to protect or gain market share. And the way they do that is with very heavy promotional activities, okay? And so we are seeing promotions across the board in every channel. We're seeing competitors that are being extremely aggressive in terms of pricing, in terms of value packs, in terms of fighting for shelf space. So it's really tough. And in this kind of environment, you have to be tougher than competitors. And we have not seen a lot of very significant innovation. We are -- we are seeing things here and there, but nothing very relevant except for a few. But it's been tough. I mean it's -- everybody wants a piece of share in a market that is declining. So pricing is very predominant, shelf displays, shipping volume into the stores to have more presence. So that's the kind of behaviors that we are seeing. In our case, we are -- as we said, we are defending and fighting back really hard, which is working. But also, we are betting very strongly on innovation. We have -- this quarter, we just launched Suerox Mineral that is working extremely well. As you just saw in the presentation, the results of Suerox are outstanding, and we continue -- as we expand the initiative, we continue to see very strong results in the retailers. And we have 5 new launches that we are planning for the second half of 2026, in which we are betting everything as well. So to your second question on what am I excited about for the second half? I am right now cautiously optimistic, but in reality, very optimistic about what is coming. I think the full expansion of the launch of Suerox Mineral is going to be a hit, big time. And then we are also starting to expand or planning the expansion of Suerox Mineral to other markets. I think that's going to be huge. I think that the preparation and the plans that we have for the winter season in our cough and cold categories here in Mexico and honestly, across the board, but mostly in Mexico, I am very, very confident because we have already discussed our plans with the retailers, with customers. We have already sold many of these plants and everything looks extremely encouraging. And then the innovation. So if I have to put it in three bullet points, I would say Suerox Mineral, number one, the execution of the winter season across the board. And then third, the execution on the 5 initiatives that we have for the second half. And I think -- and that's it, yes. So those are the three, I would say.

Our next question comes from Froylan Mendez from JPMorgan.

Marco, would you describe the third quarter to be a turning point for sales and margins in Mexico? And what would need to happen for the third quarter to be the turning point? And second question would be, how do you see inventory levels for the Isotonic segment for you and for competition into the second half? And I'm asking this question because I guess there was a lot of excitement around the World Cup and probably many people flooded the channels with extra inventory, and I don't see that the expected demand was actually there. Is there a risk that we see another episode of inventory -- of high inventory in the channels given the more depressed demand and the seasonality not coming as strong as expected?