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 Third 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 Ibáñez Ibanez, Genomma's Head of Investor Relations. Please Go ahead.

Thank you, Daniel, 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. Let me now turn the call over to Mr. Marco Sparvieri.

Thank you, Chris, and thank you, everyone, for joining our third quarter 2026 earnings call. Let me open with a quarter highlights. First, our recovery plan is reversing the trend as we anticipated. Mexico improved for a third quarter consecutive sellout returns to growth and market share is recovering with Suerox reaching a historic high as the leading retailer. Second, EBITDA margin reached 21%, in line with our expectations. This reflects our deliberate decision to invest more in the business in promotional activity and commercial spending to accelerate growth. And third, net margin expanded 168 basis points to 11.4%, and net profit grew 18.6%, driven by lower financial expenses an unfavorable foreign exchange results. Last quarter, we told you we expected a continued gradual recovery during the second half of 2026, the third quarter confirms that the recovery is underway. Turning to Mexico. Net sales declined minus 2.4%, a third consecutive sequential improvement from minus 4.4% in the second quarter, minus 8.6% in the first quarter and minus 22.1% in the fourth quarter of 2025. That is nearly 20 percentage points of recovery in 3 quarters, supported by strong growth in beverage and infant nutrition. More importantly, sellout returns to growth, a sign that consumer demand for our brands is improving. We held or grew market share across all business units and the innovation we launched in late June is already accelerating growth. This view shows the sellout across our monitored retailers in Mexico, our acid test. Last quarter, we shared that monitored sell-out turned positive in the first 2 weeks of July. The full quarter confirmed at plus 2.7% in July, plus 7.4% in August and plus 8.6% in September, plus 5.8% in the third quarter. That is a 24-point improvement since April and 27 points above the low point of 2025. Month-after-month, the recovery is holding. As the leading retailer, our largest client, the recovery remains ahead of the curve. Sellout grew plus 20% in July, plus 30% in August and plus 22% in September, plus 24% for the quarter and 41 points above the low point of the second quarter of 2025. Last quarter, we said this [ lining ] is a leading indicator of what our strategy can deliver. We continue to execute the same strategy with each of our clients. A key driver of that acceleration is innovation. Since the launch of Suerox sellout as the leading retailer moved from minus 25% in late May to plus 81% in August. Over the same period, Suerox value share climbed from 6.6%, 12.6% a new historic high, up 6 percentage points in the 3 months.[indiscernible], these results are at a single retailer, so we remain measured, but they show that innovation is pulling the brand up and it is why we are accelerating our launches. Now let me put our sell-out in the context of the market. In OTC, Personal Care and Infant Nutrition, we grew ahead of our categories. OTC sell-out grew 5.2% in a category that declined minus 3%. Personal Care grew 5.8% against a category down minus 9.3%, and Infant Nutrition grew 4% in a flat category. In isotonic beverages, our total sellout still declined minus 9.7%, while the category grew 2.9%, but where our innovation is on the shelf, sell-out grew 39% on average between June and August. That is the gap. Our innovation is designed to close. Turning to our consolidated results. Net sales grew 1.3%, reflecting the ongoing recovery in Mexico and 12.2% growth in Latin America, partially offset by continued weakness in the U.S. Hispanic retail market. Gross margin was 61.4% at 244 basis point contraction, mainly reflecting the destruction of return products in the United States and higher promotional investment including the fully absorbed impact of Mexico's new tax on noncaloric [indiscernible] at beverages. EBITDA margin reached 21%, down 271 basis points while our productivity savings reduced SG&A by 1.1% despite higher OpEx and inflation. Net margin expanded 168 basis points to 11.4%, driven by lower financial expenses and nonrecurring power foreign exchange results. Let me be direct about margins. Last quarter, we said EBITDA pressure was a deliberate choice to prioritize market share. This quarter, we choose to set up that investment in promotion, commercial spending and launches because the returns are now visible in sellout and market share. EBITDA came in line with our expectations. In Latin America, net sales grew 12.2% and EBITDA margin expanded 190 basis points to 23.7%. Central America and the Andean region continued to grow on market share gains and traditional channel expansion, more than offsetting lower selling in Brazil, where customers are reducing inventories ahead of the country's tax reform. We expect Brazil selling to normalize in the first quarter of 2027. Once the new tax rules take effect. Argentina grew 39% driven by unit share gains in OTC and beverages and a favorable hyperinflation effect. In the United States, net sales declined 30%, reflecting distribution gaps and a continued weakness in Hispanic retail market, while sellout declined minus 8.8% in local currency. Suerox sellout maintained double-digit growth and e-commerce continued to expand. We are realigning our commercial footprint and distribution model to stabilize performance and support gradual recovery. We added 1 slide because there is a significant increase in our cash conversion cycle that I wanted to explain, and I will let Antonio get into further explanations and details. But what I wanted to highlight is that mostly the increase in the cash conversion cycle is driven by 2 effects. One is the Argentine noncash effect that is driven by inflation and currency devaluation. We have in the base, a massive devaluation of the Argentine peso that is causing this effect. Number one. And number 2 is that delivery increase in the inventory buildup in Mexico. This has been a very complicated year throughout the quarter since January because of everything that is going on in the world with the wars and shortages that we were potentially facing, and we made a conscious decision of purchasing in advance more than what we normally do of the apps that we require to produce the winter season brands that we expect to be a very strong season in Mexico. We have early signs in this quarter that that's going to happen. And we purchased in advance of a very massive price increases because of the oil price. So that led to an increase of inventories in Mexico. That, coupled with 5 new launches that we have in OTC and the launch of Suerox Mineral that we needed the inventory to make sure that we can respond to the demand that is coming forward, okay? So I wanted to provide that perspective. That is what took our conversion cycle from 129 days to 165. One commitment that we are making is that by the end of the fourth quarter, we are going to at least take that number down to 140 days. Obviously, the noncash or inflationary or currency depreciation in Argentina is not going to impact us in the fourth quarter, though that's going to be gone. And the inventory, we should expect to sell most of it in the fourth quarter and the first quarter of 2027, okay? One note that I added in this slide because I know this is a recurrent concern from investors, shareholders is the accounts receivables, okay? I wanted to explain how accounts receivables is being impacted by the Argentine noncash effect. If you exclude that, our accounts receivables remain very much in line with the last quarter and we expect to maintain that level going forward. So there's nothing affecting the receivables right now. This is mostly driven by the Mexico buildup in inventory and the noncash effect in Argentina. And we'll answer any questions you guys have after the presentation. Before I close, let me leave you with 4 messages. First, Mexico delivered what we anticipated a third consecutive quarter of sales improvement and sell out back to growth. Second, we are growing ahead of our categories in OTC, Personal Care and Infant Nutrition with market share stable or growing across all business units. Third, innovation is working. Our late June launch took Suerox to a historic high share as the leading retailer, and we are accelerating launches and stepping up investment to expand market share. Fourth, we entered the fourth quarter with momentum, a stronger innovation pipeline and a solid balance sheet with working capital expected to improve as the quarter's temporary effect unwinded. To close this quarter -- to close this quarter confirms that our recovery plan is working. On December 3, in New York at our Investors Day, we will present the new operating model, the company's future strategy and the new artificial intelligence platform in action. I look forward to seeing many of you there. Before I hand over to Tonio, allow me a personal note, as we announced in September, this is my last earnings call as CEO of Genomma Lab. I will support the transition through the end of the year. And on January 1, [ Rodrigo Barrera], our Founder and Chairman, will become the interim CEO. I am proud of what we have built together we kept our financial discipline through a difficult consumption cycle. We defended our market share. And today, we are seeing the recovery we work for. I leave confident it will come next Genomma's greater strength powered by artificial intelligence. I want to thank our team for their disciplined execution, their commitment, Rodrigo and the board for their trust and you, our investors and analysts for your support and your candid questions during my time as CEO. Genomma is in very good hands, and I will follow its next chapter very closely. Thank you so much. Antonio, please go ahead.

Thank you, Marco. Thank you for all these years and good morning, everyone. Our third quarter results reflect 2 realities. Mexico is recovering, and we're choosing to invest behind that recovery. At the same time, the United States remains a difficult market, and part of this quarter's net income growth came from a positive ForEx result. I will address both of these topics. Three points framed this quarter. First, sales. Mexico is improving. Net sales trend improved for the third consecutive quarter and sell-out returned to growth. Latin America grew 12.2% in Mexican peso terms and the U.S. declined 30% and remains a principal challenge. Second, margins. Margins declined partly by design. We increased promotional and commercial investment and fully absorbed Mexico's new tax calc sweetened beverages. The effect of return products in the U.S. from the past winter season and also weighed on our margins. Operating savings significantly offset inflation and SG&A declined 1.1%. Third, cash. Cash generation and liquidity are sound Operating cash flow rose 12.5%. Free cash flow rose 52% and 85% of our debt is now long term. Working capital increased, and I will explain why in a moment, Net income grew 18.6% with a significant contribution from a ForEx exchange gain, and we will go into the details a little bit later. Let me now turn to the results. Revenues. Net sales were MXN 4.497 billion, up 1.3%. Latin America grew 12.2%, which more than offset declines of 30% in the U.S. and 2.4% in Mexico. The 7.3% appreciation of the Mexican peso against the U.S. dollar created a translational headwind on our international results. Gross margin was 61.4%, down 244 basis points. Two factors drove the decline. The effect of return products in the U.S. and higher promotional investment, including the full absorption of Mexico's new tax or non-caloric sweeten beverages. The second was a conscious decision to support growth. The first was not, it was the result of a past milder-than-expected winter season in the U.S. EBITDA was MXN 945 million, a 20% -- 21% margin, in line with our expectations and 271 basis points below last year. We are accepting lower margins in the near term to invest in growth. The trade-off is justified only if it produces sustained improvement in sell-out and market share and that is a standard against which we will evaluate this investment. Cost discipline was maintained, operating savings significantly offset inflation and SG&A declined 1.1%. Net income rose 18.6% to reach MXN 550 million and net margin expanded at 168 basis points to 11.4%. Lower financial expenses and our foreign exchange gains more than offset a lower EBITDA margin and a higher inflationary loss on our monetary position in Argentina. The FX gain is nonrecurring and without it, we have to acknowledge this. Net income growth would have been lower. Over time, earnings growth has to come from operations. Let's move now into Mexico. In Mexico, net sales declined 2.4%. It is still a decline, but it is the third consecutive quarter of improvement and nearly 20 percentage points better than the low, minus 22% in the fourth quarter of 2025. Beverages and Infant Nutrition grew strongly. In Mexico, a market that, as we all know, remains soft, we outperform our categories in OTC, Personal Care and Infant Nutrition and market share was stable or growing in every business unit. Sellout returned to positive territory and which is an encouraging signal of consumer demand. The product we launched in late June drove 39% sell-out growth among customers carrying it, and Suerox achieved a record high value market share as our leading retailer. These are early indicators we will need to see them sustained. We are accelerating launches and increasing investment to expand market share. As a result, Mexico's EBITDA margin was 20%, down versus last year, and this reflects investments ahead of the sales ramp-up we anticipate, partly funded by administrative savings. Award on currency before turning to the U.S. the Mexican peso averaged MXN 17.27 per dollar. Now it's changing, but that was during the quarter. This represented a 7.3% stronger peso than a year ago, which reduced our U.S. results when translated into Mexican pesos. The U.S., as we said before, remains our most challenging market. In the U.S., net sales declined 30%, reflecting distribution gaps amid continued weakness in the Hispanic retail market. Sell-out declined less, but still, it was a decline of 8.8% in local currency. On the other hand, there are positives, Suerox allow maintained double-digit growth and e-commerce continue to expand in that country. We are realigning our commercial footprint and distribution model to stabilize performance, and we expect the recovery to be gradual. EBITDA margin was 8.6%, down 492 basis points, primarily reflecting operating deleverage and the impact of return products from the past winter season, which, as we mentioned, it was very mild. In Latin America, most countries depreciated against the Mexican peso, creating as well a translation headwind for the region. Latin America net sales grew 12.2%, Argentina grew 39.2%, driven by unit share gains in OTC and beverages and a favorable hyperinflationary effect. Excluding Argentina, Latin America grew 1.6%. Central America and the Andean region performed well with market share gains in OTC and beverages in key markets and expansion in the traditional channel. Brazil, on the other hand, declined as customers reduced inventory ahead of the country's tax reform. We expect Brazil selling to normalize in the first quarter of 2027 once the new tax rules take effect. Regional EBITDA margin, including Argentina, expanded 190 basis points to 23.7%, reflecting operating leverage from higher sales. The foreign exchange result that we mentioned was a gain of MXN 41 million compared with a loss of MXN 122 million in the third quarter of 2025. During the quarter, we paid down intercompany balances reduce the amount of exposure to different currency movements and also the Mexican peso is now getting to more normal levels. So this was one of the drivers for the net income growth during this quarter. Turning to the balance sheet. As of June 30, MXN 1.808 billion of our debt was due in 2026. During the quarter, we replaced most of that short-term debt term with a long-term bank credit withdrew on a 10-year amortizing term loan with [ Bancomext], and we announced last quarter that we also closed a MXN 1 billion unsecured loan with [ Banamex ] maturing in 2029. As you can see, this is our maturity profile today. As of September 30, short-term debt decreased 63% to MXN 1.185 billion, over 2.3x by cash and equivalents of MXN 2.76 billion. 85% of our gross debt is now long term and the net debt closed at MXN 5.2 billion, MXN 94 million lower than in the second quarter. As you can see in this graph, 2027 remains our largest maturity year. We are we continue with our plans to extend maturities and lower our cost of funding as we will present in the coming quarters. Working capital is the area that requires the most attention this quarter, as Marco mentioned earlier. Our cash conversion cycle reached 165 days up 36 days from the second quarter. Receivables increased 12 days. Inventories increased 21 days, and payables decreased 3 days. There are 2 temporary effects that explain 28 of the 36 days, which are a noncash inflationary accounting effect in Argentina of 13 days that Marco explained earlier, and a planned inventory build in Mexico or 15 days ahead of the winter season. There's a lot of innovation coming, including [ cost and coal ] launches in the fourth quarter of 2026, and the first quarter of 2027. Excluding -- if we exclude Argentina from these figures, receivable days rose only 3 days with no material increase in overdue balances. We expect the cycle to decline to approximately 140 days in the fourth quarter as the winter inventory in Mexico sells through and the Argentine effect normalizes. Even at that level of 140 days, it would remain above where it was a year ago and improving cash conversion cycle is a priority. Operating cash, operating cash flow grew 12.5% to MXN 496 million after a planned 46 million investment in working capital, and we also cover CapEx, interest payments, debt repayment and dividends. Free cash flow increased 52% to reach MXN 470 million during the quarter from MXN 39 million a year ago and totaled MXN 1.420 billion over the last 12 months. Our capital allocation, as we all know, 6 to balance 3 objectives: first, investing in the business, maintaining a sound balance sheet and also returning cash to shareholders. On September 30, we paid our 17th consecutive quarterly dividend of MXN 0.20 per common share totaling almost MXN 195 million. CapEx totaled close to MXN 25 million, including MXN 21.2 million invested in our manufacturing plant and distribution center. Net debt-to-EBITDA is 1.4x and our debt service coverage is 5.5x. This gives Genomma the flexibility to keep investing in the business while meeting our commitments to shareholders. To conclude, this was a quarter of mixed results, and we want to clear -- we want to be clear about both sides. On one side, Mexico continues to improve. Sellout has returned to growth Cost discipline help operating cash flow increased and our debt maturity profile is longer. On the other side, the U.S. remains difficult. Margins declined, working capital increased, and part of our net income growth, I may not repeat. Our task now is to convert the improvement in sell-out into sustained sales growth, bring the cash conversion cycle down to approximately 140 days in the fourth quarter and maintain the financial discipline that underpins long-term value creation. Finally, just a reminder that on December 3, we will host an Investor Day in New York where the company will present the new strategy and a demonstration of the artificial intelligence agents that will help the company accelerate results. Please register to attend. Here you have a QR to do so if you haven't done it yet. It will be worthy. It's very important that everybody knows that being there, it's not the same as attending remotely. It's worth attending in person, we encourage again to register. And with that, I will hand the call back to the operator for your questions.

[Operator Instructions]. Our first question will come from Álvaro García from BTG Pactual.

Obviously, a lot to get into on the working capital front, but I wanted to start off with a question for Medical. Just sort of as you hand over the key, I was curious if you could maybe talk about what you're proudest of in your tenure as CEO and maybe what you'd see as unfinished business, again, as you hand over the keys?

Thank you, Alvaro. No, I think that over the past years, I think that the company has made a huge amount of progress in several fronts, which I am very proud of to see and we'll continue to be proud as we embark on the new phase of the company, I would say, number one, obviously, is the commercial expansion of this company. If you look back 10, 12 years ago, this was a company that was mainly focused on the pharmacy channel, okay? And now the pharmacy channel today is one of several channels and it doesn't represent the majority of the business, on the contrary, okay? That has been a massive achievement for this company. We have opened we went from having 2 customers, 2 retailers in the U.S. to now be serving more than 80 customers in the U.S., in Latin America, we went from having a bunch of customers, no more than 10, 15 customers in total in the sum of all the markets. Today, we serve more than 180 customers in total in Latin America. In Mexico, we were very dependent on the pharmacy channel and Walmart. And today, we have a traditional channel that represents almost 28% of the business. That was built from scratch. This was a very hard work that was done by the entire team throughout the year. So that's one thing. Second, I would say that the start-up and the build of all the manufacturing facilities that the company has. If you go back 7, 8 years ago, we -- everything we did was manufactured by third parties. Today, more than 68% of our business is manufactured in our own facilities and the greenfield start-up of all these plans was very exciting, and I think it brought a massive amount of savings in COGS and improvements in quality for the company. I think the team that the company was able to build over the years today, whatever you look in the different functions, markets areas, wherever you see top-level people needing the functions, people with extraordinary careers from other companies that came to the company trusting they could continue to grow and to add value with us as a company. And finally, I would say that the very strong relationship that we have with suppliers and customers. I think that's something that we have built. And I expect at all these things. It's like I don't know if you guys know the -- read the book that is called standing in the shoulders of giants, which is basically this Chinese story in which like everything in life, has a cycle. And every cycle that comes after the one that is finishing needs to build on top of what is being left, okay? I am 100% confident that under the leadership of [ Ron Rego ] and the current leadership team, the company will continue to build on everything that we have done as a company in the past several years.

No, no doubt no doubt. And all the best going forward. It's been a pleasure, and thanks for all your help over the years. All the best.

Our next question comes from Antonio Hernandez from Actinver.

Marco, that was a great round of highlights and congrats, and thanks for all your support throughout these years. Well, my question is regarding -- so profitability, how profitability around like throughout this last couple of quarters with the effect. And of course, you will take advantage of that in terms of from a competitive standpoint, having better prices versus competitors. Now what about the margins -- or -- how is profitability throughout this quarter?

I don't want to brag too much about this, but I think that this is a world-class way of managing the situation by the company and the team. First, when we started working on how to improve Suerox [indiscernible] that was back in -- by the end of 2023. We were purchasing the preforms and the labels and the gaps from third parties. And on a brand that is -- that is so large the cost of doing that is very high, okay? So it was by chance that we started working on a very large project to acquire the manufacturing machinery that we needed to manufacture our own performance. That got us to a massive improvement in COGS because we were purchasing just to give you the numbers, and we were purchasing the performance at [ 1.19 ] from our suppliers. And today, we are manufacturing the performance at MXN 0.83, okay? So that's a huge amount of COGS savings. Same thing with the labels. We purchased the line to do our own labels, and we managed to get to a great negotiation with the [ CAPS ] manufacturer. So when you look at the Suerox, I'm going to quote some COGS numbers here, but you need to double check this with Christianne later on. But when you look at our COGS of -- so basically, the impact of the [ GOP ] was in the range of 1 point, okay? When you -- after absorbing all the yes, and getting more aggressive in pricing. Most of that investment was absorbed by the savings that we got in the products on the -- as I said, the performance, the labels and the caps. So it ended up very well for us.

This is Antonio Zamora. Just expanding on Marco's comment to give you a sense of the huge impact of this productivity in our services business. If I compare the cost of goods sold or manufacturing 1 Suerox bottle today versus the cost that we used to pay back in 2021, okay? Today, our COGS is 21% lower than what we used to pay back in 2021. And obviously, from that point in time, you would need to add a lot of inflation that we were able to offset and create significant productivity. So all of these initiatives that Marco described about the preform internalizing into our plan, launching the second line, the labels, et cetera. that created massive productivity that obviously helps the Suerox business. Do we like the [indiscernible]? Of course not. Of course, that's adding cost that we didn't have. Fortunately, we had all these initiatives, and we were able to offset them. And we know it's a very competitive market, and we will continue expanding on productivity initiatives to become even more competitive. But a lot has been done in that business. And I think it's remarkable. Thank you, Marco, for all the work that has been done as well as the team that made all these productivity gains [indiscernible].

Our next question will be from Froylan Mendez with JPMorgan.

Marco, [indiscernible]. Thank you so much for your help and support the best on your next journey. And going into my question, and sorry if you touched upon this, I arrived a little bit late to the call. But could you just help us understand the 3Q nonrecurring impacts on top line and cost from the 2 coal inventory returns. If you already answered, I can then check with Christianne and don't lose your time on answering that if you already did. The second and probably the most important one on Mexico margin recovery. So EBITDA contracted almost 7 percentage points you did have some sequential improvement in sales. So how much of that compression was deliberate investment versus operating deleverage? And going forward, what needs to happen for Mexico margins to recover from current levels?