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Edited Transcript of LABB.MX earnings conference call or presentation 23-Apr-20 3:00pm GMT

Apr 24, 2020 (Thomson StreetEvents) — Edited Transcript of Genomma Lab Internacional SAB de CV earnings conference call or presentation Thursday, April 23, 2020 at 3:00:00pm GMT

Genomma Lab Internacional, S.A.B. de C.V. – Executive VP & CFO

Genomma Lab Internacional, S.A.B. de C.V. – Head of IR

Genomma Lab Internacional, S.A.B. de C.V. – CEO

* Benjamin M. Theurer

Barclays Bank PLC, Research Division – Head of the Mexico Equity Research & Director

Ladies and gentlemen, thank you for standing by. Welcome to Genomma Lab’s First Quarter 2020 Earnings Call. (Operator Instructions) As a reminder, today’s call is being recorded. I’ll now turn the call over to Enrique Gonzlez, IRO of Genomma Labs. Please go ahead, sir.

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

Thank you. Good morning, everyone. We welcome you to our first quarter 2020 earnings conference call.

Joining today are Jorge Brake, Genomma Lab’s, Chief Executive Officer; and Antonio Zamora, our Chief Financial Officer.

Jorge will provide an update on the first quarter on Genomma’s response to the coronavirus pandemic. Antonio will then review first quarter results and COVID-19 financial impact. We will then be joined by Jorge to take your questions.

Please note that today’s discussion could contain forward-looking statements about the company’s future business and financial performance. These are based on management current expectations and are subject to risks and uncertainties.

Factors that could cause actual results to differ materially are included in our reports and filed with the Mexican Stock Exchange.

In particular, there is a good [determined] certainty about the relation and contemplated impact of the COVID-19 pandemic. This means Genomma’s results could change at any time and the impact of COVID-19 and the company’s business results and outlook is the best estimate based on the information available as today’s date.

Please note that in the interest of safety, we are utilizing a more detour approach in exercising social distancing while conducting this call. We will ask you to please bear that in mind in light of any potential technology difficulties which could occur.

With that, I am now pleased to turn the call over to Mr. Jorge Brake. Jorge, go ahead.

Thank you, Enrique and hello to everyone. Clearly, COVID-19 is at the strong forefront of everyone’s mind, which is why we plan to focus today’s discussion on the near-term actions aligned with our longer-term strategy we are taking in our market to confirm the global pandemic.

Additionally, we will review what we believe our longer-term changes to consumer behavior and demand in light of the COVID environment.

To begin, it’s important to note that Genomma Lab has a long history of weathering challenges and quickly adapting to capitalize on opportunities.

Our results this quarter are just of one reflection of set resilience and adaptability. The transformational growth of this strategy we began 15 months ago by strengthening Genomma’s business and today, we benefit from high demand to our advantage product portfolio, positioning us for unique and exciting growth opportunities.

Therefore, we have focused on the following key priorities while navigating through this period of volatility and uncertainty.

First, ensure the health and safety of our employees, their families and the communities where we operate; second, protect our supply chain and the quality and integrity of our products; third, maintain the financial strength of our business; and finally, to ensure Genomma Lab emerges from this event in a better position, by driving our long-term strategy, while really responding to changing consumer behavior opportunities from our position of relative strength.

We are taking the steps to safely operate our business and supply our consumers and customers as well as continue to operate our supply chain in order to minimize interruption.

We have implemented contingency planning with most employees working remotely where possible. We have regional prices being in place, continually monitoring the rapidly evolving situation and recommending risk mitigation actions.

And we have implemented travel restrictions, digital protocols and social distancing practices for those who required to work on site, as you expect.

I would like to highlight a few points on the current conditions we are seeing. The virus crisis has led to an unprecedented surge in customer and consumer demand for certain drug profile driving for instance, Tukol cold and Paracetamol acetaminophen in the U.S., sales through all countries in which we operate.

As an example Teatrical going through the review, sales are breaking records in Argentina. Today, consumers are also focused on hygiene and personal care habits that are being — that are growing over time, but accelerated in the COVID environment.

Our success in delivering transformational products through innovation have gained, resonated in the wake of today’s unprecedented situation.

By quarter’s end, we began production and distribution of our new line of our antibacterial products under the XL-3 brand in Mexico and the Next brand within the U.S.

Initial production focused on antibacterial hand sanitizing gel allocated to key retailers and drugstores across Mexico and the United States.

This represents an exciting opportunity, not only to address a significant market deficits, but also drive brand recognition for Genomma products in the U.S. And to Genomma, in the mid and long term, we believe these categories will remain large and attractive. We will continue to launch new antibacterial presentations, such as hand soap, disinfecting towels and sprays throughout all Genomma market as we roll this out during the year.

Our momentum in shampoo continuing with robust growth during the first quarter, as quarantine times consumers tend their focus on health care, while at home.

Tio Nacho “Coco”, or coconut shampoo continued its penetration in Genomma’s Latin American market, with a strong initial results as well as an increased presence of other brands, such as Teatrical and Revie brands in Brazil.

New parents are also should keep picking out the best possible infant care and nutrition during the crisis.

Our newest Novamil brand of which Genomma began sales and distribution in Q4 2019 had strong performance this quarter and surpassed our initial expectation for this important new product category. This again reflects a standing execution by Genomma sales and logistics and marketing teams.

An example of which is the new piloted telemedicine program we launched in partnership with pediatricians to provide free care towards Novamil also consultations during this time of social distancing.

Today, it is also apparent that more people are buying the products and services online whatever possible, affecting most category, sectors and industries with increased consumer consumption, both in e-commerce and in formal traditional Mom & Pop channel. We are strengthening Genomma’s connection with the consumer, especially with digital, e-commerce and social media outreach, which is even more important today with consumers at home looking for solution.

Simply put, our consumer portfolio and plans are even more relevant today than they were before. Genomma’s online presence is growing at rapid pace, representing an ever-increasing component of overall sales for the first quarter, and we believe an important contributor for future growth beyond today’s pandemic.

As you know, our plans to create even deeper connections with our consumers by bridging the physical and digital experiences have been underway since last year.

We continue to develop best-in-class home safe opportunities for our consumers to connect with us as well as strengthen our brand as an indisputable partner for our consumers for their journey to improve health care and well-being.

For example, during the quarter, we developed a new communication strategy for our packaged care product to raise awareness and consciousness about illnesses. These opportunities have now increased and even go beyond basic hygiene.

Today, we are also fulfilling an important need which is another opportunity to increase visibility.

Our direct distribution program, partnership, as we call it, for direct sales to this small Mom & Pop traditional channels proves to be another very important competitive advantage in today’s hi-tech consumer sales environment, characterized by reduced in store retail traffic and social distancing initiatives.

During the quarter, we increased our point of sales base in the traditional channel. We are also closely monitoring, responding and adapting to changes in consumer demand and behavior, ensuring product access and availability, while exploring new high demand sales, visibility and communication channels, while we continue optimizing our newest strategy.

They are devices with various enhancements that I just described, will be the result of short term needs, we expect some level of elevated demand to continue, particularly at Mexico and Latin America approaches their respective pandemic(inaudible).

Turning to our world-class manufacturing and supply chain capability. Our supply chain business, continuity plans has been active since last — late last year. We have been working closely with key suppliers with whom we have recently renewed relationships to ensure we are able to address the increased demand we are seeing.

We believe many categories will continue to grow after the various prices due to permanent — not permanent, the uncertain buying patterns as consumers become more conscious of their health and well-being to allocate more share of pocket in health, hygiene and personal care products.

We have also assessed and implemented continuity plans and safety test of key items to ensure we are able to provide the customers with continued supply in the short term.

To date, there has been no material impact in our suppliers. And for those impacted, continuity plans have been activated. We also maintained a prudent approach with our suppliers to mitigate supply on price risks.

Further, Genomma’s 2019 direct distribution partnership program has posted optimal profitability under current circumstances.

To conclude, we are operating in a more challenging, dynamic and rather flat category environment than ever before. We will leverage our unique business model, and make an excellent innovation to be agile in responding to the current environment and the changing consumer behaviors.

Our overall growth plans and the pillars of our strategy have not changed and will not change. Although, some have been adapted and they have been and even strengthened to enable us to effectively execute today and through the balance of the year. We are capitalizing on the opportunity to help our consumers and our customers through these difficult times.

We delivered solid first quarter results, underscored by key growth market initiatives. Our new product uptake categories, the effectiveness of our supply chain and a fully committed and energized organization, again proving our strategies are effective.

We are fortunate that we continue to drive future growth. While we know the balance of the year will be impacted by an uncertain environment, our underlying foundation and performance remains very strong.

Thank you for your attention. It’s now my pleasure to turn over to Antonio.


Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. – Executive VP & CFO [4]


Thank you, Jorge. Good morning, and thank you all for being part of the quarterly conference call. As Jorge commented, we will keep this quarter’s comments focused on those relevant to the current situation.

Genomma achieved solid consolidated net sales for the first quarter of the year, reaching MXN 3.3 billion, a 6.3% increase, with a 40 basis point increase in our EBITDA margin year-on-year.

We continue to benefit from our company-wide growth strategy during the quarter as well as heightened demand related to our privileged product portfolio and our ability to swiftly adapt to address evolving market demand.

The MXN 197 increase in sales is also due to the increase in number of points of sale served, additional sales resulting from new categories and new lines of products and presentations.

The improvement in the year-on-year EBITDA margin described above benefited from operational leverage effects and continued success in maintaining tight cost and expense controls.

In Mexico, Jorge has described a strong performance of the Novamil infant nutrition we recently added to our portfolio. Innovation, strength in the traditional channel, outstanding go-to-market strategies and e-commerce capabilities with benefit of the additional boost in COVID ’19 related demand supported our performance during the first quarter of 2020.

The current environment has increased consumers focused on self-care and personal hygiene, as Jorge discussed earlier, and as well as their share of disposable income now available for our related products.

This is favorable for the demand of Genomma’s products in the immediate and short term. The benefit of which is reflected in late first quarter results, particularly in the Mexican market.

We also believe that consumer habits have permanently altered, particularly for products such as hand sanitizers and antibacterial product line.

In Mexico, new product launches and line extensions through our increased store base resulting from new and strengthened retailer relationships drove a nearly 5% year-on-year increase in net sales for the quarter.

Performance in Argentina and Central America were particularly noteworthy, offsetting the adverse impacts of COVID-19 and to a lesser effect the depreciation of currencies on the decline in sales of countries, including Brazil, Chile and Colombia.

The 20% or 730 basis point decrease in EBITDA margin for the Latin America market was due to an increase in COGS from higher raw material prices due to ForEx impact as well as investments we made in marketing and in-store visibility, mainly focused to new product launches.

Consolidated gross profit only grew 2% during the quarter to reach MXN 2.06 billion. The higher COGS is mainly the result of the impact from foreign exchange effects on input costs during the quarter.

Genomma is well positioned from a balance sheet perspective, which is an important advantage during challenging times as today.

The leverage ratio that decreased on a consecutive basis from 2.0x to 1.8x net debt-to-EBITDA and a solid MXN 1.4 billion in cash balance for the end of the quarter.

We further optimized Genomma’s working capital during the quarter, reducing our cash conversion cycle by 2 days from 101 days at the end of 2019 to 99 days at the end of March 2020.

In closing, we are continuing to drive long-term sales growth, balanced with close cost and expense control, to expand margins and sustainably realize long-term earnings growth.

We have a solid balance sheet and a strong foundation. Within an environment that continues to be dynamic and fast-paced, we are ensuring we remain agile, relevant and focused on long-term sustainable growth.

With that, let’s turn to your questions. Cherry, please go ahead.


Questions and Answers


Operator [1]


(Operator Instructions) Our first question is from Ben Theurer with Barclays.


Benjamin M. Theurer, Barclays Bank PLC, Research Division – Head of the Mexico Equity Research & Director [2]


Congrats on the results. A quick question on the different market dynamics. So when going through the release in your prepared remarks, it seems like performance with the COVID-19 situation has been very different across regions. So it kind of was a tailwind in Mexico, but at the same time it was a headwind in the U.S. and in LatAm, can you elaborate on what’s been driving this? Is it sales mix? Is it channel exposure? What’s the difference amongst the different regions?

And how do you think this is actually going to turn out over the coming weeks, considering that different market dynamic already at the very beginning? What would you expect to see in coming weeks from the regional performance as it relates to the different category sales in the different regions?


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


Okay. I will take the first part of the answer, Antonio, and then you can complement.

The situation, as you can imagine, is very challenging. It has been very challenging since early March, actually. But we’ve been able to deal with the situation with a different actions we have decided to implement, and I will tell you about those in a minute.

In general terms, execution overall is the same, it’s just a little bit of lag in different countries vis–vis when they started to feel the number of infections and all of those things happening.

So if you think about Latin America as a whole, including Mexico, we are expecting the peak of infections to happen in the next 2, 3 weeks, although most countries, I would say, all countries in the region have been able to take actions that are very strict in most of the cases since mid-March.

So I would say that despite of the fact that the region is not as well prepared in terms of medical services and infrastructure, has reacted very soon. So that is a combination of factors that I think are making that and the countries being able to control the situation much better.

So for instance, today, I’m participating in a session in the morning because we are reviewing our Q2, Q3 and Q4 plans by country this week and people are saying, we already got used to it because we have 4 weeks almost of working in the crisis scenario through which we have very clear rules and guidelines on how to work in our everyday life, including the office people, including the plant people, including the distribution center people, the salespeople people and the in-store people.

So I think the company has been able to adapt very quickly and very efficiently through the situation in the last 3, 4 weeks. So now we are working, although under a situation that is not normal, of course, because many things in the different countries are locked down or closed, we are being able to operate our supply chain, our sales processes and fortunately, we have 95% of the stores that sell our products open. Those are the ones that have been considered essential activities in all these countries. Therefore, they remain open because people need to go and buy food, medicine, personal care, hygiene products. And as I said, fortunate for us, all our products are all in those type of the stock, be — being then, traditional stores or supermarkets or pharmacies, et cetera, et cetera.

So from that standpoint, the situation, I would say, is under control. And we are seeing that some categories like personal care categories could be somewhat affected because they are not top priority for consumers now. But on the other hand, we see OTC products, hygiene products, infant formula is very high demand, given the situation.

So as I said, we’ve been able to adapt quickly in terms of operations and in terms of production and product lines to the new situation.

In terms of the second part of your question, which is, how do we see or how do we foresee the valuation of the next few weeks? I think, we see it positively. We have very strong plans. We’ve been able to react, as I said, very quickly and efficiently. And thanks to the fact that we have a very experienced team also in — all the time (inaudible)had flourished in Mexico. So we’ve been able to develop and design a very strong plan that includes innovation as we did with the antibact category that is a new business for us and is already in the stores in the U.S. and Mexico to start.

But also in terms of making sure that our capabilities are working well, making sure that we are very focused on e-commerce, so that we can take advantage of the trend in terms of purchases via e-commerce platforms and in the organization, which is another very important factor. We are working remotely, except our salespeople at our distribution and plants people, but we’ve been able to keep our organization very well informed, domestic, and as we said, energized behind this situation.

And results, fortunate there can be in line with our expectations and lead positively this quarter and Q3, which we believe will be the most challenging in a very positive way.

Antonio, anything else?


Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. – Executive VP & CFO [4]


Thank you, Jorge, and thank you, Ben, for your question. This is Antonio. I would like to add a couple of additional comments. I think that part of the beauty of Genomma is that, we are a very well diversified company. As we operate in 18 countries and Jorge very well pointed out that some countries were in the beginning of the curve and some other countries are at the end of the curve, like perhaps, Mexico and many countries have adopted very different approaches to the current situation.

Some have been very strict in terms of the lockdowns or there have been more focused on suppression or their own mitigation of the pandemic. So it’s a very, very different reaction in each market.

And of course, as in any crisis, there’s a danger and there’s always opportunities. I think that the fact that Genomma was able to adapt very, very quickly as Jorge very well pointed out, and in a very, very short period of time, we entered the hand sanitizer category as well as antibacterial products, where we work with our suppliers to reconvert their lines — their production lines, reflects that the strategy that was defined and implemented at the beginning of 2019 is working.

We are an agile company that is adapting to every single situation in each market. There’s countries like Argentina, where our business is booming. As we all know, our Teatrical brand, which is the leader in Paracetamol or acetaminophen products is — it was already the leader there, and it’s creating a huge boom for our business down there.

There’s countries where the hand sanitizers are literally flying off the shelves. There’s other countries, particularly going in a little bit into Q2 that the lockdown has been very, very strict. And the traditional channel, the Mom & Pops are suffering because people are not on the streets or not allowed to go out and shop as they used to.

Obviously, this is temporary. Cough and cold medicine and analgesics are, again, flying off the shelves. That’s very good. On the other hand, other categories like cosmetics are not performing as well, as people stay at home and they don’t need to go out and they don’t need to go to work or even for youngsters, dating and these kind of things, they are not buying us as much makeup as they used to in the past.

But as I said before, the beauty of Genomma is that, we are very well diversified in many countries, in many categories. And I think that the agility of the team and the strategy has been helping us to cope with this situation.

So, so far, up until today and including what is going on in Q2, we’re performing well. So that’s — in that regard, we are fortunate, but at the same time, we are working very hard to take advantage of the opportunities that this crisis presents to all of us.

So it’s an excellent question, but it’s very tough to give you just a single answer, because every market, every category is in a different situation. But I don’t know, Ben, were we able to answer your question?


Benjamin M. Theurer, Barclays Bank PLC, Research Division – Head of the Mexico Equity Research & Director [5]


Yes. It went into the right direction. Actually, just one quick follow-up. So you’ve mentioned 95% of the stores were basically your product is sold are open. Is that 95% equally distributed amongst the major regions? Or are there areas where it’s almost 100% in other areas, where it’s more like 80%, 85%? Just to understand that, that would be great.


Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. – CEO [6]


Okay. I would say that, that applies to all the countries, to be honest. I would say that the range is 95% to 100%. Recall that our coverage is, today, very well diversified also because — than it was a couple of years ago.

We have important businesses in the traditional channel now that we didn’t have a few years ago. We have also the supermarket food stores, grocery stores and the independent and pharmacy and the drug chains or drug channel, in terms of pharmacy and perfumery, the beauty stores. All of those are open in all our countries.

So that’s why I’ve just given the example to confirm. The right range would be between 95% and 100%.


Benjamin M. Theurer, Barclays Bank PLC, Research Division – Head of the Mexico Equity Research & Director [7]


Okay. Perfect. Very clear.


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


Complementing on Jorge’s answer, I would say it’s not just a matter of stores being open, but again, depending on the country, there are some countries that are restricting people on the street.

So I mean, the amount of time that they have to go to the stores and buy our products or any other products is limited. So in those countries, obviously, the business is not performing as well. And I think all the categories are — or all the competitors are facing the same thing. But that is not impacting at all overall consolidated business. So there’s exceptions, and we know that’s temporary, some of those countries that have been more strict in terms of the lockdown are the ones who are analyzing, changing a little bit of the strategy.

So generally speaking, I agree with Jorge. Most of them are open. It’s just that, the amount of time that some consumers in specific countries are having to shop. It’s more limited. On the other hand, I think that’s something that we also need to consider is that, we used to have other types of competitors. When we talk about disposable income, people in the past, in the whole world, could travel, could take vacations, could go out and eat at restaurants and all those expenses and actually spending money on gasoline on their cars, all that money is now available to spend on other things.

And most of the purchases that the general consumer can do right now is, things that happen in supermarkets, drug stores, pharmacies or Mom & Pops.

So in that regard, that’s positive for us. But that — so the dynamic is very complex, but I think that we are fortunate to be in the positive range of things.


Benjamin M. Theurer, Barclays Bank PLC, Research Division – Head of the Mexico Equity Research & Director [9]


Okay. Perfect.


Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. – CEO [10]


Antonio, one more thing that I would like to add. I think it is relevant now to mention the e-commerce capability because as people are going or in some countries are not being able to go to the store as frequently as before, for those type of things, I think it is important for us to mention that the e-commerce platform because, we have been working on this in 2019, as you know, but given the situation, also one of the things that we decided in March is to accelerate and compare it as a top priority for the company, all that we were doing into relevant half could further develop our e-commerce platform.

So we put a few people in-charge of that, and that is already in place and have been put in the next level. So we have countries like Chile, for instance, where in the last 2 or 3 weeks, we have doubled the — not regular sales we had per week pre-March, and that’s just an example because we think this “new channel”, that is still a move for us, will further develop in the next few days, weeks and months to become a very relevant portion of our business.


Operator [11]


Our next question is from Andrs Ortiz with Crdit Suisse.


Andrés Ortiz, Crédit Suisse AG, Research Division – Research Analyst [12]


I would like to ask 2 questions related to EBITDA margins, particularly in Mexico and Latin America. We saw an impressive improvement in EBITDA margins in Mexico, even as the comparison base was quite easy. We saw that Mexico retained the most profitable operation this quarter.

I would like to ask it, different, new EBITDA level is sustainable? Or what were the main drivers to achieve this? And in the case of Latin America, what was the reason behind that important deterioration of EBITDA margin? And how should we now look for EBITDA margins to behave in the future?


Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. – CEO [13]


Antonio, can you take that?


Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. – Executive VP & CFO [14]


Yes, Jorge. Thank you, Andrs, for your question. During the quarter — and let me go a little bit back to Q4. If you remember the exchange rate of the Mexico — Mexican peso against the U.S. dollar was around 18 50, which was something, I would say, unexpected, the Mexican peso strengthened.

And as the Mexican peso strengthened and as you all know, big [Audio Gap] of the products that are sold in Latin America are manufactured in Mexico.

So the transfer price for Latin America basically increased because of the strengthening of the peso. And that situation stayed for most of the quarter — most of the first quarter. So that had an impact.

Of course, by the end of (technical difficulty) turn itself around, and we had Mexican peso against the dollar at MXN 24, to even MXN 25 at some point in time. So now it’s the other way around. So that’s a big swing in ForEx that impacted, on the one hand, Mexico in a positive way And Latin America in a negative way because the swing was significant. So I would say that, that’s one of the main components.

The other thing that’s important to mention is that a couple of countries at the end of the quarter, you know that last third of the quarter, started with a very strict lockdown. And that, obviously, created some headwinds in terms of sell-out of our products in those markets temporarily and that created an additional negative headwind for Latin America.

So what I would say is that, this is, I would say, a Q1 situation, where Mexico is more profitable than perhaps, in the future and Latin America was affected in this regard.

Now, obviously, as we are moving very fast and entering new businesses and new categories like hand sanitizers and antibacterial, obviously, the infant nutrition business is growing significantly in Mexico. That’s going to then create new dynamics for our business.

So what are the profit margins of those categories? It depends on the market, it depends on situation, on supply and demand. I think that the right way to approach or to view our numbers is from a consolidated perspective at this moment.

And as you can see, our EBITDA margin has shown improvement versus the first quarter of 2019, which is something positive. I wouldn’t overanalyze too much on the Mexico versus Latin America and if this is going to be sustainable because ForEx created that big swing.

And as I mentioned before, the lockdowns of certain countries in South America at the end of the quarter negatively impacted business in that region. And of course, that’s not going to be sustainable.

So I would say that’s something unique of this quarter. I don’t know if this explains or provides the answer that you were looking for, Andres.


Andrés Ortiz, Crédit Suisse AG, Research Division – Research Analyst [15]


Very clear. And one additional question. Could you give us a sense of what level of your COGS are dollarized to try to understand differently better.


Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. – Executive VP & CFO [16]


Yes. I — I mean, that’s an excellent question, and many people are — many investors are also asking this question in the many one-on-one calls that Jorge, Enrique and I have. That’s a recurrent question.

I would say that, you should consider about 30% of our — it’s a rough estimate of our total COGS are in U.S. dollar denominated.

Having said this, that doesn’t necessarily get transferred to our COGS immediately because let me just put one example, plastic resin. Plastic resin is — it’s a commodity, polyethylene, polypropylene, et cetera. It’s a commodity. Usually, it’s covered in U.S. dollars. So if you only think about that raw material, you would say, okay, that’s dollarized. However, it’s also based on oil. So if oil prices collapse, as they happen to have, there’s an additional effect there that could also impact that specific raw material.

Now even in that specific case, actually, it’s more tied to the natural gas price than to the barrel of oil. And so that needs to be taken into consideration.

And there’s sometimes lag effect on those commodity prices. So there’s a number of factors to take into consideration. There’s also some raw materials that we procure, like, I don’t know, packaging materials like aluminum or paper or carton, et cetera, that are included in local currency in Mexican pesos. But eventually, as there’s inflation, eventually, those prices stabilize. So there’s a lag effect there. And on top of that, another factor to consider is that some — we are an industry that is globalized. Some of the molecules that we buy for the medicines, the so-called APIs, the active pharma ingredients, are sourced from global sources, whether China, Germany, India, et cetera. And as there has been disruptions in the global supply chains, some prices are moving onwards, or they were — are moving downwards. So my recommendation, I mean, it’s a great question. My — and that’s why I say around 30%, it’s dollar-based, the rest is more local currency. And this is basically taking into consideration all of the impacts that I just described, but it’s not automatic. So if you want to include that in the model, that’s fine, that’s great. I think it’s a good way to take a look at it. But please, just take into consideration that there’s many factors impacting our COGS.

Now having said all of this, I think that the good news is that, generally speaking, manufacturing in Mexico and sourcing for Mexico has been a competitive advantage for the company.

Mexico is probably the lowest cost producer in the world for many goods. So that’s — generally speaking, that’s positive. The FX swing that I described earlier that’s — that was a unique situation between Q4 and Q1.

Generally speaking, Mexico is a low-cost producer of many manufactured goods. So that’s positive. And the other aspect is, some of the dynamics that I just described are the same dynamics that would impact Bayer, AstraZeneca, Glaxo, Sanofi, they also buy APIs from the same suppliers that we do.

So we all — from a competitive landscape, we are all impacted in the same way. So that’s not an advantage or a disadvantage. It’s just a characteristic of our industry.


Operator [17]


Our next question is from Rodrigo Alcantara.


Rodrigo Alcantara, UBS Investment Bank, Research Division – Associate Analyst [18]


My first question would be for Antonio, just a quick follow-up on the Mexico margin. So quite impressive the degree of operating leverage you achieved here. I mean we were indeed expecting something that relatively takes positive 500 basis margin expansion perhaps, but I was wondering, if you can comment of these operating efficiencies that you implemented in Mexico that perhaps, could have driven similarly in 1Q? And to what level could these operating efficiencies could be replicated in LatAm or even in the U.S.? That would be my first question, Antonio.


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


Yes. Let me just provide.


Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. – Executive VP & CFO [20]


Yes, go ahead, Jorge.


Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. – CEO [21]


Let me just provide perspective for you overall, and then you will take it with more detail, but it’s a good question.

Since early March, as I said a few minutes ago, we were very — embrace this by priority mentality in the whole organization, so starting with me, of course. And as I said, given the fact that it has very good experienced people in our teams in all countries, especially in Mexico in the headquarters. We were able to identify several areas of opportunity for the crisis period that basically generated a few key actions so that there could be very well a structure in terms of expenses and operating efficiencies for the following months, probably, for the whole year. And those will be a good base for the budget we will develop for 2021 and 2022. In this crisis, a great opportunity too, to prove and test things that we didn’t do before in terms of products, innovation and in terms of operating efficiency.

And I’ll give you a couple of examples. For instance, we explore and analyze our media spending. And we said, what is going to happen during the crisis in terms of consumer behavior changes? What is going to happen in terms of OpenTV, PayTV, digital advertising, in-store even? And based on that analysis, in a week or so, we decided to adjust our media spending strategy so that we will be much more efficient, while saving money in the following weeks and months.

The other thing that we did is, for instance, we closed all hiring for the remaining of the year. And we have the organization to truly look at their structures and the different roles and responsibilities towards their people, so that they could relocate people, if needed, so that we could cover the top priorities we were selecting as part of our plan for the short-term before the short-term or midterm, I would say, if you think about the whole year.

So those are the type of things that we did, several of those in all countries, not only in Mexico, that are making us very prudent and conscious during these crisis time, while we continue operating flawlessly. Antonio?


Antonio Zamora Galland, Genomma Lab Internacional, S.A.B. de C.V. – Executive VP & CFO [22]


Thank you, Jorge. That’s totally right. The tight COGS and expense control that was implemented in Mexico, obviously, is driving these positive results.

And as Jorge very well pointed out, we are now developing new capabilities in terms of digital and new media type of marketing, which is driving very good results.

But on top of that, I also need to highlight, as I mentioned, in Anders question that there’s also an impact, I mean, when you look at regions, that the transfer prices between Mexico and Latin America positively impacted Mexico and negatively impacted Latin America.

So that’s now an additional effect to take into consideration. And obviously, in a way the swing between Q4 and Q1 in the Mexican exchange rate is not something that we expect to continue.

But more important than that, I think that what Jorge mentioned is very important because that’s sustainable, that’s for the long term, that’s part of the strategy. And again, that’s part of the agility that our team, that the organization is showing, and we are moving really, really fast.

And we are — we always look at opportunities to streamline, to improve our operations, to become more efficient, and the results are there.


Rodrigo Alcantara, UBS Investment Bank, Research Division – Associate Analyst [23]


Great. And my second would be, apologies if you have said this at the beginning of the call. So it’s related with the online sales channels. So is there any way you’re able to track the sales through this channel? Any way you can measure a level of top sales here? Or what are you doing here to make sure that you stay relevant in this channel, especially, when we see store traffic deceleration? That would be the question on online. And very quick on this, on the hand Sanitizer, a new segment. Maybe it’s a bit early to say it or to give any numbers, but do you have any idea of how much revenue can contribute these new categories that you are entering?


Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. – CEO [24]


Okay. On the online sales or e-commerce, as I said a few minutes ago, it is a top priority. That’s a priority for development as you know in 2019. It’s top priority now, given the context and the change in the sales and purchases — purchasing behavior in all countries. But today, people are never before got both able to be online is now buying online because of their obvious reasons. We have a target to develop this channel that was in 2018, probably less than 1% of our sales. 2019 developed, excluding in the single digits, we wanted to become — to get into the double-digit in terms of proportion of our service. So we want to at least reach 10% of our sales in online or e-commerce trade. Throughout, I would say, the end of this year. And that’s on the (inaudible)that we think you’re going to build new businesses to us, and it’s going to bring market share to us, if we do it right, of course.

So that — and as I said, we have a team of 2 or 3 people that are experts on this, that are helping all countries to develop different platform. We are already saying and we’ll be telling more in our key customers’ platforms, mainly Walmart in Mexico, Walmart in Central America, et cetera, et cetera, or other similar to Walmart’s, key chains, blockchain, all of them are accelerating all their programs related to e-commerce sales. And we are working with them to win in those platforms. We are also working with Amazon and Mercado Libre in Latin America, so that we are also using these other platforms as part of these projects.

So it’s a very holistic plan. But as I said, should take us to at least 10% in the next quarters of our sales. That will be a major achievement, by the way.

And then the second question on the antibac an idea, let me say first that, I have more than 35 years of experience in businesses and different countries and companies, and this is probably a record earning in terms of it’s hit to launch from idea to market. We did it in 3 weeks, just identifying the opportunity in early March and enable to carve our XL-3 brand in Mexico and Next brand in the U.S. in stores by the end of March. This will be a big business for us.

The whole antibac category, the way we are looking at it, will be big this year and will be big in the future because we think, we have it behind the hygiene and sales really had stayed for a long time after the virus has gone. So this will become a big business. We will — we have entered a gel — antibac, for now. You will see in the next month to 2 months, Genomma brands also in the wet towels antibac, bar and liquid soap antibac and (inaudible) antibac in the different market gradually, as I said.

So difficult to say, just the last part of your question, what is the potential of this for Genomma? But this is a huge category and we’ll be much bigger in the U.S. and Latin America very quickly and for the years to come.

So we think that if we could get 10% of whatever is going to be sold in this category that is growing, that’s why it’s difficult to predict because it will continue growing. But if we’ll get 10% of that category, that could be several hundred millions of dollars in the next few years for Genomma.


Operator [25]


And our final question is from Sylvia Bigio with Ita.


Sylvia Bigio, [26]


Jorge, Antonio, Enrique, first of all, I wanted to congratulate you on the speed-to-market with the antibacts. Very, very impressive. My main question was the one that the previous caller just asked, but I have a follow-up and another question.

So in terms of the antibac category, which can be significant based on your previous answers, I understood it. In terms of margins, are these — can you give us idea of this — of whether these are higher-margin categories or not? And what other products are you thinking in terms of that broad category? I can tell you that in the U.S., I’m having a very hard time finding cleaning products that has to do with bleach. I don’t know if that can be an idea?

And then a second question would be on the infant formula, which you call it infant nutrition. Can you give us a sense of the size of the business, and potential size of the business? And also, any lines extensions that you can — that you’re thinking about perhaps, baby food or any other thing that you’re thinking about as this seems to be a very attractive category as demonstrated by your sales this quarter?


Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. – CEO [27]


Yes. Yes. Thank you, Sylvia. Yes. I will answer the first one in terms of the antibac. Yes, our idea is to expand our presence in several subcategories of the antibac under the antibac umbrella.

And as I said, gel is the first step on this. It is hard to start because, as you can imagine, we have to identify alcohol suppliers with whom we have now, mid- and long-term contracts, that are located in the U.S. and Mexico.

We have to identify manufacturers of gel and the whole process of importing their alcohol or bringing it from Mexico to certain parts of the country for the manufacturers, et cetera, et cetera. Very hard work, but I truly feel very proud of my team on how during this thing in just 3 weeks.

So that’s one thing. We will enter — we just signed, Antonio, myself and Marco signed approvals for projects 2 weeks ago actually. We enter the wet towels, wet wipes antibac product similar to Lysol, for instance. We are going to enter sprays, that is — and also similar to Lysol. And we are going to enter liquid and bar soaps that are antibac, actually, another record as we launched our bars, soaps and bought under the brand Next in Brazil last week. So that was first also in terms of timing of that initiative, and it’s going very well in the first few days of sales in Brazil.

All of these things are going to be expanded to all countries. It’s just a matter of following effective and efficient process. And you will see our brands in these 4 categories that are key in the — under the antibact umbrella this year. All of them will be implemented in the next, 2Q is I would say of year on time.

So big business, big potential for the future. And in addition to that, just to add to the perspective, we continue working on several OTC projects that I had mentioned in our previous meetings. OTC has become a major priority for us to accelerate our growth in the future in the OTC segments. And we have a small team of 3 people that are now working only 100% of their time exploring, evaluating, analyzing opportunities in the OTC world that could go from — and given the context I think it’s a good moment we’re in, in a very potential M&A, joint ventures, entered to a new categories in OTC that we have been exploring in the last few months, actually, et cetera, et cetera.

So I think the combination of these 2 things, new categories in OTC that had been explored in the past, plus the antibac umbrella will provide a huge very important building block for growth in the short and the midterm for the company.

What was your second question, Sylvia?


Sylvia Bigio, [28]


The potential size of the market — not only those market actually, for you guys in terms of the infant formula and whether or not you can consider life in the infant category, such as baby foods and purees and all that stuff, which can be huge, especially in the U.S.?


Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. – CEO [29]


Okay? Oh, yes, yes. Great question. As you remember, as I’ve mentioned before that this is a category of one — the size of this category in Latin America, except Brazil, because in Brazil, the brand has a different license, is $1.5 billion a year.

We participate in about 40% of that category because Novamil is more focused on a specialized formula that is special formulas of technology, of special needs of the baby’s model like reflux or allergies, or those types of things. And we want to be 50% of that segment in Latin America.

So you do numbers very quickly, we want to be 50% or $600 million category, which is 40% of the $1.5 billion, that’s about $200 million to $300 million in 3 or 4 years. That’s our goal for the whole Latin America market and maybe sections of the U.S., but it could be a big business for the company, and that’s our target.

As you know, we have decided, actually the first quarter of sale — full sales in Mexico has been huge one, surpassed our expectations. In the case of Mexico, we think that this brand is going to be very close to $20 million to $30 million this year. So in our journey to get to that big number, then we launch and develop the brand in all the countries.


Operator [30]


This does conclude the Q&A portion. I would like to turn the conference back over to management for closing remarks.


Jorge Luis Brake Valderrama, Genomma Lab Internacional, S.A.B. de C.V. – CEO [31]


Okay. Thank you, operator, and thank you, everyone, for joining us today. Our experienced leaders and employees are executing on our strategies, which are defined to build long-term value for shareholders, while reacting to changes and capitalizing on opportunities.

I want to recognize Genomma associates throughout the America for driving our momentum and success and credit them for their efforts, engagement and product into this new environment during a very volatile time.

I want to particularly thank our many employees who are working hard every day and arriving to support Genomma and their communities.

Our commitment to our long-term financial objectives have not changed. We are very well positioned for growth. And as always, Genomma remains focused on delivering on our commitments and responsibilities to our consumers, communities and shareholders.

Please free to contact us, any time to provide further information. And thank you for your time as well.


Operator [32]


Thank you for joining us today. You may disconnect your lines at this time. Have a great day.

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