Good afternoon. This is the Chorus Call operator. Welcome, and thank you for joining Recordati conference call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Miss Federica De Medici. Please go ahead, madam.
Thank you, George. Good afternoon or good morning, everyone, and thank you for attending the Recordati conference call today. I'm pleased to be here with our CEO, Rob Koremans, and Luigi La Corte, our CFO, who will be presenting the 2023 first quarter results. They will be running you through the presentation. As usual, the set of slides is available on our website in the investor section. After that, we will open up for Q&A. Please, I now leave the floor to Robert. Please go ahead.
Thank you, Federica, and good afternoon, ladies and gentlemen. Welcome on our call. This year's first quarter confirmed Recordati's ability to consistently deliver outstanding performance and showed an excellent start of the year. With revenues at EUR 551.4 million, up 31.5% versus previous year or 21% on a like-for-like at constant exchange rate, with strong underlying momentum across both business units and across all key markets. I am extremely encouraged by the overall group performance. SPC grew double digits ahead of the relevant markets, thanks to continuous improvements in competitiveness. I'm also extremely happy with Endocrinology's growth of 44.7% on a year-over-year basis. A really successful onco franchise integration, where that business showed 24.2% growth on a year-over-year pro forma basis.
In the first quarter, we also benefited from strong metabolic performance, which was resilient and so far very low and slow penetration of the generics in first quarter. It is really worth highlighting some phasing, some real one-offs, and some seasonal shifts, but we are still able and very happy to upgrade our full year guidance. The strong underlying revenue performance enhanced by channel movements in Turkey and Russia and phasing of shipments to international distributors with a total Q1 benefit of roughly EUR 15 million-EUR 20 million, the largest part of which was in our SPC unit. What was also quite exceptional in Q1 was a strong cough and cold the season. The flu season was very strong, and we were able to benefit from that in most of our markets.
Also in Turkey, we've seen throughout the year and again also at the beginning of Q1, multiple price increases as a reaction to the constant devaluation and inflation that we see in Turkey. The high volume also gave us a high operating leverage, and this allowed us to really deliver strong operating and bottom-line results with an EBITDA of EUR 220.8 million. Operating margins benefit from fixed cost absorption level in COGS and a gradual ramp-up of the R&D spend related to also gradual ramp-up of R&D activities, very much in line with our plan. Adjusted net income of EUR 155 million or up 33.3% versus previous year, driven by the positive operating performance, partially offset by higher financial expenses due to higher net debt and increased interest rates.
Our net debt of EUR 1,339.6 million were leveraged at 1.8 times LTM EBITDA, with strong free cash flow of EUR 103.4 million absorbing working capital increase, which was in inventories and receivables from high business growth. Also, we're very happy with the key R&D pipeline projects progressing to plan, and Luigi will expand on that a little bit more. We're very happy to raise our full-year targets for 2023, which are now expected to exceed top end of the guidance range that we set in February, both on revenue and on bottom line. With that, I'm handing over to Luigi.
Thank you, Rob, and good morning, good afternoon, everyone. Always happy to provide more color on our financial performance, and even more so on days like this when the performance of Q1 was so strong. As usual, I will start by providing a little bit more perspective on our revenue growth drivers. I will do it by giving a little bit more color on the core therapeutic areas of each of our two business units, which I think is hopefully a more helpful way to go through the numbers. You will find our usual disclosure on key corporate products in appendix.
Starting with Specialty and Primary Care on slide 3, you will see that SPC was really a key contributor to growth in the first quarter, with all our therapeutic areas growing at double digit, and with growth really broad-based, you know, driven both by our corporate and local products, both Rx and OTC. Clearly supported by a strong underlying market growth. Fair to say we grew ahead of our competition, benefited as Rob has said, also some phasing benefits and obviously the impact of very high price increases achieved in Turkey over the course of the last 12 months, and a really exceptional cough and cold season.
I'll try and unpick those effects as I go along. You'll see strong growth of our core legacy cardiovascular franchise, which is still our biggest franchise in SPC, growing by 12.6%, driven by Lercanidipine franchise, which benefited to the tune of around EUR 6 million from timing of shipments to some of our international partners, grew in most of our direct markets as well, and particularly in the U.K. We had broadly stable sales of Metoprolol and Pitavastatin, and a little bit of erosion in some of our local cardiovascular portfolio, and felt a little bit the effect of tenders in Germany.
Urology franchise grew by 29%, led obviously by continued strong performance of Avodart that not only grew but gained market share in a number of our markets. That's ahead of the rollout of the new device. So obviously strong performance there. Robust sales of Silodosin and also some of our key local brands, Tergynan in Russia, Miktonorm in Turkey. An initial contribution from Telesil in Italy of EUR 0.8 million. GI and also the long tail of other therapeutic areas grew by over 10%, driven by products like Procto-Glyvenol, our probiotics franchise, Magnesio Supremo and Eumill in Italy, just to name a few, once again across both our Rx and OTC products.
Really the standout obviously here on the page is cough and cold, with growth of close to 67% year-over-year. We see we've added on slide 4 a little bit more perspective on the evolution of cough and cold. It's been such a big driver of fluctuations over the last year. You will see that the chart compares quarterly revenues of 2022 and now Q1 2023 to pre-pandemic levels, so 2019. You will see from the blue bar that Q1 last year was still quite a bit below pre-pandemic levels, but started recovering and progressively grew ahead of 2019 over the course of Q3 and Q4.
Q1 this year was clearly an exceptionally strong season, well above pre-pandemic levels. Once again, this was on the back of, and you would have heard this from other companies as well, a very strong underlying market, which we were able to respond to, and benefited from it. There was also a little bit of effect here from restocking on Russia, on the back of strong sellout in the market at the end of last year, all of which contributed to a really standout quarter for cough and cold. We don't expect these kind of rates to be sustainable.
In fact, we expect the remainder of the year to be closer to the levels achieved in Q2, Q4 of last year, as some of those phasing benefits unwind and factoring in also headwinds, which we expect based on consensus on the ruble. Turning over to rare disease on slide 5. Rob has already called it out. All of our key franchises and future growth drivers are absolutely tracking in line with the targets that we have set. In Endocrinology, we continue to see a strong uptake of Isturisa, both in the U.S. and in E.U., particularly in those markets where we recently achieved reimbursement, but also continuing to enjoy double-digit growth of Signifor.
Isturisa was up over 70% in the quarter, Signifor, by just over 20%. We also had a very strong start of the year on the oncology franchise with QARZIBA growing outside of Europe, mostly, and Sylvant really growing across geographies. As Rob has commented, metabolic performance was also very resilient and ahead of expectations, thanks to the continued growth of Carbaglu and Cystadrops, particularly in the U.S., but also in particular, thanks to a more gradual erosion from recent generic entries in U.S., which we have however started to see impacting in Q2. Finally, on rare disease to note, we're continuing to progress on the various opportunities which we talked about in February.
I'll call out the work that we're doing to prepare for developing a Signifor in a new indication, PBH. We've had positive feedback from the FDA on our proposed development plan, and are on track to start that off in Q3. Of course, look forward to providing more update on that and the other programs over the course of this year. On slide 6, you will see our usual chart with revenue by geography. You know, in brief terms, as growth was solid across all of the areas, clearly reflecting the strong performance of the two business units, and the addition of EUSA.
I'll focus like maybe on the outliers, which really showed exceptional growth, and that are the key ones behind those EUR 15 million-EUR 20 million benefits of one-off and phasing that we've called out. First one on the chart is Turkey, which you will see as in local currency terms more than tripled sales versus the Q1 of 2022. That's really down to things, one, very significant level of price increases that were both awarded by the authorities to the sector, but also achieved by our team in Turkey on some of our key products, which drive a significant portion of the growth. We do see continued good underlying volume growth in Turkey as well.
In this case, in Q1, this has also been distorted by the phasing, in fact, the timing of those price increases as you can expect when they happen. There's always a little bit of tug-of-war with the wholesalers around the quantities shipped. I think that probably led to somewhat soft Q1 2022, and now a somewhat strong Q1 of 2023 in Turkey. The pricing clearly has more than offset the devaluation in this period of the Turkish lira. Don't forget that under hyperinflation, what will count in the end will be the exchange rate at the end of the year. Russia, other CIS in Ukraine, obviously also growing significantly by 87.3%.
that benefits from around 5 million years of effects, particularly in Russia. You'll recall last year, the ruble moved a little bit widely over the course of the year. The growth there driven by the strength, obviously, of the Cough and Cold portfolio. And also in Russia, some of the pricing actions that were taken over the course of 2022. We are starting to see in Russia a bit of softening of volume growth in the market as a result of the impact of the economic sanctions.
Finally, other international sales also posting a strong growth of 48%, driven by around EUR 6 million benefit, which I've already mentioned, phasing of shipments of Lercanidipine, in particular to our international customers, and the addition of the oncology portfolio, which in the international markets was particularly relevant, and which is also behind a large part of the growth which we're seeing in other Western European markets. Finally, on this slide, the only other thing I'll highlight is obviously the continued strong growth in the U.S., behind the rare disease franchise, with U.S. now accounting for just over 14% of revenue, and getting very close to becoming our number 1 market.
Turning to the P&L, on slide 7, hopefully you are as delighted as me to see that the strong revenue performance is flowing through nicely to the bottom line. Margins obviously reflect both the effect of the higher revenue and hence operating leverage. Also you will see a strong and very resilient gross profit margin, which at on an adjusted basis, you're adjusting for the unwind of the EUSA fair value step up of inventory, is holding up very closely in line with last year. So far we've proven able to offset that through the mix of things that we said we would do last year, a bit of the pricing.
Obviously, the high volumes also help absorb the fixed cost base of our manufacturing sites. We do have a benefit from a good mix this quarter as well. SG&A expenses at EUR 150.4 million are very much in line in terms of run rate with where we were post the EUSA integration, starting Q2 of last year, reflecting the benefit of some of the efficiency initiatives which we kicked off and announced already last year, namely the SPC right sizing, the synergies we're extracting from the EUSA integration.
Within that, selling cost at around 21.8% and G&A cost around 5.5%. R&D expenses at EUR 60.5 million, a 38.4% increase, step up versus last year, of course, as expected, obviously reflecting the integration of EUSA, an additional roughly EUR 8 million incremental amortization, but also the gradual step up of activities that we planned over the course of this year and which we expect that will gradually increase as we progress our key development programs. The one negative line on the P&L, I think Rob called it out. Of course, no surprises there. Financial expenses ahead of last year at EUR 12.6 million.
There's a EUR 1.5 million benefit in there from effects and the benefit of in net monetary gains from IAS 29. We will see financial expenses step up further in the remainder of the year as variable rate loans reset on the back of, as you all have seen, reference rates which continue creeping up. All that consider leads to very strong margins, EBITDA of 40% for the quarter, adjusted an income of 28%, with high margins across both business units and both growing by over 30%. That translates also in continued solid cash flow generation for the group on slide 8.
Cash flow, free cash flow of EUR 103.4 million, clearly reflects the strong EBITDA, but also, on the other hand, the increase in working capital, purely driven by the increase in the volume of the business. In fact, inventory days decreased nicely since the end of December to mitigate a little bit the impact. Always tricky on a quarter by quarter basis to call this one, but not expect, you know, very substantial further increases in the remainder of the year.
The cash flow, combined with our operating performance, and to finish off on my side, leads, as you have seen on slide 9, to us showing still a very solid balance sheet, with leverage at just over 1.8 times last 12 months EBITDA and very much in line with our planning guidance. With that, I'll hand over back to Rob to provide a perspective on our full year outlook. Rob.
Thank you, Luigi. As you can see on slide 10, we are increasing now on the back of our really good first quarter, the excellent performance that we're achieving and the view that we have for full year 2023, we do expect to exceed the top end of both the top and the bottom line guidance that we gave earlier. Revenue expected to be between EUR 2,050 million and EUR 2,090 million, with top line outlook for SPC to deliver mid-single digit growth and our rare disease business to expect to continue to deliver double-digit revenue growth. Very, very good revenue development going forward. EBITDA above the original range set in February, now between EUR 750 million and EUR 770 million.
The margins that also Luigi already alluded to, where we set them originally around 36%±, we now see them creeping closer to the 37%. We expect lower quarterly revenue run rate, increased inflation that will creep through on our costs, and the step up in R&D activities that was planned and we're executing on will also have a slight increase in the expenses. Then quarter four historically has always been the lower quarter, and I don't expect this to change in this year. Despite the fact that we see a financial expenses step up, as we alluded to before, we are now also raising the target for the...
an upgrade to the adjusted net income target, for between EUR 490 million and EUR 500 million. Momentum being really, really good, and I'm very confident for the outlook for our business and the ability for us to continue to deliver and to continue to thrive. With that, I would like to hand over to you and allow for questions.
We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question comes from Isacco Brambilla from Mediobanca. Please go ahead, sir.
Hi. Good afternoon, everybody. Three questions from my side. The first one is on Eligard. Could you please confirm if there is anything
A non-recurring supporting first quarter performance, or if we should expect this pace of growth even for the rest of the year. Second question is on R&D. You mentioned some sort of phasing in spending. Could you please give us some color on the incident, some phase of R&D embedded in your guidance for this year? Last question is on external growth. With such a strong organic momentum this year, should we expect plans in terms of external growth to be, say, set aside in the coming quarters? Thanks.
Sorry. Acoustically, the third question was very difficult for us to hear. Could you repeat the third question, Isacco?
Last question is on your M&A strategy. Since you are experiencing very strong momentum on an organic basis, should we expect some sort of, say, delay in terms of urgency of your external growth in the coming quarters?
Thanks for the question. Let me maybe address the last question and the R&D question and then hand to Luigi to address the first question. Our strategy on M&A hasn't changed. We will take the opportunities. We have a very clear, defined strategy on the sort of targets we're looking at, both in terms of partnering and acquisitions. With EUSA fully integrated, and that work being done, we're really happy and able, as you said, we're generating good performance out of our business. That enables us to really do the deals we want to do. This is absolutely on our agenda. This is actively being pursued.
That hasn't changed for both the SPC and the rare disease business as is our strategy. What you see on the R&D is a step up. I think the two programs that I would like. This was planned. One is the continued development on REC 0559, where we are in phase II, and enrollment is going really well. We expect to be able to finish and report results on that in line with our plan, but that also comes with increasing costs. The same is true for the planned studies that we now have aligned with the FDA on the so-called BPH indication, which we believe is very important, and we shared with you when we did the three-year outlook, and that is also fully in line with plans.
All the things that we were planning to do are actually happening, and with that come the cost. These are strongly focused on our rare disease portfolio, where we have opportunities to expand the indications. There's low risk, fairly affordable, but it will creep up slowly, as we indicated before. We're talking about in total at year-end throughout the period, not even 1% increase in R&D expenses. It's quite moderate. Notwithstanding that, we're very able and confident to be able to keep our margins, in fact, even increase the guidance for this year.
Hi there, Isacco. To your first question, short answer is no. There's no real one-off effect on Eligard that said, you know, I'd always caution people to taking a single quarter and extrapolating. Just to be absolutely clear for everyone on the call, where we saw the one-off was really in three areas. One on the Lercanidipine, two in Turkey, driven by sort of different timing across the years of price increases and, you know, channel dynamics that drive, and three in Russia. You can assume that EUR 15 million-EUR 20 million to be split pretty much equally across those three. In Russia, it was mostly on the cough and cold portfolio.
I hope, hopefully that addresses your question and helps unpick those numbers.
Yes. Many thanks.
The next question comes from Martino De Ambroggi, from Equita. Please go ahead, sir.
Thank you. Good afternoon, and good morning, everybody. I'm focusing on the guidance, because if I look the change at midpoint, your implicit incremental EBITDA is 70%+. I understand during your speech you mentioned there is a higher absorption of fixed costs, but could you elaborate on what else had such an important impact on profitability for your change in guidance? This is my first question.
Martino, hi. Luigi here. I'm not sure I captured the percentage that you quoted in terms of. I think I thought I heard you say 70, but I don't recognize that number.
60%+, the change in midpoint EBITDA from previous to current guidance midpoint, and compared to the change in sales, always midpoint. In any case, it is much higher than the 37% that you performed in Q1
Just to be clear, in terms of, you know, the drivers of upgrade to the guidance are essentially really two. Number one is the revenue growth and operating leverage that comes from that. And, you know, of course, within that, we've built an assumption of, you know, potentially some of those, the benefits that we had in Q1 are sticking for the year and some unwinding. Then on the margin, you know, slightly, we were able to offset inflation in the first quarter.
We won't be able to do that for the full of the year, but we did have a benefit in Q1 that we would seek to repay. So apologies. Maybe I'll see if I can sort of reconcile the numbers that you're quoting and come back if you need more on the specific question. The drivers of the upgrade are those.
Okay. That my figure was very, very roughly. The second question is still on the guidance, because if I look at the full year 2025 guidance, you are just at the midpoint of the EBITDA, you are just 6% below the low end of the guidance. I perfectly know you will not discuss 2025, but it's too early for sure. Is there any reason why you shouldn't state that are easily achievable or maybe potentially could be revised upwards? It seems to be that the non-recurring event are not justifying and a big portion of the upwards revision this year.
Martino, you are absolutely right. We will not discuss 2025. I mean, that's really too early. The business is doing well. We're happy we have increased our 2023 guidance. We're confident that we're doing not only in terms of financial performance, but also in preparing our company for the future, the right things, like the R&D investments, like the commercial excellence, all those things that we're not gonna discuss or change or for that matter now, the outlook for next year or the year thereafter. We will definitely do this at some point in time, but I think at the moment, for us it suffices to really stick to 2023.
Okay. The last question on EUSA, because you guided EUR 185 million-EUR 200 million. I was wondering if you confirm this or probably considering the trend in Q1 could be even higher. I don't know if you can share with us the contribution of profitability from EUSA.
In line with what we just said on just looking forward, we just confirmed so far everything. By not explicitly mentioning it, I think we confirmed these things. Business of what we now call our oncology franchise in rare disease is really performing extremely well. We're happy with it. We're a little ahead of the plan that we had when we announced the deal, and we continue to do better. I would like to leave it at that.
Martino on that applies also to endo. Both of the franchises, as I said, you know, we're tracking in line with the guidance that we provided early in the year to be changing that. I think you were comparing the if I understood now correctly, you're comparing the EUR 17 million implied increase in the mid of the range on revenue to the EUR 45 million on EBITDA. Of course, the difference between the two is the operating leverage. You know, the EUR 17 million comes at a gross margin, which is much higher than the, you know, our average EBITDA margin. As you said, we've our initial guidance was a margin of 36%±.
As Rob said, we now see it moving closer to 37. That's why you see that higher, let's say, relative upgrade on the EBITDA level. Hopefully that makes sense.
Yeah, makes sense. Thank you.
The next question comes from Jo Walton from Credit Suisse. Please go ahead.
Thank you. A few questions, please. Just to start with, can you tell us what impact of foreign exchange you are including in your guidance, presumably at the net level for the year, not very significant? My second question is just a clarification. You've changed some of the way that you give us detail. It's nice and simple in, you know, in big chunks. Are you going to be able to do that? Is that how we should be thinking of modeling going forwards in terms of cardiovascular, urology, et cetera? Or is this just a one-off illustration? Then my main... Associated with that, in terms of cough and cold, how much of that is prescription and how much of that is OTC? Because at the moment, we model those two separately.
My main questions, if I could please, just thinking about a couple of products you've got. You talk about your Qarziba, your Type C meeting with the FDA and the outcome of that in 3Q. Just are there any issues that the FDA has brought up? Anything we should be aware of? I think we all assume that that's going to be a fairly, you know, simple move forward. You talk also about Carbaglu getting ready for a potential launch in China. Would you try and do that yourself? Is that with a partner? Just a little bit of your broader geographic ambitions and whether you would like to have more of a footprint in some of these other markets. Many thanks.
Okay. Maybe Luigi, you wanna answer the first couple of questions from Jo?
Yeah, that's happy to do that. Hi, Jo. In terms of effects, we've modeled as usual, what's suggested also by consensus. It was fairly benign, this first part of the year. You know, the ruble has moved against us, and as has the Turkish lira has continued to creep up. I didn't check. By the way, we're announcing these results today, on the day of the elections in Turkey. We are seeing at the moment effects for the full year close to around 2% in terms of headwind, more closer to -2 than -1 for sure.
Q1 to date was very small because if you recall, the ruble had this very funny movement beginning of last year. For modeling purposes, Jo, to ensure that you had all the details, we did keep in the back, you will find all of the details that we've disclosed in the past on corporate products, local products, OTC. I don't believe we ever gave a split of cough and cold between Rx, OTC, but we can come back to you on that. So you have all the details there. We believe, and it's a little bit in line with where we presented the plan, that looking at these MA categories is probably a better way of looking at the business.
Corporate products, you know, only was really speaking to SPC. Some of them are probably gonna be flat or thereabout for the coming years. You know, we've given visibility on both.
Maybe Jo, on the filing meeting planned for Q3 this year on Tarceva with the FDA. as you well know, these meetings are never a walk in the park. You have to really prepare for the best possible outcome. data analysis is all going well. We're confident, but we have to be really well prepared, so it's not a given that this will just automatically follow. we're well on track and happy with where we are and that hasn't changed. Carbaglu in China, we do plan to do that ourselves. in the past, we've worked with a distributor for Lercanidipine.
We've also had a partner in our onco business for China. We're very happy with that because we really believe that's a super competent partner in the oncology space. In endocrinology and metabolic, we want to build our own presence, and we're doing that gradually during this year to be able to launch early next year, which is the plan. So far everything is in line with that plan.
Can I just follow up please with a broader question? Is part of the reason that you are able to have a small upgrade in sales, the fact that the market environment has just been a bit more benign? I know in the U.K. we've had some, you know, nasty rebates and things, but that's not a market that you're particularly involved with. Would it be fair to say that in general, the pharma market, particularly in the countries that you're operating in, have, you know, we've not seen any extra austerity measures and things are relatively benign and that you're just a little bit more confident about things? Or is it something whereby you have outperformed the market more?
It's more the latter, Jo. We have outperformed the market in just about every of the markets where we compete. The parts of the portfolio that we do not promote, obviously, benefit from a good market. That's right. All the areas where we do promote and all our focus products are outperforming the market, without exception. It's a bit of a combination of both. Of course a thing like the cough and cold season is not something you can ever predict, and as Luigi shared, this one was exceptionally good, so that's not something we wanted to budget for or share with you at the before the year start as a target. We have benefited from that. You also have to be able to benefit from it, right?
We've seen with some of our competitors that they were not able to react fast and deliver, and we've been able to really do that and very confident that our organization can continue to do, make use of opportunities as they come. What makes me very optimistic and confident is the fact that we're outperforming the market and that we've increased our competitiveness with a much more focused and smaller team. We have significantly improved through commercial excellence exercises, and we are doing really well on that. If you look. That is mostly on the SPC side where we've done that exercise. If I look what we've done in the U.S., where really a fantastic momentum, which is a really important market going forward, as you well know, for rare diseases.
The key markets I would say, the way that our endocrinology franchise, our onco franchise and in fact even our metabolic franchise have held up, or are growing, that is, very encouraging. That's also part of the reason why we're able to increase the guidance for this year. These are things that we will continue or expect to continue and make us very happy and confident.
Maybe, Joe, if I can add to some of your this question in the earlier one. We're not immune from effects that also others are seeing. You know, in Germany, we called out already this quarter, and I'm sure we will continue to see for the remainder of the year pressures from tenders. In France, we have seen, you know, increase in clawbacks. They don't impact us very materially in France, but what they do. You know, we have seen people avoid, most concern is, as you said, U.K., MedTech, in Italy, but you know, we don't we're not really exposed to those.
Finally, on the way of looking at the business and the numbers, you recall on SPC, when we went through the plan with Alberto Martinez, went through the plan, you know, we spoke of the three therapeutic areas, you know, cardio, urology, and GI as really being our core, and that's how we look at the business and how we drive it. We think a little bit less in terms of core per product versus local. That's why we've decided to sort of present them and hopefully provide a bit more color in the way we've just done.
Thank you.
The next question comes from Nicolò Storer from Kepler. Please go ahead.
Good afternoon. Thanks for taking my questions. The first one is just a clarification. Is it right to say that the increase in your guidance has come entirely from Specialty and Primary Care with targets set out during business representation for rare disease business, broadly unchanged? The second question is on gross margin, which as you highlighted before, net of inventory uplift, we are flat year-on-year. My question here is why should we expect things to worsen over the coming quarters if we have to? Last question is on the evolution of lercanidipine and silodosin.
I think that also, if we take out the pre-buying effect on Lercanidipine, you mentioned the performance of the two, Zanidip and Zanipress was nonetheless very strong. Urorec was very strong. Maybe if you can shed more light on why that. Thank you.
Yeah. Thanks for the question, Nicolo. The increase in guidance is on the back of both businesses, Rare Disease and Specialty Primary Care performing really well, in terms of market shares, in terms of everything, and it makes us confident to increase the guidance for both. Like I just said also in answering Joe's question, if I look at our Rare Disease performance, for instance, in the U.S., but also in Latin America, in Asia, and across the board, it's really doing extremely well, and that allows us to increase the guidance. Maybe, Luigi, you wanna take the question more on the margin because of the remainder of the year? Yeah, sure. No, thanks.
It's an obvious question, Nicolò, on gross margin. Gross margin in Q1, as I said, is benefiting from a number of things that are helping offset inflation impact, which we are seeing and will continue to see. You know, number one, we have the benefit of pricing that we took particularly last year. If you take Turkey aside as a little bit of an outlier, remember I said last year, over the course of the year, we took a bit more pricing than we've done historically. Far this year, you know, excluding Turkey, we're only marginally positive, so we've taken some price actions, but we also see the impact of erosion in Germany.
That it's like that pricing benefit and offset to inflation will become a little bit lower. Another source of benefit in Q1 is the fact that we had extremely high volumes, and you'll recall 60% of our products are manufactured internally. We have, you know, that comes with a portion of cost, which are fixed, which in Q1, you know, were absorbed and amortized over a greater volume. That provides a benefit. If you recall, we also said that in the plan presentation that we benefited last year and would benefit in the first half of 2023 still from some of the hedges and energy costs, which were taken out in 2020.
Energy costs have been coming down versus the peaks they achieved, but still, they're higher than, you know, certainly, well, significantly higher than where they were in 2020. You know, these things do take a little bit of time to then creep through inventory, but, you know, we do still expect what we said at the start of the year to hold true, and that is that we expect to see, you know, gross margin for this year below the level of 2022. However, that impact to a large extent, offset by the operating leverage benefit from higher sales on SG&A and the benefit, obviously, of the other efficiency initiatives that we've been taking.
You still get the meeting.
No, I don't think that's for us.
Okay. Hopefully, Nicolò, that addresses your question.
Yep.
That's really why we expect. Yeah.
Then maybe the last on the base products like Lercanidipine. That has benefited. Sales in Q1 were higher in the international division, where we export, for instance, to Russia or to China. There was a very good benefit. In general, for these products like we have indicated, we are really seeing good stabilization well after loss of exclusivity for these products. There is a low single-digit volume growth that is basically on the back of the increased prevalence and incidents and number of cases that require treatment for diseases like hypertension, which is what we expected. We're able to really hold our shares there really well.
going forward, we expect this to stabilize or continue to stabilize and allow for growth through the products that really drive our growth, which are not in this, which are not Lercanidipine and products like that.
Maybe I just add on to the other thing, Nicolò. I think, you know, number one, this is one of the products where actually in Turkey, our colleagues were able to negotiate a level of pricing over and above, you know, what was generally awarded to the market. That was on the back of also the fact that we source the cost goods in hard currency. On the and also on the... Sorry, there's a bit of background noise. Someone is not doesn't have the line...
No, maybe it's me.
I think it might be Nicolò.
Oh, okay.
Let me put it in mute.
No. Also I'd say, you know, there's a little bit of a positive halo effect. When you're out in urology with a field force excited by the positive performance on Eligard, you know, obviously you see a little bit of benefit on the other products in that same franchise that those same reps promote, which again, why we think looking at things by category, you know, makes sense from our point of view.
Thank you.
See you. Bye.
The next question comes from Charles Pitman from Barclays. Please go ahead.
Hi. Thanks very much for taking my question. Sorry if there's a bit of background noise here as well. If my questions repeat anything, I joined a little late. My questions relate to, first just on M&A and kind of your intentions for debt. Obviously, you had good free cash flow. You like paying it down to kind of 1.8 times now. I'm just wondering if you can give an update on kind of how you're thinking about kind of covenants and maybe what level you'd want to bring that leverage down to before you thought about kind of M&A in kind of more holistic sense. Maybe just one a little bit more kind of theoretical.
Obviously, we recently saw the EU proposals for reform that highlighted that companies needed to launch their products in all markets. Given you have very good geographic reach, I was just wondering if there's any implications for Recordati over the longer term as a result of those proposals. Thanks so much.
Thanks, Charles. To start off with the latter, no, we don't really see an implication of these reforms. Of course, we monitor this carefully. Like you said, we have a really good coverage of all of our European markets, and, not, like, so as far as we can judge now, this is not gonna be something that is gonna impact us too much. As to M&A, our strategy hasn't changed, neither has our willingness to take on debt. We have, the governance hasn't changed either. So we keep with, at the moment we're at 1.8, and that is something that we're quite happy with, but of course, aim to bring that down.
For the right deals, we'll go up and we'll go for the best deals in class with others. High as three, and that's it. Nothing changed at all.
We're not working to a specific, sort of target, leverage before we would do a deal. It really also depends on the opportunities. We feel we're in a good place, right now within the guidance that we set. We look at opportunities all the time, as we've always said.
Thank you.
Welcome.
As a reminder, if you wish to register for a question, please press star and one on your telephone.
I think if there are no more questions and everyone having full agendas, thank you for joining. We were very happy to share this, what we believe very good base for the remainder of the year. Very happy with the results, very happy with what my colleagues are delivering all over the world, and confident about the future and our ability to continue to deliver. Thank you for joining us today and looking forward to interact with you and keep you updated. Bye.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.