Earnings Call: Q1 2021

Apr 23, 2021

Good morning. Welcome to HEPERA Pharma First Quarter 2021 Results Earnings Call. Mr. Brando Olivera, CEO and Mr. Ado Mario Corto, CFO and IRO are here with us today. This event is being recorded. All participants will be in a listen only mode. After the closing remarks, there will be a Q and A session for investors and analysts. Further instructions will be given then. Pharma. Today's live webcast is being broadcast at www.hepera dotcomtapir. We also would like to inform that statements during this conference may continue forward looking statements. Such statements are subject to known and unknown risks and uncertainties that could cause the company's actual results to differ materially from those Expected. I'll turn the floor over to Mr. Bruno Olivera. Mr. Olivera, you have the floor. Good morning, everyone. Welcome to our First Quarter Earnings Call. I would like to start by talking about our growth on Slide 3. For the Q2 in a row, we grew our sellout organically in double digits and we gained market share. Organic growth was 11.5 percent in our sellout, 2 percentage points above market. The comparison for the sellout is very challenging in this quarter because March last year, The market grew by over 30% when consumers went to drugstores to purchase medicine right at the start the pandemic. Our sellout growth is favored by the gradual improvement of the pharmaceutical industry starting in Q2 last year as well as our initiatives to boost our growth. Similar and generics were the highlight with 2 digit Growth. We are benefited by our distribution network to boost Neo Chemica brand and through the expansion of our production capacity. In our pipeline, we have important new products that can contribute to increase our coverage in the generic products, reaching 55% of the total molecules in the market by year's end. On top of that, in this quarter, we signed a master sponsorship from a soccer club of the Neochemica Arena signed last year. In prescription products, we grew over market average. We are reaping the harvest of the new products we introduced for chronic use and we also benefited from the strong performance of Colfax, Ofolatto and Adara brands. In skincare, the portfolio has been growing heavily or strongly Ever since we acquired the Glenmark portfolio, in consumer health, I would like to point out vitamins, supplements and nutritional products Benefited from the extension of vitaCy and Fin brands, the gastro segment with Tamarind, Epochlear and Gastro brand and the recent introduction of Marakogina Noiti. By concluding the acquisition of the Takeda Brands portfolio, We have strengthened our business in this area of consumer health. With these acquired brands, we have consolidated our leadership at 20% market share and we are now the 3rd largest player in the prescription Sector. The integration of acquisitions are according to plan. In the late Q1, we had sales and marketing teams from Takeda already integrated to our structure. And in terms of operation, at the end of the second quarter, We have all the Buscopene secondary packaging and the entire Takeda portfolio being produced in Annapolis. And by early next year, the entire boscopene production will be conducted in our facilities. We have a pipeline with over 3 50 projects with the potential to grow the size of the company substantially in years to come. These investments are already yielding good results as you can see on the next slide. 34% of the revenue From this quarter came from products introduced in the past 5 years, an 8 percentage points growth Since we started concentrated our operations in the pharmaceutical industry in Brazil and intensified our investments in R and D. In the quarter, we have important introductions. Let me point out the expansion of lines of neochemical vitamins for both vitamin C and vitamin C plus Zinc. Adara Flesh, the first film D vitamin and AlectoSPED, an extension from the enhanced estimate patented and acquired from Takeda to promote them for pediatric use. Innovation is part of our DNA. We've been investing more than any other player and introducing products in relevant segments in this market, and they are contributed substantially to our sustainable growth. I'll turn over to Adel Mario. He'll be talking about this quarter's results. Thank you, Bruno. Good morning, everyone. I'll be talking about the highlights of our results and also for the cash flow in the quarter. Let me start on Slide 6, please. Sell in, that's our net revenue. Growth was almost 44%, driven by the consolidation of the Boscapan family numbers and the 2 months of the Takeda portfolio sales at the company we've recently acquired. In the quarter, when we combined the 2, Their contribution was about $220,000,000 of additional sales. When we compare to the same basis last year, excluding the contribution of acquisitions, growth would have been 16%. Out of this 16% price increases contributed in about 5%. Volumes went up about 11%. All our product lines where we operate had positive contribution towards their growth, a market share gain in several important categories. I would like to point out generics and similar products. Gross margin was 64% in the quarter, over 2 percentage points drop when compared to the same period last year because of the exchange rate and the product mix. The average Exchange rate was BRL 5.07, a favorable impact through the hedging policy implemented by the company. Depreciation was 26% when we compare to Q1 of 2020, trying to mitigate exchange rate devaluation and to protect ourselves from future volatility, we have updated our prices in early April. And as we said in the previous call, we had 100 percent of hedging of 100% of inputs pegged to the dollar for 2021 at R5.30 dollars Onto expenses now. We had a 19% increase in sales expenses because of the increase in the R and D Infrastructure and we incremented or we improved our bonuses and The total investments grew by 2 digits. That is proof of our commitment to innovation and sustainable growth. Marketing expenses went up 18% By investing in new markets, especially for media expenses in the case of Buscopene and free samples. Increase in Takeda portfolio. We had important introductions just like Amomi. It will compete with the Nasonex brand. And by doing so, We have increased substantially the free samples, which is common when new products are introduced. Despite that positioning, we had a major drop as a percentage of revenues when compared to the same quarter last year, over 22% to 18% of our net revenue. That's the first indication of the synergy capture when we acquired these Other Brands. SG and A went up 12%. As a percentage of revenue, they were We have an EBITDA margin of almost 31% in the quarter, dollars 862,000,000 EBITDA, Substantial growth of 45% when compared to the same period of last year. The financial results was negative because of the leverage levels after we paid for the Taked acquisition. Taxes was slightly positive because of interest on equity and Because of Government Subsidies as well. Net income was $307,000,000 in continuing operations and in total $305,000,000 and almost 28% growth. On to cash flow on Slide 7, We had an operational generation of 151,000,000 When we use working capital of Takeda, dollars 135,000,000 and payments of that sponsorship on that soccer team Jersey. We had smaller CapEx investments when we compare to the past two quarters of 2020. We're almost concluding the expansion construction site for the solids unit in Annapolis. In intangibles, we have the net payment of almost BRL3.4 billion, R and D investments of $47,000,000 and the payment of Simp Organic. In the quarter, We took some financial additional financial lines for a 2 year term, And that's according to our strategy to have that cash cushion because of the impacts of the lockdowns that would be announced that were announced back in March. We also paid interest in our equity for 2020 In late March, interest on equity was BRL195 million, dollars 0.31 per share as to the Q1 of the year, a 5% increase when we compare to last year's numbers. The year was almost 4%. By doing so, the company has a cash position of BRL1.7 billion and the net debt level is BRL5 billion, 2.5 times. The EBITDA We have announced as our guidance for the year that was announced in Hype Day. Let me comment that in early April, we announced the sale of our distribution center for the consumable products for BRL 231 million that will contribute to reduce our leverage levels. As to the balance sheet accounts, major changes was the liquidity position, reducing cash position. On the other hand, we had more intangible lessons after we acquired Takeda's portfolio. When we look at the major lines that contribute to working capital, we had an increase of almost 20% of finished goods and raw material inventory and a 10% increase for our consumers. Receivables is in line with what we had last year. By doing so, we had more cash conversion, 174 days. The most important impact was the working capital for Takeda. I'll give the floor back to Bruno for his final remarks before we go on to the Q and A. Thank you, D'Amario. We're very pleased with Hepera's results In the Q1, 12% growth in sell out, 44% in net revenue, 60% when we exclude acquisitions, 46% EBITDA Growth and 24% in net income of a continuing operations. The sell out growth in recent months, the integration of acquired portfolios, the new launches and the innovation pipeline with over 3.50 projects puts us To fight for the leadership position in the market, we are confident we're heading the right directions. Early data in April show a sell out growth over 25% that will entail In accrued growth for the year above 15%, along the lines of the growth we expect for the year. That's why early this month, we've announced the guidances for 2021. Net revenue about BRL 5,000,000,000, BRL5.9 million. EBITDA for continued operations, dollars 2,000,000,000 net Income, dollars 1,500,000,000 We remain confident in the growth of the Brazilian Pharmaceutical market And we'll keep on growing through innovation, M and A, considering new markets and new distribution channels such as the institutional market and e commerce. We'll continue to use cash generation to invest in our business to deleverage and to distribute dividends to our shareholders. Thank you for attending this earnings call and we'll move on to the Q and A session now. We'll now start our Q and A session Forum Investors and Analysts. Josef Giordano from JPMorgan asks the first question. Good morning, everyone. Thank you for taking my call. I have a couple of questions more focused on the short term. You talked about capturing synergies. When you look at the guidance about $280,000,000 for buskupan When should we expect the full speed of these synergies? What about short term? We had significant price increases in April, and your hedging seems to be very favorable at 5:15. What can you expect as to the gross margin and marketing expenses developments? It seems to be very small still. And the second question is more on the midterm business. You said that Towards the year's end, you have about 55% of molecules This is Brenna. I'll be fielding the first question about synergies and then Ade Mario will answer the portion of hedging and marketing and the last question about generics. All right. In terms of synergy capture, As you know, we acquired these 2 companies and we purchased the Takeda's Brand Portfolio and Boscopen. In the case of Boscopen, they had a small marketing team. They have already been integrated to our team include the integration of these teams. In the case of Takeda, they had a bigger team in terms of product portfolio as well. That call on doctors' offices. These results have already been captured as early as the Q1. Now on to the Q2. We start having synergies In terms of production, part of the secondary packaging is now being conducted here in our facilities. And By year's end, the entire production for Boscarpa as it is next year, early 2022, The entire BOS Kaplan production will be conducted in our facilities. Synergies in sales and marketing have already been captured and production synergies, Most or some of it, it will be captured now in Q2, we'll be making the secondary packaging and the rest or the remainder will come by for early 2022. And the Takeda will take longer because the production contract we signed with them will take from 3 to 5 years to transfer their production in house. But most of these synergies will be captured in this second quarter. You see most of these synergies captured in Q2 results. Hello. Let me address your question about price increases and margins. We increased prices back in early April between 8% and 9% on average. That helps to bring margins up. It hasn't been Enough to cover the 100% impact with exchange rate devaluations that occurred last year, but that helped. This Q1 is historically a quarter with smaller margins. But we expect that in quarters to come with these price increases, we may be able to restore gross margins. And we are comfortable They'll be able to reach our guidance for the year. That is the EBITDA margin between 33% and 34% for the year. It's closer to 34% actually. As to generic products, generic products have become more and more important overall. As we manage to have enough capacity to meet that demand for generic products. This is a very important point. We've been investing in increasing our capacity in the past 2 years and at the same time introducing new molecules to focus on those more relevant molecules that grow the most And then we'll be able to use the capillarity that we have for the Neo Kimika brand and also to benefit from the marketing efforts. And as a consequence, increased penetration. The coverage level will be over half of the market by year's end. And for the years to come, we'll have a very robust pipeline, not only for the molecules that already exist that are no longer exclusive, but many others that will be terminating that exclusively and some of them are very relevant and that will take place in early 2022. We are very well positioned to be one of the first companies to introduce products with those molecules. Thank you, Bruno. Thank you, Adel Mario. Thank you. Leandro Bastos from Citibank asks the following question. Good morning. This is a very quick one. When you look at the acquired brands portfolio, especially those from Takeda. How much is the sell out growth for these brands and what to expect from the future? It's breaking up a little bit. For Buscopan, grew 14% in Q4. It's growing in line with our original portfolio. Takeda's growth is somewhat smaller in February March mostly. It's a matter of placement, product inventory. We have been improving that work. It's growing Now in April, in line with the rest of the portfolio, about 20%. Let me remind you that Takeda has a less seasonal portfolio. It is not as impacted by COVID as the other products. From Glenmark. It grew substantially as we said, about 25%, 30%. Takeda at the start was somewhat more difficult, but they're getting back on track and we are growing over 20% now in April. Thank you. Have a good day. Robert Ford from Bank of America asks the next question. Thank you. Congratulations on your results. Can you give us some sales numbers for Q1. What about quality of innovation? When the repetition of these numbers. You are already innovating the Takeda portfolio. What about the other stronger brands you've also acquired recently? Hi, Bob. As to Pio Navis, it's about double digit growth. It's very relevant. Last year, we grew because of the new molecules that were included in our portfolio. Growth should be somewhat smaller, albeit significant. We keep on investing in Bionove heavily. We believe it's an important branch or an arm for the PDPs, we've been investing to have their its own facility and to have our own product before 2023, But growth isn't expected to be as high as the one we had last year. Thank you, Adamario. Could you repeat the other questions? Yes, of course, Bruno. What about quality of innovation? And Can it be repeatable when you purchase new products? And you're already innovating in the Takeda portfolio. What should be our take as to the change in innovations for your stronger brands that you have recently acquired? That was to have new introductions, line extensions, it was not their core and they were not investing in that direction. Did not introduce those products. Let me give you an example. The one I just mentioned, Alectus for pediatrician use, It was in their pipeline, but we ended up speeding it up and we introduced it. I won't be giving you any details about specific projects, but there are many things in our pipeline along those lines, There are launches for NIO, NelsauDENA, their number one brand, but I won't be giving you any details, but we have already mapped out that new launch. And the other question was about the quality of the Innovation Portfolio, right? Yes, that's right. Is that repeatable so that we can have a taste of the quality of that innovation? Yes, granular data, both from sellout sales as well as prescriptions. Of course, in the case of prescription products, and that's according to plan. When you introduce a new product, we put together a business plan for the products and we keep track of results very closely, and that's according to plan. Of course, some products do better than expected, other not as well. Thank you very much, Bruno. Congratulations one more time. Thank you, Bob. Guilherme Assis from Safra asks the next question. Good morning, Brenna Ademar. Thank you for taking my question. I would like to delve into the sell in topic when compared to sell out. You provided a lot of information about the organic growth and correct me if I'm wrong. Sell in was about 11.5%, sellout 16.3, right? You've also mentioned that you invested in working capital To normalize, I guess that's the word, your inventory levels for both Buscopan and Takeda Brands. What should we expect will sell in and sell out will gravitate towards 15% Hi, Guilherme. You've mentioned, well, in actual fact, sell out grew 12 and sell in, including acquisitions, grew 16%. Yes, that's right. That's right. Sell in grew more than sell out this quarter, but we do not look that quarter after quarter in terms of growth. In the last quarters of last year, sell out grew slightly over sell in. But in terms of non mineral values, we keep close track of everything. And spin Inventory levels have been kept steady. In the Q1, you have that increase, price increases, Customers profitability comes from the previous period before price increase And we negotiate that of course and this quarter sell in was a little over sell out. Let me remind you that in Q1 2020, We had the impact of the Q4 of 2019. There was some water shortage in Annapolis that impacted results was somewhat smaller, but we are not expecting any variations. Midterm basis, These growth will be closer together and that's our goal for 2021. Perfect. That was very clear. Let me just follow-up on that. As to the capital structure, You were very deleveraged. You were even given guidance for the deleveraging levels. Is there anything you can do to speed that deleveraging effort up? You sold your DC, right, dollars 130,000,000 Is there room to sell somewhat asset or any other type of activity to improve that deleveraging profile for the No, the only asset that was non operational was our DC. We had been working on trying to sell that DC for some time. We have finalized it now. We want to deleverage, of course, that's our goal, especially from cash generation. Our EBITDA conversion into operational cash flow is very high. And our intention is to use that cash generation to grow the business, to invest in the business, CapEx, R and D, So that's our goal to bring to less than 2x EBITDA on a midterm basis. We are 2.4 give or take using the guidance as our reference and our goal is to bring that Thank you, Guilherme. Caio Moscardini from Morgan Stanley asks the next question. Hi, I have two quick questions. The first one is about the sale of our DC. I would like to confirm That was $230,000,000 should be other revenues. It shouldn't be booked as the guidance of EBITDA. And my second question is about the cash flow. A return to historical levels on that front. Hi, Caio. The DC sales will not be booked as the results is not incorporated in our guidance for the year. The profit would be about $100,000,000 given the booked asset, but it shouldn't be reflected in our results. And the other question was about the recurring cash flow, is that right? Yes, the number of suppliers increased substantially. Is it the new normal or Would that be brought down to historical levels? The main component of our cash flow was the construction work we had to do for the Takeda portfolio. When you acquire a brand, unlike company acquisition. You don't get the receivables. We had to build that working capital gradually. We purchased the Takeda products, we have the inventory, We increased our supplier portfolio and that would be going back to regular levels in quarters to come. This impact won't be recurring when you look at the Q2 of this year, for example. Perfect. Thank you, Adamario. Thank you. Mauricio Sepeda from Credit Suisse asks the next question. Good morning. Thank you for taking my call. My question, Pedro Del Mario, my question is about the working capital. The question was about the sell in growing more than the sell out and you explained it. Would there be an opportunity to reduce the number of days worth of receivables or Working capital, as we see it, is being based on suppliers. Is that a result of Takeda's acquisition or is it the policy that the company implemented? And what about remote? Are you going to stick to a remote working, working from home? Are you going to resort to that or maybe a hybrid model? And I would like to know whether there are any specific risks in the Takeda contract as to the U. S. Dollar, Whether packaging is dollar based, whether there are any FX Risks in there. Hello, Cipeda. Thank you for your questions. Let me address some of them and then Adel Mario will take over as to the Takeda's contract. If I miss something, just let me know. Well, the first question as to inventory levels and our customers of the acquired portfolio. Yes, that's right. Because they have more predictability in their portfolio. Our intention is not to increase inventory levels. We're going to compare products, but our intention is to have to The trend is to bring that down slightly, maybe 100 days, give or take. That's what our expectation for years end. There was another question about Inventory levels go up as well and you impact the suppliers' account as well. Ever since the beginning of the pandemic, we have been increasing our inventory These raw materials come from China and India. We have increased our raw material inventory levels from China, from India. In Q1, we have boosted our inventory levels of raw materials. By doing so, we are at a better position to discuss or negotiate payment terms. And as to remote visiting in the beginning of the pandemic. And we've been resorting to that hybrid model. We expect to perpetuate that productivity gains are about 20% by resorting to this hybrid model. And we expect that to remain in the future. It's And as to the last portion of your question, the contract we have with Takeda, prices are in reals. The production of all the products is made in Brazil. It's a 12 month contract term that can be renegotiated every 12 months. Well, let me add to that. There's no difference as to what we have. The Takeda cost structure is very similar to ours. Raw material in general is imported. Jagayuna plant is even more exposed than yourselves, right? [SPEAKER PIERRE YVES LESAICHERRE:] Yes, that's right. Initially? That's true, yes. Perfect. Thank you. Thank you. Gustavo Tissil from Bradesco asks the next question. I have 2 actually. The first is about M and As. You've been trying to resort to M and A that will have less impact in the drugstore Expecting the same line of investments or anything disruptive coming along? What about the institutional sector? Are you going to boost investments to reach that 7%, 8%? And my second question is about commercial synergies from Takeda. You said that was marketing and you've already integrated their marketing teams. Coming from Takeda. Thank you. Hi, Gustavo. This is Breno. Let me answer the question about the M and A. The volume was very low. I don't know whether I understood your question. But I believe that the question was about new M and A opportunities for both the company and also in the Corporate Venture Capital Program. Let me start with the Corporate Venture Capital. We've announced 2 acquisitions And we had committed in late 2019 to invest up to $200,000,000 in that program. We're not disclosing how much these acquisitions were, but we still have room for new acquisitions. We're not in a hurry. There's no urgent need to allocate companies and startups that have that growth potential and which are related to the health industry in Brazil. As to the acquisitions for our own business, as I said, M and A has always been part of our strategy and it will remain so in the future. There are still Many opportunities, several multinational organizations leaving the country or even focusing on their core businesses and Selling Product Portfolios, OTC rather. Short term, the focus is deleveraging, but mid term basis, we keep close attention to new opportunities that may come up to our company. As to the institutional segment, our Focus is to grow organically there, both using the existing product portfolio and we have more production capacity now. Based on the investments we have made, we have room to tackle this institutional market. Just like we said during our Investor Day, a new product pipeline through partnerships just like we do in the products we have for retail, plant concluded and it's going to be concluded in or early next year rather. Dalmari will be talking about the synergies. Well, Gustavo, you talked about sales expenses in the past. In the past, they amounted to 9% to 10% of our revenues. In this quarter, that number was brought down to about 7%. So we already see this synergy happening. In the case of Buscopan, it was integrated back there back in September. And we haven't had any additions in terms of sales, maybe 1 or 2 people in sales. And for Takeda, These are large and relevant brands. They are perfect fit to our portfolio. We've increased our team, but small increase when we compare to the total number of employees we have in that department. Anyway, we see part of that synergy being captured already, despite the fact that we've had only 2 months of Takeda in our portfolio. Now in Q2, we expect to capture even more synergies because they will be 100% integrated, especially sales and marketing teams. We expect to see even more relevant synergy gains. In the tax portion, we haven't captured anything yet in Q4 Q1 rather, and we will begin to capture part of that synergy in Q2. That was very clear. 1. Since there are no questions, this concludes the Q and A session. I'll turn the floor over to Mr. Breno Olivera for his final remarks. I would like to Thank each and every one of you for attending this earnings call. Myself, Adamario and the IR team are available to answer any further questions. Thank you. Have a good day. This concludes Hepera's earnings call. Thank you for attending. Have a great day.