Good morning. Welcome to Hypera Pharma first quarter 2021 results earnings call. Mr. Breno Oliveira, CEO, and Mr. Adalmario Couto, 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&A session for investors and analysts. Further instructions will be given then. If you need assistance during the conference call, please press star zero to reach the operator. Questions can only be asked by telephone. If you're connected through the webcast, submit your question through email at ir@hypera.com.br. Today's live webcast is being broadcast at ri.hypera.com.br/ir/. We also would like to inform that statements during this conference may contain 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. Breno Oliveira. Mr. Oliveira, 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 three. For the second quarter in a row, we grew our sellout organically in double digits, and we gained market share. Organic growth was 11.5% 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 of the pandemic. Our sellout growth is favored by the gradual improvement of the pharmaceutical industry starting in second quarter last year, as well as our initiatives to boost our growth. Similar and generics were the highlight with two-digit growth.
We are benefited by our distribution network to boost Neo Química 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 jersey, Vitasay and Neo Química. It's on top of the naming rights contract of the Neo Química 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 Colflex, Ofolato, and Addera 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 Vitasay Fin brands, the gastro segment with Tamarine, Epocler, and Gastrol brand, and the recent introduction of Maracugina Noite. 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, we are now the third 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. In terms of operation, at the end of the second quarter, we'll have all the Buscopan secondary packaging and the entire Takeda portfolio being produced in Anápolis.
By early next year, the entire Buscopan production will be conducted in our facilities. We keep on investing in our portfolio to foster our long-term growth. There are several opportunities to expand the lines of these acquired brands. We have a pipeline with over 350 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 five years, and eight percentage points growth since we started concentrated our operations in the pharmaceutical industry in Brazil and intensified our investments in R&D. In the quarter, we have important introductions. Let me point out the expansion of lines of Neo Química vitamins for both vitamin C and vitamin C plus zinc.
Addera Flash, the first film D vitamin, and Alektos Ped, an extension from the antihistamine, 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 Adalmario. He'll be talking about this quarter's results.
Thank you, Breno. 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 six, please. Selling, that's our net revenue. Growth was almost 44%, driven by the consolidation of the Buscopan family numbers and the two months of the Takeda portfolio sales, that company we've recently acquired. In the quarter, when we combined the two, their contribution was about BRL 220 million of additional sales.
When we compare to the same basis last year, excluding the contribution of acquisitions, growth would've 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 that 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. An 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. As we said in the previous call, we had 100% of hedging of 100% of inputs pegged to the USD for 2021 at BRL 5.30. On to expenses now. We had a 19% increase in sales expenses because of the increase in the R&D infrastructure, and we incremented our bonuses, and the total investments grew by two 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 Buscopan and free samples increase in Takeda portfolio. We had important introductions just like Amome. It will compete with the Nasonex brand.
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&A went up 12%. As a percentage of revenue, they were 1.5% below what we had last year in the same period. There were no other relevant impacts. We have an EBITDA margin of almost 31% in the quarter, a BRL 362 million EBITDA, a 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 Takeda acquisition.
Taxes was slightly positive because of interest on equity and because of government subsidies as well. Net income was BRL 307 million in continuing operations, and a total BRL 305 million and almost 28% growth. Cash flow on slide seven. We had a operational generation of BRL 151 million. We use working capital of Takeda, BRL 135 million 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 Anápolis. Intangibles, we have the net payment of almost BRL 3.4 billion. R&D investments of BRL 47 million, and the payment of Simple Organic.
In the quarter, we took some additional financial lines for a two-year term, and that's according to our strategy to have that cash cushion because of the impacts of the lockdowns that were announced back in March. We also paid interest on our equity for 2020 in late March. Interest on equity was BRL 195 million, BRL 0.31 per share as to the first quarter 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 BRL 1.7 billion and the net debt level is BRL 5 billion, 2.5x 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 assets 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 Breno for his final remarks before we go on to the Q&A.
Thank you, Adalmario. We're very pleased with Hypera's results in the first quarter.
12% growth in sell-out, 44% in net revenue, 60% when we exclude acquisitions, 46% EBITDA growth, and 24% in net income of our continuing operations. The sell-out growth in recent months, the integration of acquired portfolios, the new launches, and the innovation pipeline with over 350 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 an 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 5.9 million. EBITDA for continued operations, BRL 2 billion. Net income, BRL 1.5 billion.
We remain confident in the growth of the Brazilian pharmaceutical market and will keep on growing through innovation, M&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. We'll move on to the Q&A session now.
We'll now start our Q&A session for investors and analysts. Joseph Giordano from JP Morgan 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 BRL 280 million for Buscopan and from other Takeda assets, how much have you captured so far? When should we expect the full speed of these synergies?
What about short term? We had significant price increases in April, your hedging seems to be very favorable at BRL 5.15. What can you expect as to the gross margin and marketing expenses developments? It seems to be very small still. The second question is more on the midterm basis. You said that towards the year's end, you have about 55% of molecules for generics in retail. What does that mean in incremental markets for the company? Thank you.
This is Breno. I'll be fielding the first question about synergies, then Adalmario 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 two companies, we purchased the Takeda's brand portfolio and Buscopan. In the case of Buscopan, they had a small marketing team.
They have already been integrated to our team back in September last year. The results you see already include the integration of these teams. In the case of Takeda, they had a bigger team in terms of product portfolio as well. We have integrated both a marketing and the sales teams, and these representatives that call on doctors' offices. These results have already been captured as early as the first quarter. On to the second quarter. We start having synergies in terms of production. Part of the secondary packaging is now being conducted here in our facilities. By year's end, the entire production for Buscopan, as early as next year, early 2022, the entire Buscopan production will be conducted in our facilities.
Synergies in sales and marketing have already been captured, and production synergies, most or some of it will be captured now, and Q2 will be making the secondary packaging, and the rest or the remainder will come by or early 2022. The Takeda will take longer because the production contract we signed with them will take from three - five years to transfer that production in-house. 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. That helped.
This first quarter 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. We are comfortable that we'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 two years, and at the same time introducing new molecules to focus on those more relevant molecules that grow the most. We'll be able to use the capillarity that we have for the Neo Química brand, and also to benefit from the marketing efforts.
As a consequence, increased penetration. The coverage level will be over half of the market by year's end. 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 exclusivity, 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, Breno. Thank you, Adalmario.
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? I hope you were able to hear my question because the call is 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%. We are very pleased by the sell-out growth of these acquired products. Takeda at the start was somewhat more difficult, they're getting back on track, we're growing over 20% now in April.
Thank you. Have a good day.
Thank you.
Robert Ford from Bank of America asks the next question.
Thank you. Congratulations on your results. Can you give us some sales numbers for first quarter? What about quality of innovation? 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 Bionovis, 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. We do not expect as many new molecules or new products, rather, in the portfolio. Growth should be somewhat smaller, albeit significant. We keep on investing in Bionovis heavily. We believe it's an important branch or an arm for the PDPs. We've been investing to have its own facility and to have our own product before 2023. Growth isn't expected to be as high as the one we had last year.
Thank you, Adalmario.
Could you repeat the other questions?
Yes, of course, Breno. 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?
Well, Bob, that's part of our business plans in our acquisitions. That was to have new introductions, line extensions. It was not their core, and they were not investing in that direction. There were projects being designed, but they did not pull the trigger. They did not introduce those products. Let me give you an example. The one I just mentioned, Alektos 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, things that will be introduced in the second and third quarters using these strong brands. There are launches for Neosaldina, their number one brand, but I won't be giving any details. We have already mapped out that new launch. 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. We monitor that regularly through sell-out. We have very granular data both from sell-out sales as well as prescriptions. Of course, in the case of prescription products, we can see the recurrence of prescriptions.
With our top customers, we purchase data from them, from Raia, Pague Menos, the top retailers, then we get that information. That's according to plan. When you introduce a new product, we put together a business plan for the products, we keep track of results very closely, that's according to plan. Of course, some products do better than expected, other not as well, but on average, performance has been according to our expectations.
Thank you very much, Breno. Congratulations one more time.
Thank you, Bob.
Guilherme Assis from Safra asks the next question.
Good morning, Breno, Adalmario. 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, correct me if I'm wrong, sell-in was about 11.5%, sell-out 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 gravitate towards 15%? What's the dynamics that will play out between sell-out sales and your own sales through your channels?
Hi, Guilherme. You've mentioned, well, in actual fact, sell-out grew 12% sell-in, including acquisitions, grew 16%. Yes, that's right. Sell-in grew more than sell-out this quarter, 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. In terms of nominal values, we keep close track of everything. Inventory levels have been kept steady. In the first quarter, you have that increase, price increases.
Customers' profitability comes from the previous period before price increases. We negotiate that, of course. This quarter sell in was a little over sellout. Let me remind you that in Q1 2020, we had the impact of the Q4 of 2019. There was some water shortage in Anápolis that impacted results for both Q4 and Q1 2020. The sell in comparison was somewhat smaller. We are not expecting any variations mid-term basis. These growth will be closer together. 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 de-leveraged. You were even given guidance for the de-leveraging levels. Is there anything you can do to speed that de-leveraging effort up? You sold your DC, right? BRL 230 million. Is there room to sell some more asset or any other type of activity to improve that de-leveraging profile for the company?
No. The only asset that was non-operational was our DC. We had been working on or trying to sell that DC for some time. We have finalized it now. We want to de-leverage, 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&D, just as we have been doing, distributing dividends increasingly to shareholders, and at the same time, de-leveraging the company. That's our goal, to bring to less than 2x EBITDA on a midterm basis. We are at 2.4x, give or take, using the guidance as our reference.
Our goal is to bring that under 2x , but using company's cash generation in years to come.
Perfect. That was very clear. Thank you, Breno.
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 BRL 230 million should be other-revenues. It shouldn't be booked as the guidance of EBITDA. My second question is about the cash flow. The number of suppliers increased dramatically. Are we to expect a return to historical levels on that front?
Hi, Caio. The DC sales will not be booked as the results. It's not incorporated in our guidance for the year. That's the sale of an asset. The profit would be about BRL 100 million given the booked asset, but it shouldn't be reflected in our results. 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 that construction work we had to do for the Takeda portfolio. When you acquire a brand, it's unlike a company acquisition. You don't get the receivables. We had to build that working capital gradually. We purchase the Takeda products. We have the inventory. We increase our supplier portfolio. That would be going back to regular levels in quarters to come. This impact won't be recurring when you look at the second quarter of this year, for example.
Perfect. Thank you, Adalmario.
Thank you.
Mauricio Cepeda from Credit Suisse asks the next question.
Good morning. Thank you for taking my question, Breno, Adalmario . My question is about the working capital. The question was about the sell-in growing more than the sell-out, and you explained it. Anyway, knowing that both Buscopan and Takeda portfolio are more traditional products, would that be an opportunity to reduce the number of days worth of receivables, or are you going to use that advantage to increase sell-in? 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? What about remote? Are you going to stick to remote working from home? Are you going to resort to that or maybe a hybrid model?
I would like to know whether there are any specific risks in the Takeda contract as to the US dollar. Whether packaging is USD-based, whether there are any FX risks in there.
Hello, Cepeda. Thank you for your questions. Let me address some of them, and then Adalmario will take over as to the Takeda contract. If I miss something, just let me know. Well, the first question as to inventory levels at our customers of the acquired portfolio. Yes, that's right. Takeda and Boehringer used low inventory levels with their customers 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 average levels smaller than what we have at Hypera.
We're going to use that to reduce or to bring our average numbers down, and then they'll show up in the receivables in terms of number of days. We are at about 110 days. The trend is to bring that down slightly, maybe 100 days, give or take. That's what our expectation for year's end. There was another question about the suppliers, about the leveraging of our suppliers. Well, we have been working with our suppliers to extend these terms. We started that last year. We have been very successful in those negotiations. That's why these numbers are going up. Inventory levels go up as well, and you impact the supplier's account as well. Ever since the beginning of the pandemic, we have been increasing our inventory levels for finished products and raw material to have that cushion, especially for those relevant raw materials.
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. As to remote visiting doctors, we talked about that on our Hype Day. We've used that virtual 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 included in our guidance for the year. That is a productivity gain that can be captured. As to the last portion of your question, the contract we have with Takeda, prices are in BRL. 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. Transformation costs are in Brazilian currency. We shouldn't expect any changes as to the cost structure.
That was very clear. There's still some delay, right? Jaguariúna plant is even more exposed than yourselves, right?
Yes, that's right. Yep.
Perfect. Thank you.
Thank you.
Gustavo Tiseo from Bradesco asks the next question.
Thank you for taking my question. I have two, actually. The first is about M&As. You've been trying to resort to M&A that will have less impact in the drugstore segment. Are you going to keep on 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%? My second question is about commercial synergies from Takeda. You said there was marketing, and you've already integrated their marketing teams. What can we expect in the long run? Can we expect midterm, long-term benefits coming from Takeda? Thank you.
Hi, Gustavo Tiseo. This is Breno. Let me answer the question about the M&A, and then Adalmario will be answering the portion of the synergies. The volume was very low. I don't know whether I understood your question, but I believe that the question was about new M&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 two acquisitions, and we had committed in late 2019 to invest up to BRL 200 million 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 this capital, but the goal is to keep looking for opportunities, 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&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, OPC, OTC rather. Short term, the focus is deleveraging, midterm 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 and just like we said during our Hype Day, a new product pipeline through partnerships, just like we do in the products we have for retail, as well as developing our own products once we have our new sterile plant concluded, and it's going to be concluded in or early next year rather. Adalmario will be talking about the synergies.
Well, Gustavo Tiseo, you talked about sales expenses in the past. In the past, they amounted to 9%-10% of our revenues. In this quarter, that number was brought down to about 7%. We already see this synergy happening.
In the case of Buscopan, it was integrated back in September, and we haven't had any additions in terms of sales, maybe one or two people in sales. 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 it 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 two 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 Q1 rather, and we will begin to capture part of that synergy in Q2.
That was very clear. I'm sorry the audio was not very low, but the answer was clear. You answered all my questions. Thank you.
Let me remind you that to ask a question, please press star one. Since there are no questions, this concludes the Q&A session. I'll turn the floor over to Mr. Breno Oliveira for his final remarks.
I would like to thank each and every one of you for attending this earnings call. Myself, Adalmario, and the IR team are available to answer any further questions. Thank you. Have a good day.
This concludes Hypera's earnings call. Thank you for attending. Have a great day.