Earnings Call: Q1 2020

Apr 27, 2020

Welcome to Ipera Pharma Teleconference. This is the 2020 Results. We have Mr. Brenna Oliveira, CEO and Mr. Adam Mariocoto, CFO, are here with us today. We would like to inform you that this event is being recorded and all participants will be in a listen only mode during the company's presentation. We will then have a Q and A session for investors and analysts only when further instructions will be given. If you need any assistance during the call, please press 0 to reach the operator. We would like to inform you that questions can only be asked by phone. If you are connected through the webcast, you should e mail your questions directly to the IR team at rihipera dot com. Br. Today's live webcast may be accessed through the company's Investor Relations website at www.hipera.com.brir. We would also like to inform that statements made during this conference call may constitute 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 set forward in the forward looking statements. We would like to turn the floor over to Mr. Greno Oliveira. You can begin your presentation now, sir. Good morning, everyone. Welcome to our Q1 results call. In the previous call, we talked about the conclusion of our committee. There may be or there will be a delay. We'll be informing the market as soon as this work is concluded. Let me talk about our operational performance. In Q1, our sellout grew by 11%. It's the fourth quarter in a row that we had two digit growth, especially because of strong demand on consumer health in the March, because consumers went to drugstores to stock their medicine cabinets because of COVID-nineteen. Flu, painkillers and vitamins, in brand prescription, Finosuril, Coflex, Ocelac, especially because of recent news about the importance of vitamin D. On the other hand, other important categories, some such as dermatology and pedigree suffered in sales because it the crisis promoted branded prescription sales that hurt short term sales. In the March, we had some fall, but there seems to be a gradual boost in demand in recent weeks. In the first quarter, we had net income of $815,000,000 We recovered our gross margin of 67%, that reached 31% for the quarter, in alignment with what we expect for the rest of the year. The pandemic brought additional challenges to our day to day operations. That was no different to us. I would like to talk about the measures we took on Slide four. Our main focus has been to take care of our employees. We've adopted home office to 100% of our admin workers. And we put or we gave all our employees are on vacation. When they come back, we'll be adopting special safety measures. We have brought reinforcement to our corporate health team and extended the benefits to all our employees. We donated 20 ventilators to the City of Annapolis. We gave donations of drugs, food and hand sanitizers. And also we did the same in Sao Paulo in Rio. It's important to protect our plant and our innovation center. We've adopted several prevention measurements. We are taking the temperature of our employees, especially in the entrance and the mass hall. On top of that, we placed orders from China ahead of time and we do not expect any shortages of inputs in our production facilities. We must make sure that everyone has access to drugs and medical services. And we are taking care of the communities where we operate. We also try to boost our short term liquidity given the uncertainties of current terms. We have a credit line of about BRL900 million for this year and next year. We are over BRL2.5 billion in debentures. We'll be paying out the Farrer for the quarter, the 2020. We have more than enough cash to conclude this operation. Back in March, we sold our portfolio or we maintained our sole focus in the pharmaceutical industry in Brazil. With recent derivatives operations conducted back in March and April, our exposure is about below US400 million dollars less than 50% of the original exposure. Before I turn over to Dalmario, let me talk about innovation. Total investments in R and D reached 7.2% of net income, reinforcing our commitment to innovation and sustainable growth, especially during the pandemic. In the quarter, we acquired the GrowthLink Dermatology product line. With the other important brands that we already have in our portfolio reinforce our positioning within the dermatology segment. We've acquired leading brands, Vitamin D, Dare and Ductrol. I'll turn over to Del Mario now. He'll be talking about this quarter results. Thank you, Brenda. Good morning, everyone. Let me start with the highlights on Slide six. Net revenue was million, more than double year on year. It's not a good basis for comparison given the drop in sales in 2019, aiming at reducing inventory levels at that time. Gross margin was below the sellout sales. Just like Brenna said, that was very prevalent in the first two weeks of March. We cannot replenish our customers' inventory levels. We've had huge demand because of the pandemic associated with the lack of definition on sales prices, updates or increases, the selling growth will be very close to the sellout growth since we are now adapting this new business model, reducing inventory levels at our customers. For 2020, selling should be bigger than sellout to replenish our customers' inventory after the above average demand we had back in March. Gross profit amounted R543 million Gross margin was almost 67%, an almost 7% improvement when compared to Q4 twenty nineteen. Some factors contributed to that effect, reducing idle times in our plant and the increase of average price, reducing the number of POSs and that offset the negative impact of exchange rate. Average return was about R4 dollars when compared to the exchange rate of R368 dollars we had in Q1 twenty nineteen, and almost a 10% increase. Let me remind you our policy to hedge 100% of purchase orders from inputs. We had additional hedging earlier this year to protect us from purchases throughout the year. The impact of lower exchange rates will be minimized in gross margin for 2020. Factors that negatively impacted include high number of returns above our expectation, but things should get back on track throughout in the remaining of the year. The best the better gross margin helped our EBITDA margin to go above 30%. We had more discipline in managing expenses in Q1, given the pandemics. Let me give you some color on that. We reduced our promotion activities in our POSs given social distancing in several states. That brought about a 25% reduction of those promotions in POSs in this last quarter. In terms of commercial expenses, they remained at the same level that we had last year. Our R and D expenses was offset with marketing and sales force adjustments and more expenses were allocated to R and D projects. Marketing expenses were $23,000,000 more given the increase of the sales teams and free samples given in this past quarter. Part of that growth was offset given better negotiation of on and offline media packages. Admin expenses were somewhat smaller, and we had a reduction of million dollars given tax credits granted. Financial results were positive because of the cash flow and given the P and L hedging to reduce or to offset exchange rate variations. We had a positive contribution from income tax, given the capital return on capital that maximizes tax benefits, the total amount was million dollars at R0.29 dollars per share, 15% above that in Q1 twenty nineteen. We had capital gain for shareholders for the fourth quarter in a row. We maintained that return on capital, adjusting their own capital. That shows how confident we are in the cash generation of our business now and also in the future. Let me now talk about cash flow on Slide seven. Our operational cash flow was $170,000,000 in Q1. In May, that was more than necessary to support CapEx and intangible investments. Investments in the pipeline projects, they are all leveraged. Just like Bruno said, our R and D investments grew by 11% in the quarter, R58 million dollars all those that were deactivated and those that are activated. We had a free cash flow of $45,000,000 just like Renault said. Our goal is to improve our liquidity. We had over R600 million dollars of additional investments by late March. This greater investment with the additional R300 million with almost a BRL2.5 billion that show our capacity to have access to the capital market. And if necessary, we'll be able to reach the best deals, maintaining our solidity and our balance is key given the current scenario so that we can ensure sustainable growth in the long run. Our free cash flow position in the quarter was R240 million dollars after we paid interest on our own capital as to 2019. I'll turn over back to Bruno for his final remarks. Thank you, Romario. Just like in all previous crises, this will be no different. There will be opportunities. We're working to come out even stronger. Recent investments include trade marketing structure focused on the e commerce platform. Sales more than doubled in recent weeks. In early twenty nineteen, we created a virtual medical system. We offer that platform to over 1,000 medical events, so they can online and offline operate their clinics. And we are getting closer and closer to startups in the medical industry to address opportunities in important industries. Despite short term adversities, our long term growth projections in our industry remain intact, especially with the growing population. Concluding the transformational acquisitions we've had will make Hipera Pharma the leading pharmaceutical company, a robust platform, leading brands and our strong investment capacities put Hipera as the company that is better prepared to benefit from the opportunities in the pharmaceutical industry in Brazil. Thank you very much. We'll move on to the Q and A session. Thank you. We'll now have our Q and A for investors and analysts. Mr. Robert Ford from Bank of America. Good morning. I hope you all are safe and sound. Let me ask you the first question. Could you elaborate on the current operational trends? Number two, what are the plans for your sales force? How are you trying to implement new technology when we things get back to normal? How can you talk about the gross margin? What are your expectations for this year's growth margin? Hi, Bob. Good morning. Thank you for your questions. I hope you are all safe, your family as well. Let me address the first question. Delmario will be fielding the third one. As to current trends, in mid March, we've seen some uptake in demand. We've seen variations of demand depending on the product. Flu medications, vitamins, especially vitamin D, they're doing very well. Acute medication, they depend on medical consultation, pediatrics, children are not going to school, are not getting sick. So we've seen major changes in performance depending on the category. April started out slowly, but week after week performance is improving. We should have a net zero growth for April, but a gradual positive trend. In terms of competition, there are some smaller players that are not as aggressive as they used to be. You know the effect of the exchange rate on our brands and also on the competition And the credit crunch will be even more complicated to smaller players. As to your second question, when we go back to business as usual, our field teams are operating from home. Some weeks later, we gave them a collective vacation. And these teams are slowly going back to the field, merchandising people that replenish shelters. They came back just last week, taking all the necessary precautions, wearing gloves, masks. They have a more flexible work hours. And the medical visitation teams are going back to work today. They're beginning to use a new tool so they can visit clinics remotely. We do believe that these new technologies are here to stay. This of course will require major changes in the behavior. Doctors, patients are becoming more and more accustomed to telemedicine. This is only working as a catalyst to boost this trend. This adoption rate is picking up. They're changing the way representatives relate doctors and doctors to patients. I think I answered your first two questions and then I'll turn over to Delmario to field the third question. Hi, Bob. How are you doing? Good morning. We do not have a formal guidance for growth or gross margin. But given the more challenging scenario, given the weaker real, we believe the gross margin should be close to what we had in this first quarter. We expect a more positive result from our product mix, new launches and prescriptions as well. And also because of the positive effect from some categories in our portfolio, such as vitamin D, such as Adara, greater margins than the average margin for our products. There has been substantial growth in demand for this vitamin D product, a product that was struggling in the past. But as of March, sales picked up and Hedera is a leading brand, so that why it had a chance to expand its market share. We then believe that the gross margin would be similar to what we had this first quarter. In our budget, we calculate a dollars exchange rate, how it would impact our margins. Let's see how things play out in the weeks and months to come. And then we'll find out whether any additional adjustments are necessary if the exchange rate goes even higher. Thank you. Joseph Giordano from JPMorgan is next. Good morning, everyone. Actually, I have three questions. The first question is about hedging. You're operating at BRL5 exchange rate. So my question about the operational hedging, are you using the same exchange rates? My second question is about the pandemic. What was the sellout up until mid March? You ended with at eleven. I would like to break that down if possible. Maybe trying to extrapolate numbers for Q2. What is the take of those products in the total setup? And my final question is about price increase of some four odd percent. Is there any chance of a gradual price increase given the pressure from exchange rates that are higher? Let me answer your first question about hedging. Ever since we announced the acquisition of Takeda, we've been hedging, reducing our foreign exchange exposure. It was about BRL450 million then. On the first day, we did some hedging. The average cost today, the average rate, it's about R516 million on average, about R240 million dollars that we hedged. We are, of course, closely monitoring it. When it's close to 5, we can increase our hedging level. Our intention is to reduce our exposure even further. As to the purchasing hedge, we've always done it once we place orders all the way to the payment. When we place the order all the way to the payment date, we've been hedging. The only thing we did differently was to have that additional hedging operation to cover the entire year. For the first two weeks of January, we locked that exchange rate all the way to June between $4 and $4.1 That was the expectation earlier this year. When we have that purchase hedging plus that additional hedging operation, we hope that this higher exchange rate will begin to impact our numbers in late September more towards the end of the year. But we'll be monitoring it to increase the hedging even more. As to the other questions, what was your second question? Did the participants sell out pre COVID, what would be the trend without the pandemic effects? And my second question was, how much prescription or what's the take, what's the participation of prescription within Yosem? Well, things picked up. It was in the high single digits in the first two months of the year. What happened was the demand variation back in March. Cosmetics slowed dramatically, but the market didn't grow in Q1. It's more important to us than the market average. Prescription overall accounts for about 40% of our portfolio. So you have different defects within prescription. Acute medication suffered the most. People are not working out as often. They don't get hurt as often. They don't go to the doctor and there are fewer prescription drugs being prescribed to patients. So there's a growing trend. We could not react as positively in selling given the fact of the delivery of goods were also hurt. This has been recorded yet in Q2, but we hope there will be some effects by the end of the quarter. As to price increases, I think the associations or the trade associations and the government have been negotiating the price increases. But we believe we are going to have the price increases that have been announced. This will affect 16% to eighteen percent of our portfolio. As of March, price increases have been authorized for similar and generic products. We have a very high level of discounts. Even if prices do not go any higher than what had been announced, there won't be any changes. The impact will be in prescription drugs. They're similar to the list prices already. And that will impact about 17% of our portfolio, as I said. Thank you. Thank you, Bruno. Thank you, Ademario. Have a good day. Mr. Gustavo Oliveira from UBS. Good morning. Sales were below expectations in Q1. What are you thinking about the guidance you had announced? Do you believe you can maintain that guidance? You also said that in Q1, the market didn't grow as much. What are the market expectations? What were the growth expectations for the market that you're considering? Sales were smaller in selling than we expected, but it was not that different from what we expected. If you take sales from Q1 when compared to the guidance for the year, it's about 19%, right? Sellout accounts for about 20%, and that's about 20% for the rest of the year. We have a very strong portfolio for the winter, especially Q2, Q3, flu medication antihistaminic, Rinosoro, Princiini. They usually sell more in the winter. Sell out for Q1 is a little more. Yes, that's right. But it's less than a quarter for the year. In other words, we are comfortable with those numbers. There was more demand towards the end of the quarter, but we could not replenish stocks because deliveries were hurt. But that can be offset in early or the April. I understand. And what is your expectation for the market growth? The market was flat and you had 11 growth in sellout, you gained market share. What is your take for the rest of the year? It's too soon. We expected high single digit growth, but we've been talking to customers. We've seen that happen in several of our customers. We will have weaker growth in April that will offset the stronger growth we had back in March. We do not see any reason to change our guidance, but we do not expect major variations in demand when you consider market averages. Some categories will suffer more, will benefit more, as I said. I believe the trend should be maintained high single digit growth. Let me ask you a final question, I may. I missed the initial presentation. Could you please elaborate on why it happened? What I said, we were expecting to conclude that work in April to present that proposal to regulatory agencies, but given the pandemic, we had to postpone some meetings. We believe the process should be concluded in late March. It's a one month delay. I believe you've been talking to some regulatory agencies, haven't you? Do you keep on talking to them? I do not have any detailed information. The impact is internal. Thank you very much. That was very clear. Gustavo Niele from Itau BBA. Good morning, Bruno and Adomario. I hope you are all well. Two questions. The first one is about the dermatology portfolio. Can you share some information about that portfolio, about its weight and your total sell out? I think there are nine brands. Do you expect growth that will be very different from the could you give more detailed information about these brands? Thank you. And my second question, can you elaborate on that partnership you had with RAPI? Do you expect or do you consider extending that kind of partnership with other products? These are my two questions. Thanks. Let me answer your first question, Brenna will field the second. Strategically speaking, that discussion, that partnership brings in a lot of synergy. Cosmetics, skincare, it's a leading brand in Brazil. You have of course L'Oreal that owns several brands, but as a single brand, we are leaders in that segment. We have that need for medication in that cosmetics industry. So they bring in, they supplement that portfolio very nicely. Initial sales are low, but we believe that under our portfolio, once we can expand promotions with our representatives, we can increase sales, especially in the first and second years after the start of the promotion. They had less or fewer than 30 representatives. We have over 150 reps. So this, the boost in sales will be captured further down the road. As to the partnership with RAPI, we're taking into account the social aspect. Any purchases of medications through RAPI, we are offering that free delivery. Thinking about the social aspect and also to promote Benigrypi and Nidera. It's a long term marketing activity with that social component as I mentioned. We don't expect major sales in the short term. And of course, we're considering other initiatives, sponsorships of these live streaming, Ingovy, Benagrypt and donations. As I said, we made that donation to an NGO in the state of Goias. We donated 20 ventilators to the city of Annapolis. We're conducting several activities along the same lines. Thank you. I'd like to ask a third question, if I may. I had to leave the call for about ten minutes and I would like to apologize if you already mentioned it. Did you detect any replenishment activities in April to offset that mismatch in sell inset out in March. Have you noticed some activities in that regard? Yes. We've seen an uptake in customer orders once delivery orders were placed by March 31, but replenishment orders had already been placed. This mismatch must be adjusted or should be adjusted in the next quarter. Thank you very much. That was very clear. Fred Lenz from Bradesco asks the next question. Good morning. I have two questions. Let me go back to what Gustavo said. I would like to understand whether that drought in Annapolis had some impacts. That's my first question. When you renegotiate with customers, I know you deal with major players, but these smaller players are being more aggressive trying to renegotiate prices. What's that situation like? Let me answer the second question first. We haven't had any major conflicts because that segment is operating somewhat under normal conditions. There haven't been any major impacts in our customers' results. Therefore, there's no need for renegotiation. Of course, we haven't we have been preparing if the scenario becomes any worse. However, delinquency rates, we haven't detected any major issues right now because there is demand. And what was your first question again? I want to understand the dynamics of revenues. I know Gustavo talked about it, but was there any impact because of that drought? My question is, was there any impact in this quarter as well? I believe it ended up affecting it too. We talked about it in Q4 because of the water problem. We had low inventory levels. So it happened in part of it in Q1, part of it in Q2. So we are getting back on track slowly in Q2 and because of the demand concentrated later in the quarter, our or the inventory levels in our customers was somewhat smaller than what we wanted than what we expected. Thank you. That was very clear, Bruno. Irma Segas from Goldman Sachs asks the following question. Most of my questions have already been made or have been asked. My question is about new products. My question is about the marketing mix what we can do to reduce expenses. My question is about the balance between reductions or in marketing efforts and slower sales. Let me answer the first question. As to our pipeline, it's a robust one. Almost 100 new launches for the year, most of them in the second half of the year. We don't see any impacts. We are in the prelaunch phases. We are still getting some raw materials. We're conducting training programs. So the schedule hasn't been changed. Of course, we're closely monitoring the situation. Our medical visitation teams, merchandising teams, they should go back to work this week using a new tool that had been tested as of last year and Q2 launches will be conducted using this platform. Of course, this schedule will be dependent upon the pandemic. Drugstores have been open, But some categories, specialists, doctors that are specialists, we should be close to them and we'll be monitoring the situation as time goes by. As to the other question about reductions in expenses, We're not reducing our investments. We're not changing our investment plan. We ran some simulations. If necessary, will cut costs, but we haven't detected the need for those costs. Some areas, when you visit doctors, reps were on vacation, doctors' offices are closed, clinics are closed, Free sampling is not happening. Travel expenses were not incurred. We'll be reducing those expenses because we have just found out that we can do many, many things online. Sports events. We are renegotiating our campaigns on television. We're not reducing. In April people are home, TV rates are high, So we'll keep on investing in media for the second half of the year. We're now reducing those expenses. We're just reallocating them given the scenario changes. For example, we had an investment plan for the trade marketing in our e commerce platform. We reallocated those investments to April and May, people are purchasing way more. So we are reallocating those investments, but we're now reducing market investments. We're keeping our focus on the sell out and market share. Tobias Simmons from Citibank. Good afternoon, Greno Delmario. I have a very quick question. You talked about Adara. I think you had reached 10% of sales, right? And then you changed the protocol. Now with the pandemic, how can you what do you expect from the growth of that category? It's about 6% that what it accounts in our total portfolio for the year. It was going down about 15%, 20%. Now it's back on the rise, But it's too soon to be as to detect or to determine whether it's a trend or not. We'll be conducting some clinical studies to try to determine its uptake in sales and the COVID-nineteen pandemic. Yes, it was a very positive impact on the short term. Are you talking about a tariff specific? It was positive, low single digits, a marginal growth. The brand was growing slightly. Vitamins are not that important to us. What's the ballpark figure for vitamins? As you know, Tobias, we have strong brands in that segment. We have relaunched the Vitasai brand and central tax. That's called a Smart Choice. Our share is still small, but March and April proved to be strong months. We have very strong media campaigns on TV. CentroTavis has very good distribution. Adderabita Saeed, Ctrip tax that accounts for 78% of our portfolio. Thank you. Thank you. This concludes the Q and A session. Mr. Brenda Oliveira will be making his final remarks. Thank you for taking part in our call. And as usual, our IR team is available to answer any questions you may have. Thank you. Have a good day. A fair conference call ends now. Thank you. Good afternoon.