Hello, welcome to the Fagron Q1 2023 trading update call. Please note this call is being recorded. For the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end. This can be done by pressing star one on your telephone keypad. I will now hand you over to Karen Berg, Head of Investor Relations, to begin today's conference. Please go ahead.
Good morning, everyone, and welcome to our Q1 trading update. I'm here together with our CEO, Rafael Padilla, and our CFO, Karin de Jong. Rafael will guide you through the results of the Q1, and then there will be room for questions. With that, I would like to hand over to Rafael.
Thanks, Karen. Good morning and welcome all. Before Karen and I take your questions, we'll go through the presentation where we'll explain on a global and regional level the highlights of the Q1 of 2023. We'll elaborate on the evolving environment where we operate, and we will discuss our full year guidance. We will conclude and open for Q&A. In the Q1, we operated in a high inflationary and evolving environment. Therefore, we are pleased to see a strong top-line development supported by organic growth in all three regions. Disciplined M&A, whilst we have seen a Forex tailwind. Our solid Q1 performance has been accomplished in all businesses and segments, and is the result of the strategic actions taken, especially in our global operational excellence programs.
Following our structured and disciplined M&A approach, we have completed the acquisition of Wildlife Pharmaceuticals in South Africa, which offers access to the attractive veterinary compounding market. Lastly, we reiterate our full year guidance. Moving on to next slide. Despite the fact that we operate in an uncertain environment where inflationary pressure remains, we have seen strong organic revenue growth, particularly in EMEA and North America. We have continued driving operational improvements, mainly in our global sourcing departments, where we are taking advantage of our global large scale. We have intensified our procurement and supply activities, resulting in stronger purchasing power and better logistic terms. Regarding supply chain, again, given our global large scale, we have a broad supplier base, and we continue to further broaden our options. On an important note, syringe shortage continued to ease throughout the quarter.
Finally, we observed that pricing pass-through in EMEA is at the end of the cycle. As we mentioned during the previous call, operational excellence continues to be a key focus for us as we expand our activities globally in a more competitive and efficient manner. Moving on to the regional update. EMEA's growing trajectory continues as the result of strategic actions taken as centralized production, streamlined back office and brand rationalization and reinforcing registration and in-licensing capabilities, as we have seen today with the announced deal. On a very relevant note, our compounding service activities in the Netherlands showed further growth. As stated in the previous call, our CGMP repackaging facility in Poland is fully operational, and we have already seen the benefits out of it.
For the region, continuous pricing pass-through exercises are important, and we have progressed well despite it's at the end of the cycle. As we explained, we continue diversifying across the EMEA region by delivering outstanding performances in markets such as Italy, Czech, South Africa and Israel. Moving into LATAM, the fact that we maintain our leading position in 22 paid off as the market is showing signs of recovery, especially after the holiday and carnival season. Given the attractiveness of the Brazilian compounding market, the competitive landscape remains heightened. In order to continue maintaining our leadership and drive operational efficiencies, we are executing on back and front office projects such as centralizing all our warehouse activities, being this finalized at the second semester of 2023. We're also improving our product availability on our A items, and we are improving our innovation capabilities.
During Q1, we also continued to further diversify into Mexico and Colombia, especially in the compounding services segment of this last one. Looking ahead to 2023, we remain cautious and committed to maintaining our market leading position in Brazil as it is the second biggest compounding market in the world and long-term fundamentals remain attractive. Moving into North America, the market demand here is increasing as well as regulatory scrutiny, creating further opportunities for us. At FSS, we have reached the $125 million run rate for Wichita and Boston combined. Again, we have seen further signs of the easing syringe shortage, and we expect a progressive step-up through 2023 as we ensure quality remains of the highest standards. Regarding Boston, as you recall, strategically, the purchase of this high quality asset is very important for us as it gives presence in the Northeast, more capacity and redundancy.
During this Q1, the FDA audited our Boston facility, concluding in only two observations, and we have already submitted our response. As previously stated, integration is on track, and we have now 16 licenses and expect to be breakeven during the second semester. We're also very pleased with the developments of our health and wellness division, AnazaoHealth, which is capitalizing on strong underlying demand for personalized treatments as well as short-term drug shortages. On our B&E division, regarding the Minneapolis warning letter, we continue to take a more conservative approach and deliberately delayed the sales from this facility to enable a seamless closure of the audit. We are also accelerating our original integration plan by increasing the transfer of sales and CGMP API repackaging to our Ledco facility.
All these actions will ensure the strength of our position, and we expect to see an acceleration of sales during the second semester of 2023. In line with our strategy of having the best in class facilities, we are assessing the investment requirements for a new CGMP repackaging facility, which will provide capacity expansion. As communicated during the full year results, we decided to invest additional CapEx in the Tampa's AnazaoHealth facility to support the underlying growth in the long run. Moving on to next slide. We currently experience a fast changing environment where agility and guaranteeing the highest quality standards are key. Looking at the external risk, inflation remains high. We manage this by a dynamic pricing pass through, though it is at the end of the cycle in EMEA.
Regarding the competitive landscape, we aim to maintain leadership in all of our markets by strengthening our commercial approach, balancing competitive pricing and being unique with our brands. We offer the widest portfolio and aim to set the highest quality standards in the industry as the regulatory environment evolves. Being the global compounding leader, we have strengthened our quality management organization, and we continued implementing our global quality systems across all our regions. We commit to invest in state-of-the-art infrastructure, especially North America, in order to remain well ahead of expectations. Moving to supply chain risk on sourcing. Given our global large scale, we have a broad supplier base and are continuing to further broaden our options. We have intensified our procurement and supply activities, resulting in stronger purchasing power and better logistic terms.
Finally, on our internal business drivers on operational excellence, while we always focus on it has now become necessary to be our key strength to support our activities across the globe, to be more competitive and have better cost management. We already see good developments through increased product availability. Regarding our discipline M&A activities, we continue to look actively for opportunities across all our markets, and the announced acquisition of Wildlife in South Africa is an example of this. Moving on to next slide. We reiterate our full year guidance with revenues growing organically mid to high single digit with an increased profitability compared to 2022. CapEx will remain at 3-3.5% of sales with one off in North America. To sum up, our Q1 2023 performance was slightly ahead of our expectations as we saw small gains across all regions.
EMEA saw good operational efficiencies as well as pricing pass through exercise. However, this last one has not reached the end of the cycle. LATAM's markets started seeing recovery, though competitive environment remains. North America saw an easing of the syringe supply shortage at FSS, and AnazaoHealth capitalized on strong underlying demand. Finally, to end, Fagron is a global, vertical, integrated, niche, defensive, high cash generating company who is consolidating a highly fragmented market. We benefit from a resilient business with diversified geographical presence and the broadest product portfolio in the industry with favorable underlying trends such as demographics and personalization. Our operational excellent plans will drive several efficiencies across the company, mainly on global procurement synergies. As in today, discipline M&A remains a key part of our growth strategy. To conclude, sustainability is a key strategic pillar as together we create the future of personalized medicine.
Now time for Q&A. Karen?
Thank you, Rafael. Yeah, it's time for Q&A.
Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question on today's call, please press star one on your telephone keypad. That is star 1 for questions. Our first question today comes from Frank Claes of Degroof Petercam. Please go ahead.
Yes, good morning, all. two questions, please. First, on your outlook, with the full year results, you said that the organic growth would accelerate throughout the year to the mid to high single digits. With 8% in Q1, that's clearly ahead of that. What has changed? Why was it better than what you suggested, I would say, with the full year numbers? What are the main drivers? Secondly, on the acquisition, Wildlife, could you indicate how big that roughly is? Will the veterinarian market be a new segment for you? Will you be looking for more M&A in that field? Thank you.
Yeah, maybe, first to start, Frank, with the question on the outlook. As you have seen, we had a good start of 2023, and we see positive signs across all the regions. We're slightly ahead of expectations, and that had to do with improving demand, some supply chain easing and operational progress we have made. We reiterate our full year guidance. However, we also see that macroeconomically there's still uncertainty. We see there's still inflation, we continue increasing prices, but for instance, in EMEA, we see that we're at the end of the cycle. We see improving demands, but we also benefit from drug shortages.
Therefore, we see that, we reiterate the guidance that we had a very good Q1, but we expect to see mid to high single-digit growth for the year on top line. Maybe second on the Wildlife acquisition. Wildlife, we see that their veterinarian and human compounding are relatively similar, and veterinary compounding is an attractive segment. With this acquisition, we have an entry point, mainly locally, to support existing efforts in selected markets globally. Wildlife holds multiple registration and is close to finalizing a handful of new ones. That capability will strengthen Fagron in-house knowledge on registration, first of all, of course, for the South African market, but potentially also outside this region, mainly in EMEA. Veterinarian is not completely new for Fagron.
What we see is that in most of the markets, our essentials and brands are also sold to that segment and are used for vet compounding. It's not completely new. However, of course, our main focus remains on human compounding.
How big is this acquisition? How much revenues were in that?
Low single digits. It's a very small one. All right, it's a very small one with the EBITDA margin that is in line with Fagron's group average at this point.
Okay, thank you.
Thank you, Frank.
Now we're moving on to our next questioner, which is Matthias Maenhaut of Kepler. Please go ahead.
Good morning. Thanks for taking my questions. I have two here for me. I will take them one by one. First one is actually a clarification. You have 8% organic growth in Q1. Could you split that out in the effect of pricing and the effect of volumes, please? How does that stack up to Q4?
Yeah. Thank you, Mathias, for the question. If we look overall for price and volume on Fagron, we see a balance mixed for total Fagron. However, if we go to the different regions, there's a slightly different picture in each region. For EMEA, we see a healthy mix of price and volume. We of course, have the benefits of the price increases in EMEA. And if we correct for the COVID testing, we sold last year, we also see nice volume increases, and that's driven by strong demand in the European region. If we go to the LATAM region, we see an improvement, especially after the holiday season and the carnival. We see volumes increasing. However, that's fully offset by price decreases as the competitive pressure remains heightened.
There we see an increase in volume, but a decrease in price. For the US, growth is driven fully by volume increases, especially, of course, in the compounding segment. Overall, a balanced view for Fagron in a whole, but different, in the different regions.
Okay, that's very clear. Thank you. Next question is actually on a remark that Rafa made during the introduction. He mentioned stronger purchasing power and logistic terms. Could you maybe elaborate a little bit on that process, maybe quantify how much the benefit is, and when did you actually see this coming through? Was this already the fact in H2 or is it an incremental step that you're making now?
Yes. Good morning, Mathias. On the procurement and supply elements, as we explained, mainly after the COVID period, that we reinforced that department globally. Of course, we're purchasing globally, but more on a spot base. Now we have centralized, we are doing with categorization, so we have better purchase power, if you will, right? Having said that, on the logistic part, we see that the pricing of bringing the products from Asia decrease compared to the COVID period and also with the inflationary trends as well that we saw afterwards. It's not yet at pre-COVID levels, but clearly improve. On the procurement side, what we see now is that prices start to be more rational, in some categories start even decreasing. I said before, taking the global volumes that we have, it's helping us to get better conditions.
Yeah, maybe to add on that one, Mathias. We, of course, had the production location up and running last year, and that was in H2 of 2022, and we continue to see benefit of that. Full year benefit will be in 2023, and of course, the EMEA gross margin will benefit from that.
Yeah. Very clear. The last question is maybe on the registrations in Benelux that you mentioned. Could you maybe elaborate a little bit on what kind of registrations these are that you acquired, maybe the cost and the addressable market?
Indeed, we acquired the rights for exclusive marketing and distribution of registered niche products in the Benelux. We consider this as an attractive add-on to our registration business. We start in the Benelux, where we already have other niche registrations, as we consider this our home market, but we may consider extending this to other EMEA countries at a later stage. We pay a low single digit upfront fee in Q2, in this quarter.
Further payments of that same rate range will follow later this year and in 2024, and that's mainly for R&D. We expect to see benefits and proceed of this deal in H2 of 2024, and we expect a high single-digit revenue sales on an annual basis, depending on different variables such as the launch date, adoption, prescription behavior, and marketing and action sales. That's short summary of the registration deal, Matthias.
Yeah. Just short follow-up, if I may. These are products that you presently do not yet market or you do?
We don't.
Okay, thanks.
Thank you. Up next, we have Stijn Demeester of ING. Please go ahead.
Yes, good morning. Thanks for taking my questions. Also two from my end. The first one is also under registration. Can you comment on the status of the organic initiatives in terms of registrations that you have announced in the past? Yeah, that's the first question.
Sure. Good morning, Stijn. Here, as we also explained, we decided to invest in. As you know, pharmaceutical compounding, mainly on the non-sterile, right? When the compounding starts with ad hoc, then it goes to book compounding when it becomes more or less sizable. You saw in the past that some pharmaceutical players entered the market and then compounding was not allowed, right? What we decided also together with our partners, and mainly with TIO in the Netherlands to start the registration process of some of our compounds. We launched to the market at that time some registrations together. Now you have seen the pipeline evolving, and if you recall, Stijn, at the Capital Markets Day, Hans Waals from TIO Pharma announced that we have a registration coming, an interesting one.
This has been launched also during this, the beginning of 2023, we continue, of course, with the registration pipeline. This means not only the current compounding services or non-sterile compounding products, but also some items that we have to lost in the past. It's a combination of both. The pipeline is full. Of course, not all the projects come to a good end, as you understand, right? We are working diligently on that. Next to this, we're also working in distribution and in licensing deals. We also last year with Curaphar, with omeprazole suspension. We have some of those that we bring into the Dutch, also now we're looking into the Belgian market.
Okay. Understood. Second question is on Wichita. Yeah, the question is basically how do you see growth trajectory from here onwards? Will you provide a new sort of, midterm target or, will you leave it up to the market to sort of, model that?
Sure. Right. Also, Stijn, when we had the Capital Markets Day last year in March, we guided the regional revenue growth, and in North America it was mid-teens. The FSS activities are embedded in that mid-teens for US as a whole, with the three divisions, right, that we have FSS, Prevention and Lifestyle, and the BNE, right? For 2023, being specific on your question, we will see a step up through the year and also, of course, depends on the supply and operational elements, but very important and also that's something that we explained on the last call, having or maintaining the highest quality standards in the industry remains our main priority.
Yeah. Maybe follow up, if I may, on licenses for Boston. Any update here? I hear you're now at 16, so, how should we look at sort of full coverage and when that will arrive?
Sure. This element is very important. This is a very important question because we depend on the licenses, mainly on big states like Texas, you know, New York, Florida, California, to make the jump on revenues there, right? Now that we did get the FDA on site and we had those two observations, we already submitted the response. This is very important for us because we need the report in order to get extra licenses. We filed them almost in all states, right? At least in the most relevant ones. We will, of course, we'll see throughout the next months, quarters, semesters, also next year, we'll see them coming.
Of course, this together with the fact that we are, as we explained also during the last call, we have one commercial team selling both sites, right? The portfolio produced at both sites, this will increase the revenues. At the end, this is very important in order to get to breakeven during the second semester of 23.
Okay. Maybe one more follow-up, if you allow me, on Wichita in Q1. Has there been a case of some pent-up demand after sort of the syringe shortages in the H2, or is it purely a case of strong underlying demand that explains the Q1 performance?
Sure. Yeah, that's a good one because it's a combination of both. Stijn, the underlying demand is there, right? What we see is that hospitals outsource, we all know it very well. We have been talking about this for the last years, right? Next to the fact that it's being more outsourced, what we also see is that some of the players are having some challenges on the quality side, right? This means that the players that stay, that have the highest quality standards in the industry do get more requests from the market. You have in one side, new customers that come, and on the other side, existing customers that order more SKUs of your portfolio. Right.
Having said that, the fact that also the syringe shortage is easing, right, that we also saw at the last call, the combination of the two factors make that we have been able to grow nicely because if you remember it in January, we were at $100 million run rate. We made a nice step up in February and March. This is what we have seen during this Q1.
Okay. Thank you.
Yeah. Welcome, Stijn.
Thank you. As a reminder, that is star one for your questions today. We're moving on now to Eric Wilmer of ABN AMRO. Please go ahead.
Hi, good morning, everyone, and thanks for taking my questions. Got a few remaining, also ask them one by one. My first is on AnazaoHealth. It has been a key contributor to strong North American growth. You previously highlighted that you will invest a significant amount in your Tampa facility. To what extent will this negatively impact sales for AnazaoHealth in Q2, Q3, Q4 this year? That's my first question. Thanks.
Yeah. Thank you, Eric, for the question. What we currently have is a facility in Tampa, which is running, and we're building a new one. The sales will not be negatively impacted by the build-out because it's a new facility. We run in the current one. We have still sufficient capacity there to cover the growth we are seeing. We don't expect any negative elements causing a delay in that sales because of the new facility we are building.
That's very clear. It's also not the intention to integrate them, maybe at a later stage.
No, the intention-
It's really just an expansion.
Yeah, yeah, correct. Eric, yeah, correct.
Okay. My next question, it's tied to Stijn's question on your 503B sales growth in Wichita and Boston combined. Could you also break that partially down to what came from Boston? It's probably rather small still, but could you shed some light on that as well in that sequential growth?
If we look at the $125 million, approximately $15 million is coming from Boston and the rest is coming from Wichita.
Okay. My last question, you mentioned inflation this year. At the same time, we are also seeing some rolls coming down. Do you have any additional pricing rounds planned in EMEA this year?
Good morning, Eric. As you know, the contract sales that we have is more than 50% of the sales that we have in EMEA. It's mainly hospitals and wholesalers, and it's an ongoing process on 12-18 months normally, on average. What we see now that we come to the end of the cycle, right, so when these are being renovated, we see some exhaustion of the customers and also the customers of our customers. We would say that this arrive to the end of the cycle.
That is very clear. Thank you.
Thanks a lot, Eric.
Thank you.
Thank you. As a final reminder, that is star one for your questions today. We just received a question from Martin Verbeek of the IDEA!. Please go ahead.
Good morning. It's Martin of the IDEA!. A couple of questions from my side. You just mentioned concerning those licenses for Boston. You are awaiting the FDA report. Once you have that FDA report, will you then automatically receive those licenses for those states? How many states does it involve? Do you also have a goal, how many licenses you would have for Boston?
Sure. Good morning, Martin. Regarding this one, as the first per state, the requirements that you need in order to get the license, right? In most of them, you need an FDA audit report that we already have, right? We already have this report. This helps because the audit went very well. What we do now is focus on the main state. We do that, if you remember, with Wichita, it took us approximately three years to get almost all the states. We have everything except North Dakota, if I recall correctly, right? Here will be the same. We do it tranche by tranche. Now our focus is to get New York, Texas, Florida and California.
Okay. Thank you.
Yeah.
One brief follow-up on the acquisition of Wildlife. Could you inform us when it will be consolidated and what kind of multiple you paid for this business?
Yeah. we consolidated as of this month. that will be the consolidation moment. the multiple is within the range that we usually pay. that's between five and eight times.
Thank you very much.
Thank you. We now have a follow-up question from Matthias Maenhaut of Kepler. Please go ahead.
Yeah. Thanks. Actually two follow-ups, if I may. Just on the acquisition, can you maybe elaborate on the historical growth profile of this business, so the Wildlife acquisition? Secondly, on Latam, I understood that demand is improving. Could you confirm also that you haven't done any additional, I would say, price investments that would trigger gross margin pressure in Brazil?
Yeah. On the first one, just to highlight, it's a very small acquisition, right? The sales is low single digits. They had low single digits organic growth historically. We believe we can accelerate that growth by the registrations and then the ones that are in the pipeline. The earn-out is based on sales picking up on of regarding those registrations. Just to highlight, it's a very small one. Secondly, on LatAm, so we see volumes increasing. However, that has a price impact. When we said historically H2 is better for LatAm than H1 if we look at profitability, so we expect to see some impacts in H1 as prices are impacted in the Q1.
Would margins be up, quarter-over-quarter in LatAm, in H1?
Sorry, I missed the initial.
Would the gross margin be up year over year in LatAm in H1?
Yeah, that's not something we're going to disclose. Overall, we see an increase in profitability, but for LatAm it will be more towards the H2 of the year than the H1 of the year.
All right. Very clear. Thank you.
Thank you. As we currently have no further telephone questions, I'd like to hand the call back over for any additional or closing remarks.
Well, thank you very much, and thank you all for your questions. It was really nice to have you again. Looking forward to see you at our next result call and of course, for those who are interested, at our AGM in May, early May. Thank you so much. Thank you.
Thank you.
Thank you for joining today's call, and you may now disconnect.