Earnings Call: Q2 2020

Aug 24, 2020

Quarterly report

Afternoon, and welcome to the earnings call of Mediros Argies for the first half of twenty twenty. On our customers' request, this conference will be recorded. May I now hand over to Claudia Nicolau, Head of Investor and Public Relations of Mediums. Please go ahead. Welcome everybody to our conference call on our results for the 1st 6 months 2020. Before we start, let me make some general remarks. First, the presentation and the subsequent Q and A will be recorded. 2nd, all relevant documents can also be downloaded from our Investor Relations website. And finally, this presentation can be followed in parallel via the Internet link provided to you in the invitation. Today with me is our CFO, Matthias Gertner. Matthias will guide us through the presentation and will be available to answer your questions. I would now like to hand over to Matthias. Okay. Thank you, Clauter. Also a warm welcome from my side. Thank you very much for attending this call and your time and your interest in Medius. I will start with the highlights for the 1st 6 months of this year, followed by an update on the COVID-nineteen effects on our operations and some comments on the second half of the year. Before we will answer your questions, I will also comment on our financials and on our outlook for 2020. I also will be referring to the slides of the presentation. So let's start with the highlights of our operations and our financials outlined on Slide 4. Our growth strategy is on track. Both segments reported sales growth despite the ongoing corona-nineteen pandemic effects, which I will explain in a minute. We expanded our compounding business through the acquisition of Kreischer Blisster in April. This is a good example for external growth. The blistering business offers attractive growth opportunities as well as synergy effects, for example, in purchasing and logistics. Furthermore, we won far more than 100 new customers, including about 80 specialized pharmacies via Kolgepilster. And we can offer our partner network the new service blistering as well. In addition, we rented a new building in Berlin within the building complex where our wholesale business is already located. With this, we will be able to triple our production capacity in the midterm and realize further synergies by concentrating logistics and warehousing at one site. The same already applies for our administrative units, which are concentrated at one new location here in Berlin Mitte since May 2020. Last but not least, we successfully uplisted from the less regulated segment general standard of the Stock Exchange Frankfurt to the prime standard, the segment with the highest transparency and publicity requirement. Now a brief overview on the financials shown on Slide 5. We reported almost 30% revenue growth for the 1st 6 months of this year with both segments, Pharmaceutical Supply as well as Patient Specific Therapies contributing to revenues and to earnings. Sales growth was only slightly impacted by COVID-nineteen in H1 2020. Earnings, however, were more negatively affected by the COVID-nineteen than revenue. Consequently, we had to adjust our guidance for 2020 at the beginning of August. I will comment on the financials in more detail later on. But before that, I would like to give you some more details about the COVID-nineteen pandemic related special effects illustrated on Slide 6, very much in line with what we already presented at our Analyst and Investors call on the 6th August. In February, the corona pandemic began to spread around the world. We became aware of the development and quickly implemented precautions. We started to increase our inventory levels to extend the range. Also, we had no shortage at that time. In March, a quota system was implemented in Germany by the Federal Institute For Drugs and Medical Devices. This regulation applies to the pharmaceutical industry, including wholesalers and is applied for certain drugs. The aim of this quota system is to prevent hoarding of pharmaceuticals as we saw excessive stockpiling and to prevent future supply bottlenecks as well. Furthermore, authorities and pharma companies have a high interest that those trucks are not being exported to other EU countries with higher prices and being sold there. Each country was worried about getting into supply bottleneck, resulting in heavy regulations and competition between several countries. Even the German Minister of Health had considered stopping exports at that time. From April onwards, voters on orders placed with pharmaceutical manufacturers were limited to the average purchasing level of the previous year, which means 100% of the product we bought in 2019. As a result, we had and still have this procurement issue. This was and still is a challenge for Meteos as a growth company. As we have more than 100 additional customers, our order volume increased significantly. Consequently, we had to order from other third parties, for example, from full range wholesalers, of course, at lower or sometimes even low margins for Mature. In addition, we saw disturbed flow of goods from Asia to Germany. And finally, the question for us is whether we continue to buy trucks at higher prices in order to be able to deliver our customers and take lower margins into account or if not, to possibly disappoint and lose customers. Of course, we prefer to satisfy our customers. We still assume that this corona related situation will persist in the second half of this year, and we do not know how long this quota system will be in place. The Federal Institute recently declared it will be as long as the COVID pandemic will last. So we believe that the situation may start to ease maybe in 2021 and can be back to normal in 2022. These developments and effects prompted us to adjust our guidance for 2020 and to reconsider the just mentioned assumptions. What is the conclusion for us? The growth story of Meteos continues as illustrated on Page 7. Our sales force is active again after being inactive since March due to corona related restrictions. Our business model is intact. We have strong demand. We could even further increase sales if drugs were available. Our partner network covers far more than 300 specialized pharmacies now. We are investing in growth. Here are some examples. Our new and attractive indication, hemophilia, starting in September this year, our new blistering business will give us the opportunity to further extend the share of manufacturing business within the whole Matrix Group as well as the new building, which we offer which will offer the possibility to triple production capacities midterm. And due to further consolidation of the market, we have the potential and the financial power to grow via acquisitions. I will now comment on our financials for the first half of twenty twenty and our outlook for this year. So let's move to Slide 9, covering the figures for the 1st 6 months of the year. A full set of financial figures can be found in the half year financial report on our website and in the appendix of this presentation as well. As explained before, our half year figures were significantly affected by the corona pandemic. Despite these challenges, revenue rose by almost 30%, driven by our wholesale business. And for the first time including Kolscheplista for 3 months. Since we were faced with the procurement restrictions mentioned, revenue growth was affected as well and lower than it could have been without the imposed quota. Furthermore, personnel expenses rose by almost €2,000,000 due to a staff increase to be prepared for future growth, such as starting the new indication hemophilia and for the mandatory e prescription from January 2022 onwards. And not to forget the expansion of our compounding business as already mentioned. Other expenses also increased significantly, representing investments in future growth, for example, legal and consulting costs in connection with M and A, including the acquisition of Kolgepilsner. As a result of these effects, earnings could not keep up with revenue and were lower than in the same period of last year. EBT without extraordinary expenses decreased from €6,800,000 for the first half of 2019 to €4,900,000 this year. Cash flow from operating activities rose compared to last year. The increase of the financing cash flow is a result of the capital increase conducted in June and the short term utilization of our syndicated loan. Overall, the increase of cash and cash equivalents was up to €86,000,000 mainly due to the before mentioned capital measure. Now some comments on our segments outlined on Slide 10. Revenue growth driver was the Pharmaceutical Supply segment reporting more than €260,000,000 for the 1st 6 months. However, earnings of the segment were substantially impacted by higher procurement prices, which we did not expect to also last throughout the Q2. Cost of goods sold increased accordingly and the resulting ratio rose by around 1 percentage point, which led to a EUR 2,600,000 impact on earnings, which is 1% out of the €260,000,000 in revenues. The segment, patient specific therapies, also grew by almost 27%, up to €30,600,000 including 3 months revenue of kerzuplister. The reported EBITDA margin for this segment weakened as a result of the internal cost allocation of already explained investments for future growth like M and A and personnel costs. Without the allocation of these internal costs, the EBITDA margin would have increased by 1.5 percentage points from 14.6 percent in H1 twenty nineteen up to 16.1% for H1 twenty twenty. Let's switch to Slide 11, providing an overview of our currently available funds as of August 21, which amount to around €122,000,000 Main reasons for this strong increase are we signed a contract for a syndicated loan in March with the amount of €62,500,000 Day off, we have only used €1,500,000 to pay half of the acquisition costs for Kreischer Blisster so far. Current liquidity of around €60,000,000 and positive operating business cash flow within the first half of twenty twenty. These funds will be used for organic growth and potential acquisitions. As per our corresponding press release, a high single digit €1,000,000 amount will be invested to build up additional laboratories in an already rented new building in Berlin. And we will pursue our M and A strategy looking for attractive targets, especially in the compounding business. Slide 12 gives an overview of our investment criteria for potential target companies. We aim to be an active player in the market consolidation. The acquisition of Kreischerblister is small, but a good example of an interesting and attractive acquisition with a promising future, high growth potential and significant synergy effect. As you can see, we have a very clear strategy. The focus in the future will be the expansion of our compounding business. For that, we identified some premium patient specific manufacturers with focus on additional indication areas to further grow and also diversify our business. I would now comment on our guidance for 2020 as outlined on Slide 14. Due to the unexpected ongoing COVID-nineteen effect on the supply side, we had to adjust our guidance at the beginning of August. I already mentioned the reasons behind and what we expect going forward. So let me just give you a brief summary. As said, the implemented quota system mainly resulted in limitations on revenue growth and to higher procurement prices. For the first half of twenty twenty, our costs of goods sold significantly rose, especially in the Pharmaceutical Supply segment. And we now assume this effect to continue at least till the end of 2020. We have updated our planning assumptions respectively and applied this effect to the full year and adjusted our earnings accordingly. The respective figures we already disclosed on August 5 are shown on slides 1415. However, the overall growth model of Matrix is intact. We are convinced of the mid- and long term growth potential, and our target is to reach the €1,000,000,000 revenue mark for 2023 at the latest. And this, of course, at higher margins than in an exceptional 2020. So we are confident that our growth story will continue, and we are well prepared to meet the challenges the future might bring. We are seeing strong demand for our services and we could even further increase sales if trucks were available. We are almost debt free, and we have a solid balance sheet. Our earnings allow us significant investments into the future despite the ongoing corona crisis. Here again some examples. New indication area hemophilia as of September this year exploit the blistering business with high future potential and synergy effects, expand our compounding business. The new building gives us the potential to triple our production capacities in the future. New business opportunities due to the electronic prescription as of January 2022 and potentially growth via M and A measures with strong financial power in the consolidating market. Ladies and gentlemen, this concludes our presentation. Thank you for your attention. I'm now available to answer your questions. Operator, could you please read out the instructions? Thank you very much.