Alliance Pharma plc (APH) Earnings Call Transcript & Summary

Good morning, everybody. My name is Peter Butterfield, and I am the CEO of Alliance, and I'm joined, as ever, by Andrew Franklin, our Chief Financial Officer. And it gives me great pleasure to be able to present to you our 2021 interim results today. So turning to Slide 3, just to give you an overview of the contents of this short presentation. Firstly, I'll just skip through the financial highlights and then talk a little bit more about our business in more depth. Andrew will take you through the 2021 results in more depth, then we'll look at our brands, the key drivers of the business, and then we'll finish with a summary and outlook at the end. So Slide 5 gives an overview of our 2021 interim results. I'm really pleased to report continued strong results across the board, with revenue and profits up 24%, improving margins of almost 4 percentage points, leverage coming down, underlying organic growth into double digits and the payment of our interim dividend. All this despite currency headwinds and continued lockdown in some of our territories. Now for those of you less familiar with our business, I just wanted to take a couple of minutes to take you through the overview on Slide 7. So Alliance is a growing international health care group with a portfolio of clinically valuable products. Our core business is Consumer Healthcare, and this accounts for about 70% of our revenues and drives our growth. We also have a well-established Prescription Medicines business, sharing the same strong regulatory and operational platform. Our commercial operations extend across EMEA, the Americas and APAC and support a mix of direct, distributor and e-commerce sales. And we outsource all our capital-intensive activities, including manufacturing and logistics, making us really CapEx-light and allowing us to focus on maximizing the value of our key brands. We're highly profitable and cash generative and have an annualized turnover in excess of GBP 160 million. And our vision is to become an international health care business, built around products that are clinically valuable to patients. We will be both the partner and employer of choice. If you look at our revenue progression, over the last 4 years, it has been strong. It's also been underpinned by 3 main brands: Kelo-cote, Amberen and also Nizoral as well and the key metric to there, and Andrew will go into those in more depth as we move through presentation. Now the next 2 slides take you through how our business is structured, both physically and also the core skill sets that lie within the business. So turning to Slide 8. The platform that we've created enables us to drive growth of our existing brands and also to acquire and integrate new assets with ease. We're structured in 3 main geographic tranches. We have EMEA, where we're headquartered here in the U.K., but we have 7 offices outside of the U.K. That business is also complemented by a structure of 2 offices in the Asia Pacific region, 1 in Singapore and 1 in Shanghai. And we have 2 offices in the U.S.A., our main office in Cary, North Carolina and also an office in L.A. as well. And within those offices, we have the local capabilities of general management, sales, marketing, supply chain, regulatory and finance, but the routes to market are slightly different. So within Europe, we have a consumer and pharma business, both direct and distributor. In Asia Pacific, we have a consumer-based business, which is driven by distributors for the majority and 2 main brands out there, Kelo-cote and Nizoral. And for the U.S., we are a consumer-based business, and we trade directly. And 2 main brands out there are Amberen and Vamousse. We'll go into those in more detail. Those 3 geographic areas are all underpinned by global support functions of marketing, HR, IT and facilities as well as our corporate development expertise. So on top of that geographic footprint, we've also got 7 core skills that underpin the growth of the business in order to maximize the value of our brands. And these are the key capabilities, expertise and relationships that enable us to drive value creation. So across the top at the front end, we have core expertise in global marketing, ensuring consistency of promotion for each of our brands, delivering insight-led campaigns with tailored messaging to each of our core customer groups. That complements a distributor network of around 100 distributors around the world, that's a very extensive network, and we're very pleased with the performance of a lot of our distributors in market as well and we do a lot to support them. A growing capability with Alliance is our e-commerce ability and our capability, and that channel now accounts for over 30% of what Alliance does in its Consumer Healthcare business. And we have dedicated in-house resource for global e-commerce, and that's augmented by external agencies as and when we need to do that. We also have a new capability within the business. It's grown up over the last 2 or 3 years, and that's our innovation and development capability. And that's a dedicated in-house resource, which goes behind the key functions and the key brands in order to develop new line extensions and keep our brands contemporary. And you'll hear more of that in the presentation as we move through. That's underpinned by 20 years' worth of regulatory expertise, medical and claims expertise and supply chain management. And all of our brands share this same platform as they're all clinically valuable. And as I say, these are the key capabilities and expertise and relationships that enable us to drive value creation. And the way we go about doing our business has always been incredibly important to Alliance. The clinically valuable nature of our product portfolio means that we're in a business that makes a real difference to people's lives, in any case. But over the last 12 months, we've also made some great progress in progressing, specifically our ESG agenda. We've, over the last 6 months, strengthened our governance. We have an ESG Board committee. We've also appointed a new NED in Kristof Neirynck, who joins us at the beginning of December. In terms of empowering our people, we're not only registered as a great place to work with some incredibly high scores last year in terms of employee engagement, we're also embracing new hybrid ways of working, which we've rolled out in July 2021, enabling employees to benefit from more flexible working arrangements. We've improved our working environment. We've upgraded and refurbished our U.K. headquarters and also moved into a larger and more modern office in carrying North Carolina to accommodate our growing U.S. team. In terms of engaging with our stakeholders, we've done more than ever before with a proactive outreach to our shareholders, but also an engagement program with employees around sustainable business initiatives. We've increased our ESG disclosures. You'll be able to see more of that on our website. And we're doing more than ever to understand our environmental impact, not only with Scope 1 and 2 carbon emissions, but we're also looking into Scope 3 as a precursor to developing our carbon action plan. All this rolls into our ESG strategy, which is developing quite nicely at the moment. By the end of the year, we'll have our balanced scorecard of key performance indicators, which we'll publish. And also those indicators will be measured every 6 months. All that work is also underway to ensure that those KPIs are reflected in our risk management system as well. So we've made a great deal of progress over the last 6 months. Turning to Slide 11, where does this take us in terms of ambition as a business. Now Slide 11 outlines the medium-term ambition for Alliance, i.e., the next 3 to 5 years. And if you look at the revenue potential from Kelo-cote, Amberen, Nizoral and our existing base business, we have a business we believe that can get to between GBP 225 million to GBP 250 million in the next 3 to 5 years with an underlying PBT target of up to GBP 60 million on the same metric. So the business has a great growth runway, and we're very pleased with the way it's performing currently. Now that's before acquisitions. And as many of you know, Alliance has enhanced its organic growth over the past years through acquisitions. We're a selective acquirer, seeking assets that we can integrate into our platform and apply our skills and know-how to generate strong returns for the business. And when it comes to acquisitions, we use a balanced scorecard approach. And here are some of the criteria that we look for. There are 16 on the balance scorecard. It all starts with the product. Can we get behind it? What are the regulatory considerations? The strength of the clinical data and claims? And is it clinically valuable? It needs also to have a strong dependable USP as well. In terms of channel, absolutely looking at OTC assets, preferably in a niche category with reasonable levels of A&P spend. In terms of financial assessment, the metrics are all there for you to see, but sales anywhere between GBP 5 million and GBP 50 million with EBITDA and EPS accretion to the base P&L as well and good margins, with investment metrics as well, looking at high near-term return on invested capital. Life cycle stage. We much prefer those brands that have a track record and have been marketed for at least 5 years-plus. That's where we tend to have added real value into those brands moving forward. And manufacturing arrangements, of course, need to be contract manufactured and outsourced. And the ease of integration, of course, we'd like something simple and easy to integrate as well. So those are the core criteria that we look at. Obviously, their preference is you don't get a perfect deal every time, but we've been pretty good with our track record. So that's all I have to say on the platform and the outline of the business. And I'd now like to hand over to Andrew to talk you through the numbers for the first half of the year.

Thank you very much, Pete, and good morning, everyone. The group delivered another strong financial performance in the first half, with both revenues and pretax profits growing by 24% on the same period as last year. This growth was despite the impact of currency headwinds of GBP 2.4 million, primarily against the U.S. dollar. On a constant currency basis, revenues grew by 28%. You may recall that we ended last year with the acquisition of Amberen. And if we exclude the sales generated from Amberen, on a like-for-like basis, sales grew 9% and 12% on a constant currency basis in the first half. Our Consumer Health brands continued their strong performance with sales up 30% in the first half at GBP 56.8 million. And on a like-for-like basis, sales increased 12% on a constant currency basis. Key products in this portfolio include the sales of Kelo-cote, our scar prevention and treatment product. Their sales grew 54% to GBP 21.9 million, as we saw continued strong demand in China, reflecting both in the growth in the domestic sales and the significant growth in cross-border e-commerce. Amberen has started well and traded in line with our expectations. In the first 6 months, Amberen generated sales of GBP 9.5 million, up 10% on a constant currency basis over the last 6-month period under its previous ownership. And Nizoral, our medicated anti-dandruff shampoo, delivered sales of GBP 9 million, which was 8% lower than last year and on a constant currency basis 7%. And this is due to a combination of distributor ordering and the ongoing impact of COVID affecting demand. Revenue from our Prescription Medicines portfolio increased by 12% to GBP 24.1 million in the 6-month period. This reflects a partial return of routine treatments compared to the early stages of the pandemic this time last year. Gross margin increased from 59.1% to 63.8% of revenues, reflecting the greater proportion of our growing Consumer Health portfolio on group sales. Net of increased operating costs to support and grow the business, operating margins were maintained with underlying EBITDA increasing 26% in the previous period to GBP 22.8 million and underlying PBT up 24% to GBP 20.1 million. Underlying basic earnings per share grew to similar rate, up 22% to 2.99p per share. And we're also pleased to announce the Board is declaring an interim dividend payment of 0.563p, an increase of 5% on last year's interim dividend. This will be paid on the 7th of January 2022 to shareholders on the register on December 24 this year. Free cash flow for the period was good at GBP 6.5 million, which was constrained, as anticipated, due to reversal of favorable working capital movements in the fourth quarter last year, together with the timing of sales within this period. And finally, net debt reduced by GBP 4 million in the 6-month period to GBP 105.4 million at the end of June. Group leverage reduced to 2.21x, and we expect leverage to fall below 2x by the end of the year. And moving on to the next slide. We can see again that the group delivered a strong financial performance across the income statement. Gross profit increased by a larger percentage to sales at 34% to GBP 51.6 million. The step-up in gross margin increasing from 59.1% to 63.8% of revenues. This increase includes the beneficial impact of Amberen, together with other favorable changes in product mix. Operating costs increased by GBP 7.4 million at GBP 27.3 million due to primarily to the inclusion of Amberen in the cost base for the first time, coupled with increased levels of investment in the business more generally. As a result, operating costs as a percentage of sales increased 3% to 34% of sales and reflects our focus on our growing consumer health portfolio. Net of this increased investment, underlying EBITDA increased by 26%, a rate higher than that of sales at GBP 22.8 million and represents 28.1% to sales, 0.6% higher than last year's rate. Finance costs were up by GBP 0.6 million compared to the prior period at GBP 1.6 million. Part of this increase relates to an increase in borrowing from the Amberen acquisition and the remainder related to lower currency gains in the period. But overall, the group delivered an underlying PBT of GBP 20.1 million, up 24% on last year, with basic underlying EPS up to 2.99p and diluted EPS up to 2.94p, up 22% and 21.5%, respectively. On this slide, we can see cash flow and net debt movement for the period. Firstly, cash flow. Overall, our cash flow from trading was good at GBP 14.5 million, which reinforces the good cash generation of the business. As expected, cash flows were constrained in the first 6 months due to an increase in working capital. The GBP 9.8 million working cap increase includes anticipated increase in receivables with the sales in the first half this year being weighted towards the end of the period versus the sales in the fourth quarter last year, which are weighted towards the start of that quarter. And after taking account of tax, interest, CapEx and free cash flow for the 6 months -- for free cash flow, rather, was GBP 6.5 million for the 6 months. And based on expected sales timings for the second half, the business will be strongly cash generative. The right-hand chart shows our movements in net debt. We started the year with a net debt of GBP 109.4 million, a leverage of 2.4x. And in the period, we generated cash from operations of GBP 14.5 million. And after allowing for outflows for tax, interest, CapEx and the 2020 interim dividend, our net debt reduced by GBP 4 million to GBP 104.5 million and a leverage of 2.2x, and we expect net debt to continue to decrease this year and for leverage to be below 2x by the end of the year. I'll finish with this next slide, and it shows 6 charts that showed a strong continued progress made by Alliance over the past 4 years. The charts on the top row illustrate that an evenly leveraged P&L with sales, EBITDA, PBT, all growing in the mid-teen 3-year CAGR of between 14% and 18%. And the bottom row shows the continued progression: earnings per share, up 14%; dividend, up 5%; and the half year free cash flow being temporarily constrained in the first half of this year. And with that, I'll now hand back to Pete, who will take you through a more detailed review of our brands. Pete?

Thank you, Andrew. So what you can start to see from Alliance is consistent delivery of growth over the last 4 years, and we've had again a strong set of numbers for the first half. So I'd now like to dive into the brands in a bit more detail. Let's take the lead brands first. So what characterizes our leading brands? Well, as I say, it all starts with the product. Have they got good clinical value and claim set? And if you look at Kelo-cote, Amberen and Nizoral, they all have a great clinical utility and deliver real value to patients. In terms of size, all 3 brands are sizable, Consumer Healthcare medicines with revenues in excess of GBP 20 million per annum. They're all exposed to growing demographics. So Kelo-cote, Amberen and Nizoral, all target demographics, which are growing in their respective core geographic markets. They all have the ability to be marketed over e-commerce platforms and also through digital marketing as well. We're a bit further down the line with Kelo-cote and Amberen, but we also have some exciting plans for Nizoral as well later on. And that allows us to target demographics and means that we'll have a good return on investment for those brands when we promote them. And finally, they all offer opportunities to innovate and extend their respective ranges, either through line extensions, through brand extensions or new formulations as well. And that's much easier to do with a Consumer Healthcare portfolio like this than a Prescription Meds portfolio. And when you add the brand characteristics, the platform that we've created, our expertise and relationships all together, that gives us the opportunity to drive double-digit growth from these brands and enhance the return on invested capital. So let's look at each of these brands in more depth. Turning to Kelo-cote. And for those of you less familiar with the brand, Kelo-cote is our flagship brand. It's a leading scar prevention treatment, offering significant growth potential, particularly in Asia, and I'm very pleased to say that it's had another strong half with sales of GBP 21.9 million, up 54% like-for-like. This growth has been predominantly driven by China, where the overall market growth is strong at around 18%. That's driven by social pressures to improve appearance, driving increased cosmetic procedures, and also access to imported Western brands, but we've also seen some strong performances in Hong Kong, South Korea and elsewhere in South America and a number of our European countries as well. I'm pleased to say the brand continues to flourish both domestically and also through cross-border e-commerce. And in the coming months, we're looking to continue our growth following a new cross-border e-commerce distribution agreement, which gets us closer to the customer and gives us greater visibility in market. We're also having some new exciting product development lined very soon and some line extensions as well, so please watch this space. Turning to Amberen, which we acquired at the end of 2020. Amberen is a product for the relief of the symptoms of menopause, predominantly sold in the U.S., where it's the #1 menopause relief supplement SKU in that category. And I'm very pleased to say that Amberen has had a strong first half under our ownership, with sales up 10% on a constant currency basis in market versus the previous 6 months. We've also made some great progress internally since we acquired this brand. The integration is now complete, and we've made some fantastic new senior hires in Cary, enhancing our operating capabilities in the U.S. And as I say, we've opened our new U.S. headquarters as well to accommodate our growing business out there. The perimenopause treatment, which was launched in June 2020, has also continued to gain market share. So the brand is in great shape. We've got some exciting plans to continue its growth, and we stand by our midterm target of making Amberen, a GBP 35 million-plus brand in the next 3 to 5 years. Turning to Nizoral. For those of you not aware of the brand, Nizoral is over 40 years old with great heritage, trust and proven efficacy for the treatment of dandruff, and it's a clinically effective in most users. Performance, in the first half of the year, has been held back slightly due to a phasing of distributor orders, some minor supply constraints and COVID resurgence in certain APAC territories, making visits to pharmacy difficult for customers and putting a delay in activation of some of our new campaigns. However, we fully expect this brand to return to growth in 2022 and beyond and stand by our target of GBP 30 million-plus in the near term. Moving to the portfolio as a whole on Slide 23. As Andrew has already stated, we've had a solid performance from some of our key Consumer Healthcare brands, particularly Kelo-cote and Amberen. Our other consumer brands fell back slightly in the first half of the year, and that's a mixed picture with MacuShield up 54% following normalization of stocking post-Brexit and COVID. Vamousse sales, however, were down. This is a treatment for head lice, which relies heavily on physical contact, and it was obviously going to have a very difficult time during lockdown. However, we're starting to see the category come back to growth again, which is very encouraging. And Vamousse has also gained market share in lockdown as retailers rationalize their portfolios. So it's set to recover very nicely. And then 2 lower-margin products, Aloclair and Oxyplastine. Again, there's been a little bit of distributor stocking last year, which is in round, but we're not overly concerned about this, and we expect that to normalize over the course of the second half of the year, and those brands to return to growth in 2022. The Prescription Medicines business has had a pleasing recovery, as lockdowns ease, particularly, in Europe. And if you remember the structure that we went through, our Prescription Medicine business is predominantly European, so that reflects a partial return to the delivery of routine treatment, which is great to see that normalizing, and that will continue to do so over the course of the year. So overall, revenue up 24%. As I say, strip-out currency, it's 28%. It's been a very strong first half of the year with more to come in the second half, and the primary growth driver of that being our Consumer Healthcare business. And turning to the other Consumer Healthcare brands. It's not just the 3 at the front, we also have some very strong brands behind these. And to pull out 3, notably MacuShield, our eye health supplement. As I say, that's had a great recovery, and we've got further good performance, we believe, coming in the second half and beyond, an increase in distributor sales and also e-commerce opportunities and a near-term significant launch in 2022. Vamousse, the head lice treatment I've just mentioned, again, has returned to growth. We've gained 1.6% market share over the last year, but we've also taken our time to develop some great new packaging and new product development. And again, these will be released during 2022 to help further win market share and gain growth as that market normalizes. Ashton & Parsons, which is our leading product for teething, has also now become the #1 teething brand in the U.K. We're very pleased to report that. And size of these brands is anywhere between GBP 1.5 million to GBP 8 million per annum, just to give you an idea of that. And they also have limited but very focused promotional spend behind them. And there are several innovation opportunities with these brands. Vamousse, MacuShield and Ashton & Parsons have all benefited from these in recent months. Now on to Slide 25, our Prescription Medicines business. All of these Consumer Healthcare brands are underpinned by a Prescription Medicines portfolio, which shares exactly the same platform in terms of regulatory capability, license manufacturing and maintenance. It's really important to note that many of our Consumer Healthcare medicines are just as highly regulated. So it's great to have that shared platform. Our Prescription Medicines are sold predominantly in the U.K. and the EU and require very limited promotional expenditure as they're embedded into clinical practice and occupy their own niches. However, we do often need to maintain or improve these formulations to ensure that they can continue to meet patient needs. All this provides a strong performance on which we can continue to build with our Consumer Healthcare portfolio. So in summary, hopefully, that's given you a good idea of the dynamics of the first half of the year and also a good understanding of the business and the platform that we have now built. So we have our scalable platform across the EMEA, APAC and U.S., a clear focus on Consumer Healthcare business supported by a well-defined value maximization strategy, a strong H1 performance and 2021 full year trading in line with market expectations. Pleased to say the Amberen integration is complete, balancing our Consumer Healthcare portfolio around the globe and providing a nuclear pathway for growth. We've implemented new systems as well over the last 6 months, including our ERP system. We've upgraded our U.K. headquarters and strengthened our Board, as I said, with the appointment of Kristof Neirynck as a new independent NED from December this year. And looking ahead, we now have this established global platform and a proven ability to extract value from our key consumer brands, and this leaves us really well placed to realize our midterm growth ambitions. And this platform also enables us to acquire and integrate new assets with these, and we're continuing to evaluate opportunities, which meet our selective acquisition criteria. So that brings us to the end of the presentation this morning. I'd like to thank you all very much for listening.