Alliance Pharma plc (APH) Earnings Call Transcript & Summary

Okay. Good morning, everybody, and welcome to the Alliance 2021 Preliminary Results Presentation. I'm delighted to see so many of you here in person and look forward to meeting those of you who are listening on the webcast in the near future. I'm joined, as always, this morning by Andrew Franklin, our CFO. And I'd also like to take this opportunity to welcome Cora McCallum, who I know is familiar to many of you. Cora joins Alliance as Head of Investor Relations and Corporate Communications. Welcome, Cora. So turning our attention to today's presentation. I'll begin with a reminder of our strategy and how this has supported our excellent performance in 2021 before handing over to Andrew to walk you through the detail of the results. I'll then finish with a summary and outlook for 2022 before opening the floor to questions. This slide serves as a reminder of our strategy. We're committed to delivering solid organic growth through investment in marketing excellence supported by innovation and development. We remain focused on our Consumer Healthcare portfolio, which benefits from the in-house regulatory knowledge embedded in our legacy Prescription Medicines business. This synergy will become more important as the Consumer Healthcare market evolves and regulatory oversight increases. We aim to further enhance organic growth through selective complementary acquisitions. We maintain an active review of M&A opportunities focused on the consumer health care market, where we look to leverage our global platform, particularly in the U.S. and in the APAC regions. Our strongly cash-generative business means that we've been able to reduce net debt and leverage over the last 2 years, once again leaving the company well placed to participate in acquisitions. This strategy is underpinned by our investment in people and in building a sustainable business so that Alliance can continue its purpose to improve the lives of consumers and patients through making available a range of clinically valuable health care products. So let's take a closer look at what this strategy has delivered to date. This chart shows our M&A strategy, how our M&A strategy has enhanced organic growth with reported compound revenue growth of 14% between 2017 and 2021. Here, we split out the key brands, the 3 of them: Amberen, which was acquired in December 2020; Nizoral, which was acquired in June 2018; and Kelo-cote, which was acquired through the Sinclair acquisition in 2015. This is an impressive performance given the impact of COVID in 2020 and 2021 whilst the rest of the business, which excludes these 3 brands, did pull back a little bit in 2020. And we saw a return to growth in these sales in 2021. This time last year, in the full year '20 preliminary results, we laid out our midterm ambitions for Alliance targeting GBP 225 million to GBP 250 million worth of revenue in 3 to 5 years. This chart shows we're on track to meet that goal, which requires additional revenue of some GBP 55 million to hit the lower end of the target range. If we assume there was no growth at all in the base business and if each of our 3 key brands reaches the stated sales potential for 2025, this would generate some GBP 51 million additional revenue, pretty much meeting the bottom end of our target range. But revenue growth is only part of the Alliance story. And as this slide demonstrates, our profit delivery over the years has outpaced our revenue growth. This is down to a deliberate focus on the higher-margin consumer business and ongoing efficiency improvements as we integrate the cost base of acquired brands and leverage of the P&L. This strategy has delivered 15% compound annual growth in underlying profit before tax between 2017 and 2021, an impressive performance against the challenging backdrop with the COVID pandemic and our investments in our platform, particularly in the U.S. Again, this slide demonstrates that we're on track to meet our midterm ambition of between GBP 50 million and GBP 60 million underlying profit before tax in 3 to 5 years with a profit margin in the range of 22% to 25%. You'll note that the bottom end of this margin range is below the 23.6% we've averaged over the last 5 years, but this reflects the anticipated additional marketing and innovation and development spend to drive top line growth, particularly as we move closer to the customer. So how are we going to ensure that all our brands reach their potential? There are 2 drivers of organic growth for each brand. The first is marketing excellence. Now we've spoken to you about this before, but we have significant in-house expertise in this area. When we first acquire a new brand, we optimize its route to market through leveraging our existing distributor networks. Next, we look at things like refreshing the packaging to ensure it has its greatest impact with target customer. Then we create improved marketing materials to support the distributor. And finally, we consider new markets. The image below shows the first outdoor marketing campaign for Nizoral for some 8 to 10 years. In quarter 1 2022, in partnership with our local distributor, we were the main advertiser in Gangnam Terminal Station in South Korea with a campaign covering all gates, banners and adverts on the inside of trains. E-commerce represents one of the routes to market where we see significant growth opportunities. The global e-commerce market is worth some $5 trillion, of which consumer commerce, e-commerce represents around $260 billion. The market expanded rapidly during the COVID pandemic with fastest growth in China and the U.S. Today's consumers, particularly younger generations, are increasingly turning to online resources to research health conditions and seek solutions. One in 20 Google searches are health related, 60% of consumers surveyed by IQVIA stated that they tend to take an OTC product before making an appointment with a doctor. And 59% say they take OTC products to manage acute health conditions. The chart on the right shows the relevance of the online channel for various consumer health care categories. And you'll note that the categories with the highest online relevance have significant overlap with the Alliance brands, with Amberen in the top category and Kelo-cote in wound care, the category ranked fifth. Our e-commerce strategy is to partner with leading e-tailers such as those listed at the bottom of this slide. In September, we launched a flagship online store in China dedicated to Kelo-cote. And we're using the experience we gained through the process to drive e-commerce opportunities and other brands in other territories. The second key driver of organic growth is innovation and development. And in late 2018, we launched a gel formulation of our Ashton & Parsons teething brand and a chewable formulation of MacuShield was launched in 2019. These products have helped drive nearly 16% and 8% compound growth, respectively, between 2017 and 2021. We've recently strengthened this part of our business with the recruitment of a dedicated innovation and development team and have just launched our first product from the new I&D platform, Kelo-cote Kids, a child-friendly formulation of Kelo-cote. We envisage spending some GBP 1 million to GBP 2 million per annum on innovation and development going forward with an aim to generate 10% of net consumer sales from new product innovation in the future. I'll now detail how this strategy has delivered our exceptional performance in 2021. So in 2021, we consolidated our global platform to support future growth. The focus on marketing and innovation, which I've just described, drove 12% organic growth at constant exchange rates. Performance in the consumer business was particularly encouraging with 14% growth on an organic basis. And the Prescription Medicines business had another solid year with revenues up 8%. In line with our strategy, we supplemented organic growth through the acquisition of Amberen in December 2020 and whilst the rollout of the strategic brand plan for Nizoral is well underway. This slide takes you through the performance of each of our 3 key brands. Starting with Kelo-cote, I'm delighted with the 47% revenue growth, which reflects continuing strong demand in China and significant cross-border e-commerce sales. We entered a new CBEC distribution agreement in 2021 to move Alliance closer to the customer and provide greater control of our distribution chain. We continue to see significant growth potential in the future for this brand, particularly in Asia Pacific, and anticipate sales potential of some GBP 75 million in 2025. 2021 was the first year of ownership of Amberen, and we made an encouraging start with 3% sales growth for the year, excluding currency impacts, but 12% growth in H2 '21 versus H2 2020. Amazon sales were strong, compensating for more challenging conditions in the bricks-and-mortar channel. We anticipate sales acceleration in 2022 with a waiting to half 2 as we leverage the operational platform we've established in the U.S., increasing our brand positioning and executing new marketing campaigns. In 2025, we anticipate Amberen sales of around GBP 35 million. But the Amberen acquisition bought more than just a product. This is a brand of scale and one without the seasonality inherent in Vamousse. The acquisition also brought important infrastructure such as regulatory, HR, marketing and commercial functions into the business. You'll have seen the announcement we published yesterday confirming that we're in discussions to acquire 2 further products in the U.S. for around $20 million. Obviously, we can't say more on this. But if the acquisition is successful, this would really leverage that U.S. infrastructure. Turning to Nizoral. We delivered a 1% revenue growth in 2021 with a challenging start to the year due to distributor order phasing, manufacturing delays and the ongoing impacts of COVID on demand, particularly in India. However, revenues recovered in the second half with Triatop Combi pharmacy listings in China improving in the last few weeks of the year, which should support sales momentum in 2022. The rollout of our strategic brand plan is now well underway with marketing campaigns planned across a number of key territories just like the one I showed you in South Korea earlier. Finally, the marketing authorization for Nizoral in China passed from J&J to Alliance this month, meaning that we now have full control of the supply chain and no longer have to seek approval from Johnson & Johnson to change distribution partners or conduct marketing campaigns. We anticipate Nizoral sales of GBP 30 million in 2025. 2021 was also a year in which we strengthened our business to ensure it remains sustainable for the long term. Our ERP system went live in the first half, delivering benefits to the business through standardization of processes. We also reviewed our operations to ensure that we have the right resources in the right territory to optimize efficiency. As a result, we tripled the size of our U.S. business moving to new offices in Cary, North Carolina. And we streamlined our European footprint through the closure of our Italian office in Milan. We also changed our cross-border e-commerce partner to gain greater exposure to this important market. We continue to expand our headcount to ensure we have the right expertise in-house. And in 2021, we created around 20 new roles across our main geographic locations as we look to meet the needs of our evolving business. This included the creation of the new dedicated innovation and development team. Recruiting and retaining the right people is a critical success factor for Alliance. We were therefore delighted that in 2021, we retained our Great Place to Work certification for the U.K. and China whilst gaining additional certification in Singapore, our main APAC hub. 81% of participants globally agree that Alliance is a great place to work. We've continued to focus on developing our sustainable business strategy and in 2021 developed our sustainability framework, which details our specific areas of focus and the key activities which underpin these. This framework was informed by feedback from investors and external gap analysis and input from employees following a series of workshops. We're in the early stages of developing our broader environmental strategy. Given the nature of our business and our use of third-party manufacturers and distributors, the majority of our emissions are Scope 3. Our Scope 1 and 2 emissions are well understood and controlled. And in 2022, we will achieve carbon neutrality for our 2021 emissions through the use of sequestration schemes. We've worked with external advisers to quantify our Scope 3 emissions and for the first time in 2022 will reach out to our largest partners to help refine our Scope 3 calculations with a view to setting carbon reduction targets and our path to net 0 in the near future. We also have a program of works in place to drive improvements to the sustainability of our product packaging whilst continuing our focus on supply chain management and business ethics. I'll now hand over to Andrew to walk you through our financial results. Andrew?

Many thanks, Pete, and good morning to everybody. 2021 was an exceptionally strong year for Alliance. We achieved 23% C3 sales growth to GBP 169.6 million with organic growth being boosted by the inclusion of sales from Amberen for the first full year of ownership. The strong growth in our consumer brands, coupled with the change in our distribution arrangements for Kelo-cote and included Amberen in the first year, led to a 32% increase in gross profit and a 430 basis point increase in gross profit margin to 64.5%. As Pete has already highlighted, we increased investments in the business to improve our efficiencies and operating capabilities and provide it to a number of brands. And we also incorporated Amberen in the cost base for the first time in 2021, yet underlying EBITDA and PBT both increased 26% due to the strong sales growth. With modest increases in net finance costs, tax, underlying basic EPS increased 25% to 6.39p. We are pleased to recommend a 5% increase in the final dividend to 1.128p per share. Pete has already talked through the detail of our key brands. And in the other consumer category, this includes Vamousse, our treatment for head lice, which has been impacted by the continuing social distancing at schools; and 2 lower-margin products, Aloclair and Oxyplastine, which were impacted by the timing of orders from distributors during 2021. We expect to see the sales of these products and a number of our other smaller consumer brands recover this year. You'll also notice the continued strong growth in our Consumer Health business, which now represents 72% of group sales, up from 68% in 2020. In addition to the annual amortization charge, in 2021, we reported some non-underlying items which are not related to the current trading performance of the group. Following a review of our Prescription Medicines portfolio, we recorded a noncash charge of GBP 6.2 million, which relates principally to a low-margin asset. This asset was acquired in 2015 as part of a bundle of assets and operates in a tender-driven market which is now no longer economically viable. Also included in 2021 are restructuring costs. These relate to the closure of Milan and Los Angeles offices as we reorganize our EU and U.S. footprint to be rightsized for future growth. And finally, following the infringement decision issued by the CMA in February, we have booked a noncash provision equal to their proposed fine. As previously stated, we fundamentally disagree with CMA's findings and are appealing their decision. We expect the Competition Appeals Tribunal to sit later this year or early next, although the time of this may be extended due to the workload pressures in the court system. On this slide, I'm particularly pleased to report our balance sheet and cash flow headlines. Free cash flow for the year remained strong at GBP 30.2 million, driving a GBP 22 million reduction in net debt to GBP 87.0 million for the year. As a result our net debt-to-EBITDA ratio now sits comfortably below 2x at 1.7x, placing Alliance in a strong position to participate in M&A when opportunities arise. This slide walks through the cash and debt movements in more detail. The working capital outflow of GBP 5.9 million arises primarily due to timing differences in both the reversal of the favorable movements in net working capital seen at the end of 2020 and a timing of sales in the second half this year. CapEx of GBP 5.5 million is in line with our expectation and relates primarily to our ERP system that was implemented in May. This strong cash generation reduced net debt and facilitated our GBP 8.6 million dividend payment. And as a reminder, we have our GBP 165 million revolving credit facility, of which GBP 48 million remains undrawn. We also detailed an appendix on Slide 30 some technical guidance for you. We note that CapEx will be lower this year in the range of GBP 3 million to GBP 4 million, and net debt will be in the range of GBP 65 million to GBP 55 million in the absence of any acquisitions. We also know there's a lot of focus on cost inflation in the current environment, which has only been exacerbated by the invasion of Ukraine. And on the latter point, Alliance has no direct sales in Russia or the Ukraine, and sales into these countries through distributors are immaterial. With regards to inflationary pressures, we are cushioned to a certain extent by the longer lead times in our business. From an input cost perspective, we and our contract manufacturers typically buy active ingredients and componentry a long time in advance. We also have the ability to pass some cost inflation on to consumers through price increases, although this is generally not possible for the pharmaceutical portfolio. On the supply side, our distributors typically hold around 6 months' worth of stock. And these factors mean that the impact of any inflation should be weighted towards the second half of the year. And with that, I'll hand back to Pete to provide a summary.

Thank you, Andrew. So in summary, we're very pleased with the performance of the business in 2021. Our portfolio approach has allowed us to withstand the challenging conditions presented by the COVID pandemic to deliver double-digit organic growth. We have a strong base business and significant in-house expertise to drive continual growth in our brands through marketing excellence and product innovation. We've optimized our global footprint to ensure we have the right resources in the right territories and are leaning into the e-commerce opportunity through partnering with leading players in this field. Strong cash generation has reduced our leverage, meaning we're very well positioned to participate in complementary M&A when appropriate opportunities arise. We look forward to the future with confidence in our ability to meet our midterm ambitions and in 2022 anticipate financial performance in line with market expectations. Thank you all for your continued interest in Alliance. We're now happy to take your questions. Andrew?

It's Andrew Whitney from Investec. Just 2 questions, if I may, please. E-commerce features a lot in your release, and you've spoken about it here today. I see you've got a new innovation and development team. Is there an overlap in that? Is the innovation and development team the resource you drive e-commerce with? I know you're going to partner with people, but is there a function of that innovation and development team in the actual marketing of products through the electronic channel? So just understanding your relationship there. And then the other question is a more general one. A couple of the other companies I look at have talked about the ongoing disruption of COVID in end markets and tried to broadly quantify that. Is there like a -- I think some people have said sort of 90% of -- is back to 90% of where it was pre-pandemic in terms of the market. Is there a sense that you could give us in terms of how disrupted your markets remain? I know it's a difficult question.

Yes. No, both very good questions. I'll start -- I'll take them in that order, I think. When you look at e-commerce and innovation and development, they do go hand in hand as part of our infrastructure, and we're purposefully looking at products that we can augment with our own in-house development, hence, the creation of that innovation and development team. So those brands that we're looking to create and work on will flow nicely into the e-commerce channel. So that is predominantly focused behind our key brands. We're not using innovation and development to any great degree in our Prescription Medicines business. And our key brands such as Kelo-cote, Amberen, products like MacuShield have particularly high exposure to e-commerce right now. And in our M&A strategy, we're purposely looking at brands that we think can leverage that channel too because it's a really useful channel for us that has emerged relatively quickly over the last 5 years, I would say. It was accelerated a little bit through the COVID pandemic. And we've been really well placed to take advantage of that. So the innovations that you see that we pulled out in the deck, those are the types of things that you can expect to see in the near term. As we look a little bit further out, we have some exciting new developments that are proprietary to us as well that we are also considering. But right now, it's supporting those key brands through that channel.

So I think you mentioned sort of GBP 1 million to GBP 2 million spend per annum for that innovation and development. Does all of that specifically sit with the product? Or is it some of it going into the marketing as well?

Yes, it's -- that's specifically sitting into innovation and development. That isn't marketing spend, if that's what you're driving at. So we have a separate advertising and promotion budget outside of that. In terms of COVID, that's a great question. It'd probably be a very, very long answer, I think, to sort of pot it. If you look at our prescription business, predominantly EU but majority U.K. based, we feel we're at a sort of sensible run rate for that, and that sort of stabilized over the back end of last year. So we might see stable performance from that part of the portfolio. In terms of the Consumer Healthcare landscape, without doubt, different countries have emerged at different rates. And I think you saw a little bit of that with Nizoral last year. So the Asia Pacific region certainly, from our perspective, felt like it had a slightly slower recovery than where we were in the U.K. And the U.S. was always a little bit behind where we were in Europe. That's certainly what we were seeing in our business. So I think the majority of that is now washed through. If you're hearing 90% in other businesses, I'd say it's not far off that, if not a little bit higher, I think, because of where we're exposed in e-commerce and that Prescription Medicines business as well. So there's less uncertainty as we move forward with regards to COVID.

Actually, a couple of follow-ons from actually Andrew's questions. So you talked about obviously inflationary pressures, also uncertainties in many regional markets at the moment. How do you stress test the price that you're coming in with your Consumer Healthcare brands and to then pass through those costs onto the consumer? I was trying to understand the elasticity of the price for those key products. And then probably a follow-on question after that.

Okay. So we are almost one step removed because we had a lot of distributors in our network. We deal through over 100 of those distributors around the world. So in terms of what we can pass through, we have sensible discussions with all our distributors, particularly in terms of Consumer Healthcare. For Prescription Medicines, that's very much fixed in terms of pricing. And so where we do have flexibility, we will talk to our distributors in that region. And I think also just to Andrew's point, we are relatively well buffered, so I would expect the distributors to hold anywhere between 3 and 6 months' worth of stock. We also have stock in our warehouse. So the amount of stock we have in the system and on hand right now isn't feeling those inflationary pressures. It comes 9, 12 months down the line, but there is certainly volatility in terms of input costs going in. Does that answer your question, [ Ed ]?

Yes, it does. And then the next question actually was, Andrew pointed out, you do focus a lot on the e-commerce platform. Is there particular products that you think are better suited for that platform? What kind of metrics do you think are important for acquisition targets to bolt into that platform? And then actually a more specific question, how much of the gross margin improvement for the Consumer Healthcare revenues was led by that e-commerce platform rather than product mix?

Yes. Yes. So remind me of the first part, [ Ed ].

The first part was which products were better suited to bolting onto that platform.

So there are certainly ones that work better through that channel than others. So products that are not subject to a distressed purchase. So Vamousse is one that we always pull out as a distressed purchase. You need it now, you're more likely to walk into a pharmacy and go and find the right one on shelf. That's still vitally important. Although even in areas like Vamousse where deliveries are becoming much more shorter term, able to get same-day delivery, people are looking towards those channels for those that you traditionally think wouldn't go particularly well through the e-commerce channel. Unquestionably, brands like MacuShield, Amberen that are taken on a consistent basis by a fixed customer group who can use things like Amazon subscribe and save and get a regular delivery of things like VMS, brilliant for e-commerce. In terms of the metrics, [ Ed ], what was behind your question there, just remind me?