Blau Farmacêutica S.A. (BLAU3) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Earnings Call for the Fourth Quarter and the Year of 2024 of Blau Farmacêutica. We are live with Marcelo Hahn, CEO and Founder; Douglas Rodrigues, the CFO; and myself, Matheus Fujisawa, the IR Director. We have the call being done in Portuguese with some of the translation in English, which will be available on the company's IR website. At the end of the presentation, we'll have the Q&A session with the priority for the sell-side analysts. [Operator Instructions] Now I would like to pass on the word to Marcelo to begin the Slide 3.

Thank you, Matheus, and everyone. I would like to thank our team of employees dedicated to search for improvements despite a macroeconomic scenario that's challenging. And I would also like to highlight that we've been improving all of the metrics, increase of the revenue, EBITDA, reduction of the days in the stock, optimization of the working capital and reduction of the net debt. The numbers you can see here on the slide, I'm going to highlight the all-time high net revenue, BRL 1.750 billion in 2024 with a growth of 28% in regards to the results. This was levered by the private market where Blau really had growth in all of the different business units, especially in the hospital unit. We also have some active operation and strategic planning, and we've been working on sustainable growth and perpetuity of the company. In the LatAm market, operations in Uruguay, Argentina, Chile, Peru, Colombia and Ecuador, Blau has been has been recognized as an attractive platform in the region. Blau has many different avenues for growth. Geographic expansion, early diagnosis, the increase of productive capacity, investments that are recurring in R&D, bringing in a new portfolio, partnerships with international players to have specific products in the market niches and for the Brazilian market and the LatAm region. So Blau has many different investments in its business with RD&I, Hemarus and Prothya. Some of these at the moment have still not counted on the recognition of profitability, but just the expenses. And the returns are still coming around, but they will come for sure. So I want to call these as startups. And in 2024, we continued to invest, reducing the net debt, showing the solidness of -- financial solidness of the company, the capacity to invest and generate cash with an increase of 14% in regards to 2023. We launched 8 new medications with an addressable total market of BRL 700 million, submitting this for the approval of ANVISA was about BRL 2.1 billion. And our operation was levered by constant capacity and expansion of our portfolio. To give you an idea of this growth, in 2024, we had 72 products with 45 in the LatAm market and 27 in Brazil. The scale gains along with the sale of products, and the Blau plant also led to more and more share. On Slide 4, we have the next step for the recognition globally, and that's why we've been focusing on the investments in technology. Among different products for RD&I, we want to highlight the biotechnological products, which are part of the core business of Blau that are going to be really transformational and very important for the medication in Brazil. Now we want to present 4 different opportunities that have the capacity to make Blau for monoclonal antibodies with a -- in Brazil, in 1 year, that represents BRL 100 billion. These are biotechnological drugs that produce specific technological diagnosis that are important for patients with cancer. The development of this product reinforces Blau's commitment to expand access for high complexity products. And below, you can see our pipeline, where we have products that have an accumulated market size and 3/4 of these are biologicals. We should also have new emissions this year -- new submissions this year, and so this should grow. Now on the right side, you can see an investment in the plasma market, Prothya. It's a strategic market for the company. We already had an investment in the U.S. with Hemarus in 2023. We started investing in the operation in Europe with Prothya. The plasma market is very attractive with a global value of $29 billion in '22. It should lead to a CAGR growth of 7% and reach $40 billion in '28. Medicines are essential for life with the demand growth greater than the installed capacity, supported by the continuous increase in different referrals and indications. Finally, we're producing APIs at our Cotia complex, which aims to increase the company's competitiveness in global markets. In addition to developing the -- we also have the alphaepoetin, and these are already being pegfilgrastim alpha, and these are already exported to LatAm, and we're seeking approval to sell them in the local market as well. These are important for relevant markets. Alphaepotin has a relevant global market of $12 billion and a solid CAGR of 4% a year, while filgrastim and pegfilgrastim have a smaller global market, $2 billion, but with an accelerated projected growth of 14%. Now Matheus will continue the presentation. Thank you so much.

Thank you, Marcelo. Now on Slide 5, we noticed that invested almost 10% of the year's revenue in research, development and innovation, while the revenue from launches contributed just with over 6%, as you can see on the left side. What's most important is noticing the trends. We are aware that in the future, the contribution of the launches should overcome investments, leading to a significant increase in cash generation. On the right side, you can see the reason for this confidence and trust. If we consider the launches in 2022 all the way to '24, we'll notice a TAM of about BRL 667 million per year in that period. And if we consider the BRL 3 billion of the pipeline that has still not been launched, we should have at least BRL 1 billion of launches in the year from '25 to '27, which would be 50% above the last 3 years. And if we go further and consider only the first 3 monoclonal antibodies that we're developing, we can reach a value of BRL 2 billion per year between '28 and 2030, which would be double the previous period in the projection. And I want to reinforce here that with each new submission to ANVISA, these values should continue to grow. Moving on, Slide 6. As we talk about the net revenue, we can notice once again another consistent result in the fourth quarter of '24, slightly below that of the second and third quarters, but pretty much at the same level. It's important to note that in this analysis, the first quarter, we normally have a seasonality negative period for sales with a level that's significantly lower than the presented in the second and fourth quarters. As you can see in this trend in the charts in '23 and in '24. But in fact, this dynamic has been going on ever since 2019. What's cool about this analysis is that it's clear to see the company's new sales level in '24, leveraged by the performance in the private sector. With this, we reached an all-time high revenue of BRL 1.75 billion and a growth of 28% compared to '23. The organic growth was 22% in the same period. When we analyze this per segment, here at the bottom, you can see hospital segment, our core business. It grew 25% in the year, reflecting Blau's market share gains in a resilient market, which is the pharmaceutical market with solid performance in the mature portfolio and a highlight for the growth of almost 60% growth, reaping the fruits of investments in recent years. And then on the second segment, that it really considers the we also had relevant growth of 46% in the period with a highlight on the retail and aesthetics segments, which together grew 55%. Now I'll give the floor to Douglas to continue with the presentation.

Thank you, Matheus. Good morning, everyone. Well, before we get into the details of the results on our performance financially, I wanted to talk about the highlights. The first highlight, of course, is the fourth quarter. The delivery of the fourth quarter came around to consolidate the year '24. And then when we get into '24, we can say that it's important to highlight the quality of the deliverables and results. Blau had reached a whole new level of revenue and margins in a very healthy manner, sustainable manner, and that certainly gives us the conviction of this recurrence. And along with this, the company was able to ensure an execution that was very solid this year and at the same time, address all of the investments that were strategic with a robust cash generation. And so that more than just highlighting how much, it's about how and the quality of the deliverables were key to analyze our results in '24. Here, you can see a clear example, and Matheus will highlight this. If you reach the new level of revenue and then you have organic growth and the core business growth, growth in the business units and the launches, our gross margin has also been sequentially going through this evolution process. So when we look at the annual, you can see growth of over 30%, almost 2 margin points. So you grow the margin above the revenue. And when you look at this from an isolated perspective, you can see the main drivers for the evolution of the revenue. So you see Blau ex-Bergamo, we're already at a level that's higher than what was the best quarter when it comes to margin deliverables. And Bergamo, as we can highlight from the starting point all the way here, it's an evolution that's very strong. And you can see greater availability to meet the sales mix as we've highlighted in the growth of the revenue and also the more utilization of the productive capacity, operational excellence in the factories. And all of this really brings the company to a whole new level, which certainly gives us the certainty that we can start from now on and search for more gains, especially in the Bergamo operation, as we highlighted in the Blau Day, still half of this evolution. Moving on to the next slide. We see the expenses in the annual comparison that grew 18%. Below the growth of the revenue, there's a dilution of the SG&A. And I think it's important to highlight this, the company has been going through this process, adapting new structures. And now with the growth of the revenue, we should search for the SG&A dilution. And here, when you get into research development and we can see that the company is actually reaching a record investments in RD&I and innovation. And most of this is capitalized. So this is a trend that we'll see until we have the launches of the monoclonal antibodies. Moving on the next slide. I think we want to highlight the EBITDA once again. So you have a sequential evolution that's very consistent. When you look at the last quarter and you compare with the best quarter in '23, we've reached this level. When you look at the comparison annually, it's above 50% growth. And this is really connected to the dilution of expenses, but also the evolution of the gross margin. And so once again, I think we have a deliverable that's really solid, very consistent in the operational results. Next slide, please. Here, you can see the net income. And before we get into the comparison, it's worth mentioning the last quarter, which has 2 effects. First, the financial expenses. And it's important to highlight that we consider that we had a currency loss in value. Those are very strong at the end of '24, and the dollar has been taking a step backwards. And so this helps us with the balance sheet. And when it comes to taxes, the company's strategies were really to anticipate the deductions in the first semester quarters to preserve cash. And clearly, we reached the last quarter with a lower capacity to deduct the tax base. But in the end of the year, we can also highlight our tax planning as an important contribution to our net margins. So when you look at the comparison year-over-year, we still have a growth in the net income of 23%, which is very important. Next slide, working capital and CapEx. Well, same dynamic. I think for working capital, it's worth highlighting that those accounts and balance sheets are considering foreign exchange, and they were affected by the pretax at BRL 519 million because if you had BRL 545 million in the first quarter, now you have the assets, liabilities and all of this and then that reached BRL 619 million. But when you look at this in days, there's a significant increase in days. But if you just adjust this by the currency, you have a reduction of almost 10 days. Anyways, what's most important is to highlight the evolution of the working capital in the company, which allowed us to have a bigger release in our cash position. When you consider the cash cycle, it's almost 70 days, very important. And you go from a level of 60%, you reached 45% now, something we've been highlighting a lot. It's a level that we understand is healthy, and we should keep and of course, considering the occasional efficiencies. When you look at the right side, the CapEx here of the company, this is a level that the company is going to actually address new investments in fixed assets, addressing the productive capacity to sustain the business. And we've highlighted some of these investments with some lines that we'll be able to work on actually prior to the Pernambuco investments. And when it comes to R&D, this is a whole new level. We're always considering about 10% of our revenue, which is, of course, today, we expect a contribution that's greater and greater, the new launches within the company's revenue. So that's fundamental to address the future of the company. Then finally, last but not least, if cash is king in the current moment, the macroeconomic scenario, we know this is even more important. So we should have an increase in interest rates again today. So when you look at the results operationally at Blau, along with an improvement in the efficiency of our cash cycle, this was all possible considering all of the company investments and pay off the debt as well as compensate shareholders. And still now, if you look at the company, there's no leverage. So that demonstrates our solidity financially and how the company is a case that's almost unique in the market really, delivering so much quality in our results and along with this, a strong cash generation without too much leverage really positions us more and more as a relevant player that's very well prepared to analyze and explore opportunities. And so this is something that really gives us the conviction we need. We know about our responsibility, and we'll keep up with this. Now I'll pass it on to Marcelo for his final comments, and then we'll get into Q&A. Thank you very much.

Thank you, Douglas. So as you can see in the previous slides in this presentation, Blau had a privileged financial position, and this allows us to assess different opportunities to sustainably expand our competitive position in the sector through organic investments, partnerships and acquisitions. You can also see on this slide, we have some strategic drivers, which are really in line with our investments. I want to thank our Blauers team, which were fundamental to help us achieve the 2024 results. I'm even more excited about what's coming and the possibility of building together, and I'm sure we're going to be very successful. This feeling is also reinforced because despite macroeconomic scenarios and challenges, Blau has sustainable and consistent growth over time, which is due to the large investments in different initiatives, international expansion, the creation of new production lines. In addition to strong performance in research, development and innovation with a promising portfolio of new drug launches, biosimilars and incremental innovations, we're building a strong future. And I'm extremely excited and confident about the releases to come. These investments will ensure the perpetuity and global recognition of Blau Pharmaceuticals. Join us. Blau is just starting. Now I'll pass the floor on to Matheus so he can continue with the Q&A session.

Thank you, Marcelo. Now we're going to head to the Q&A session. [Operator Instructions] We'll start off with Felipe Amancio from Itau BBA.

Two questions here on my side. The first is about working capital. When we look here, we can see that we have another improvement in the cash cycle with improvements in almost all of the lines. But if you could explore a bit of the main drivers behind this reduction in receivables to understand if we can -- if you already understand that the health chain is in a scenario that's a little less pressured than in the last years? And also about capital allocation. The company has been able to reduce the net debt with an important leverage position. And I want to understand the company's plans for cash allocation, if it makes sense to wait for more dividend distribution or if that's going to go into an increasing capacity or maybe there's left over space for M&A.

So they always start off with that, right? Well, anyways, thank you so much for the question. Yes, when we talk about the working capital, I think there's an effect with the receivables. I think we still have a pressured supply chain, and we have a seasonality in the last quarter and the characteristics of the mix. And we understand that the sector is still pressured. The payment terms are really important because of the level of leverage and the interest rates. But in the working capital overall, the company has been searching for the sufficiency. And I think the biggest highlight was really the stock turn and this ready service really managing the stock chain. And when it comes to the leverage, I think we've highlighted this a lot with the Blau Day. And so when you look at '24, you can see the operational cash generation and improvements have already considered the investments in compensation of shareholders. The company continues to distribute 25%. And so that's also very relevant, also addressing the productive capacity. So I think this considers the investments and of course, this would make the company take on a bigger leverage would be to analyze an M&A opportunity. The company always considers this, and we're a relevant player in this market locally and globally. And so we're constantly assessing opportunities. And that would help us, of course, with a change in the leverage and then search for ways to deleverage. Do you want to add on to anything?

Well, I think we have nothing considered towards M&A and profit distribution. We're always looking into opportunities. And if we see them come up, we'll perform acquisitions, et cetera. But at the moment, we're just looking at opportunities, but no decisions exactly.

The next question is going to be from Leandro Bastos at Citi.

Marcelo, Douglas, two questions here. The first is if you could talk about the perspective for the gross margin this year. And if you have any news, you have the currency factor, the sector as a whole has a lower price adjustment. And if you could talk about how you're looking at this, we can also consider the gross margins, et cetera, taking advantage also of the slides you showed with the gains and just bringing it all in-house and seeing what we can consider from now on this line? And that's the first question. The second is on the working capital. If you could talk about the effect of suppliers in the fourth quarter, which I think is also important to help with the cash cycle if there's something occasional and if that would maybe be normalized in Q1 or if we have reached a different level at this point in time?

Thank you, Leandro. Well, let's start off with margins. I think we reached specifically in the second quarter a level of 40%. We highlighted this evolution. And of course, it's difficult to arrive and keep up. But when we look at the drivers and consider like the readjustment issue. Of course, we already expected something considering a more challenging scenario in Brazil that could be really in line with the inflation. But then between the maximum price, we always have this space, right? And when you look at the dynamic and you see Blau and many competitors are importers of the APIs or the finished products. So this reliance and of course, if the dollar is at a whole new level, this is going to be transferred. And so also the limit of [ CMED ]. And so when you have products that reach this, then you start this discussion with CMED because sometimes this is a lot more connected to a lack of balance in the supply and demand. And of course, the company was maybe a little conservative looking at the business plan in a more stressed currency scenario. But now we understand that this level is healthy and sustainable, and we should search for this with greater efficiency at Bergamo, considering this evolution of 24 months. And so we see space to improve, of course, in the margin issues. But when you look at the working capital and suppliers, you have this effect with the balance sheet. You set your foreign supplier at BRL 619 million. And then when you look at that in days, you have an increase almost of 10 days. So the company internally, of course, has been seeing this process for the extension of these suppliers because today, we have a negotiation power that's a lot greater consolidation with Bergamo also made us a lot more relevant. And occasionally, the currency interferes more than our efficiency, I'd say.

Our next question is from Samuel Alves at BTG Pactual.

Two questions here. The first is a follow-up from the previous question. And the company understands that they can offset with efficiency gains and that there would be space for margin gains in 2025. Could you guys maybe quantify this? That's the first question. And the second is kind of related to this, but could you talk about how the seasonality should work with the margins in '25 because of the currency factor, especially because in the end of the year, the currency was more unfavorable and then the company had to kind of reestablish stock with a higher currency, which is an offset as the real gains more value and as we move to the trend we've been seeing in 2025. But just to talk about the seasonality a bit.

Well, we'll talk about the currency seasonality, and the company has a natural hedge. In our cash, we have a significant amount in dollars, but to be able to go through these moments of important changes, right? We always consider our business the best opportunities, and we're constantly searching for improvements. So when we talk about a production, we try to improve the size of the batches, less people in the process, more equipment that's modern, a smaller amount of analysis in a more optimized way and processes that are more efficient with more batches tested at once and so on. So we continue to search for operational improvements in everything we do. And actually to export as well because I'll give you an example. This week, we were exporting to our subsidiary in Uruguay. It's the first time we have this transportation done with our own trucks. that were supplied with all of the loads required for the whole month. Before we were doing this with like airfreight and spot. So these are efficiency gains you search for. But in the operation, we're constantly searching for improvements in the operation. So today, we have systems and KPIs that help measure the improvements constantly.\ Now to add on, I'll let Douglas talk about this as well.

Well, anyways, internally, it's a process of operational efficiency and excellence. But then, of course, when we look abroad, we always look at the process to monitor what the dollar is that I have in my inventory and what would be an average dollar also to understand what the commercial price policy is. And it's kind of like what we mentioned. It's simple, but the company is capable of doing this because just as I import, my competitor also imports. So that's why it's so important because with the projects we have here, we look at the verticalization more and more, which helps with a relevant gain in the future of the company. So do you want to talk about Bergamo a bit?

Yes. I think even before Bergamo, we talked about the carryover in 2024. We started off with a margin that's a lot smaller in the first quarter than what took place in the fourth quarter. So you have about 900 bps of the gross margin. So we also capture this full effect, and there should be a margin gain. We also consider the currency issues, and we have the positive conditions, which are Bergamo. So they ended the year with 27% above our expectations. So the consolidated gross margin and with Bergamo has been wrapping up with the gross margin side, and it's a positive driver that could contribute to the company's margin. So when we look at Blau ex-Bergamo, there are other effects that bring the margin downwards. So all of these other expenses with all the investments we've been working on in the subsidiaries that are generating profitability expected in the beginning of the operation. We have some that are having positive operations and others that are negative operations. So in the same way as our plasma bank, and we're expanding our capacity, but it's still an operation that's negative for the company, and it's going to start bringing better margins. So gradually, we will improve margins. And in our business, we have our metrics, and we're constantly searching for ways to improve in all departments. So this is a recurrence, and we're far from maybe reaching the maximum excellence. We improved a lot, but we still have lots of opportunities, for example, on the freight. Now we have freight done with our own trucks. That's more economical. We're also considering how we can bring merchandise back. Sometimes maybe we can send a product that's an imported input to another country, maybe cheaper than sending it to Brazil, et cetera. So we have different opportunities, right? It's just a simple example of margins versus opportunities. And there are many things and initiatives, right, in the procurement department, we're looking at providing bigger purchases. We're not servicing only a small quantity, but all of Latin America. And so we become a really important player, right? So this is a very relevant way as well. So as you mentioned, we also saw that there's a lot to be extracted in the current assets, not only this year, but short, midterm, where there's still space to grow our margins. And we also have the second b, right?

Yes. So maybe we don't know how to communicate with the market. But even Prothya, Prothya has a revenue of EUR 300 million. If we consider 20% of this going to be EUR 60 million, and we could be consolidating our results, and that's another BRL 400 million of revenue. So these are things that we're going to bring in over time. We're expanding our participation there. So we have a lot of things that are still not contributing to margins, but will start contributing with positive margins.

We have some questions here on the chat. First from [ Caio Loureiro ]. He says, could you talk about the perspectives on the sale of immunoglobulin? Was there an update?

The company is actually following its business plan for 2025 and the market is normalized. Prices are still not at the levels we would like them to be, and they improved a lot. We've been growing in the private market. And so this amount was just one player got part of this and the rest of this is going to once again have a new bid in the next 60 or 90 days, and then we plan to participate once again. So we participated in the first bid. We were in second place with prices, but we didn't accept to lower prices even more. So we thought that the first place lowered their prices too much. And so these are things that happen, but that we understand with the second part of the bid, we should -- well, we also don't have this in our business plan for 2025. That would be an upside. And so we are following this.

We've already talked about this quite a bit, and [ Nicolas Esteves ] asks for an update also that's from Prothya, right?

Well, Prothya has 2 plants, one in and one in Belgium. Their revenue was about EUR 300 million actually. We're still in the investment process. As soon as we have more time, we'll show that -- we'll pass this on to you guys and then continue with the operation. It's an asset that the company invested in and that also have a lot of transformation opportunities. It's a plasma transformer, among the 10 greatest in the world. There are some registrations of the revenue and drugs in some countries in Europe. Today, Blau distributes the products for Prothya in Latin America, with the exception of Brazil. And so we also see many opportunities. Our intention is to increase our share there, and we really see this as an important opportunity. We don't choose the moment for these investments. If they come around, we have to be ready for this. And I think Blau is also really prepared financially and ready to start expanding its participation also at Prothya. So this is actually a strategy tier. And also when you consider the main worldwide players with biological products and that also have the biological products. But it's important to highlight that Prothya also has its own plasma collection center and also in Hungary and exclusivity as well in the plasma in the Netherlands. We also have an agreement with the foundation that works on this process, and they have 100% of this plasma in the Netherlands for production.

We have one more question that came in from [ Giovanni ] from [ GDP ]. And he's asking if we could give more details on the percentage of research development and innovation that are accounted in your P&L and CapEx?

Well, we've invested about 10% of our revenue in R&D and about 80% goes to the CapEx and 20% goes to the expenses. And that's because most of the projects are taking place prior to the submission at ANVISA. And so that's why most of these are capitalized instead of considered expenses.

These are longer development processes, and we also have all of these processes where the idea with the company is to have technical background and clinical background to sell these products all over the world. And so they prefer to conduct these studies in Europe, not only in Europe, but we have some countries in the European community and others that are not. And depending also on the drugs, but the idea is to have the technical background and support with the conditions to export this to the world. And we're really doing things that are excellent, very well structured so we can do this once. Well, that's what determines the level of investments. And well, besides all of this, Blau has been investing a lot on this kind of incremental innovation. And we have one of these drugs that are also in the registration process, which is also a single presentation in the market. So these are the types of things that Blau has been dedicating our time to working on to not get into the struggle for prices of generic products. And so we can also have the sustainability of the business over time, right? So that's a startup we have currently. And I'm really excited about what we have up ahead. I've never gone through a moment such an enthusiastic moment in the company with the stability we have economically and the sales and our margins. So this makes me very confident that we should continue to invest, believing we're doing the right thing and continuing to grow without performing any absurds.

Without any other questions here, investors, if they have any other questions, they can contact IR, ir.blau.com.br, and we'll answer your e-mails as soon as we can.

I also want to invite whoever is interested in getting to visit our operations. If you're here for the first time, if you want to get in touch with Matheus and we can schedule a visit. And you can come and get to know our operation, understand Blau more. And we have some interesting projects going on, and we have this mission of being a company that is global and perpetual, and we struggle for this. And we also want to ensure that we have profitability and ongoing improvements in the business. So that's why we're here coming to work every day. Thank you so much, everyone. Have a great day.

Thanks, guys. [Statements in English on this transcript were spoken by an interpreter present on the live call.]