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

Good morning, everyone. Welcome to the earnings call for the second quarter of 2026 at Blau Farmaceutica. We're live at Blau Studios in Sao Paulo with Marcelo Hahn, CEO and Founder; Douglas Rodrigues, our CFO and Investor Relations; and myself, Matheus Fujisawa, Investor Relations. Our call is being held in Portuguese with some translation into English and will be available timely on the company's IR website. Just to show you the agenda today. We'll start off with Marcelo presenting the highlights, then I'll come back, and we'll talk about the pipeline and revenue, and Douglas will talk about the operation and financial aspects, and Marcelo gets back for the final comments. At the end of our presentation, we'll have our Q&A section with a priority, of course, for sell-side analysts. [Operator Instructions]. Now I would like to pass the call on to Marcelo, so you can begin the presentation on Slide 5.

I want to start off by highlighting that the semester despite challenges in the macro scenario was very positive in our assessment. Blau had revenue growth, increasing margins and cash generation after working capital and CapEx. Our net revenue grew 10% in the first half, in line with the average growth over the last 3 years. And the difference in performance between the first and second quarter is due to the public channel only through the phasing of deliveries and for comparison basis, right? But importantly, growth has the potential to accelerate. And in the second half, at the beginning of operation in the new production lines and a more favorable comparison basis than the last quarter. And this growth was accompanied by higher profitability and an improvement in both our gross margin and our EBITDA recurring margin, including a sequential improvement from the first to the second quarter. Our recurring net income was impacted by the exchange rate variation. And now in the first quarter and now the second quarter grew 12%. Excluding the exchange rate variation, we had a growth of 18% of semester and about 26% in the second quarter. Now as we move on to Slide 6. And we continue on the next page, you can see the balance sheet highlights. So our working capital had a sequential improvement of 300 bps going to 50.8% of our revenue. An important highlight to the third consecutive reduction in our inventories. We know that we need to improve even more. I will continue to focus on reducing working capital needs in the second half and onwards. We continue to invest heavily on our sustainable growth, but the main difference compared to last year is that CapEx is now lower than our recurring EBITDA. Operating cash generation, including working capital, was 2.4x higher in the semester and represented about 92% of our recurring EBITDA. The company's free cash generation after CapEx was BRL 70 million with a generation of BRL 81 million in the second quarter of BRL 26 million, reversing the consumption of about BRL 11 million in the first quarter of BRL 26 million. Finally, we continue to have more cash than debt, improving this number by BRL 49 million in the quarter with cash generation that supports our investments to service of our debt and compensation for investors. Now I'm going to pass the word on to Matheus.

Thank you, Marcelo. Starting off with Slide 8 on the left graph, you can see that the revenue from our launches and investments in R&D really accelerated in the last 12 months. And our new launches, we grew over 30% in the last 12 months and an accelerating pace compared to the last semester. In investments, we had a planned growth the pipeline projects and to compensate or offset this increase in R&D. We reduced our fixed asset investments. And Douglas is going to talk about this more during the CapEx section on the right side. You can see law has about BRL 7 billion of addressable market in the pharmaceutical hospital market. And looking ahead, we have transformational growth, which also justifies higher investments in R&D and innovation. This pipeline is concentrated in biologicals that are more differentiated and should boost our growth and our margins. Moving on, you'll notice a standard in the P&L slides where we highlight the semester because we think this is an important starting point to have projections for the future, but also include the view of each quarter, so we can explain variations. So Blau grew 10% in the first half in line with the growth of the last 3 years. Our highlights were the public channel and growth in 34% of our launches. In the public channel, many end up focusing only on Alphaepotin, but Blau has a wide range of medication pursues and stay municipal sectors, and we see general positive performance in the channel. As we analyze the quarters, the first grew more than the second, mainly because of the difference in delivery volumes and a comparison basis in the public channel itself. When we analyze the private market, despite difficulties with high interest rates, there was also an acceleration from the first quarter compared to second quarter. And to mitigate these macro effects, the company is working to diversify its customer base and selling directly to hospitals. What's most important in the performance of the first meters that the company should go through a growth cycle in the next many years. And Marcelo will talk more about this at the end of the presentation. Now as we talk about the short term a bit more, it's probable that the growth will accelerate in the second half with new production lines and a more accessible basis for comparison. Now I'm going to pass on to Douglas, our CFO, he continues the presentation.

Thank you, Matheus. Well, moving on here. I think the main highlights was the gross profit we were able to reach in this quarter and first half, of course. And what's most important in our assessment, and this is a very robust result, very positive, but what's most important is how we got there, right? How we can keep this stable. Considering all of the challenges and scenarios in the macro environment, it's a margin level that reinforces that a strong adherence to our business plan is significant and to stay our commitment to our strategic plan. So yes, we have an organization that is focused and very disciplined, focusing on profitability, prioritizing generation. And then first, we have to generate so that we can then invest. And when we look at the quality and the elements that made us reach a level of margin, that was basically our target from 200 bps throughout the year. We can see that there is -- and we have conviction and possibility for evolution in the second half, right? So we know that there are the new lines. We're going to continue to use our productive capacity in the best way possible. We also have the launches. And even the factors that were favorable like the mix in the currency variations or FX have a trend to have a continuity, right, in the next quarters. And even like the plasma that could maybe contribute downwards, at some moment, it could even unleash value, and we can really leverage the margins. So I think -- it's about -- it's a matter of conviction on the recurrence and a sustainable margin level that could be -- then when we look at the next slide, we talk about the recurring EBITDA. And here, I think it's really important because we're already looking at a margin of 25%. And when we look at the comparison last year in the same period, it's also in line -- but the comparison basis, if you look at the first semester, it was even more about like lower expenses versus revenue than the gross margin right now in the first semester of '26, right? So of course, when you look ahead, and we'll see this in the next slide. As Matheus mentioned, for example, you have with the possibility to accelerate the growth of our revenue in the second semester onwards and keeping the expense levels per share, the EBITDA margin has the potential to grow and deliver what the consensus expects and maybe even have the opportunity to be a little greater considering the dilution and maintenance of the gross margin. So I think the next slide shows you this expense scenario. And when you look at the movement with the growth of revenue now in the first semester, how are we going to dilute this, right? So if you look at a potential greater growth in the second half and the maintenance, which is another important factor. When you look at the first semester of '26 and you compare that you can understand that there's like this expense maintenance. Of course, the company has many different initiatives. We're working on a lot of different things, but we're kind of in the middle of the confusion, right? We're reorganizing, looking at processes, we have support from consulting firms and a series of initiatives, right? We're already capturing the results of these initiatives but we have a potential to dilute and achieve these results, which is a lot greater in '27 and a little less than '26 when we start implementing this, right? So with the growth of our revenue, once again, we'll be able to look at this and project what would be an EBITDA margin generation opportunity in the next cycle, of course. And then the next slide, net income. Just as with the first quarter, we highlighted the effects of the currency variation, a little less this quarter than last quarter. Of course, the variation of the currency between quarters was smaller, but the trend is with the currency cap, this will definitely impact a lot less of the operational cash generation in the second semester. And then you have a positive factor as well once again with the reduction of the actual rates. And we have tax planning initiatives as well that are very efficient, so that when you generate more operational results, we can transform this into net income, and that's a trend. That's what we should follow for the second semester in the next cycle as well. And then here, I think it's our recurring net income. It's important to highlight. People have already questioned this actually about the net income from an accounting perspective. We had a provision when it comes to acquisition prices for the M&A. And this is still at an initial level, first level in the court discussions. But even in the PPA, the company had in 2020, Blau was not even attributing value to the registration of this drug, which was then -- so that's why it's a nonrecurring treatment, and we understand that there are possibilities to reverse this with an accounting provision. Moving on to the next slide, working capital, yes. So this is a priority and a goal. We have the intention of searching for an improvement in our cash cycle. We are moving in this direction, and the biggest challenge here is our inventory, reducing our inventory and leveraging the company's growth, but with a level of inventory that's a lot healthier to generate cash. And so when you consider our payment cycle and receipts, the average supply term gets back to a normal level. I think in the first quarter, it was not favorable, but now it gets back to what we consider normal customer cycles, I think it's not necessary to reinforce this. Everyone knows how the sector is still really hindered and the second quarter maybe brings in a higher level of revenue, but the company more than ever has been extremely diligent in this process. We're not going to do anything crazy. Our focus is profitability. And if we grew less, it was -- looking at the quality of our sales and profitability and taking on less risks at this moment. As we know, it's still a very delicate moment, right, in the market, but let's see how it will behave in the second semester. But of course, our priority is looking in-house and our inventory and what we can control more. Well, next slide, just as in the first quarter, the company's expectation of course, with the beginning of 2026 as well more positive to accelerate different investments and initiatives. But I think we continue to have this commitment discipline. Internally, the focus is first you generate, then invest, right? So of course, the investments that are priorities that are in our strategic plan with a high potential for growth and returns, then the companies are definitely focusing on Blau's keeping up with all these projects are on track. But what we can still wait a little bit with and carefully look at first considering cash generation, we were able to do in the first semester. And so the potential for investments here in the second semester tends to be greater because of the new biological plant and even the Pernambuco contraction work there, but the target is still the same, right? The year's CapEx needs to be in line with our cash generation in the year to be able to handle this constant cash generation discipline and keeping the low leverage, right? So on the next slide, another important highlight for the quarter, which is while we've been generating cash this quarter, and I think this is super important. When you look at the semester, with all of the challenges and all of the addressable projects you've been working on, we're still net cash, right? So that's important to highlight. Treasury team has already done some excellent work on this. They continue to be focused, and we're able to capture all of those good opportunities that we had in the market. The window here kind of closed a bit. We understand that at the moment, there will be new opportunities, Treasury is focused on this. And of course, that graph on the right side, should be more extended. And of course, the trend of the cost of debt and this trend is really important, especially in moments where you have more volatility and uncertainty, you can really have the necessary resources to address all of the investments in strategic findings. So I'll pass the word on to Marcelo for his final remarks, and then we'll be back here for Q&A. Thank you so much.

Thanks, Douglas. On Slide 20, we show you the performance and achievements in the last 3 years to give you the consistency and longer windows. Our revenue grew an average of 10% a year, and the gross margin grew 30 basis points per year, and the recurring EBITDA margin about 200 basis points per year. Even more importantly, throughout the last 3 years, we've performed -- worked on a consistent strategic agenda that strengthened our foundations to have sustainable long-term growth. We successfully completed our Pernambuco turnaround, capturing operational synergies and also expanding our production capacity along with the ramp-up of other low production lines, reaching an all-time high of volume produced and increasing the efficiency of our operations. We expanded our geographic presence. We operate in 9 countries and exporting to more than 20 markets in addition to significantly expanding our addressable market in Brazil by approximately BRL 1.5 billion. We continue to invest in platforms with higher added value. We've advanced in the expansion of biotechnological API plants and development of monoclonal antibodies, including the certification of our factory by ANVISA for pembrolizumab and other molecules. And we more recently also started optimizing capital allocation with more disciplined prioritizing products upgrade risk, return potential and better strategic alignment especially investments in the differentiation of our loan pipeline and in the expansion of our production capacity in our current factories. This movement included the divestment of Prothya and greater phasing out of investments in the future plan. On the next slide, we can see here that the best is yet to come still, right? We show our commitments of our strategic plan in a very summarized way. The investments are really focused on differentiation and increased production capacity in biotechnology, along with scale gains and low operational costs. In the medium -- in the short term, we've already pretty much hired an expectation of over BRL 2 billion in our addressable market with the new production lines of synthetic medication in our current funds. We're also implementing a new package line in Pernambuco, focused on imported products. So we can have -- we can meet the needs of the allocation when it comes to the fiscal benefits. So these are initiatives that should generate efficiency gains and more operating leverage. In addition, we've also -- with the attention of enhancing Blau's current and future pipeline, we invested in new research and development and innovation headquarter together with the ICT Inventor with cutting-edge equipment. So in the medium term, we should start reaping the fruits of a new phase of transformation at Blau. And so the launch of our first monoclonal antibody produced 100% in Brazil, pembrolizumab. We're also anticipating the further expansion of the biotech API plant and investments in a new line of finished biological drugs following the EMA and FDA concepts to consider this addressable markets concentrated in these drugs categories. And all this should increase higher value products in our portfolio as we advance as well through partnerships and international expansion. In the long term, the conclusion is that we'll have a more differentiated portfolio and even greater capacity technologically consolidated leadership position in the local pharmaceutical hospital market and also enabling us to have strong global expansion. Before closing, I would like to really congratulate the over 2,500 Blauers in Brazil and around the world for these results and thank our shareholders for their trust, other stakeholders. The market in Brazil has not been easy, but we've been able to show considerable evolution in the last 3 years and really have solid foundations to unleash lows extraordinary potential for the next years. Thank you all so much. Thank you, Matheus. Let's head to the Q&A.

Sure. Now we'll begin the Q&A section. We'll have our sell side analysts. I want to share their questions. [Operator Instructions] We'll start off with Flavio Yoshida Bank of America.

We have 2 on our side. First one, we talk about the channel, private and public. We saw that in this quarter, specifically, private demonstrated a pretty good merger, and I wanted to understand what the competitive environment is like right in hospital and private. What's the perspective to continue to grow in a robust manner what's the dynamic also for price pressure? And my second question is about the gross margin, right? We reached this level. that's pretty elevated. And I wanted to understand if there were structural factors or overall environment factors as well in regards to the sales mix. And I wanted to understand like more from a long-term view, what should we consider, right? When we look at the gross margins, if it's more of an environment factor or a more structural factor, et cetera?

Flavio, well, we're going to talk about the private channel a little bit. So every day, we've been developing tools and improvements in our processes to consider these different approaches with our customers. Our portfolio also grew. And with this, we've been able to have mid- to long-term contracts with our customers, especially our final customers, we're going straight to them than what we had done previously. And so it's a process that's not just like an on-off button procedure, but it's something we've been working on with these long-term partnerships that are established directly with the customers, the hospitals and clinics. And that's really helped improve the quality of our sales and profitability. So yes, we do see a competitive market. So especially for generic products where you have a lot of players in the market with more capacity than demand. But we have a pretty big portfolio and and we can then really reap the best results. And so we've also been improving our productive efficiency and negotiations with suppliers, et cetera. So it's all of factors that's really been improving the results of our business as a whole. And then we can be more competitive also, right? So it's something sustainable. It's not like a one-off scenario. Actually, we really see there's potential to grow even more, have more partnerships and even the possibility to have more agreements with these end customers and -- these are mid- to long-term contracts, and they're not renewed every month to conquer a new contract. Sometimes it takes a little longer because this is being provided by another player, et cetera. So it's a process, but we see major opportunities for growth. And day by day, we've been getting closer to these end customers. Great. So now let's talk about our margins. I think we spoke about negotiations with suppliers, operational improvements, et cetera, but maybe you can add on to this, Douglas.

Yes, great. So that's pretty much when we look at this quarter specifically, there is a factor there with the mix and interfere in this, and that's a positive factor. But of course, when you look at the margin for the semester and you imagine that for the second semester, that would maybe be more reasonable to consider this margin level that we consider, of course, the first slowdown in the currency and then, of course, considering our stock turnover, we'll be able to capture, but then it tends to be smaller later on, but of course, the the trend in the mix. You want to keep that and such these opportunities. We have the new lines and that's a factor at an contribute to the margin, right, even if other factors are not that positive in the second half of the year, we also have this plasma snare that kind of pushes downwards that someone we could unleash this and it could be an important lever. But maybe today, searching for this level of margins of about 42%, which is kind of in line with what the consensus expects is we believe can be sustainable on recurring and can really take us to the closing here for '26.

Great. So just adding on here. I don't think it's your case, but a lot of analysts look at the gross margin projected for this year kind of perpetuate this, right, for the next many years. And what we see actually is that there are many levers. In the short term, maybe we're looking more at stability, et cetera, but in the mid- to long term, maybe we have a lot of levers, right? We have EMRs that still purchase our leverage downwards. We have an expansion in Latin America. We have different divisions that only have expenses and our revenue. But when we have revenue coming that's going to start diluting this as well, then you have the new lines, Douglas has already mentioned. You're adding capacity and sharing the fixed cost. And if we accelerate growth as we probably will do, then we should also dilute costs and fixed expenses. So besides this, we're migrating to more biological products with lower competition than the generics. And theoretically, they have lower competition and then greater margin. So we believe that when we look up ahead, the consensus is maybe a little conservative, right, when it comes to margins at. Great. Thank you. Moving on to the next question here. We're going to talk to Vinicius Figueiredo Itau.

Okay. one, we have 2 points here that we wanted to explore one of them. You kind of already discussed with the CapEx in the second half. But I just wanted to try to explore this a little bit and try to get your expectation on this, right? What could be the magnitude of this acceleration, right, if we look at the second semester? And even if we look at 2027, you guys have multiple different projects that should require some investments -- growing investments, right, in the short term. And of course, you have all of the security issues. And just to try to understand this cash consumption that should be expected for the second half, right, 2027? And then in regards new lines, you guys also mentioned in your release about the expectation for the acceleration of our revenue from the third quarter onwards. Could you give us a bit of an update on the timing for these new lines? And how that's looking in regards to the approvals when it comes to ANVISA and the government authorities as well, that would be really good.

Well, we're going to start off with the last question. On the productive lines. And actually, we're just waiting on the same authorization from the same authority, which is the local municipal inspection authority. We don't understand why it's taking so long. Actually, we're convinced about all of the projects and all of the facilities and equipment are in line with the regulation. And it's just actually their timing that's being postponed more than normal. And we're really working on our major efforts to get their stance as soon as possible. We actually have products in stock that contributed negatively to the stock days that are produced there and we're just waiting on like a green light to sell, right? On the other hand, we also have a restrained demand that we can't service due to the situation. If not, we could have growth, that would be a lot greater. So we also have this expectation, and we should have already had this stance already from the local health in section author before, but we're waiting on this. And we've been requesting this feedback almost daily. And that's a big priority for us. We have this area kind of ready. And -- but anyway, that's part of it. And the company has really improved processes, has improved operational excellence in its operations, cutting down processes and improving batch sizes and doing different things to significantly improve our results, but we're kind of in this scenario, right?

Yes. And then if you look at the CapEx levels, we were actually providing some guidance even when you look at the second semester, you will see that. Of course, there's an acceleration in the clinical trial schedule. And I think that's a priority for share, right, of intangibles, we're already a bigger investment, and there should be a slight acceleration. But when it comes to fixed asset CapEx, we have the beginning of our biologicals as well, and then we're going to have the packaging line as well. And so we should expect a higher level, right? So that should be a little bit lower than the EBITDA. But if the consensus is saying like BRL 470 million, then maybe we're considering BRL 470 million further and some. Let's see how things advance. But basically, the priorities are going to be the clinical trials and now in the biological and our packaging factory there in Pernambuco lookup ahead. what will really change this is going to be our Pernambuco project, right? We've been working on some of these initiatives and even the packaging line will allow us to have more cash generation and our results and accommodate the investments even more. But with these different phases of new lines we're working on here at our sites, we really have what it takes to lever this CapEx a little more? And maybe that is one of the biggest changes, right? And then after maybe we can get into like a physical financial time line to keep you guys up to date on this project, right? Well, what's most important is we need to have this discipline, right, and not get...

Yes, that's always our concern, right? So we really believe that our EBITDA generation will increase. And considering these corrective lines and the launch of these new products, we have a considerable addressable market, and we'll always have this focus, right, on never leveraging the company too much, right, but always keeping it at a healthy level and care for this with a special bit of attention.

Okay. Excellent. Further questions -- for the answers. Our next question is from Mauricio Cepeda from Morgan Stanley.

We have 2 questions here. The first one is about these comments on the private channel. Let you guys -- for us, that's been more connected to the macro scenario than a quarter scenario, right? But we know that up ahead, you guys are going to have more capacity as well to -- look at this, and you're also looking into resuming growth, but this pressure in the private channel, shouldn't it be something more like long-lasting and not specific to this quarter. How are you considering this up ahead, right? When it comes to changing a bit of your growth profile, right? And the other question is about the direct sales. Could you guys talk about the rationale towards this with the direct sales versus distribution since -- they also have this role of managing credit and working capital. And what led to this decision, right, more direct sales?

Well, first of all, Mauricio, thank you so much. On the private channel, we've been searching -- we've been launching new products, synthetic products. And recently, we also have been working on something else that we consider to be positive. We saw one of our competitors from a patent left the market. This was a Janssen drug as well. So we also took a bit more of this market share in the private market directly interacting with hospitals. So we've had other drags as well that are more exclusive in our portfolio with less competition, and that's really been facilitating this work with the end customers, right, which are the hospitals. But we have a really robust portfolio and in this segment, and we're one of the companies with the biggest portfolios in the sector. And so that's really helped us a lot with our customers, right, to have more relevance and keep up with this stand, right? So we have a pipeline that's really significant. This pipeline for synthetic products has very few competitors. So we've been searching for like market niche products. We also have -- I don't know if you guys remember the launch of the multi-dose NOXX, and that's been successful. We've already seen some hospitals as well. placing this product in a standardized manner and we ended up being the only national manufacturer with this product. So these are all things that we're developing, their incremental innovations and they've been bringing improvements in our commercial conditions alongside our customers. and margin improvements, of course, right? So these are all initiatives that we worked on, and we've been working on the development of incremental innovation. So the same molecule is new presentation. And so that should really come in to contribute to the improvement of the use of this drug with patients. So if you could also add on to this, this initiative of direct sales?

And so Blau has been trying to launch more diversified products that are more focused and even pembrolizumab has come around reinforces. And so of course, we're testing this now because, as you mentioned, maybe it's not only like a quarter-by-quarter scenario. It sounds like macro, but maybe the channel is a little more pressured. However, it's more of a credit need issue than in actual demand. So when you think about the structural market factor, the demand remains there, right? And how are you going to access this. While that's basically what Blau every quarter has been looking at these opportunities, right?

We need to be very careful because our portfolio increases at every day. And the volume has been growing and we see some difficulty right difficult at this moment to grant so much credit to the market without any kind of guarantee the distributors' margins are already very low and when it's going to give us some guarantees or warranty that's already generates more costs and that even forces us to have drugs that have more added value or drugs that are maybe a little more exclusive, et cetera. So there's unfortunately no way out.

Yes. And I think the distributor has an important role. So how can we build these alternatives and how we can continue to launch products and different things.

Yes. So we use a lot of logistical operators and a lot of distributors are also taking on this role as logistical distributors where we commercialize our drugs through them to be able to distribute to hospitals. So hospitals are current -- we have big chains that are consolidated with many different hospitals and different markets and they want to get like almost daily deliveries, right? So this logistical work is something that we can't do -- and we need and to be part of this important link, right, taking on this role. When I say we're -- it's like we're issuing the invoice necessarily against the hospital. But for the hospitals, but we use a contract with logistical operator, of course, to help us the distribution and everything.

Well, despite growing less this quarter, when you look at only private, then we accelerated growth, right? So we grew more in the second quarter than in the first. We thought it grew less because of the dynamic with public plus the comparison basis. But just to add on the credit risk of the hospital or clinic ends up being left to you.