Fagron NV (FAGR) Earnings Call Transcript & Summary

Hello, and welcome to the Fagron Trading Update Q3 2023 Call. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to Karen Berg to begin today's conference. Please go ahead.

Thank you, and good morning all. Welcome to Fagron's Q3 2023 Trading Update. We will start with an explanation of the results by our CEO, Rafael Padilla. And then we will hand the floor over for questions, which will be answered by Rafael and Karin Jong, our CFO. So thank you all. And then I would like to hand over to Rafa.

Thanks, Karen, and good morning all. Welcome to our third quarter and 9 months trading update where we are pleased to see growth across all our regions. North America has continued its strong trend, delivering record growth. LatAm has bounced back as market conditions improved, while EMEA has been stable during the third quarter. Next is strong revenue performance. We also continued deploying our operational excellence initiatives globally and as reiterated, quality remains one of our key competitive strengths. So we are pleased with the successful completion of audits at our Letco and Polish cGMP repackaging facilities. We also continued to execute our disciplined M&A strategy as we acquired Parma Produkt in Hungary. This acquisition gives us access to the attractive Hungarian compounding market, which enhances our diversification in EMEA. We are also happy to announce that SBTi has reviewed and approved our near-term emission reduction target. This marks an important step forward in our sustainability agenda, which remains a core strategic priority for us. Lastly, for our full year revenue guidance, we expect a EUR 750 million to EUR 770 million range. On profitability, we reiterate our guidance of year-on-year increase. Moving on to the next slide, we have the 9 months revenue development at group level and across the regions where EMEA and LATAM have delivered solid growth whilst North America delivered an outstanding 27% growth. On to the regions. In EMEA, as explained at half year results, the pricing pass-through exercise is now concluded. The Compound Services segment, driven by the Netherlands, maintained its strong growth momentum on the back of enhanced capabilities and favorable external trends. The B&E segment, softer after a strong first half, was more viable during this third quarter due to an increased holiday impact after COVID normalization. Finally, our focus on diversification across the countries where we operate in EMEA continues with good progress. And as mentioned earlier, we added Hungary to that mix. Turning in to LatAm. The revenue development in the third quarter shows a nice bounce back as consumer demand in the Brazilian market continues to show gradual recovery. We have maintained market leadership despite the heightened competitive over the last year, supported by the operational efficiency measures and our strong innovation and commercial capabilities. Colombia, continued to show exceptional growth as we advance in our efforts to diversify within the region. Looking at Q4, we expect further recovery and remain confident regarding the growth prospects over the midterm. Coming to North America. We are proud to report record sales and growth during the quarter. Our improving operational excellence in this region is very visible with the progress in B&E and compounding services. At B&E, we saw continued recovery to the quarter following the integration of the Letco activities. The FDA conducted a 3-day audit at the Letco Decatur cGMP repackaging facility towards the end of the quarter, which resulted in one observation. Moving to US FSS. We also delivered an exceptional performance as we are well placed to capture the rising demand in the outsourcing pharmaceutical compounding market. Regarding Boston, the integration is on track, and we can now operate in 33 states. Finally, coming to our wellness division and Anazao, we also continue an accelerating the impressive growth rate driven by rising demand in prevention and lifestyle treatments and temporary drug shortages. On to the next slide. As we have discussed several quarters before, we continue to operate in a heightened regulatory environment. However, with quality being our key priority, we review it as a competitive strength of our business model. The early audit that concluded towards the end of the quarter at Letco with only one observation, demonstrates our strong emphasis and focus on quality. On that note, an inspection at our cGMP repackaging facility in Poland also took place during the quarter with cGMP and GDP certificates being renewed. Lastly, and as announced during our last call, this impose facilities closure is on track and should be completed by the end of this year. Coming to Poland, the Polish parliament passed laws containing changes to the reimbursement system for the overall pharmaceutical market. We have been invited to be part of the National Commission overseeing the rollout of the compounding segment. In the Polish market, we are well positioned, thanks to our commercial strength and leadership. We also remain confident in our ability to navigate through these changes over the midterm. Turning to the environment we're operating. Our top priorities are to strengthen the defensive nature of our business, which are maintaining strong growth rates with resilient margin, increased global diversification, focus on quality and operational excellence. Our targeted investments to support organic growth not only provide us with the opportunity to upscale and expand our product portfolio, but also maintain the highest quality standards resulting in a true competitive advantage. As mentioned earlier, our disciplined M&A approach supports the overall business performance and further increases our presence in new markets. Finally, we have continued working on our one global Fagron program and have particularly made progress on the global IPR monetization, centralized procurement, production and distribution capabilities. Moving on to our guidance for '23. We expect to be within the revenue range of EUR 750 million to EUR 770 million. Also as stated in previous quarters, we expect an expansion in the REBITDA margin year-on-year. Following our strategy of investing for growth, went for a CapEx of 3.5% and with a one-off related to the announced licensing deals in Tampa and Decatur facilities, which progress according to plan. Finally, Fagron is a global vertical integrated niche defensive high-cash-generating company, which is consolidating a highly fragmented market with favorable underlying trends such as demographics and personalization. We benefit from a defensive and resilient business with diversified geographical presence and the broadest product portfolio in the industry. Our operational excellence plans will drive several efficiencies across the company, mainly on global procurement synergies. Disciplined M&A also remains a key part of our growth strategy. To conclude, sustainability is a key strategic pillar of which we have taken a significant step forward, thanks to the SBTi approved targets. As together, we create the future of personalized medicine. Now time for Q&A.

[Operator Instructions] And our first question today comes from Stijn Demeester of ING.

Yes. First set of questions is on Anazao, maybe first, could you quantify the semaglutide sales boost there? Is it fair to say that it would provide you with around 2% of organic growth on group level this year? Or is that exaggerated? And also, do these sales come with in-line profitability or higher?

Yes. Good morning, Stijn. So indeed, if we look at the Anazao sales for the third quarter, we see a growth of 43.9% and that's driven by a demand for preventive care, but also helped by the drug shortages you referred to. If we take out that specific drug shortages for the third quarter, well we have a mid-teen percentage of sales and that's still very good performance for the Anazao business. As you know, we don't comment on profitability for specific products within our portfolio.

Okay, okay. But that's helpful. Then on this topic again, what is your visibility into this tailwind continuing into next year? Should we cancel in the fall back once that Novo has its capacity issues in order? Or do you have good visibility that it could last for a bit longer, given that sort of semaglutide is in high demand right now?

Yes. As long as it's on the shortage list, of course, we are able to compound and serve the markets. It's for us not clear when it's off the shortage list. So as long as it's on the list, we will benefit, but it's not sure whether that will be still continuing on into next year.

Okay. Okay. Okay. What would be a fair assumption for us to take into account?

Yes, that's difficult to say, Stijn.

Okay. Then on FSS and the EUR 150 million run rate, could you detail how much of this is on the account of Boston in terms of sort of order of magnitude? And what is the current state in terms of state licenses for Boston because I understand you made good progress here.

Yes. I think overall, we see very nice progress in FSS Boston as well as Wichita. So we see the growth sustaining with a run rate of EUR 150 million. As explained during H1, we've integrated the businesses of Wichita in Boston. So that means there's one sales team, there's one go-to-market strategy. So in H1, we combined IT system, quality system and the objective is to leverage both sides as much as possible. That's the reason we don't disclose the separate run rate. Looking at Boston, specifically, we see very nice progress after the FDA audits in the first quarter and the additional license is coming in. So we're now at 33%, so we can sell into 33 different states and we are onboarding new customers. And so we're in line with our planning to hit the breakeven for this semester.

For Boston that is?

For Boston, of course, yes.

Okay. And in terms of FSS demand, do you see there a notable impact from the recent quality issues at CAPS and Nephrons? And yes, also here, have you recently taken additional measures to save your quality control as these 2 examples really highlight sort of the 1 strike and you're out nature of this segment?

Stijn, yes, for sure. So as we discussed several times, we take the measures. We also have the FDA on site if you recall in which time Boston with successful audits, just to be specific and the quality assurance department in which we have 29 people dedicated to guarantee the highest quality, and we have quality control and checks in all the steps. On your first comment on the volumes, of course, we see an increased volume. We've seen increased demand because hospitals tend to outsource more and more. And also, we get more requests from customers, existing or new ones when a player in the industry is having some difficulties there.

Okay. Okay. A final question, if I may, on Poland. It's unclear to me if it's positive or negative. So could you elaborate a bit more on what is currently going on there?

Sure, Stijn. So well, as we also explained in North and East European countries where we operate, the government distribution systems take place there, right? So it's how the goods are being paid. And naturally, there is an evolution there. So the scope of the law is for the overall pharmaceutical market. And regarding compounding, we have been, as we said during the presentation, we have been invited for the commission who is going to take care on the implementation. And of course, we believe that we are well positioned there to our market leadership and we are confident in the midterm.

And we're now moving on to our next question, which comes from Frank Claassen of Degroof Petercam.

Yes. I'll also ask them one by one, my questions. First of all, on the Hungary acquisition, could you elaborate how big is it? And what kind of price did you pay? Does it fit in your normal range of multiples? Or could you elaborate on that, please?

Yes, yes, of course. Frank. Indeed, we have an acquisition in an attractive Hungarian market. So it's a new market entrant for Fagron. So we're very happy to enter into that market. It's active in the essential market and it has some registrations of new pharmaceuticals. If we look at the acquisition price, it's a high single-digit amount. And if we look at the metrics or so the financial metrics, we see an annual revenue mid- to high single digits and an EBITDA, which is around 10%.

Okay. That's clear. And then on EMEA, organic growth was roughly 1% in Q3, but that also includes still some, let's say, price increases spilling over. So does that mean that volumes came down? And yes, why did volumes come down in Q3? Could you elaborate on that, please?

Yes, sure, Frank. So as I said, we have seen a stable performance in Q3. And as I indicated, the pricing pass-through exercise is now completed, right, as we explained during the last call. So we have seen a strong compounding service performance of 19%, and this is mainly driven by the Netherlands, new introductions, new registrations as well as we have indicated. And the brands and essential segments, we have seen a decrease there during the quarter after a strong first semester. So despite the underlying demand is strong, right, because you see it back on the compounding services. That segment has a higher exposure to the short-term variables, supply chain, macro, et cetera, right? So we have also seen during this Q3 that the holiday season has had a greater impact after the -- well, with the post COVID normalization, right? So when you take it with a 9-month optic, we are satisfied with how this evolved in the Brands and Essentials segment. And of course, we remain confident for Q4.

Okay. Sounds good. And then on the raw material prices, do you already see them coming down? And do you have to pass these on or do you think you can keep some in your pockets of these benefits? Or yes, what is the story there?

Sure. That's a very good one, Frank, because as we also saw during COVID, when prices were going the opposite way. You need to see it or we need to see it through a product categorization, right? So you see vitamins, amino acids much more volatile than the APIs, right? So you also see it now when prices go down. So we see those categories having more volatility than the other ones. We need to say that -- well, and you know that very well, Frank, we discussed many times on our 1 global Fagron approach, also within the purchase department that we are now as 1 global Fagron going to the market to source our materials, and this helps, right? So when you're saying, are we keeping something in the pocket or are we passing through to the market? It depends on each market. So in cash market, so the B&E in the U.S. or the B&E in Brazil, for example, we try to use these advantages to maintain or even gain market share. And in some other markets where you have a fixed contract, right? So we have the benefit there.

Okay. And my final question on Brazil, the competition. Yes, has the competitive situation eased? Or is it similar? Is it more the market which is recovering? Or is also do you see less competition?

Yes, sure. So we see the same pattern we saw during the last quarter. So the competitive environment is heightened. So it's still the same. So when we explained that in the short term, we wanted to maintain market share because we believe at that time that the market would recover and then we would benefit out of it. So it's now happening. But also as you know, Frank, in the meantime, we launched some operational excellence programs that start to pay off. We are not yet there where we want to be, but start paying off. And of course, as you remember, during the course of Pharma Fair that always happens the first week in July, that is the biggest compounding fair in globally, right? So we launched some interesting new brands that are also helping us there.

And we're now moving on to our next question, which is coming from Matthias Maenhaut of Kepler Cheuvreux.

A couple of questions from my end. Maybe the first question is on the guidance. If you look at your sales guidance for EUR 750 million, EUR 770 million, the high end of that range seems to imply a very strong Q4. Is there like any specific additional positive surprise you are expecting? Or otherwise what is -- what would drive this very strong Q4 performance? And then also maybe on the profitability guidance for this year. You mentioned a year-over-year increase in profitability. Would you think that, that will also be coupled with margin expansion? My first question.

Yes. So good to have you back. So on the sales guidance, we have given an expected sales between EUR 750 million and EUR 770 million. So on the low end of the guidance, it implies our previous guidance of high single-digit growth and an opportunity to grow more on the upside. So if we look at the different markets, I think starting with LatAm, we saw a nice recovery in the third quarter, and we expect that to continue in the fourth quarter. So we have nice visibility on that and volumes are recovering in that market. So despite the fact that prices are not there yet, we do expect an improving demand to relieve that price pressure we feel in that market. For U.S., U.S. had a very, very good first 6 months and first 9 months, and we also expect a continuation of that. It may have a bit of a softer Q3, because of the reasons that Rafa described earlier. And for Q4, there are some uncertainties given the developments in Israel and Poland but we're positive about the prospects in general for Fagron for the full year. On the profitability side, we expect an increase in profitability year-on-year, and that also implies an improved margin.

Okay. That's helpful. And I have a couple of short follow-ups. Maybe on the Polish regulatory review, I would say. Could you maybe give us a time line of when we have to expect any outcome or measures of this?

Sure. So during this last quarter, Matthias -- Good morning, first of all. During this first -- the last quarter of the year, so the commission will come together and as said during the presentation, we made part of this commission. So -- and during this commission, the implementation will be discussed, and then we will know more.

Okay. Good. And then maybe on the -- a follow-up on the Hungarian acquisition. Could you maybe speak a bit about the growth rate of this, I would say, market but also specifically the acquisition? And can you just remind me of the acquisition multiple? Because I think it was said, but I missed it.

Yes. So Matthias, yes we'll combine it, Rafa and I. I will talk about the financials. So the acquisition price is high single digits, Matthias. So we didn't disclose any multiple on that deal. If we look at the top line expectation of that market, it's a new market entrant. So we see potential to grow by adding new products that we have in our product portfolio, introducing our brands, our equipment, launching the academy as we have in the other European markets. So we see a lot of potential in growing the top line.