Fagron NV (FAGR) Earnings Call Transcript & Summary

Good day, and welcome to Fagron's Full Year Results 2023 Conference Call. Today's call is being recorded. At this time, I will now turn the call over to Karen Berg. Please go ahead.

Thank you, and good morning, everyone. Welcome to the full year 2023 results webcast of Fagron. I'm here together with our CEO, Rafael Padilla, who will discuss the results and do a deep dive into the region's performance. And then our CFO, Karin de Jong will go through the financials, and afterwards, there is, as always, room for questions. So with that, I would like to hand over to Rafa.

Thanks, Karen, and good morning, everyone. We are very pleased with the 2023 results as we achieved 10.5% organic revenue growth, reaching EUR 763 million. This growth has been supported by all our regions with a Compounding Services division in North America, the largest contributor. Our REBITDA margin for the year ended at 19.5%, demonstrating our operational excellence efforts and strong M&A integration benefits from both Boston and Letco. Also, in line with our disciplined M&A strategy, we're pleased to announce the acquisition of the London Specialty Pharmacy, LSP, in the United Kingdom, which will give us the platform to enter attractive cash compounding market in the U.K. Additionally, in January, we closed the acquisition of Parma Produkt in Hungary as we continue to diversify our footprint across the EMEA region. Regarding ESG, we remain committed to our targets as we continue to make substantial progress. And lastly, we have proposed a dividend of EUR 0.30 per share, representing a year-on-year increase of 20%. Moving on to the regional dynamics. In EMEA, on the B&E side, we continued to see strong underlying demand, showcasing the effectiveness of our diversified business approach. Within B&E, Poland was impacted by the local reimbursement reforms in the last quarter of '23. And looking ahead, we have a strategic action plan in motion, which we'll discuss on the next slide. Our Compounding Services segment demonstrated impressive organic growth of 10.6%, driven by our excellent performance in the Netherlands. And as mentioned before, we acquired LSP in the U.K., a leading compounding business focused on health and wellness with higher digit revenue and EBITDA margins at Fagron levels. Moving to the next slide, on Poland. At the Q3 conference call, we updated on the changes of the loss passed by the Polish Parliament for the overall pharmaceutical market regarding reimbursement system, specifically around new pricing being implemented at the end of '23. As a result, market activity slowed in anticipation of these price changes. And at the start of this year, we are pleased with the order intake and consequent volumes as we continue to execute on our strategic plan, which includes contributing insights to the government in different [ working ] groups. Enhance partnerships efforts with medical professionals, pharmacies, and prescribers through the Fagron Academy. Increased direct sales resulting in new customer acquisitions, launch of new products and services as FagronLab and Tech. And lastly, but most importantly, we monitor customer order trends to adjust our product mix. All these factors, together with our leading market position and underlying dynamics give us confidence in our ability to navigate through it over the midterm. Moving into LatAm. Last year, we made the strategic decision to maintain our market leadership while facing competitive pressures in Brazil. And now we see the benefits as customer demand is increasing again. We have successfully leveraged this momentum through strategic product launches, operational efficiencies, and an enhanced commercial approach. As a result of these efforts, our brand revenue share has shown remarkable expansion of 250 basis points. Finally, Colombia has delivered strong results, driven by new customer acquisitions and upselling to existing ones, while Mexico remains a promising market with significant growth opportunities. Moving into North America. As we all know, this is the largest and fastest growing compounding market in the world. In North America, we are positioning ourselves to capture the demand while maintaining the highest quality standards. In the B&E segment, we are pleased with the gradual recovery, and we are strategically positioning the business for strong growth with the successful integration of Letco. Moving to Compounding Services. FSS achieved remarkable results, reaching a run rate of almost $165 million. The underlying demand remains very strong, and our results highlight that we are well positioned to capitalize on it. Boston had an impressive year as we achieved breakeven as expected, and we can now deliver in 4 states, including New York. Finally, coming to our health and wellness division Anazao, we also continued the impressive growth rate driven by rising demand in prevention and lifestyle treatments while also benefiting from temporary drug shortages. Moving into the next slide. We are a global player operating in more than 30 countries with more than 30 facilities that are being continuously audited. In the last couple of years, we have not only seen an increase in the regulatory scrutiny, but have also seen regulation evolving at a faster pace across all our markets. We work proactively with more than 75 regulatory bodies, making it our strength to navigate through this constantly changing environment. In 2023, there have been 12 audits by national regulatory bodies to our facilities. These have been successful with minor observations and no warning letters. Regarding our St. Paul's facility, we are progressing as planned, and we expect to conclude the decommissioning at Q1. Finally, to reiterate, quality remains our key competitive strength, and we continue to invest in it by building state-of-the-art facilities, increased automation and quality assurance and control efforts. To conclude into the next slide, we would like to share our progress on the ESG targets as it remains our key strategic pillar. In 2023, our science-based targets for absolute emission reduction were approved. We also progressed by improving our internal and external impact by increasing health care access and keeping high focus on employee Code of Conduct & Ethics. And now Karin will go through financial highlights and outlook..

Thank you, Rafa. So good morning, and thank you all for joining this call. I would like to walk you through the full year 2023 financials and provide some color on the full year 2024 outlook. The first slide lists our financial highlights for the year. In 2023, sales increased by 11.6% to EUR 763 million, with North America delivering the strongest reported growth of 26%. This growth was accompanied by a gross margin increase of 160 basis points, driven by price increases, particularly notable in H1 in EMEA as well as operational and product mix enhancements in LatAm and North America. Operating expenses rose by 14.5%, primarily attributed to investments in the North America labor force to support market growth, compounded by weight inflation across all regions. Nonetheless, overall recurring EBITDA saw a substantial increase of 13.9% to EUR 149 million, with a REBITDA margin expanding by 40 basis points compared to the previous year. This boost in profitability due to the North America was a direct result of synergies post-acquisition and increased volume. As guided, the Boston facility achieved breakeven in H2 2023. Earnings per share saw a modest 1% increase reaching EUR 0.97 per share. Strong cash flow conversion underscored the robust cash generation capabilities of our company with operating cash flow improving by 13.9% to EUR 124.6 million. Additionally, our net debt-to-EBITDA ratio benefited from strong cash conversion decreasing to 1.4x EBITDA, thus providing ample headroom for future acquisitions. The bridge on the next slide illustrates the sales development in 2023. EMEA experienced a modest organic growth at CER of 2.2%, primarily driven by a softer performance in the second half of the year. Meanwhile, North America saw an impressive increase of 25.5%, driven by the positive developments in the Compounding Services segment, while LatAm exhibited a 2.3% increase, indicating a quarter-on-quarter improvement. Acquisitions contributed EUR 14.5 million to sales growth led by the Boston acquisition and several smaller acquisitions. The P&L on the other side of the slide showcases a top line growth of 11.6% and a positive increase of 13.9% in EBITDA before nonrecurring items. It's worth noting that the nonrecurring benefit in 2022 was related to bad will on the FSS Boston acquisition. Depreciation and amortization are on the rise due to the acquisitions, the investments in Poland, the distribution center in Brazil, registration, and various other investments in North America. The financial costs have increased primarily due to the negative impact of the valuation of the US dollar interest hedge, resulting in a non-cash item cost of EUR 3.7 million. It's important to remember that last year, this figure was a gain of [ EUR 4.8 million ]. Additionally, the rest of the increase in financial costs is due to higher interest rates on our debt and debt-like items. The effective tax rate stood at 15.9%, benefiting from the profitability in North America, resulting in a 1.4% increase in net profit and an earnings per share of EUR 0.97. Turning to the next slide. In the EMEA region, we observed underlying organic growth supported by Compounding Services, resulting in reported growth of 3.1% and organic growth at CER of 2.2%. Q4 sales and profitability were impacted by the anticipated changes in reimbursement levels in Poland, leading to a drop in volume. Compounding Services experienced a strong year with 10.6% sales growth driven by the positive developments in all markets. We saw a slowdown in Q4 with 1% growth following a strong third quarter where sales increased by 18.9%. We remain confident about the prospects of this segment and future opportunities. Overall, profitability increased by 1% to EUR 61.1 million for the year. It's important to note we did not adjust our cost base due to the uncertainty in the Polish market in order to support the execution of our strategic action as discussed earlier. Additionally, we are pleased to announce the closure of deals in Hungary and the acquisition of LSP in the U.K. These acquisitions align with our diversification strategy in EMEA and offer upside opportunities. Turning to the next slide on Latin America. Sales increased by 4.2% to EUR 169.2 million or 2.3% at CER. In 2023, we witnessed a market recovery driven by strengthening of customer demand. The result of volume growth was partly offset by a slight decrease in essentials revenue, reflecting our effort to maintain market leadership. Overall, Essentials decline of 1.3% in Q4 was compensated by positive developments in the brand segment, which grew by 18.8%. Combining services continued to perform well with an overall growth of 13.8% year-on-year. In line with our expectation, the margin in the second half of the year improved to 17.3% compared to 15.7% in the first half, reflecting the result of previous actions taken in combination with the historic seasonality encountered in LatAm. Looking ahead, we expect margins will further improve due to a strong innovation strategy and improved operational leverage. Moving to the next slide on North America. Sales reached EUR 308.9 million, making a significant increase of 26%. B&E continues its recovery quarter-on-quarter following the completed consolidation of the repacking facility in Letco -- despite experienced an overall decline of 5.2% for the full year, we observed a continuous improvement quarter-on-quarter in 2023, reporting 0.5% growth in the fourth quarter. Compounding Services demonstrated outstanding performance, particularly in our sterile outsourcing business and Anazao with overall sales growing by 43.8%. FSS experienced remarkable growth of 52.8% attributed to increasing orders from existing customers, new order wins and drug shortages. Notably, the Boston facility reached breakeven level during H2 2023 with a combined run rate of almost $165 million. Anazao also saw substantial growth of 32.2%, driven by increased demand for personalized medicine and drug shortages. Profitability increased by 260 basis points to 19.4%, driven by synergies from acquisition and strong market demand. For full year 2024, we expect North America's margin to see a slight increase year-on-year, mainly reflecting U.S. FSS and B&E to continue their improvement, which will be partly offset as we will see some double costs running at Anazao and Tampa while we complete the transfer to the new facility. An important element of our business model is strong cash conversion. Working capital benefited from an improved collection at the end of 2023 and robust inventory management in North America. As a result, operational cash flow in 2023 amounted to EUR 124.6 million, representing an increase of 13.9%. The factoring amount stood at EUR 36 million compared to EUR 36.8 million by the end of 2022. We anticipate reducing the factoring amount with a minimum of around 50%, which will have an impact of approximately 250 basis points on our guidance of 10% to 11%. This reduction will increase our receivables but decrease the overall debt level, thereby reducing interest costs and banking fees. Total CapEx amounted to EUR 38.5 million within the guided range of 3% to 3.5% of sales, excluding registrations and North America investments. For the EUR 18 million investment in Tampa, we paid approximately 2/3 of the investment amount, while the remainder allocated to the registrations in the Benelux announced earlier. Limited funds were spent on the investment in the B&E segment as we await some local permits. The free cash flow totaled EUR 86.2 million, excluding one-off, it reached EUR 101.5 million, representing an increase of 11.6%. Moving to the next slide. This bridge illustrates the net debt development in 2023, transitioning from EUR 274 million at the end of full year 2022 to EUR 233.7 million at the end of 2023. Throughout 2023, we observed a furthering strengthening of the balance sheet with a net debt-to-EBITDA ratio improving to 1.4x compared to 1.9x at the end of previous year. This ratio, which includes adjustments such as the annualization of acquisition and IFRS 16 adjustments reflects our commitment to financial prudence and stability. Looking ahead to 2024, we will continue our disciplined M&A strategy while considering our internal threshold net debt-to-EBITDA ratio of 2.8x. With strong deleveraging capabilities driving our approach, we remain focused on maintaining a healthy balance sheet and pursuing strategic growth opportunities. Before I hand it back to Rafa, let me guide you through our full year 2024 outlook. We anticipate a high single-digit organic growth in sales with each region exhibiting its own dynamics. Furthermore, we expect profitability to -- margins to increase year-on-year with EMEA to be at a similar level, while we expect an increase in LatAm and North America. Maintenance CapEx will align with the guidance of 3% to 3.5% of sales, excluding the previously announced investments in the U.S. The one-off investment in Tampa is on track and will be finalized in 2024. Regarding long-term working capital guidance, we previously aimed for around 10% to 11%, including the same level of factoring. We plan to increase this guidance to 12.5% to 13.5% as we aim to reduce factoring debt by a minimum of 50% in the next years. This strategic move will decrease our debt position and reduced financing costs. I would now like to hand over back to Rafa for his concluding remarks.

Thanks, Karin. Fagron is a global vertically integrated niche defensive high cash generating company operating in a highly fragmented market. Our resilient business model is fortified by a diverse geographic footprint, and these factors, coupled with demographic trends and our emphasis on personalization are the basis of our success. Our quality focus, together with our ongoing operational excellence initiatives will help optimize our business through global synergies and best practices. While a disciplined M&A strategy remains a key part of our growth. Sustainability is our paramount priority and a strategic cornerstone for us. Together, we create the future of personalizing medicine. With that, we open now the floor for questions. Thank you all.

[Operator Instructions] We will take our first question from Frank Claassen, Degroof Petercam.

3 questions, please. First of all, on AnazaoHealth and the impact of the drug shortages, the Semaglutide. Can you elaborate how much AnazaoHealth grew in '23? And how much of this growth was driven by the drug shortages and how long it can be sustained? So that's the first one. Then the second one on pricing and raw materials. What do you see -- what is the dynamic on the raw materials? Do you see the raw materials coming down? And can you keep pricing or increase prices? So what is there -- the dynamic? And thirdly, on the 2 acquisitions, can you repeat and elaborate on how much revenues did they contribute? And what kind of margins and what are the synergies? And what is your, let's say, strategic rationale to do these acquisitions? Can you repeat that again?

Yes. Frank. To start with your first question on Anazao. Indeed, we benefited again from the drug shortages in combination with the underlying markets growing and developing well. So if we look at specific at the shortages in the market, we had a benefit of 2023 on sales, which is an amount of low teens. If we exclude that amount from the sales, we would end up at a mid-teens growth level for Anazao still a healthy development for that business. If we look at 2024, of course, it's very uncertain how long this will take, as we're not in control of that. However, we anticipate that we will have benefit from that in the first 2 quarters of 2024, and that's also reflected in the guidance we have given.

Frank, let's take the second question on the pricing of the raw materials. As we have said during the call, operational excellence unlocks value for us, right? So we are making some organizational improvements that support efficiency gains. And also, we are centralizing the procurement, and this will drive improvements. Having said that, what we see is that at origin, prices are stabilizing. We have said this in the last call as well. And when we go to the market, specifically in your question, we will go to the market in EMEA, for example, we see that on our contracts, we have this renewal on 12 to 18 months as we were explaining in the previous calls, remember and in cash markets as the U.S. and Brazil will go with the market trends. So when they stabilize, and as said before, we take the efficiency gains that our operational excellence programs unlock, we feel confident on the pricing of the raw materials.

Sorry to interrupt, but do you still see room to increase prices or is it more flattish going into '24?

Again, in '24, when you look at EMEA, we need to respect the contractual basis of the contract that is renewed in 12 to 18 months. Here, there is an inflation building. So now as you see inflation is also stabilizing. And on cash markets like the U.S. and in LatAm, you follow more the trends of the market, the dynamics in the market.

Okay, clear. And the acquisitions?

Yes. And then on the acquisitions, so coming back, we indeed announced 2 acquisitions, one in Hungary and 1 in the U.K. We believe that this acquisition will diversify our sales contribution in EMEA more and offer potential in growth on sales and profitability. So if we go to the Hungary one, which we announced already earlier last year, so this is -- we acquired this from a wholesaler. We believe that Hungary is a very attractive mark and offers opportunities for top line growth. It's active in the essentials, and they have a couple of registrations. So they have a mid-to-high single-digit amount in revenue and a profitability that's around 10%. And if we look at the acquisition price for that acquisition, it was high single digits. The upside, we expect that we could bring the company towards group level EBITDA margins in around 24 months. So that's on the Hungary one. And then we announced a new one LSP in the United Kingdom. That's a pharmacy specialized in personalized medication mainly non-reimbursed. So the focus is on hormone treatment, hair treatments, dermatological solutions, pain medication. Business is non-reimbursed by NHS and it serves clinics, hospitals and also goes direct to patients. The synergies that we see in this business are more related to the use of our raw materials and brands in the compounding products. If we look at the numbers, so the historic numbers are a mid-to-high single-digit amount of sales in British pounds and a profit margin that's around group average. The acquisition price is a low mid-teens amount.

We will take our next question from Matthias Maenhaut from Kepler.

Congratulations with the results. 2 questions from my end. Actually, both on results and to get a better grasp on the guidance. If I'm not mistaken, I understood that you're aiming to be for 2024 EMEA REBITDA margin flat versus 2023. However, if I look at H2 developments, it's down 250 basis points year-over-year, and I think 250 also in H2 versus H1. So could you give us a little bit more grasp on how you see the phasing of the margin of EMEA throughout the year? Is this another significant decrease in H1 and then an uptick in H2, what will drive this? And then thirdly, maybe can you elaborate a little bit on Polish profitability as it stood in Q4 and how big was the sales decrease? And what are you baking in for next year? That's on EMEA. And then on North America, I just wanted to get a better understanding on the profitability of Semaglutide. It's a branded product -- it's a patented product, which sells at, I would say, significantly higher ASPs than I would imagine on your rest of your portfolio. So why would the gross margin of this product be in line with the rest of your products?

Yes. Matthias, maybe to start on the first one on the Polish impact. So indeed, if you look at Q4, we experienced a decline in the sales running up to the changes in the Polish reimbursement system. The sales decline had a direct negative impact on the sales of the growth of the brand and essentials in Q4 in EMEA. So there was a decline on that level. If you normalize for Poland, we should have seen a growth in that region. The loss of these high gross margin products impacted the profitability for the region as we didn't adjust any cost in 2023, yes, moving into 2024 and also seeing how the market would evolve based on the anticipated changes in that market. So the impact of Q4 on the profitability in combination with a slow Q3 had an impact on our profitability, and that's why you see translated in the profitability margin for the region in H2. As we go into 2024, we saw low volumes in Q4, but heading into 2024, we had a plant start of the year with trends towards larger-sized products and initial signs of volumes recovering with trends towards selling those larger-sized products. We expect the margin recovery in 2024 moving throughout the year. So towards the full year 2023 level throughout the year as we roll out all the strategic actions. So it remains an uncertain situation. We believe that we have taken the right strategic actions currently, as Rafa already described in the presentation earlier. So we are positive about the outcome of that, but we assess the situation as it goes along as we, as you know, are just heading into 2024. So overall, we expect a growth for the EMEA region in general for full year and a profitability margin that moved throughout the year towards the level of full year 2023. Then secondly, on the Semaglutide margin of the product. Indeed, we have a good contribution on that. As you can imagine, we will not disclose the separate margin of products that we sell. Just remember that it's a compounded product in the 503E facility. So it's not made in bulk. It's made on a scripts basis for a specific patient. So despite the fact that it has a nice contribution, it's not over adding value to the growth in the U.S. market in general.

Okay. Maybe just as a follow-up, I actually have 2 Poland, your strategic actions, I understood correctly, there's not yet any cost savings measures you've put in place. Would you like -- would you be able to give like a magnitude of potential savings there that you would see at this point in time?

Yes. Sorry, continue.

Yes. Sorry, we have a bit of a background noise here. And then secondly, I was -- my second question was actually on Semaglutide, if you speak about the profitability, if you give an idea of -- you say that it's on a per-script basis. So effectively, you say labor is one of the drivers of the margins being not substantially above average. Could you maybe elaborate on this production process? How many syringes you make an hour per employee? Is there an information you would be willing to give?

Maybe to start on the first one on the Polish situation. So last year, we didn't adjust our cost basis. We wanted to see how the market would evolve. I believe we've taken the right strategic actions, as Rafa described for that market, and we continuously assess the situation. If additional measures are needed. So if we need to do additional cost cutting then we would, of course, do that during the course of the year. However, currently, we believe that the measures we have taken are sufficient, and we don't need additional cost savings.

Right. And Matthias regarding the process of [indiscernible] or a patient-specific script, you can take this in the U.S., but also in the rest of the world, right? So you can imagine that it is -- the preparation comes into the pharmacy, into a compounding center, right, then the pharmacies [ check it ] and when it's correct, it goes through the operating rooms, right, through the clean rooms. Then the operator takes the product, the raw materials, make the preparation, right, depending whether it is a solution, a cream, an ointment, and then it comes with the filling, labeling, and get it of the clean room and then sending the product to the customer, right? So you can imagine more or less this process, how it goes and how long it takes to fill in one prescription to prepare it. First, of course, and then going into the customer.

Okay. May I just ask your ASP is that in line with the ASP or the average selling price of the products in the market? Or do you sell at a big discount to this selling price?

No. It's in line with the market, Matthias.

[Operator Instructions] We'll take our next question from Stijn Demeester from ING.

I have 2 follow-ups. I might have missed it, but what is the absolute amount of factoring at year-end, the first one. And then on the FSS run rate of $165 million, is it measured on a quarterly basis, monthly basis, because you only specify at year-end, I think it could be helpful to get maybe an idea on what basis that is measured.

Yes. So maybe to start, so factoring was around EUR 37 million. That's around the same amount that we had last year. And we anticipate by decreasing that amount, so that will reduce our debt, but brings our working capital up. And it has to do with the cost we pay for that. So that's on the factoring.

Stijn, and regarding the FSS run rate, we take the same methodology as we always did. We take the last part of the quarter.

So that's 1.5 months then?

Yes, 2 months, correct, last 2 months.

And on the -- maybe on the factoring, you want to reduce it by 50%, if I'm right?

Yes, correct.

We will take our next question from Thomas Vranken from KBC Securities.

2 from my side. I think the first one is on North America. And there looking at the REBITDA margins, they have jumped up quite significantly also in H2 again. I just wanted to see with regards to that, you mentioned that in Letco and Boston sites are continuously or further being integrated. Do you still expect to see significant gains from that in the course of 2024? And the second question would be on the EMEA market there. I just wanted to have a bit more granularity on your view with regards to the U.K. compounding market given that you have entered there as well? How do you perceive that market vis-a-vis other European countries?

Thomas. So maybe to start with the first question on North America profitability. We saw benefits in H2, indeed, increasing our profitability to 20.4%. Going into 2024, we see positive developments. We expect an improvement in the B&E as they continue their quarter-on-quarter improvements as of 2023. So we see upside there in combination with FSS. They had, of course, outstanding results in 2023, and we expect the continuation of that, Boston, increasing the number of licensing again, so offering additional opportunity and FSS in which again, benefiting from an increased demand in that market. However, on the other side, we also see that we have some tailwind from the drug shortages at Anazao as we described previously. It's uncertain how long that will continue into 2024 in combination with the fact that we are transferring to the new site in Tampa. So that's the 503A facility we built for Anazao. We will transfer to that new location during 2024. And that will mean that we have some double costs if we are waiting for the new registrations from the states to come in, so that has an impact. Overall, we're positive about 2024 profitability, and we do expect an increase if we compare that to full year 2023.

Thomas. And your question is a very good one, right? Because when you look at the EMEA landscape, we have always explained that compounding per capita is more countries like Belgium or Hungary, in this case, Czech Republic is high, right? And in bigger countries, like in this case, U.K. or France or Italy, it's a bit lower. So looking specifically at the U.K. market, the traditional compounding, it's called there the specials is the market that is there. It's stable. It has some growth with LSP, we enter into the health and wellness, the prevention and lifestyle market that we see that is growing at a faster pace because it would be more or less like the U.S. or the Brazilian market where personalization and lifestyle and healthy aging is an underlying driver as, of course, there is an increased aging in population. Having said that, LSP is the leading compounding pharmacy in the U.K. situated in London with high-quality standards. And of course, as you know, we are vertically integrated, so we will leverage our raw material pricing, first of all. Second, the innovations also with our brands. So we have now a channel to introduce this one and use LSP go-to-market and prescribers approach also with the academy that they have locally, right? And this will enhance the growth that the underlying market has because, again, there is a strong trend on prevention and lifestyle in the U.K. market as we see in North America or in Brazil.

[Operator Instructions] We have no further questions on the line, and I would like to turn the call back over to the speaker for additional or closing remarks.

Thank you all for joining this webcast on our full year results. I hope you have a great day and looking forward to see you at our Q1 results in April. Thank you.

Thank you for joining today's call. You may now disconnect.