Hypera S.A. (HYPE3) Earnings Call Transcript & Summary

Good morning. Welcome to Hypera Pharma's Second Quarter 2020 Results Conference Call. Today with us, we have Mr. Breno Oliveira, CEO; and Mr. Adalmario Couto, CFO and IRO. We would like to inform you that this event is being recorded [Operator Instructions] Today's live webcast may be accessed with the company's Investor Relations website at hypera.com.br/ir. We would like to inform you that some statements during this conference call may constitute forward-looking statements. The statements are subject to known and unknown risks and uncertainties that could cause the company's actual results to differ materially from those set forth in the forward-looking statements. Now I'll turn the floor to Mr. Breno Oliveira, who will begin the presentation. Mr. Breno, you may begin your conference.

Good morning, everyone. Welcome to our earnings call for the second quarter of 2020. I'd like to begin by talking about the conclusion of the efforts in the independent committee. In May 25, we communicated to market that the committee's activities will be concluded. The Board approved a payment term in which our main shareholder, without taking responsibility and understanding this to be the company's -- in the company's best interest as well as its shareholders agreed to pay the company the remaining value of undue payments found by an internal investigation, amounting to around BRL 110 million. The independent committee also presented recommendations aiming to perfecting even further our internal controls in our compliance program, which has evolved significantly in the last years. These recommendations are being assessed and put into practice by our compliance team, coordinated by the auditing committee. The company continues to collaborate with the investigations and is assessing legal top -- new alternatives to conclude this situation. Now we're going to talk about our operational performance on Slide 3. Our net revenue reached BRL 1.050 billion in the quarter, 8% higher than the second quarter of 2019. This was boosted by a strong growth in sellout in Consumer Health at the end of March, which did not impact the net revenue in the first quarter. And as a consequence, the surge that consumers had in buying over-the-counter medications in the beginning of the COVID-19 pandemic and also increased sellout in Generics over the second quarter of 2020. Due to the challenges caused by the pandemic, we have been having more discipline in managing expenses and costs, which has resulted in an increased EBITDA margin in the second quarter, both compared to the second quarter of 2019 and the first quarter of 2020, even excluding other nonrecurring operational revenues. Social isolation have maintained -- are maintained through the second quarter of 2020, which reduced the number of people in pharmacies, reduced the number of doctor consultations and in the reduction of prescription medication, especially acute-use medication, which is a relevant part of our portfolio. This has led to a negative impact on the Brazilian pharma industry, and as a consequence, affected our sellout, which had a drop of 1.6% in the quarter. This was caused mainly by our performance in April when movement restrictions were stronger in the main regions of Brazil and our medical visiting teams were put on furlough. In April, our sellout dropped by 10%. From May, we saw that social isolation was flexibilized in some regions, which led to a gradual recovery in the number of doctor consultations and increased the number of people at pharmacies. These factors and the return of the medical business teams and the merchandising teams as well as resuming our investments in point-of-sale and intensifying our investments in digital marketing has recovered our sellout performance. In June, we grew 7%. And based on preliminary data, July will also have a growth of 7% to 8%. The Generics category was the main highlight of the second quarter. Sellout grew especially boosted by generic medication and brands, Doralgina, Histamin, Dropy D and Centrotabs as seen on Slide 4. This growth was taking place, especially in medium networks and in the regions that were further from the big cities, which highlights our distribution strength, which can reach basically 100% of pharmacies in Brazil. In Consumer Health, the highlight was once again the vitamins and supplement segment, which has been underscored by the recent launches, Vitasay and Tamarine as well as Biotônico Fontoura and Maracugina. We have to highlight that the anti-flu medication segment, where we are market leaders, have presented a strong drop this quarter, impacted mainly by social isolation and the winter in Brazil, which is the most important sellout period in this category. Prescription products were once again benefited by the Addera brand, which gained market share this quarter and is still benefited by recent studies, which reinforce the importance of vitamin D for the regulation of the immune system. Beside that, recent launches such as Colflex and Ofolato also had an important performance this quarter. On the other hand, despite the gradual recovery we've seen in the number of doctor consultations after our teams have come back and after social isolation has been flexibilized, the quarter ended marked by a strong reduction in the number of doctor consultations because of the COVID pandemic, impacting sellout negatively in some relative categories such as dermatology, pediatrics and orthopedics. In the second quarter, we have not lost sight of our long-term objective, which is innovation. We've invested 7.1% of our net revenue in research and development, launching some extended product lines, which are important for the company. In Prescription Product, I'd like to highlight Colflex Trio, an extension of the Colflex brand, to treat osteoarthritis, pain and cartilage regeneration; and Gestamax Plus, an extension of the Gestamax supplement, indicated during pregnancy. In Consumer Health, the main launch has been a line extension of the sweetener Zero-Cal brand, with a new presentation based on Eritritol. Before I let Adalmario speak about the second quarter results in further detail, I'd like to quickly mention recent acquisitions, shareholder payouts and some of the measures we've taken about COVID-19, shown on Slide 5. We've taken important steps in acquiring Buscopan recently and selling new Neocopan. The contribution of Neocopan for our operation's EBITDA in 2019 was under 0.5%. Besides that, we hedged all of our exposure to the U.S. dollar in acquiring Takeda brands. We've maintained our shareholder payout strategy. We declared BRL 186 million in interest over our own capital or BRL 0.29 per share, a growth of 15% versus the second quarter 2019. We've also continued our expansion project in our solids plant, which should be concluded in September and the new area should be put into operation in early 2021. With that, we'll have the capacity to grow, especially in Generics and to produce Buscopan and Takeda brands, our products, internally. Finally, we maintained our main initiatives to maintain well-being for our teams and the communities we relate to, such as reinforcing coronavirus prevention efforts in our sites, home office for employees who are in the risk groups and for our management teams. And we've also made telemedicine services available to all our employees and their family numbers. Moreover, we donated this quarter respirators and COVID-19 tests for the Anápolis population, a region where we have nearly 4,000 employees. This quarter, we managed to expand our net revenues, our EBITDA and our net profit. And we generated demand in some relevant categories for the company such as flu medication, dermatology, pediatrics and orthopedics. And they impacted our sellout growth in the first half of the year and as a consequence, our set goals for this year in terms of net revenue. We have a robust constant motion plan for the second half of 2020 to mitigate impacts of reduced sales. And based on that, we establish new guidances for 2020, which are net revenue around BRL 4 billion and a net profit of continued operations around BRL 1.3 billion. This guidance is already considering the expected results from Buscopan and will be submitted to the authorities still this week, but it does not include the brands acquired from Takeda. Now Adalmario will speak about other results this quarter.

Thank you, Breno. Good morning, everyone. Before going into the second quarter of figures in further detail, I'd just like to mention this has not been an easy quarter. It actually never is. But we have had very good results with all the challenges we've had, especially when we consider the overall economy and other industries. This crisis specifically highlights not only the resilience but also the importance of the health industry, especially pharma, in aiding and treating, developing vaccines and also the importance of prevention and the concern of the population with having a higher immunity. Now to speak about our results. We had a growth of about 8% in net revenues, led especially by increased volumes of 5% and 3% related to increased prices.

Ladies and gentlemen, please hold. The conference call will return soon. [Technical Difficulty] Ladies and gentlemen, thank you for holding. We will now continue the Hypera Pharma conference call.

Everyone, sorry for the issue. Just to continue, we were talking about the growth of our net revenue, which was about 8%. It was mainly boosted by increased volumes of about 5% and 3% versus price increase. Regarding price readjustments, we had a 60-day delay in readjustment, which was authorized by the government for monitored medication. It was supposed to start on April 1, but it was enacted only on June 1. In our case, the impact was lower since most of our portfolio is in the free price category, and we have more flexibility in readjusting price. With that, skin cosmetic and supplement prices have been readjusted in April. And medications, especially in the over-the-counter portfolio increased for May and the rest of the portfolio in June. The average readjustment was about 6.5%. We had a great contribution this quarter from Consumer Health, led by our clients restarting their inventories after a strong demand in mainly all of the current categories in March. There will be higher concentration at the end of the month and also acceleration in the demand for Generics as well as the strong growth in revenue and volumes. There was a reduction in Prescription products because of the impact of some categories that -- in which we have a higher concentration such as pediatrics, respiratory and orthopedics. Now to talk about costs. We had an increase in our costs, especially related to exchange rates. The average exchange rate went from BRL 4.24 versus BRL 3.74 in the same quarter last year. That is a depreciation of 13%. We also had the impact of an effective increase in the dollar price inputs and additional expenses related to COVID and shipping since we have to change from sea transportation to air to increase the availability of the drugs. With that, our gross margins were slightly below 66%, a reduction of 2.5 points versus the second quarter of 2019. Before we talk about expenses, I'd also like to mention that not only did we complete hedging to pay for the Takeda acquisition, as Breno said, but we also hedged 100% of our expected purchase in imported inputs for the rest of the year, at an exchange rate under BRL 5. We also started a hedge for the CapEx forecast, especially related to machinery importation to expand our plant. Speaking about expenses, despite the reduction we had in travel and vehicles in the trade and merchant teams, we had a slight increase versus the same period last year, especially because of a higher investment in R&D and expansion in our employees list and materials related to developing new products. With regards to marketing, where we allocate most of our investments, we optimized management, which has allowed our marketing expenses to be below 18% of our net revenue. We reduced our expenses with media by 17%, and we also had a lower number of medical events because of COVID-19. We also anticipated vacations for the medical visiting team in April, and it normally takes place between December and January. SG&A was in line with what we had, and we had an additional revenue of BRL 107 million, which came from the damages agreement and payment term between the company and its major shareholder. Depreciation was in line with the previous year. And with that, EBITDA reached BRL 440 million or 43% of our margin before nonrecurring expenses. That would be BRL 347 million adjusted for 33% of the EBITDA margin. This margin is higher than what we have in our budget due to a slightly higher gross margin, but especially because of the lower investment margin. Financial results were impacted by the additional leverage spread, which we took to reinforce the company's liquidity between the end of the first quarter and the beginning of the second quarter. And we also saw the positive effect of mark-to-market of the hedge related to the Takeda acquisition. Income tax expenses were about BRL 3 million after deducting benefits of interest over our own capital and the subvention in the state of Goiás. With that, our net profits for continued operations were BRL 399 million with a total net profit of BRL 396 million. Now let's talk about cash flow. The cash generated by the operation this quarter was more than enough for our CapEx investment, especially increasing our productive capacity and maintenance. And it also allowed us to improve our R&D investments to develop new products, generating at the end of the quarter a free cash flow of BRL 239 million. As we have said in the previous call, we spent about BRL 2.5 billion in long-term financing, in particular, to pay for the Takeda acquisition and to make sure that the company had cash resources available. We also took BRL 300 million in additional financing to reinforce the company's liquidity. With that, we concluded the quarter with cash position above BRL 5 billion, which is more than enough to pay for the Buscopan and Takeda acquisitions. Without considering that -- those acquisitions, the company still have net cash of BRL 370 million. And even after paying for the acquisition, our leverage ratio should be below 2x, considering the combined portfolio with Buscopan and Takeda. In our balance, the main variations were what we mentioned on the company's liquidity. We concluded the quarter at a comfortable position of over BRL 5 billion in cash, with an increase of our short- and long-term credits. Regarding the main ones impacted by our merchant capital investment, we had an increase of BRL 300 million in accounts receivables, which was reflected in the number of days from 95 in the second quarter of 2019 to 110 days. We also had an increase in the level of our inventory, which was offset by the increase in the average return for suppliers. With that, our working capital investments as a percentage of net revenue was stable under 40%. Now Breno will now give his closing remarks.

Thanks, Adalmario. The Brazilian pharma at this year has proven once again that not only does it count with several growth opportunities in several segments, but also it is solid and very resilient. This quarter was strongly affected by the reduction in the number of doctor consultations and a lower number of people in pharmacies that have, as the main reason as Brazilians resume its activities, our expectations are that the market will gradually go back to its historical growth level, especially given the aging population, which favors the increase of the consumption of medication. Combined with these factors, the strength of our brand and our distribution reaching 100% of pharmacies across Brazil and the conclusion of the recent acquisitions will leverage our sellout growth in the next quarters and years. Thank you, and we'll now continue with the questions-and-answer session.

[Operator Instructions] The first question is from JPMorgan, Mr. Joseph.

I'm sorry, I can't hear you very well, but my question here is on M&A. What is your outlook on potential acquisitions after the recent one? I'm sure that given the current context, many companies have had troubles with the delayed increased prices and weaker sellout first quarter. So my question is about your sellout. What do you see are the main trends here for sellout so far and profitability?

Joe, we're hearing that the call is not, I think, very good quality, so I'll try to speak slower. I can hear you fine now. Okay. So I'll answer your question, and if there are any problems, please let me know. So to answer the first question on M&A, our focus right now has been in integrating the recent acquisitions we had.

I'm sorry, I can't hear your answer.

That's okay. Just give us a second, and we're seeing what we can do with our provider. So I'll try and speak slowly, and we'll see if you can hear me. Starting on M&A, our focus right now is to integrate the recent acquisitions we had, Buscopan and Takeda. We're also focusing on organic growth, innovation, which is the company's main focus. With regard to other opportunities, just as we have these opportunities here, we are looking for opportunities that would make sense from a strategical point of view. From a financial point of view, as Adalmario said, despite the acquisitions, we're still at a very comfortable situation financially. We're expecting a leverage of 2x the EBITDA we're under, even after the acquisitions. So to summarize, we're going to be looking for opportunities that do make sense from a strategical point of view, but this is not our priority. With regards to the sellout trends, as I said, this has been improving gradually and slowly. So we saw that the results were negative in April. In May, they were even. And in June, we already saw some growth. And data from July are also showing high single-digit growth levels. So we believe that as social isolation reduces, demand will bounce back again. And our portfolio, which has been affected, especially the influenza and chronic -- or, excuse me, acute use medication will recover their demand. We believe that this is a one-off. The second half of next year will not be related to this year, assuming the situation with COVID-19 is normalized. This entire trend will be reversed later on. We're looking at the situation on a monthly basis, and it has been improving, especially in the markets I mentioned. Another point to highlight here is the performance of the Generics segment, which has been growing significantly. We expect this to continue to grow, especially because of some factors, because consumers are finding alternatives that come at a better cost and also social isolation being reduced. I think social isolation will be reduced in main cities, and I'm not sure if that is an answer that you can understand -- that you could understand.

Yes. I have some trouble with the connection, but I did manage to hear most of your answer. If you can tell us a bit about your SG&A reduction. You mentioned marketing, but I'd just like to understand how that went on the corporate side, if you had pay cuts, if you reduced your personnel. If you could you tell us a bit about that?

Right. Before I answer, I just got some feedback saying that the connection's better on the webcast. So if you can connect through there, I think it will make it better. To answer your question, Joe, we did not reduce working hours or salaries. We've taken some measures such as a hiring freeze. We've also adjusted some administrative expenses, but many of the expenses were reduced naturally, as Adalmario said, by reducing travel expenses from our sales team, the administrative staff, the reduction in number of free samples distributed because everyone was on leave in April. Medical events, many of the sponsors have been -- sponsored events were held online. And with that, we also had a high level of savings. And there were some other measures in which we were able to contain expenses more rigorously, but we did not have to reduce working hours. Our focus was to generate demand, and that includes the medical visiting and merchandising teams. And I think that's how we're going to be able to recover the demand for our products.

I hope you can hear me well. I can barely hear you. I'm going to ask you my question. The fact that you hired an investment bank for one of the brands you're purchasing, but that -- is that an indication that you're talking to the authorities? Do you think that process can be accelerated? I'm asking about Takeda. You mentioned in your guidance that your expectation was to conclude this by next year. Is that the expectation we should maintain? And what did you learn from the crisis? What's going to be better in your operations? I imagine that we're going to see a permanent reduction in traveling and visiting that could generate some savings. So talk a bit about what you learned in the last few months.

So to answer your first question, the Takeda process is going according to our original expectations. So when we announced transactions, we mentioned that we expected to conclude Buscopan in the third quarter and Takeda in the fourth quarter. So this is still our best estimate. But probably, Takeda will be concluded by the end of the fourth quarter. Our goal is to have the authorities approve it still this year so that we can close it this year and have the results of these acquisitions by 2021. That's our best estimate right now. About the lessons learned and improvements, we think the technology is here to stay especially in what concerns office dynamics as not only our office but many others. We had acted quickly to the new reality, and we think that this is here to stay. So travel expenses, for example, for the rest year, they will be cut by 150%. So basically, we can save on traveling and have online meetings. This doesn't apply so much to the field team, but our own teams interacting with plants, São Paulo, Goiânia, Anápolis, that was reduced significantly. Regarding medical business, we also picked the decision to stay. What should happen from now on is a hybrid model to generate medical demands. So reps can have personal visits, but they can also use tools to visit remotely, that can be used to visit doctors again to reinforce the first visit and also visiting doctors and regions we are not present or we don't have a local team. So that, we believe, is bound to stay, and we should see a reduction, or that is, an increased productivity in these teams by about 30%. This is what I can show you. I think that's what will be the long-term impact from the lessons learned about this moment right now.

In the first quarter, you mentioned you have made a partnership with Rappi, the delivery app. So what else has evolved in digital online sales? You mentioned an accelerated investing in technology companies. So if you could tell us a bit about how that has evolved in this quarter.

Right. That's also an important point. I didn't mention it before, but we have been working in online sales platforms, especially the ones belonging to our clients. So retailers have received investments from us. We have a dedicated team to online trade marketing for our clients. And we've increased our investments there, and we have been seeing the results. Our goal is to gain market share and to lead in our clients' online platforms. And we're also working on our own direct sales platform. We launched our own e-commerce platform in the second quarter. And it was only a pilot project with acute meds, but our team is working on both fronts, especially with clients. Some of clients already have those platforms and they have a natural demand for these kind of products.

I'm not sure if they announced my name, but I'll continue with my question. I'd just like to hear about how you are dealing with the demand in June and July. How do you see this dynamic in the -- in what you described in the release, the media networks and the meds from the areas that are further from big cities? Do you see that trend still? And the second question is, how we should consider inventory and falls in sell-in trends in the gap, how that's going to be for the rest of the year?

Yes. To answer your first question, we saw this trend moving away from big cities especially at the beginning of social isolation restrictions. As that evolves, we're seeing that going back to normal, as we had before, and this is happening gradually. To answer your question on inventory, for the first quarter, we finished with an inventory that was slightly lower than expected. As we said, we received a great demand at the end of the first quarter. And now we see that inventory levels have normalized, considering what we see happening in the second quarter vis-a-vis the growth we saw right now. So our clients -- and we ourselves have been getting ready for the demand levels that we expected for the second quarter. So the tendency is for this to normalize.