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

Good morning. Welcome to Hypera Pharma First Quarter 2021 Results Earnings Call. Mr. Breno Oliveira, CEO; and Mr. Adalmario Couto, CFO and IRO, are here with us today. This event is being recorded. [Operator Instructions] Today's live webcast is being broadcast at www.hypera.com.br/ir. We also would like to inform that statements during this conference may continue forward-looking statements. Such statements are subject to known and unknown risks and uncertainties that could cause the company's actual results to differ materially from those expected. I'll turn the floor over to Mr. Breno Oliveira. Mr. Oliveira, you have the floor.

Good morning, everyone. Welcome to our first quarter earnings call. I would like to start by talking about our growth on Slide 3. For the second quarter in a row, we grew our sell-out organically in double digits and we gained market share. Organic growth was 11.5% in our sell-out, 2 percentage points above market. The comparison for the sell-out is very challenging in this quarter because March last year, the market grew by over 30% when consumers went to drugstores to purchase medicine, right at the start of the pandemic. Our sell-out growth is favored by the gradual improvement of the pharmaceutical industry starting in second quarter last year as well as our initiatives to boost our growth. Similar and Generics were the highlight -- the highlight with 2-digit growth. We are benefited by our distribution network to boost Neo Química brand and through the expansion of our production capacity. In our pipeline, we have important new products that can contribute to increase our coverage in the generic products, reaching 55% of the total molecules in the market by year's end. On top of that, in this quarter, we signed a master sponsorship from a soccer club jersey, Vitasay and Neo Química. It's on top of the naming rights contract of the Neo Química Arena signed last year. In Prescription Products, we grew over market average. We are reaping the harvest of the new products we introduced for chronic use, and we also benefited from the strong performance of Colflex, Ofolato and Addera brands. In skin care, the portfolio has been growing heavily or strongly ever since we acquired the Glenmark portfolio. In Consumer Health, I would like to point out vitamins, supplements and nutritional products benefited from the extension of Vitasay and Finn brands; the gastro segment with Tamarine, Epocler and Gastrol brand and the recent introduction of Maracugina Noite. By concluding the acquisition of the Takeda brands portfolio, we have strengthened our business in this area of consumer health. With these acquired brands, we have consolidated our leadership at 20% market share, and we are now the third largest player in the prescription sector. The integration of acquisitions are according to plan. In the late Q1, we had sales and marketing teams from Takeda already integrated to our structure. And in terms of operation, at the end of the second quarter, we'll have all the Buscopan secondary packaging and the entire Takeda portfolio being produced in Anápolis. And by early next year, the entire Buscopan production will be conducted in our facilities. We keep on investing in our portfolio to foster our long-term growth. There are several opportunities to expand the lines of these acquired brands. We have a pipeline with over 350 projects, with the potential to grow the size of the company substantially in years to come. These investments are already yielding good results. As you can see on the next slide, 34% of the revenue from this quarter came from products introduced in the past 5 years, an 8 percentage points growth since we started concentrated our operations in the pharmaceutical industry in Brazil and intensified our investments in R&D. In the quarter, we have important introductions. Let me point out the expansion of lines of Neo Química vitamins for both vitamin C and vitamin C plus zinc; Addera Flash, the first film D vitamin; and Alektos Ped, an extension from the antihistamine patented and acquired from Takeda to promote them for pediatric use. Innovation is part of our DNA. We've been investing more than any other player and introducing products in relevant segments in this market, and they are contributed substantially to our sustainable growth. I'll turn it over to Adalmario. He'll be talking about this quarter's results.

Thank you, Breno. Good morning, everyone. I'll be talking about the highlights of our results and also for the cash flow in the quarter. Let me start on Slide 6, please. Sell-in, that's our net revenue. Growth was almost 44%, driven by the consolidation of the Buscopan family numbers and the 2 months of the Takeda portfolio sales, the company we've recently acquired. In the quarter, when we combine the 2, their contribution was about BRL 220 million of additional sales. When we compare to the same basis last year, excluding the contribution of acquisitions, growth would have been 16%. Out of this 16%, price increases contributed in about 5%. Volumes went up about 11%. All our product lines where we operate had positive contribution towards that growth, a market share gain in several important categories. I would like to point out Generics and Similar products. Gross margin was 64% in the quarter, a over 2 percentage points drop when compared to the same period last year because of the exchange rate and the product mix. The average exchange rate was BRL 5.07, a favorable impact through the hedging policy implemented by the company. Depreciation was 26% when we compare to Q1 of 2020. Trying to mitigate exchange rate devaluation and to protect ourselves from future volatility, we have updated our prices in early April. And we -- as we said in the previous call, we had 100% of hedging of 100% of inputs pegged to the dollar for 2021 at BRL 5.30. On to expenses now. We had a 19% increase in sales expenses because of the increase in the R&D infrastructure, and we incremented or we improved our bonuses. And the total investments grew by 2 digits. That is proof of our commitment to innovation and sustainable growth. Marketing expenses went up 18% by investing in new markets, especially for media expenses in the case of Buscopan and free samples, increase in Takeda portfolio. We had important introductions just like Amome. It will compete with the Nasonex brand. And by doing so, we have increased substantially the free samples, which is common when new products are introduced. Despite that positioning, we had a major drop as a percentage of revenues when compared to the same quarter last year, over 22% to 18% of our net revenue. That's the first indication of the synergy capture when we acquired these other brands. SG&A went up 12%. As a percentage of revenue, they were 1.5% below what we had last year in the same period. There were no other relevant impacts. And we have an EBITDA margin of almost 31% in the quarter, a BRL 362 million EBITDA, substantial growth of 45% when compared to the same period of last year. The financial results was negative because of the leverage levels after we paid for the Takeda acquisition. Taxes was slightly positive because of interest on equity and because of government subsidies as well. Net income was BRL 307 million in continuing operations and a total BRL 305 million, an almost 28% growth. On to cash flow on Slide 7. We had an operational generation of BRL 151 million, when we use working capital of Takeda, BRL 135 million, and payments of that sponsorship on that soccer team jersey. We had smaller CapEx investments when we compare to the past 2 quarters of 2020. We're almost concluding the expansion construction site for the solids unit in Anápolis. In intangibles, we have the net payment of almost BRL 3.4 billion, R&D investments of BRL 47 million and the payment of Simple Organic. In the quarter, we took some financial -- additional financial lines for a 2-year term, and that's according to our strategy to have that cash cushion because of the impacts of the lockdowns that would be announced -- that were announced back in March. We also paid interest in our equity for 2020 in late March. Interest on equity was BRL 195 million, BRL 0.31 per share as to the first quarter of the year, a 5% increase when we compare to last year's numbers. The yield was almost 4%. By doing so, the company has a cash position of BRL 1.7 billion, and the net debt level is BRL 5 billion, 2.5x the EBITDA we have announced as our guidance for the year that was announced in Hype Day. Let me comment that in early April, we announced the sale of our distribution center for the consumable products for BRL 231 million that will contribute to reduce our leverage levels. As to the balance sheet accounts, major changes was the liquidity position, reducing cash position. On the other hand, we had more intangible assets after we acquired Takeda's portfolio. When we look at the major lines that contribute to working capital, we had an increase of almost 20% of finished goods and raw material inventory and a 10% increase for our consumers. Receivables is in line with what we had last year. By doing so, we had more cash conversion, 174 days. The most important impact was the working capital for Takeda. I'll give the floor back to Breno for his final remarks before we go on to the Q&A.

Thank you, Adalmario. We are very pleased with Hypera's results in the first quarter: 12% growth in sell-out, 44% in net revenue, 60% when we exclude acquisitions, 46% EBITDA growth and 24% in net income of continued operations. The sell-out growth in recent months, the integration of acquired portfolios, the new launches and the innovation pipeline with over 350 projects puts us to fight for the leadership position in the market. We are confident we're heading in the right directions. Early data in April show a sell-out growth over 25%, that will entail an accrued growth for the year above 15% along the lines that -- of growth we expect for the year. That's why early this month, we've announced the guidances for 2021. Net revenue, about BRL 5 billion -- BRL 5.9 million, BRL 5.9 million (sic) [ BRL 5.9 billion ]; EBITDA for continued operations -- continued operations, BRL 2 billion; net income, BRL 1.5 billion. We remain confident in the growth of the Brazilian pharmaceutical market, and we'll keep on growing through innovation, M&A, considering new markets and new distribution channels such as the institutional market and e-commerce. We'll continue to use cash generation to invest in our business to deleverage and to distribute dividends to our shareholders. Thank you for attending this earning calls -- this earnings call, and we'll move on to the Q&A session now.

[Operator Instructions] Joseph Giordano from JPMorgan asks the first question.

I have a couple of questions more focused on the short term. You talked about capturing synergies. When you look at the guidance, about BRL 280 million for Buscopan and from other Takeda assets, how much have you captured so far? When should we expect the full speed of these synergies? What about short term? We had significant price increases in April. And your hedging is -- seems to be very favorable at BRL 5.15%. What can you expect as to the gross margin and marketing expenses developments? It seems to be very small still. And the second question is more on the midterm basis. You said that towards the year's end, you have about 55% of molecules for Generics in retail. What does that mean in incremental markets for the company?

This is Breno. I'll be fielding the first question about synergies, and then Adalmario will answer the portion of hedging and marketing and the last question about Generics. All right. In terms of synergy capture, as you know, we acquired these 2 companies, and we purchased the Takeda's brand portfolio and Buscopan. For the case -- in the case of Buscopan, they had a small marketing team. They have already been integrated to our team. Back in September last year, the results you see already include the integration of these teams. In the case of Takeda, they had a bigger team in terms of product portfolio as well. We have integrated both a marketing and the sales teams and these representatives that call on doctor's offices. These results have already been captured as early as the first quarter. Now on to quarter -- the second quarter, we start having synergies in terms of production. Part of the secondary packaging is now being conducted here in our facilities. And by year's end, the entire production for Buscopan, as early as next year, early 2022, the entire Buscopan production will be conducted in our facilities. Synergies in sales and marketing have already been captured and production synergies, most or some of it, it will be captured now. In Q2, we'll be making the secondary packaging. And the rest or the remainder will come by or early 2022. And the Takeda will take longer because the production contract we signed with them will take from 3 to 5 years to transfer that production in-house. But most of these synergies will be captured in this second quarter. You see most of these synergies captured in Q2 results.

Let me address Your question about price increases and margins. We increased prices back in early April, between 8% and 9% on average. That helps to bring margins up. It hasn't been enough to cover the 100% impact with exchange rate devaluations that occurred last year, but that helped. This first quarter is historically a quarter with smaller margins. But we expect that in quarters to come with these price increases, we may be able to restore gross margins. And we are comfortable they will be able to reach our guidance for the year, that is the EBITDA margin between 33% and 34% for the year. It's closer to 34%, actually. As to generic products, generic products have become more and more important overall as we manage to have enough capacity to meet that demand for generic products. This is a very important point. We've been investing in increasing our capacity in the past 2 years. And at the same time, introducing new molecules to focus on those more relevant molecules that grow the most, and then we'll be able to use the capillarity that we have for the Neo Química brand and also to benefit from the marketing efforts. And as a consequence of increased penetration, the coverage level will be over half of the market by year's end. And for the years to come, we'll have a very robust pipeline, not only for the molecules that already exist that are no longer exclusive, but many others that will be terminating that exclusively and some of them are very relevant, and that will take place in early 2022. We are very well positioned to be one of the first companies to introduce products with those molecules.

Leandro Bastos from Citibank asks the following question.

This is a very quick one. When you look at the acquired brands portfolio, especially those from Takeda, how much is the sell-out growth for these brands? And what do you expect from the future? I hope you were able to hear my question because the call is pick -- is breaking up a little bit.

For Buscopan, grew 14% in Q4. It's growing in line with our original portfolio. Takeda's growth is somewhat smaller in February and March, mostly. It's a matter of placement and product inventory. We have been improving that work. It's growing now in April, in line with the rest of the portfolio, about 20%. Let me remind you that Takeda has a less seasonal portfolio. It is not as impacted by COVID as the other products. From Glenmark, it grew substantially, as we said, about 25%, 30%. So we are very pleased by the sell-out growth of these acquired products. Takeda at the start was somewhat more difficult, but they're getting back on track, and we are growing over 20% now in April.

Robert Ford from Bank of America asks the next question.

Congratulations on your results. Can you give us some sales numbers for first quarter? What about quality of innovation? When you -- the repetition of these numbers, you are already innovating the Takeda portfolio. What about the other stronger brands you've also acquired recently?

Bob, as to Bionovis, it's about double-digit growth. It's very relevant. Last year, we grew because of the new molecules that were included in our portfolio. We do not expect as many new molecules -- or new products rather, in the portfolio. Growth should be somewhat smaller, albeit significant. We keep on investing in Bionovis heavily. We believe it's an important branch or an arm for the PDPs. We've been investing to have their -- its own facility and to have our own product before 2023, but growth isn't expected to be as high as the one we had last year.

Thank you, Adalmario. Could you repeat the other questions?

Yes, of course, Breno. What about quality of innovation? And can it be repeatable when you purchase new products? And you're already innovating in the Takeda portfolio. What should be our take as to the change in innovations for your stronger brands that you have recently acquired?

Well, Bob, that's part of our business plans in our acquisitions. That was two. We have new introductions, line extensions. It was not their core and they were not investing in that direction. There were projects being designed, but they did not pull the trigger. They did not introduce those products. Let me give you an example. The one I just mentioned, Alektos for pediatrician use. It was in their pipeline, but we ended up speeding it up and we introduced it. I won't be giving you any details about specific projects, but there are many things in our pipeline along those lines, things that will be introduced in the second and third quarters using these strong brands. There are launches for Neosaldina, the #1 brand, but I won't be giving any details, but we have already mapped out that new launch. And the other question was about the quality of the innovation portfolio, right?

Yes. That's right. Is that repeatable so that we can have a taste of the quality of that innovation?

Yes, we monitor that regularly through sell-out. We have very granular data, both from sell-out sales as well as prescriptions. Of course, in the case of prescription products, we can see the recurrence of prescriptions. And with our top customers, we purchase data from them, from Raia, Pague Menos, the top retailers, and then we get that information. And that's according to plan. When you introduce a new product, we put together a business plan for the products, and we keep track of results very closely, and that's according to plan. Of course, some products do better than expected or not as well. But on average, performance has been according to our expectations.

Breno, congratulations one more time.

Guilherme Assis from Safra asks the next question.

I would like to delve into the sell-in topic when compared to sell-out. You provided a lot of information about the organic growth. And correct me if I'm wrong, sell-in was about 11.5%; sell-out, 16.3%, right? You've also mentioned that you invested in working capital to normalize, I guess that's the word, your inventory levels for both Buscopan and Takeda brands. What should we expect will sell in and sell out -- will gravitate towards 15%? And what's the dynamics that will play out between sell-out sales and your own sales through your channels?