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

Good morning. Welcome to Hypera Pharma First Quarter 2022 Earnings Call. We have Mr. Breno Oliveira, CEO; and Mr. Adalmario, IRO, with us today. We would like to inform you that this event is being recorded. [Operator Instructions] We'd like to inform you that questions can only be asked by telephone. So if you are connected through the webcast, you should e-mail your questions directly to the IR team at ri@hypera.com.br . Today's live webcast may be accessed through the company's Investor Relations website at www.hypera.com.br/ir. We also would like to inform that statements during this conference call may constitute 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 set forth in the forward-looking statements. Now I'll turn the floor over to Mr. Breno Oliveira. Mr. Oliveira, you have the floor.

Good morning. Welcome to our earnings call for the first quarter of 2022. I would like to start my presentation talking about growth on Slide 3. This was an excellent start of the year. We've grown our organic sell-out above market average in all 3 months of this quarter. We end this quarter with above-market growth in all our business units. We've grown 22% of our sell-out, 6 percentage points above market average. In Prescription Products, our performance was benefited by the growth in chronic medicines. We have been growing in this segment with important new introductions and new products and also growth of leading brands in acute drugs, Rinosoro and Alivium. In Consumer Health, growth was driven by anti-flu, painkillers and gastrointestinal, Benegrip and Engov are the highlights. In Skincare, we were benefited by the line extensions in solar protection and anti-aging lines as well as the growth of our skin or dermatological products. In Similars and Generic products, growth was driven by the introduction of new molecules and our production expansion in Anápolis. We have moved forward in our institutional market strategy, starting our pilot plant and selling the first batches of immunoglobulin that contributed to a growth of 170% in this new business unit. For the sixth quarter in a row, we have gained organic market share. And this is the biggest difference between the growth of Hypera and the growth of the market. This growth above market is the result of the initiatives to drive our sustainable growth, highlighting the faster pace of new products, increased production capacity and investment in our leading brands. In this quarter, we have concluded 1 year of the acquisition of Takeda portfolio. We are even more convinced that this was the right move for the company. We more than doubled the growth of this portfolio when compared to what we grow today and to what the portfolio grew a year ago. We have already captured over 90% of integration synergies that were calculated when we announced the acquisition. On top of that, we have introduced new important line extensions such as Alektos pediatric and Neosaldina Dip. Our organic growth and the speeding up of acquired brands show that we have the best platform in the pharmaceutical industry to combine organic growth -- sustainable organic growth and the acquisition of strategic iconic brands. As of this quarter, the brand portfolio of Sanofi will also benefit from our business platform. As I'll talk about on Slide 4, we've concluded in late March, that acquisition, and we included iconic brands for Consumer Health and Prescription Products, such as AAS, Naturetti, Cepacol, Buclina and Hidantal. We've also concluded the sale of operations in Mexico and Colombia to Eurofarma. We have several strategies that have been mapped out for drugstores, the medical community and consumers to speed up the growth of those brands. We also promoted Engov After, Neosaldina and Vitasay in the leading entertainment show in Brazil, Big Brother Brazil. That was a huge success. The customized activities to the show catapulted sales of these brands impacted over 100 million people and generated over 24,000 interactions on social media. Neosaldina grew 20% and Engov after grew 80% in this period. This quarter, we have introduced important products in all market segments. I'll talk about them on Slide 5. In Consumer Health, the highlight was Neosaldina Dip, a line extension of our OTC leading brand, and the 5 line extensions for Vitasay vitamins. In Prescription Products, the highlight was the line extension of Ofolato SOP, a food supplementary based on Methylfolate associated to vitamins. In Skincare, line extensions of Episol. Similars and Generics products, Paroxetine, Minoxidil and Montelukast. We are growing above market average consistently driving the growth of our brands that we have included in our portfolio. We're not losing sight of giving returns to our shareholders, our profitability and focus on innovation. I'll turn over to Adalmario, he'll be giving you more detail about this quarter's results.

Thank you, Breno. Good morning, everyone. Let me start talking about the numbers of this start of the year. As to sales, we had about a 28% increase. But unlike other quarters, most of this growth was driven through organic channels. The brands that we have incorporated last year accounted for about 3 percentage points of that growth. The remainder was from mature brands with a more relevant contribution of recent introductions. The new products that were introduced in 2021 accounted for about 8% of our revenues in the first quarter, about 1/3 of our growth. That clearly indicates how important it is to keep on investing on our innovation pipeline to keep on expanding our market share and growing above market average. Gross margin was about 63% in the quarter, above 1 percentage point drop when we compared to Q1 '21. That's because of input costs and the currency devaluation. Despite having that more relevant growth in some categories with smaller margins, such as generic vitamins and dermocosmetics, the mix contributed positively because of the OTC and prescription portfolio -- portfolios rather. On to expenses. We have a positive impact of acquisitions with a drop of all expense lines. And when we add sales, marketing and administrative expenses, that accounted 36% of our revenues, now they account for 32%. That's a substantial improvement in our marketing investments mostly. Total investments in R&D include intangible assets, surpassed 8% of our revenues when compared to 7% in the same period of last year. That again shows that we're committed to innovation and sustainable growth. This concludes the quarter with an EBITDA margin almost at 34%, above BRL 500 million, a 40% growth when compared with the same quarter of last year. Financial expenses increased substantially because the company is leveraged because of the acquisitions and the CDI increase, that's the most important indicator of all financing. Net revenue of continued operations was BRL 350 million, 13% growth onto cash flow and indebtedness. Investments in working capital was larger this quarter. Inventory, raw materials, semifinished products are on the rise, but we are expanding our safety inventory level. Our operating cash flow was above BRL 300 million, more than double of what we had in the same period last year. It's more than enough to cover all CapEx and R&D investments. Free cash flow generation was negative, almost $550 million, considering the payment of Sanofi brand's acquisition that occurred on March 31, net of the portfolio ex Brazil. Our financing flow was BRL 560 million positive, reflecting the inflow of new fundings that were hired in this quarter, net of interest payments and the main payments of the main financing. In this quarter, we paid out interest on own capital of '21 BRL 1.23 per share. We concluded the first quarter of the year with BRL 1.6 billion in cash and net debt of BRL 6.7 billion, a 2.5x leverage of EBITDA of continued operations for the year 2022. We maintain our focus on our financial priorities, protecting liquidity, increase cash generation to speed up the deleveraging of our balance sheet, reinvesting with discipline the excess in cash to support our organic growth through our product pipeline, also expanding our manufacturing facilities. In conclusion, I just would like to say that we keep on moving forward in our ESG initiatives. Just yesterday, we approved new risk policies, related parties activities, the nomination of Board members. Our team remains focused to help the well-being of all stakeholders to connect purposes so that people can live more and live better. In weeks to come, we are going to produce our first annual report -- the first audited annual report with more ESG initiatives and value generation to all stakeholders and also to reduce carbon emissions and waste management. I'll turn over back to Breno for his final remarks.

Thank you, Adalmario. In conclusion, I just would like to once again say that I'm very pleased with the company's results in the quarter. I would like to thank the entire team of senior management, everyone involved. Without this wonderful team, we wouldn't have been able to reach these results. In the next quarters, our focus will be on cash generation, the integration of Sanofi portfolio, and we'll keep on with the strategy of organic growth, exploring new markets such as the institutional market, innovation, line extensions of our unique brands we have in our portfolio. The performance in the first quarter, the resilience of the pharmaceutical industry, the strength of the leading brands portfolio we have and new products and the portfolio acquired from Sanofi once again focuses on reaching our guidance for 2022. Thank you. I think we can now start the Q&A session.

[Operator Instructions] Robert Ford from Bank of America asks the first question.

Congratulations on the results. Breno, what's your take on the inventory levels going up?

I think you are referring to our in-house inventory?

Yes, that's right. How much of that is API? And what are the inventory levels of your Asian suppliers?

Yes, I got it. As we've been saying for a couple of quarters, ever since the beginning of the pandemic, we have been paying close attention to our APIs -- API inventories, especially those from China and India. Because of the supply risks and logistics bottlenecks, we've seen time and time again, we haven't reduced our inventory levels. Quite the contrary, we have expanded the inventory levels of some key products that come from China. And we have also increased the level of finished products -- semifinished and finished product levels. This is more of a traditional approach, but that's driven because of the sales pickup in the second semester -- second half of the year. When we are preparing our inventory levels in the first quarter, we are looking to the sales of the quarters to come, which are usually better. Again, we are going to maintain higher inventory levels up until the point in which we are certain that these logistics problems are part of the past. As you said, gross margins are about 65%, despite the costs increase and as far as capital is concerned. I think we should prevent these risks of shortage of products that have higher margins.

Can you talk about the competition and how welcoming is the market as far as price increases?

Well, Bob, price increases, we're just transferring costs for both the industry and retail. This market is wonderful. This market dynamic, of course, there are pros and cons. But on the pro side, everyone increases prices at the same time. There are no major negotiations going on with customers because everyone, all of us are increasing prices at the same time. As far as the competition goes in the industry, I think it should be transferred over to price, too. Costs are going up. We're just transferring that cost increase that we've had in recent years and inflation is not giving any signs coming down, quite the opposite. That increase that were approved by CMED was about 10 90. Everything will be transferred over, and there won't be any discount issues.

And finally, there's a large wave of flu what should take about that situation.

It's difficult to forecast what's going to happen in the future. I don't think that this surge we had late last year and earlier -- and early this year, I don't think it's related to what's going to come down the road. There are some outbreaks, both flu and COVID, more focused on flu now. And this is going to help since we are leaders in anti-flu drugs, but that dependence is smaller than it used to be. I think it's about 6% of the portfolio that comes from anti-flu. Before the acquisitions back in 2018, 2019, that participation was even bigger.

Joseph Giordano from JPMorgan.

Good morning, everyone. Breno, Adalmario, I have 3 questions. One is somewhat more technical. What's your take on stabilized gross margins? What's your take as far as costs and hedges are concerned? The second question is about these new growth avenues. You talked about the institutional market. What is the potential there, 70 molecules, 12 billion? Are you considering partnerships to speed up growth? You talked about immunoglobulin. And finally, do you have any updates on some lenience agreements?

Joe, Adalmario will field the first question, and then I'll address the second and third.

Joe, as to the price transfer, this will help as of the second quarter. We are implementing price increases that have been authorized by CMED. It will happen to stabilize margins. And the gross margin will be very similar to what we had last year with those price increases. As to foreign or exchange rate rather, I don't think we'll benefit from it at least in this year because of devaluation of the local currency. We had our hedging policy in place. It's a little below [ 5 30 ]. It's hedged to year's end, but we're taking opportunity of this movement to hedge that below the exposure for 2023. So exchange rate won't be that helpful. However, we are protected, and we're starting 2023 to increase the hedging impact. But overall, I believe we'll have greater gross margin for the quarter and for the remainder of the year.

Joe, let me address the institutional market now. We are very optimistic. We're very excited about this growth opportunity since our presence there was not relevant because it accounts for over 40% of the total pharmaceutical market. So there's -- there are many opportunities for growth. So we're setting up R&D teams. We're going to have specific R&D for this institutional market, a pilot plant that will be dedicated to this segment, but it takes time. We will see results from these investments in 5 years -- in 4 or 5 years. On the other hand, the avenue growth on the short term is through partnerships, we are working on it. We are introducing at least 4, 5 molecules through partnerships. And there's also been opportunities I talked about, and you pointed that out, immunoglobulin. There is a shortage in the short term. And has given us that opportunity to sell it without the final registration. So we are bringing more products to the marketplace through to patients in essence. And we're, of course, aiming at getting the long-term registration, the definitive registration for this and other molecules. So we're very optimistic. As I said in the last call -- in the previous call, revenues should be about BRL 300 million for this segment. A growth that almost doubled from last year, which has also doubled when compared to 2020. Let me answer the last question. We are currently in negotiating with [ CGU ] to finalize that agreement. We are in the final stages of that negotiation. As soon as we have information, we'll make that available to the market. We'll formally announce that to the marketplace about that agreement. But again, we are at the final stages of that negotiation. We expect to make that announcement pretty soon.

Vinicius Figueiredo from Itau BBA. I think we are -- we have been cut off. We're trying to address what the problem was, please hold on. We'll come back shortly. [Technical Difficulty] Mr. Mauricio Cepeda from Credit Suisse.