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

Good morning, ladies and gentlemen, and welcome to Hypera Pharma's conference call where we will be talking about the second quarter of 2022 earnings. We have with us Mr. Breno Oliveira, CEO; and Mr. Adalmario Couto, Executive Director of Investor Relations or IRO. We'd like to inform you that this event is being recorded, and you may watch it on the company's investor relations website, hypera.com.br/ri. [Operator Instructions] Before we continue, I'd like to underscore, some of the information mentioned in this conference call may refer to projections or statements about the future. They are subject to risks, known and unknown, and uncertainties that can lead them to not come to pass or differ substantially from what was expected. Now I'd like to give the floor to Mr. Breno Oliveira, who will begin the presentation. Mr. Oliveira, over to you.

Good morning, everyone. Welcome to our conference call for the second quarter of 2022. I'm going to begin this presentation speaking about our growth on Slide 3. This quarter, our organic sell-out grew above the market by 25% or 6.5 percentage points. Our leading brands in our portfolio made up a huge difference once again and we gained market share for the seventh consecutive quarter across all business units. Our highlights were our power brands, the more traditional ones from Hypera and the ones we've recently acquired. Besides the performance of our leading brands and accelerated launches, our internal raw material inventory policy and our finished products with our clients have been very efficient and have contributed towards our sell-out growth. From the beginning of COVID, we decided to operate at higher inventory levels for our main raw materials from China and India. And we kept healthy levels of finished goods with our clients. This has ensured that we have a good supply of most of our products in pharmacies and distributors, and we've managed to grow across our main products, especially during the time in which we had less availability of pharmaceutical products. We continue to innovate to strengthen our market share in the Brazilian pharma industry even more. This quarter, we've invested over BRL 120 million in innovation, research and development, and we've had important launches, which I will mention on Slide 4. We launched the patented estrogen [ free ] contraception drug, Ammy, which is a milestone for [ Hypera ] Pharma going into a category that represents BRL 1.7 billion. Besides that, we launched CURC, Epocler Todo Dia, our first extension of the power brand, Epocler line and Buscofem Hot, the first line extension for Buscofem since its acquisition in 2020. We have over 100 products that will add BRL 1.6 billion to our gross revenue when they reach peak sales in 5 years. The company continues to invest to boost its sell-out growth and to go into new markets. And in this quarter, we reinforced our medical board with Dr. Fernando Bacal, who is the Director of the Transplantation Group at InCor and Dr. Yana Zogbi who runs the oncology center at the Sírio-Libanês Hospital. They will help us in developing our innovation pipeline for the institutional market and also for prescription drugs. We continue to invest on our growth, and we maintain our commitment to our business sustainability, paying our shareholders and well-being for our stakeholders, which I'll mention on Slide 5. This quarter, we advanced our strategies to the institutional market. We had a net revenue -- excuse me, of BRL 1.8 billion, a growth of 25% with Immunoglobulin providing additional returns. We are still firm on our initiatives to gain participation in our market. Expansion capacity for injectables, as we mentioned in 2021 will be concluded this year, and will add our capacity or production capacity next year. And we continue to advance in our R&D area exclusively for this market to support our innovation pipeline. In the second quarter, we declared interest on own capital of BRL 194 million or BRL 0.31 per share, and this was published in our 2021 annual report, showing our main highlights and initiatives in environmental, social and economic standpoint, including our emission reduction plan, which will add value and help people to live longer and better. I'll now pass the floor to Adalmario, who is going to give us some more details on these results.

Thank you, Breno. Good morning, everyone. This quarter, our net revenue was 26% higher than the comparative period and organic growth of the company's brand portfolio and then the recently launched products, which had a significant contribution, nearly 30% this quarter. We also had contributions from sales to the institutional market, which were above BRL 128 million this quarter and a contribution from net revenues -- excuse me, to net revenues from the brands acquired from Sanofi. Our gross margins were 64% versus 65.5% in the second quarter of 2021. This is a consequence, especially of a higher share of products in the hospital channel from our product mix. We also had some specific inputs at higher costs due to a higher demand during this period. This impact we received from the gross margin in an institutional market does not affect our EBITDA margin much, considering we have a lower relevance there in marketing investments and in sales in this market versus the retail segment. As Breno mentioned, our power brands had another strong quarter in growth, contributing to dilute operational expenses, especially marketing expenses, which went up 5% year-on-year, above BRL 300 million this quarter. This also had a dilution from acquisitions, which continue to impact our expenses positively. There was a reduction of 3.3 percentage points on expenses versus net revenues. Expenses and sales represented 10% of our net revenue this quarter, which is similar to what we had last year. And they were benefited from the dilution of R&D used during this time. This quarter, we also received a benefit of BRL 11 million from Lei do Bem. When we include the amount capitalized as intangible assets, and the total investments in R&D, they were 6.5% of our net revenue this quarter or nearly 2 percentage points above the comparative period last year. These R&D investments -- consider all the efforts we're making to develop the product pipeline in the institutional market. As we said before, we've mapped over 70 projects with an addressable market above BRL 12 billion. In SG&A, we had a reduction, and this reflects the capture -- the synergies captured in integrating the brands acquired from Sanofi. With that, EBITDA margin from continued operations, excluding the others was 1.5 percentage points higher than the second quarter of 2021, reaching 35.6%. And net income of continued operations was BRL 455 million this quarter. There was an impact from financial operations, nearly BRL 138 million, given that the company needed to take some debt for the acquisitions and debt now has a higher cost. Now continuing with our cash flow and debt in this quarter on Slide 7. We had record operational cash generation for a second quarter, BRL 535 million, even considering the initial investment of BRL 47 million for the working capital and for the brand portfolio acquired from Sanofi. This quarter, we invested 38% of our net revenue in working capital versus 36% in the second quarter of 2021. This high variation in working capital was due to increased inventory days for raw materials. And this is in line with our strategy of having a higher safety inventory, creating a buffer for the most strategical inputs. After the CapEx investments, focused on expanding production capacity, new lab and a pilot channel for the institutional, we had a free cash generation of BRL 364 million. We also had a net output of BRL 435 million in the financing cash flow with an amortization of BRL 230 million and the remaining for interest rates. Therefore, our cash position at the end of June was BRL 1.5 billion and our net debt above BRL 6.5 billion or 2.5x EBITDA considered in our guidance for 2022. We're also working in new ways of capturing funds to expand our debt terms and to keep an attractive and low spread. With that, we maintain our commitment to the company's main financial goals, protecting liquidity, increasing cash generation to deleverage our balance and reinvesting any excess cash to support our organic growth to our -- through our product pipelines, our production capacity, entering new channels and our digital initiatives. That's it for me, and we'll now return to Breno, who's going to make his closing remarks.

Thank you, Adalmario. So to conclude, I'd like to restate that we're very happy about the company's results for the first half of the year. With the gain in market share that we had during this time, we became the biggest pharma industry -- excuse me, the biggest pharma company in the Brazilian industry. So I'd like to thank our employees for their work and their collaboration, but also our clients, partners and consumers. For the second half of the year, we will continue to focus on generating cash, integrating the portfolio we acquired from Sanofi and expanding our sell-out. We are still confident about the guidance as we set out for 2022. And I'd like to invite everyone to our Hype Day, which will happen on September 1. We will send you further details soon. Thank you, and now we will continue with the Q&A session.

[Operator Instructions] First question will be asked by Bob Ford from Bank of America. Mr. Ford, your microphone can now be turned on. Mr. Ford, you may now turn on your microphone and ask your question.

Thank you. Good morning. Congratulations, Adalmario, for your results. I'd like to ask about market share improvements during this quarter. How do you see your market share? And how much should we consider for the future, if you could tell us a bit more about that. Finally, do you think the elections affect your sales, power brands, digital?

Your audio was not very good, so we didn't get your questions. I think the first one was related to market share, and I'll answer that one. And I think you might have asked about sustainability and market share gains. And then I'll ask you to repeat your other questions. Considering market share gains, we are confident that these gains are sustainable on the long term. And we are collecting the results from the efforts we made in the last years. The entire Hypera team with all the investments that were made in R&D since 2017, where we invested more in research and development and in expanding production capacity. This is an effort we've been making, the decisions we started in 2018 and the investments we started in 2019. So now we're starting to collect the results of these investments, these initiatives and also the acquisitions we made. As we said, since the end of the acquisitions, we have seen higher leverage in these brands in our go-to-market platform. And that has led to concrete results. So our market share gains are sustainable. We often get asked about categories that were benefited by COVID, like anti-flu medications and drugs related to the respiratory system. What we see is growth across the board in many categories. As I said, this was across all the company's categories, Generics and Similars, skin care, which basically is not impacted by this movement. And currently, the weight of these product lines that we depended most on in the past like [ food and ] medication and vitamin D, considering the Hypera portfolio, they are much less representative than they used to be. So we're very confident that the gains will be maintained. Does that answer your question?

Yes, that answers it very well. And if you can tell us a bit about Buscopan and improved margins?

Right. Consider earning the verticalization, it's a long-term movement, Bob. We have a process to transfer technologies over the next 2 years, but we really believe in improving our margins. But the most important thing we're seeing from this trend of having more raw materials available is much more about ensuring that it will be available and avoiding ruptures, having more controls over the chain. This is what motivated us to acquire this plant and technologies.

Right. There was a significant reduction in marketing expenses. Is that sustainable or was it seasonal?

Bob, this is a reflection, a reduction of our marketing as a percentage of our revenue. It is a reflection of the mix change in our portfolio. Like, gaining market share by expanding the Generics and Similars market in the institutional market as well. It contributes -- the main contribution for the dilution of these expenses besides acquisitions. The acquisitions we made and then become more efficient, especially in fixed expenses by diluting fixed expenses with a greater product portfolio. There's another factor that contributes here, which are the line extensions we're making. So with that marketing percentage, we can be more efficient in positioning it to have a better product portfolio in the -- under the umbrella brand. So I think that is the reason why we have been able to dilute marketing expenses and maintain efficiencies in these expenses, which were all reflected in our recent market share gains.

Yes. And Bob, to add to that, although we see a dilution as a percentage of the net debt this quarter. The investments we made in marketing were at record levels. The company has never invested more in a single quarter. So we continue to invest more to support all of our power brands, making line extensions. But as Breno said, given our mix and some portfolios in some categories that don't have these investments that are also growing, we see a dilution and synergies also of the line extensions we acquired. But we've made big investments. We're growing in digital. A number of years ago, we had minimal investments in digital. So now about 50% of our media investment has been in digital as well. So we can speak directly to our consumers and our targets. And we want to continue increasing it.

[Operator Instructions] The next question will be asked by Joseph Giordano from JPMorgan.

I actually have 3. The first is about the pipeline of 100 products to be launched short term. I'd like to hear about how that is split between retail and institutional. I'd just like to understand how fast we're accelerating this expansion institutionally. And looking at a product that you highlighted, the second question, immunoglobulin, I understand that you don't have a permanent registry for the product. But how is that being dealt with by the health authorities? Also, you mentioned inventory for raw materials, which I think is very important, but I'd like to ask about API prices. Has that been stabilized? Is the supply chain normalized now? That's it.

Joe, good morning. So to answer your first question, and I'll let Breno answer your other ones. In this pipeline of 100 products, we have already launched nearly 30% by July. And now we will have an acceleration in the second quarter. Most launches are for the retail channel. So we have 95 launches in retail this year. Many of them are line extensions, but also going into new categories that we did not work in before. So Breno had mentioned contraception. Gynecology is also an area that we are very strong in, but we didn't have a contraception. So now we can come in with a new generation drug that is patented as well. So we have a patent for the molecule at this concentration, and we will have it until 2031, and there are many other innovative launches to come in the second quarter -- excuse me, in the second half of the year. But we have 7 launches in the institutional channel. We've had 2 by July, and we will have 5 more until the end of the year. I don't know if that answers your question.

Joe, about immunoglobulin, we do not have and we do not want to give any information on registries due to competitive issues. But obviously, we're working on it so that we can get a permanent registry. It's an important product for the institutional segment, and we'll try to be a part of that market. So with the temporary authorization, we've brought in products to support our sales for the second half of the year. So we already have the product. And we should have additional sales in immunoglobulin over this year. And we're going to be working on getting this as quick as we can because it's very important for the institutional market. Considering your third question, considering price dynamics and safety inventory, we see a wide price variation. Some APIs have significant price increases we see some of them stabilizing or even reducing in some of them. Some of the ones that had relevant price increases in the last months. On the other hand, considering lack of APIs, ANVISA in the last few years has made it much more flexible, more flexible rules to register and include new suppliers. And we have benefited from that. So we're able to bring in other manufacturers, include them in the registry, buy from them and promote more price competition among them for some molecules. So there's an effect of these 2 factors which generates a higher price, which is being offset by the increases due to higher inflation and higher price increases authorized by CMED. So net to net, we do believe that price has increased, but that will probably normalize in the next months.

[Operator Instructions] the next question will be asked by Mr. Gustavo Miele from Goldman Sachs.