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

Good morning Ladies and gentlemen, and welcome to the Hypera Pharma's conference call where we will discuss our earnings for 2022. We have with us Mr. Breno Oliveira, CEO; and Mr. Adalmario Couto, IRO. We'd like to inform you that this event is being recorded. You may access a recording of it in the company's Investor Relations website, hypera.com.br/ri. [Operator Instructions] Before we continue, we'd like to underscore that some of the information in this conference call may refer to projections or statements on future expectations. This information is subject to known and unknown risks and uncertainties that may make them not come to pass or to be substantially different from what was expected. Now we'd like to give the floor to Mr. Breno Oliveira, who will begin the company's presentation. Mr. Breno, over to you.

Good morning, everyone. Welcome to our earnings call for 2022 and for the fourth quarter of 2022. Last year was a very special one for Hypera. We reached all the guidance that we had published for the year. We grew our market share in retail. We advanced our strategy for the institutional market. We concluded the acquisition of the Sanofi brands, and we launched several new products across all of our business units. I'm going to start this presentation discussing our growth on Slide 3. Our sell-out growth was 12% this year, a record for the company. It was 2.5 percentage points above market average growth in 2022. Our sell-out grew organically above market rates for the second year in a row and this time, it happened across all of our business units. This is a result of the initiatives that we used to boost our sustainable growth, especially increasing the pace of launches in the last few years, expanding our production capacity and especially investing in our leading brands. It was a year of record marketing investments, which are essential to strengthen our irreplaceable portfolio of leading brands and boosting the growth of our new launches. Our advance in the institutional market this year was also a highlight, as I'll mention, in Slide 4. The institutional market contributed with over BRL 380 million to our net income in 2022 versus BRL 145.6 million in 2020. This is due to the initiatives implemented by the new business unit created in 2021, which contributed to a 7% growth in our existing product portfolio in this segment and also an additional income from a non-recurring sale of the Immunoglobulin representing about BRL 130 million. We also concluded the investments in our new injectable plant in 2022 in Anápolis, and we continue creating our new innovation center, our new pilot plant and an oncological product plant to support our growth in the institutional market, which should be concluded still this year. We currently have a pipeline of 87 new molecules to be launched in the next few years in the institutional segment. And in 2022, we have already launched our first antibiotics, cefepime, cefuroxime and Bac-Sulfitrin. Our record organic growth in retail sell-out in addition to the contribution from the Sanofi brands acquired in the first quarter of 2022 and our sales going up in the institutional market allowed us to have a net income of 27% growth in 2022. We also reached a record EBITDA levels for our continued operation and the highest cash generation in our history, and Adalmario will mention this soon. We had significant operational and financial advances this year, and we maintained our commitment to sustainable growth, to paying our shareholders and to maintaining our stakeholders' wellbeing. Let's speak about innovation on Slide 5. We launched over 90 products this year, and we've made record investments in research and development, totaling about BRL 520 million use in prescription products. We are working in new markets such as contraceptives and cannabidiol. We were the first to go into the Apixaban market after the patent was broken, and we launched Ondif for the treatment and prevention of nausea. In consumer health, our highlights were Engov, a new extension of the Engov brand line and further line extensions for Merthiolate, Epocler, Buscopan and Neosaldina. In biosimilars and generics, the company advanced its strategy to increase its coverage in generic molecules. Ladies and gentlemen, please hold while we reconnect. I'm not sure if you can hear me. We've got disconnected. I'll go back to the innovation slide and start over. So, as I was saying, we launched over 90 products this year, and we had record investments in research and development, BRL 520 million. In prescription products, we went into new markets such as contraceptives, cannabidiol. We were the first to go into the Apixaban market after the patent was broken, and we launched Ondif, an oral formulation for the treatment of nausea. In Consumer Health, we launched Engov, a new line extension for the Engov brand and other line extensions such as Merthiolate, Epocler, Buscopan and Neosaldina. In biosimilars and generics, we increased our coverage of molecules from 49% in 2021 to 58% in 2022. And in skin care, we also launched significant line extensions for Episol and new products from simple organic and Bioage. I'd like to reinforce that the company still has a significant innovation pipeline with about 450 products to strengthen our presence in the Brazilian pharma retail industry for the next few years. Moving on to Slide 6. In 2022, we also announced the acquisition of a site that produces scopolamine to supply the main input that we need to produce Buscopan. We approved a new investment to expand production capacity in solid, and we also approved an expansion for our distribution center in Anápolis that should be concluded next year. We also paid out interest over our own capital of BRL 779 million or BRL 1.23 per share for the fiscal year of 2022. We also significantly advanced our ESG agenda this year, implementing several initiatives in social, environmental and governance areas. These initiatives contributed to an increase of 21% in our ESG score at Standard & Poor's. And we also received a note in the S&P Global Sustainability Yearbook, which lists the best ESG performance in 2022. Only 20 Brazilian companies were listed there. Our CDP score went from C to B, which places us above the global average for the pharma industry. We were also selected for the first time to be in the ISE portfolio at B3 for 2023. So, these were major achievements that era made in ESG. And it reflects the efforts that we've been making in this area in the last few years. I'll pass it over to Adalmario now, who's going to tell us a little bit more about this year's results as well as the [indiscernible] the fourth quarter.

Thank you, Breno. Good morning, everyone. Last year, we saw organic sell-out growth significantly across all our business units. So, there were contributions from the institutional market and the acquisitions for the Sanofi brands, which boosted our revenue. It was above BRL 7.5 billion, and it's above the guidance that we had established for the last year. About 2/3rd of this growth is related to our volume expansion which was driven especially by the launches made in the last few years. In 2022 alone, we launched over 90 new products which represented 30% of our volume growth for the year. Most of that took place during the second-half of the year. So, we expect that these products will continue to contribute to our net revenue in 2023. This year, we will launch over 100 new products and differently from last year, we should seek more launches in the first-half of the year. Considering the institutional market, we had sales contributing BRL 381 million, a large increase versus 2021. And many of them came from the non-recurring sales of Immunoglobulin. Our revenue growth was above sell-out and our retail cost-outs were replenished. When we look at the last 12 months, our sell-in was close to our organic sell-out without considering the institutional markets. Reduction of the sell-out rate in the last quarter versus the other parts of the year, this was due to the strong demand that we had in the end of 2021, which affected our comparative basis. That's when the company grew above market rates. Our gross income was about $1.3 billion in the fourth quarter with a gross margin of over 60% and BRL 4.8 billion in 2022, with a gross margin of 63%. Gross Profitability was impacted by the mix of products sold, an increase in the institutional market share and a growth in generics. With that, our continuing operation, EBITDA nearly 40% with a margin expansion and with the dilution of marketing expenses as a percentage of total expenses. The company's power brands grew in consumer health, subscription products and skin care. We also saw synergies captured by integrating the recent acquisitions. Despite this higher relevance of financial expenses and a higher level of debt, our net income reached BRL 1.7 billion in 2022, which is in line with the guidance established for the year. Continuing with our cash flow on Slide 8. As Breno said, we had a record cash generation in 2022, above BRL 2 billion. with an important increase in EBITDA conversion into operational cash flow. This cash generation allowed the company to invest significantly in CapEx this year, expanding our production capacity, new lines, increasing our R&D structure and also making smaller acquisitions. The company also made significant investments into intangible assets, including especially paying for the acquisition of the Sanofi brand and investments in innovation to strengthen our product portfolio. With that, the company's free cash flow, BRL 205 million this year and after new debt issues and payments of interest over our capital, our net debt was BRL 6.8 billion. When adjusted for the [ DCP in early ] January, our proforma net-debt came close to BRL 7.5 billion or 2.5x the EBITDA expected for 2023. As Breno said, we had a robust financial and operational results in the last year. We reached all of the guidance and we increased our operational cash generation, which is essential to continue to invest in sustainable growth. I'll pass it over to Breno for his closing remarks.

Thank you, Adalmario. I'm very pleased about these results for 2022 at Hypera. We made significant financial and operational strides and this is due to the dedication of our more than 10,000 employees, our clients, our consumers and medical community as a whole. We still believe in the Brazilian pharma market and its potential to grow. And we're the company that is most prepared to capture these market opportunities on the short and long term. We have the main brands in the market, and we're the only ones that have a significant position across all segments: prescription products, different counters, generics and skin care. We have a strong innovation and production capacity, which will allow us to strengthen our footprint in the retail market and will also allow us to go into new segments like we have been doing with the institutional market. I'm very confident for 2023, especially with the performance of our recent launches. That's why I'd like to share the guidance that we made for this year. Our net revenue is expected to be around BRL 8.6 billion, adjusted EBITDA from continuing operations, excluding others, BRL 3.05 billion and the net income from continuing operations around BRL 1.85 billion. Thank you, and we'll now pass it over to the Q&A.

[Operator Instructions] The first question will be asked by Gustavo Miele from Goldman Sachs.

I have 2 questions for you. The first is about this guidance for 2023. I'd like to ask you to give us some more details on the top-line and your margin. So, this 14% growth that you're proposing for this year, if you can tell us about how much is expected to come from the market, how much share you expect to gain in 2023? And when we look at margins, there's been a growth year-on-year, but it's relatively flat. So, what are you considering for your mix? And how much room is there to dilute SG&A? I also have questions about your results and the working capital line. So, what has affected your inventory [ days ] line that this is changing with every quarter. So, I'm wondering if you're just building up some safety inventory or is it a logistical issue. So, if you can tell us that, thank you.

Hi Gustavo. This is Breno. So, I'll answer about the guidance, and Adalmario will discuss working capital. As you said yourself, the guidance refers to a growth of 14%. As a reminder, we don't see the same positive effect that we have from immunoglobulin last year. So, if you look at the same base, it was a bit higher than that this is implicit. We expect to have above retail average growth, which is about the same that we got in the last few years. There are market expectations or the last ones that we heard are about 11%. So, we expect to grow above that. And the main driver here are new launches. So about 50% of our growth should come as a result of the launches that were made in 2022 and the launches, we will make in 2023. So, we're very confident about this figure. Concerning margins, margins are basically flat here in comparison to the previous years. We suffered some foreign exchange pressure last year and as it remains stable, we're able to control it. And inflation has been catching up, so we've been able to increase our prices to gain some margins. So, we don't have the effect of immunoglobulin, which affected our growth, but we will see better gross margins and better EBITDA margin. I'll pass it over to Adalmario, who is going to talk about working capital.

Gustavo we're continuing on the same strategy we mentioned before. So having more safety inventory than we had in the past. But when we compare the third quarter, the fourth, we didn't change our policy in the last quarter but the main effect was a deceleration of [ sale ] With that, we had a higher increase, especially in finished goods. And we believe that as we launched new products, all the launches that were made will reduce inventory. But as we launch new products in the next months, it will tend to stay flat. Another one we've been discussing in the company is maybe reducing our inventory levels. Since things are normalized now between China, India and Brazil, we don't see any disruptions on the horizon when it comes to logistics and freight. So, we believe that there is some potential on the medium-term to reduce our inventory to pre-pandemic levels. But this is a long-term thing. I think our biggest concern right now is to avoid any sort of product stock-out. Last year, for example, there were some periods in which we saw unexpected demand, and we were able to make use of those opportunities since we had a higher inventory. So, the guidance for the next months and quarters is to have lower inventory life.

Just to add to Adalmario, our business is a little bit different from retailers, which I think is most of our coverage, our margin is quite high. The EBITDA gross margin doesn't have so much operational leverage but it's very high. So, we try to avoid, of course, without wasting working capital, we try to avoid product shortages because that's the worst scenario possible for us, being stocked-out. Because then we would leave 65%, and in some cases, up to 90% margins on the table. So, we're looking at that as Adalmario said but it's a gradual thing so that we can avoid product shortages.

Next question will be asked by Caio Moscardini from Santander Bank.

I have 2 questions here. First about net revenue. What Selic rate are you considering for this guidance? And regarding G&A, if you look at the last quarter or the third quarter, we can see that it's been going up. So, I'd just like to understand if your headcount is complete, if you already have a full team or if you still need to hire? Do you think that this G&A will reduce?

Hi Caio, let me answer your question. This net income guidance basically implies the Selic of about 13.75% for the entire year of 2023. We know that if we were to look at it 3 or 4 months ago, our expectation was that it would drop more but considering the latest projections, we have been conservative and decided to consider a stable Selic rate with no reduction over the year. Obviously, if during the year, it goes down, it will have a very positive impact to our results, considering the leveraging level that we have. And we have some room to review it if it changes but we decided to be more conservative right now and work with the same Selic for the rest of the year. When it comes to G&A, we did increase our headcount in the last quarter, and this is in line with our budget, considering the number of new launches that we are having. We ended up hiring more people in the fourth quarter and for next year, we don't expect to see a significant expansion to our team. So, I think this G&A line will have some potential synergies.

You mean for next year or for 2023?

I meant for 2023. We don't expect to expand our team significantly this year in a way that would impact our G&A.

Next question will be asked by Leandro Bastos from Citibank.

I have a couple of questions. First is, if you can tell us a little bit about how you see the market doing this year. We saw that sell-out went down in the fourth quarter. And you said that it was a tough comparison and I understand that it continues for some molecules up until February. So just like to hear how you're doing? The second question. Since sell-out is less than sell-in, your inventory levels went up. So, I'd just like to understand how you see it and how you think it will be balanced for the future, that's all.

This is Breno. I'll take your first question about the beginning of the year. As you said it yourself, and we have mentioned this on our call last year, 2022 had started strong. We had an off-season spike in COVID and flu cases. So, [indiscernible] 23% in the first quarter. In January, we had grown over 40% but that comparison is tougher now. We had expected lower growth levels in the first quarter but this was already seen or considered in our guidance. So, in the first quarter, we'll have weaker growth, especially because it's a tough comparison to last year, especially the first part of the first quarter, where we had significant growth. But from then on, I think we have a normalized comparison for the remaining quarters. This has all been considered in the guidance we published this now.

So, when we look at the difference between sell-in and sell-out for the fourth quarter, it's quite natural to see some volatility with each quarter. So just to give you an example, in the second quarter of 2022, organic sell-in growth had been much lower than sell-out, about 8 percentage points. And this quarter, the fourth quarter, we saw that inventories were back up again in industries and also there were some concentrated launches in the third and fourth quarter you have a positive impact to sell-in at first and then as we invest in marketing to promote new launches, we see the [ sellers up ] along with it. So, for 2023, we will probably see the first quarter with sell-in above sell-out. But for the remaining quarters, as was said by Breno, our expectation according to our budget and guidance is that sell-out will perform [indiscernible]. Just to look at some figures, last year, retail [ seller ], meaning excluding the institutional market and also excluding acquisitions, was about 22% and sell-out was about 19.2%. So it's a very small difference, which is in line with the last 12 months.

The next question will be asked by Joseph Giordano from JPMorgan.

I actually have 3 questions. I'd just like to understand this guidance for the year because there were some seasonal effects with the flu spike, with Omicron and Immunoglobulin. I'd just like to understand from you how it should be spread throughout the year, the sell-in. The second point is to look at the pipeline. You have over 400 launches. So, I'd just like to understand what contributions will come from these launches in your guidance. So, I'd just like to understand how much the legacy is growing apart from the launches. Finally, we have many discussions on M&As in the industry. So, you still have many opportunities and what's strategic and transformational opportunities do you see in the industry?

So, considering the guidance and how it's distributed throughout the year, if you consider growth in sell-in, since we had a strong comparison basis in the first and second quarter of 2022, we will probably see lower growth levels in the first quarter this year, especially because of our sell-out, which was a bit lower, but it will tend to remain flat for the rest of the year. If you look at the comparison in 2022, in the second-half, we also had lower growth levels. So, our growth level this year should be higher than last year, but we're not perceiving any changes in the seasonal pattern. So, if you look at 2022, there were some changes to the regular seasonal pattern, especially when we consider sell-in. Obviously, our portfolio has some categories that are bit more seasonal like [indiscernible] that usually impacts our sell-in, in the first and second quarters and we'll have to see how that plays out this year. At the same time, what we're seeing is that there is a strong demand. The volume grew above historical levels across several categories. Another category that was difficult in the last few years is sunscreens, and it's a very important category for us. It's been performing very well. In fact, the entire skin care portfolio has been performing well since the end of last year. So, when we look at each category, there is a seasonal pattern, but it shouldn't change much in general terms from what we've had in the last few years. And to tell you about launches, well, we've been increasing the number of launches. So last year, we had 92 new products launched this year. We expect to launch about 120 new product and these contributions have also been going up. They've been contributing to the company's growth. So, what we considered in this guidance is an increase of over BRL 1 billion in revenue this year and about BRL 500 million out of that should come from the products that were launched in 2022 and 2023 alone. So, it's significant, as you can see. And we've been working hard to continue to expand our pipeline so that this contribution from new products becomes even greater for the next years. Breno will answer your third question.