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

[Interpreted] Good morning, ladies and gentlemen. Welcome to Hypera Pharma's earnings call for the fourth quarter of 2024. We have with us Mr. Breno Oliveira, CEO; Ramon Silva, CFO; and Adalmario Couto, IRO. This event is being recorded. The video can be seen at the company's Investor Relations website, ri.hypera.com.br. [Operator Instructions] Before we proceed, I would like to reinforce that some information in this conference call may contain projections or statements about future expectations. This information is subject to known and unknown risks and uncertainties that may cause them not to materialize or to be substantially different from what was expected. I will now turn it over to Mr. Breno Oliveira, who will begin the presentation. Mr. Oliveira, you have the floor.

Good morning. I'd like to thank you all for being here for our earnings presentation. I will start speaking about our growth on Slide 3. Our sellout went up 9% in 2024. In the institutional non-retail market, it was 26%. And in the retail market, it was 8%. We are continuing to grow significantly in the non-retail market. It was nearly 20 percentage points above the overall market growth. And this was mainly driven by acceleration in sales for our current portfolio. Retail sellout growth was in line with our expectations for the year. Influenza medication, which is about 1/3 of our sellout had a significant recovery in the second half of the year and concluded with a growth of 6% throughout the year versus a drop of 3% in 2023. Our growth was below the average market growth due to the mix effect and also due to a strong increase in the patented medication market, which grew 21%. We have significant projects in our pipeline to launch molecules that will lose their patents by 2030. And we're also strengthening our efforts in several categories in chronic and preventive treatments. And we also have line extensions for important brands in our OTC portfolio sell-out growth for the year did not increase our net revenue due to the working capital optimization process that began in the third quarter of 2024. As a reminder, our working capital optimization strategy aims at boosting the company's operational cash generation by reducing inventories with our clients and reducing our account receivable days. By operating with less inventory throughout the chain, we will also increase our operational income due to a reduction in returns, discounts and discards. Our focus is reducing inventories in our clients' distribution centers without changing the availability of our products and points of sale. We're advancing significantly at a faster pace than we initially expected in this process throughout the fourth quarter. We continue to advance in this process. And now in early March, our average sales term is about 70 days, which concludes about 80% of the foreseen adjustments in the first quarter alone. We did not have any problems in supplying 2 points of sale right now, and we have not seen an increase in sellout for the next months due to this strategy. Our working capital optimization strategy is not changing our marketing and innovation investments nor our investments in increasing production capacity, as I'll show in the next slide. We invested over BRL 2.3 billion in marketing, innovation and production and distribution capacity. Investments in marketing include advertising promos, medical visits and point of sale initiatives aiming at boosting our sellout growth, and they represented BRL 1.3 billion in 2024. Investments in research and innovation reached about BRL 550 million. We reinforce our product portfolio with over 50 launches in 2024 with line extensions for significant consumer health and skin care brands. Our cardiology, CNS and respiratory products were also a significant highlight along with our prescription products. Our CapEx investments came to a total of BRL 428 million in 2024, which include investments in our distribution center, a new pilot plant and a new biological and oncological plant to support our growth in the institutional market. We're also including the scopolamine production capacity. We're also expanding our distribution center in Anapolis, which began in 2022 and this added 27,000 pallet positions, automating inventory management and picking in an area of 1,600 square meters, which will help with our lead time and deliveries and will optimize our working capital. In 2024, we were once again recognized for our practices and our sustainable initiatives and we advanced in our corporate governance. We were selected once again to be in the FTSE4Good, one of the most important indexes, and we're also at B3 IDIVERSA, which includes companies that meet ethic and gender diversity strategies. We're also a part of the S&P Global Sustainability Year book, which includes the most sustainable companies in the pharma industry in the last year. We strengthened aspects of corporate governance by creating a Sustainability and Governance Committee which reviewed the bylaws of the Board of Directors and advisory committees, and we also updated the company's materiality study. I will now pass it over to Adalmario, who will talk to us about the results for this quarter.

Thank you, Breno. Good morning, everyone. In 2024, the company's net revenue was BRL 7.4 billion, down 6% versus 2023. Our working capital optimization led to this, and it began in September last year. Since we advanced in inventory management with our clients, net revenue decreased in the latest quarter with a reduction of 18% in sales versus the fourth quarter of 2023. This also had an impact on our operational leverage as expected by the company. With that, gross margins were at BRL 4.4 billion and BRL 786 million for the quarter, a reduction of 4 percentage points in 2024 and 10 percentage points for the quarter. Operational income was reduced due to the lower operational leverage, but also due to the mix of products sold with a higher reduction in selling consumer health and prescription products, which are the segments that have our main power brands that have higher margins. Since the beginning of the working capital optimization process, we have continued to invest on the main demand levers with digital media, POSs and medical visits. Our aim was to continue supporting sell-out growth and market share for our brands. We also invested in boosting new product launches, which are essential for the company's sustainable growth. With that, we had an increase in these expenses as a percentage of our net revenue. Marketing expenses grew 7% in 2024, which is in line with our sell-outs and selling expenses went up 4% in the last year. General and administrative expenses were 5% higher than in 2023 and this is similar to the inflation rate for this period. With that, our EBITDA margin from continuing operations was 28%, and it was BRL 137 million for the quarter, a margin of 9%. EBITDA reduction led to a reduction of 19% in net income from continuing operations for the year. The next slide shows our cash flow. We posted the highest operational cash flow in our history above BRL 2.5 billion. And this considers a significant improvement in capital and working capital investments. And this also benefits from our internal inventory reduction, raw materials and finished goods, which started in 2023. With optimizing working capital, we also had an investment in intangibles which include mainly R&D investments that were capitalized throughout the year, shows our commitment to evolving our brand portfolio and building our innovation pipeline for the institutional market. So we expanded our cash flow by 21%, and we finished the year with a net debt of BRL 7.5 billion, considering interest on own capital which was carried out last year. Our shareholder payout strategy was maintained, and we paid BRL 787 million in interest on capital and dividends for 2024, which was a dividend yield of 6.5% approximately. I will now turn it over to Mr. Breno Oliveira for his closing remarks.

Thank you, Adalmario. I'd like to conclude this call by saying that we are very happy about our working capital strategy so far. This is very painful in the short term, but it will provide enormous benefits for the company starting in the next few months. As I mentioned before, we've concluded about 80% of this movement at the end of the first quarter, and we are now at 70-day terms in March. We hope to achieve 60 days by April so that we can work in a normalized fashion starting in May. By concluding this process, Hypera will be able to combine its sustainable growth with better returns on invested capital due to a significant reduction in working capital investment. Thank you. And we will now continue with the question-and-answer session.

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

So my question is about the current trends in adjusting your inventory throughout your channel. You are further along in this process than we had imagined 4 or 5 months ago. So what I'd like to understand from you is this, looking at the very end, you mentioned in the release that most of your sales is already within these new policies. So when should we expect an inflection in your P&L? Can we start thinking about the second half of the year with some growth and some operational leverage? My second point is about your pipeline. You mentioned your pipeline with new products and how the company has a potential share of some fast-growing parts of the market. How will these launches be phased in 2026? Do you believe that this will accelerate?

This is Breno. I'm going to answer your first question, and then Adalmario will answer the second one. Considering this process, we have been able to do it faster than we had imagined initially. When we published that this process was going to happen, especially because from the operational standpoint, things are going according or better than the plan. So every month since October, we have been able to reduce these terms and clients have been able to reduce their inventories without it affecting their working capital. So as I mentioned in March, we had already been working with 70-day terms. Our goal was to get to 60 days, and we will probably have this adjustment in April. And then in May, we will probably be operating normally. So starting in May, we will probably have sell in and sell out equal to each other. The second quarter results are still impacted by these effects. But starting in the third quarter, we expect to see results closer to what the company will post from now on. So that was all. I will now pass it over to Adalmario to answer the second question.

So we mentioned in our release that last year, we launched 50 new products. Many of these launches were line extensions for the main brands we have in our portfolio. So we launched Buscopan droplets compound, which was an approval that we had already had before with Boehringer. So we were able to return to the SKU, and it performs very well. Buscopan is one of our biggest -- is the biggest brand in the company. We're very pleased with that. Last year, we also launched Muscular Neosaldina which is the headache analgesic, but now we're making use of the strength of this brand to go to other categories. This was something that was done last year in December. But the initial results have been very positive. As we mentioned before, we have the pipeline in the company prepared for this patent break that we will have that will start to accelerate in 2026 until 2030. So our potential market is BRL 10 billion, but it will probably go up when we have new patents going public, especially because some of these products have a high average ticket. So there is an expectation that it will be reduced, and that will give more access to the population. So we continue to invest in our pipeline, we're focusing mostly on chronic treatments, central nervous system, cardiology, endocrinology. These are the 3 main therapeutic classes in the market. But we have many launches in our vitamins portfolio. We have probiotics, women's health and also skin care which is the segment in which we launched the most products every year with simple organic and BioAg, we have many brands in this segment. So we're very excited our goal of balancing our portfolio continues. We're trying to balance between chronics and adults -- and acute, excuse me. We still have many acute treatments as we can see in our mix, but the medium- to long-term trend is to balance this out and to be in line with the current market with a higher share of chronics as well.

The next question will be asked by Bob Ford from Bank of America.

How should we think about your sales and EBITDA comparison for the first quarter? And what is pressuring your competition in generics. Is it a specific competitor? Or is it something broader?

This is Breno. So about the quarter, we're making an adjustment at a higher magnitude than we had in the fourth quarter. This will be very similar to the fourth quarter. Expenses continue. They grow following sell-out and this is doing well according to plan. And sales have been smaller in the short term due to this adjustment process. We're going to have an earnings call in about a month to talk about the first quarter. But it will follow a similar trend to the first quarter. But this is within expectation. Considering generics, we see a competition between the main players in the market. They're more aggressive with a few molecules, large molecules and we're also playing the game. We're also being more aggressive so that we can at least maintain our market share across a few categories. But there are price increases. So we'll have to see how the market behaves in the second quarter in this category of generics. As a reminder, generics represent 15% of our revenue, while brand medication, including OTC and prescription, represent 85% of our portfolio.

Adalmario, what are you thinking about tech covenants?

So Ramon, our CFO, will answer that question.

Bob, this is Ramon. So the covenant finished the leverage for the quarter, very close to what we had already imagined. With working capital adjustments, we expected a reduction in EBITDA and leverage was expected to be higher than in the previous periods. So about the covenant specifically, just as a reminder, we have a very flexible covenant. The trigger for this covenant is a leverage of 3.75x EBITDA. And this is done with a higher EBITDA -- with the highest EBITDA in the last 12 months and the annualized quarter EBITDA. So in order to trigger this, we would need to not follow this metric for 2 consecutive quarters. So we feel very comfortable with the level of leverage in the fourth quarter and in the next quarters. And we will still see the effects from working capital optimization.

The next question will be asked by Mauricio Cepeda from Morgan Stanley.