Medios AG (ILM1.F) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the conference call of Medios AG. At our customers' request, this conference will be recorded. [Operator Instructions]. And I now hand you over to Claudia Nickolaus, Head of Investor and Public Relations at Medios.

Welcome, everybody, to our conference call on our results for the first half year of 2022. As always, all relevant documents can also be downloaded from our Investor Relations website. Additionally, this presentation can be followed in parallel via the Internet link provided to you in the invitation. Today with me is our CEO, Matthias Gaertner; and our CFO, Falk Neukirch. Matthias will start with an executive summary, followed by Falk, who will then provide details on the financials for the first half as well as on the outlook for the current fiscal year. And finally, Matthias will comment on Medios' growth story. Both gentlemen will be then available to answer your questions. I would now like to hand over to Matthias.

Thank you, Claudia. Also a warm welcome from my side. Thank you for attending this call and your interest in Medios. I'm proud to present a further set of excellent results today. The first 6 months of '22 were by far the best ever for Medios. And Q2 was our sixth consecutive record quarter. Not only is our M&A strategy paying off. We also have delivered strong organic growth. And even more important, our margins are rising as planned. Let's go directly to Slide 3, providing an overview of the achievements and highlights for the first half of '22. Our growth strategy is on track. We are successfully integrating the NewCo Pharma Group. This latest acquisition has significantly strengthened our market position in the manufacturing area. The merger with NewCo Pharma enables us to expand our competence in the field of patient-specific therapies and thus also significantly and sustainably increase the profit margin of the entire Medios group. We continue to leverage synergy potentials and cross-selling opportunities through the expanded network of compounding facilities as well as through the network of specialized partner pharmacies, which has increased to around 600 through the merger with NewCo Pharma. In our P&L, the acquisition is already paying off. as demonstrated by the positive development of our financial results, strong inorganic growth and attractive organic growth. Adjusted for M&A effect, we grew organically at a rate of about 9% in the first 6 months of '22 as well as in the second quarter '22. Total revenue climbed by 25%. Furthermore, in H1, we have strategically increased inventories in anticipation of further growth and rising prices. We are already benefiting here as we have started to sell them off at now better margins due to inflation-related price adjustment. And finally, Medios is highly robust. So far, we do not see significant negative impact from the economic uncertainties. Our growth is currently hardly affected by the war in Ukraine, inflation, supply chain disruptions or the general macroeconomic environment. I'm very proud to successfully lead our company through these challenging times together with my fellow Board members and the entire Medios team. The early extension of my contract as CEO, which was announced recently will ensure consistency on the Executive Board as well as in the management of Medios. We are very happy to be back in the SDAX since June '22. This gives us more attention in the market. Regarding ESG, we are making progress in implementing the measures of the Medios ESG strategy '25. In a nutshell, we are showing dynamic and profitable growth and are excellently positioned for the future. Our new labs in Berlin are currently going through the validation and qualification processes, and we expect to start compounding in Q4 this year. New partner pharmacies are adding cross-selling opportunities and the digitalization of the health care system offers attractive growth potentials. And not to forget there are M&A opportunities in the market for internationalization and to set up new businesses in the area of specialty pharma. Against the background of the very successful business development in the first half, we confirm our forecast for '22 despite the ongoing global uncertainties. We expect our revenue to reach the upper range of our guidance. Falk will provide more details on our outlook later. How can the first months be summarized best, again record numbers. We continued the growth and success story. We have set ambitious targets. We confirm our forecast and expect revenue to reach the upper end of the range of EUR 1.45 billion to EUR 1.6 billion based on the excellent performance in the first half of this year. Now a short summary of the financials for the first half of '22 illustrated on Slides 4 to 6. Slide 4 illustrates the impressive continuous quarterly growth of our 2 KPIs, revenue and EBITDA pre again reaching new records. Also compared to the second quarter of last year and the first quarter of this year, all KPIs have increased. This development clearly proves the positive effect of the most recent acquisitions, especially the remarkable increase of EBITDA pre and the respective margin. Following the corona-burdened second quarter '20, we have seen 8 quarters in a row of continued growth of revenues as well as EBITDA pre. Even more impressive, each of the last 6 quarters represented new record levels. The same picture on Slide 5, a record first half with substantial growth year-on-year, record sales and a strong disproportional increase of EBITDA pre. Falk will give you more details about this later. Let's move directly to Slide 6, providing a revenue and EBITDA pre breakdown per segment for the first half of this year. This reflects the impact of the consolidation of NewCo Pharma since January. As Q1 already showed, we have also for the first 6 months, a remarkable increase of the share of PST business regarding EBITDA pre from 25% for the full year '21, up to now 43%, already above the 40% share that we aimed for in full year '22. This development is fully in line with our strategy and goal to increase the share of the higher-margin PST business. On Slide 7, we can see the strong network that we can build on with the integration of NewCo Pharma Group. This is also the driver of strong share of PST regarding our profit. Let me briefly summarize the main benefit of the acquisition. We complement each other, especially regarding the regional coverage. Together, we ensure an almost nationwide supply to our partner network of specialized pharmacies within the shortest possible time. Together, with the additional labs of our new building in Berlin, we will reach compounding capacities of 500,000 to 600,000 preparations per annum, and we have clear plans on how to use these capacities. The combination of Medios and NewCo offers significant growth potential through combining our partner network of, meanwhile, around 600 specialized pharmacies, expanding our product and service portfolio as well as synergies and cross-selling. In a nutshell, this is remarkable strengthening of our attractive higher-margin segment, Patient-Specific Therapies. And I'm very pleased that this is clearly reflected in our half year results, leading to a significant increase of our group EBITDA pre margin up to 3.6%. We have already realized synergy effects that result from the recent merger with Cranach and NewCo Pharma, mainly in the purchasing and logistics, but also from cross-selling opportunities within our extended partner network. This is all from my side for the moment. I now hand over to Falk to provide more details on the financials for the first half of '22 and on the guidance for '22.

Thank you, Matthias. Also welcome from my side. And now I will give you an overview on the -- figures for the first half of '22, unless I explicitly refer to different reports in [indiscernible]. The full set of financial figures can be found in the financial statement on our website. Let's start with Slide 9, showing relevant KPIs. The full consolidation of NewCo Pharma on January 1 of 2021 -- 2022 is reflected in the financials. Revenue increased by 24.8%, thereof 8.6% organic and 16.1% in organic. We also see a disproportionate rise of the earnings positions compared to the prior year. The gross margin increased from 5.1% to 6.7% due to the higher share of the PST business resulting from NewCo Pharma acquisition. EBITDA pre rose by 55.9% and the EBITDA pre margin reached 3.6% compared to 2.9% in the previous year period. There is -- revenue and profitability reached new levels, as Matthias has said already. Personnel costs follow the higher number of head count with 517 as of June 30, 2022. The increase of personnel costs by EUR 7 million to EUR 16.3 million is caused with EUR 4.8 million by NewCo and with EUR 0.8 million from stock option programs. The increase of other operating expenses by EUR 4.7 million to EUR 10.3 million was mainly driven by the integration of NewCo Group, followed by rising rental costs mainly due to increased rental space need and new manufacturing site. Further cost increase resulted from higher consulting and integration costs. Despite these higher expenses, EBITDA pre outperformed revenue growth considerably, driven by the consolidation of the NewCo Pharma Group. So the acquisition has already -- is already paying off. EBITDA pre was adjusted by extraordinary expenses in the amount of EUR 1.7 million for stock options, EUR 1.4 million and M&A transaction costs, which make EUR 0.3 million. Depreciation and amortization climbed from EUR 7.7 million to EUR 10.7 million, mainly due to the amortization of customer-related intangible assets attributable to NewCo Pharma. Of the EUR 10.7 million, roughly EUR 3 million result from non-PPA acquisitions, thereof EUR 1.5 million IFRS 16 driven and almost EUR 8 million result from pharma PPA effects from acquisitions. Operating cash flow amounted to almost EUR 10 million, thereof EUR 12.5 million in the second quarter of 2022 compared to almost EUR 30 million in the first 6 months last year. This development is caused by 2 extraordinary effects in 2022. One, the payment of retained taxes and social contribution for stock option plan of almost EUR 8 million in the first quarter of 2022 and second, the temporary increase in inventories to prepare for expected price increases. We expect this inventory build up to be offset in the course of the financial year with positive operational cash flow effects for the second half of the fiscal year '22. Cash flow from investing activities were especially impacted by effects in connection with the acquisition of NewCo Pharma, the cash component of the purchase price for NewCo acquisition of EUR 88 million and investment in the new labs in Berlin of EUR 1.4 million. The financing cash flow of minus EUR 15.6 million resulted primarily from the scheduled repayment of a former shareholder loan of NewCo Pharma Group in the amount of EUR 9.8 million in the first quarter and the scheduled repayments for the syndicated loan of EUR 3.2 million. The syndicated loan amounts to EUR 22.1 million as of June 30, '22. Cash and cash equivalents amounted to EUR 78.3 million at the end of the reporting period. The equity ratio decreased from 75% -- sorry, 75.2% by end of '21 to still a very solid level of 70.8%. On Slide 10 and 11, we provide a breakdown of the organic and inorganic growth by segment for the first half of 2022. Let's start with Slide 10. Revenue grew organically by EUR 54.9 million or plus 8.6%. The inorganic growth amounted to EUR 102.4 million or plus 16.1%, driven by the acquisition of NewCo Pharma. Around 74% of the inorganic revenue growth were allocated to our PST segment and the remainder to PS segment. Organic growth of EUR 54.9 million occurred almost entirely in the PS segment. The slight organic sales increase of the compounding business for the first half of '22 is again strategically driven by focusing on higher margins, but usually lower revenue. Slide 11 shows the EBITDA pre breakdown by segment for the first 6 months of '22. EBITDA pre grew inorganically by EUR 11 million as a result of the NewCo Pharma integration. Thereof EUR 9 million were allocated to our PST segment and the remainder to pharmaceutical supply. The increased demand for headquarter functions following the inorganic growth path of the company plus the development of Board remunerations are reflected in higher cost in the service segment. Let's now switch to Slide 12. As just explained, organic sales development was almost flat in the segment Patient-Specific Therapies and overall segment revenue climbed as a result of the NewCo Pharma acquisition. EBITDA pre rose respectively. This is fully in line with our strategy to focus on higher-margin products and to increase the share of the compounding business. The EBITDA pre margin decreased as a result of the NewCo PST business with lower margins due to a different product mix. The EBITDA pre margins given on Slide 12, are calculated on overall segment revenue, including internal revenue. Related to external revenue only EBITDA pre-margin PST is 12.05% for the reporting period related to 12.9% in the previous year period. As already highlighted by Matthias, the share of this segment PST in EBITDA pre of the group is meanwhile, above -- is at the target level of 40%, while PST revenue is at 14% of group revenue. Let's now switch to Slide 14 and 15. Despite ongoing economic and regulatory uncertainties, Medios confirms the guidance for '22, the company expects revenue to reach the upper end of the range of EUR 1.45 billion to EUR 1.6 billion. EBITDA pre continues to be expected to fall within the range of EUR 52 million to EUR 58 million. Global uncertainties, as outlined on Slide 15, do still exist such as rising inflation and supply chain bottlenecks. Our growth course is currently not affected, but we are cautious and are monitoring the situation closely. In addition, we must include possible regulatory risks in our consideration. Ladies and gentlemen, the numbers demonstrate the sustainable and profitable growth story of Medios. A summary of our growth initiatives, both organic and via M&A is outlined on Slide 16 and will now presented by Matthias.

Thank you, Falk. Our growth strategy remains unchanged, and its implementation will further advance. With 8 consecutive quarters of growth behind us, we are on track and well positioned for further growth in '22 and beyond. During our previous earnings calls, I highlighted the various activities to achieve growth. So today, I only want to stress our efforts relating to M&A, in particular, in the fields of the compounding business, which will help to leverage our additional compounding capacities. Also, geographically, we would be interested in expanding our partner network, especially in Bavaria and or Eastern Germany. And as we want to further increase our EBITDA pre margin, we want to tap further opportunities which will enable us to achieve our objective, international expansion of our activities. We still benefit from the high market potential in Germany with a consolidating market. However, we want to internationalize our business in the future and are considering launching new segments, respectively, new services and/or products within the field of specialty pharma. We are looking forward to presenting more details of our strategy at our Capital Markets Day that we have scheduled for November here in Berlin. We will then present more details of our mid- and long-term strategy. We will elaborate on our plans about internationalization and diversification. Before I conclude the presentation, I will now provide a short update on our ESG strategy and what has been done so far, illustrated on Slide 17. First of all, we made progress in implementing the ESG software tool, which will simplify and improve the data collection and transparency. After software training, we will be able to already use the software for this year's ESG data collection. Furthermore, we held a successful Annual General Meeting in June. Among other things, the shareholders voted in favor of modernizing the articles of association about corporate governance. As part of the sustainability strategy, we established a digital whistleblower hotline and initiated a project to improve the transport logistics. This includes various targeted measures at the different sites through Germany, ranging from material savings for packaging, the shift to more local suppliers for laboratory protective clothing or testing alternative sustainable packaging. Ladies and gentlemen, this concludes our presentation. Thank you for your attention. Falk and I am now available to answer your questions.