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

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

Good morning, everybody, and welcome to our conference call on our results for the first half of 2023. 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 the executive summary followed by Falk, who will then provide details on the financials for the first half of 2023 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.

Okay. Thank you, Claudia, and good morning from my side as well. Ladies and gentlemen, welcome to the conference call on the results for the first half of '23. The first half of the year was again successful for Medios against the background of the ongoing challenges. We managed to achieve a fast and strong recovery in the first half of the year after weak fourth quarter '22 due to regulatory changes since September '22. More important, we have laid the foundation for a strong third quarter. I can say today that the expected strong business development was already visible in July. So we expect a very strong third quarter, driven by the strategic buildup of inventories in the first month of this year. Accordingly, we are fully on track to achieve our targets and clearly confirm our guidance for '23 with revenues up to EUR 1.8 billion and an EBITDA pre up to EUR 63 million. We continue to implement our growth strategy as planned and are well positioned for a strong second half of '23. Here, also, the expected price increases in the pharma market will have a positive impact on our financials. Let's directly go to Slide 3, providing an overview of the highlights for the first half of '23. First, we further strengthened our patient-specific therapy segment through the sterile manufacturing collaboration with AfS as part of the acquisition of bbw, Blisterzentrum Baden-Württemberg, as of January '23. Following the strategic sale of Kölsche Blister in June, we have centralized all Blister activities in bbw's site near Stuttgart. This is an important step to realize efficiency gains in [indiscernible] over the next year. Second, we posted good half year financials, especially when taking into account regulatory headwinds since September '22. Revenue reached around EUR 854 million and EBITDA pre amounted to EUR 29 million with a group margin of 3.4%. This development is based on sustainable growth of both business segments and the acquisition of bbw included for 6 months. First half year results are impacted by the strategically driven inventory buildups. Consequently, operating cash flows were correspondingly negative. Falk will provide some more insights on the financials later. And third, the implementation of our extended growth strategy 2025 is making very good progress, especially with regards to the internationalization of our business. We have identified several targets across Europe and are in ongoing talks with some attractive potential target. As previously stated in our last call, we now also offer highly specialized parenteral nutrition care for prematurely-born babies and Service prevent an impending supply order mix. We benefit from the diversification of our customer groups and strengthen our position as a reliable partner in the specialty pharma sector. Furthermore, we are already adapting our ESG reporting to the new European rules and regulations for Medios still on a voluntary basis this year. In a nutshell, in the first quarter, we set the course for '23. And in the second quarter, we continued this past as planned despite some headwinds. We built up inventories in expectation of higher prices later in the year, continue to successfully integrate new co pharma and bbw and intensified work on our internationalization strategy. As said, we expect a very strong third quarter. On Slide 4, we summarize the most recent sale of Kölsche Blister, which was a strategic decision, and please be aware, this transaction has no material impact on our financials. Now let me share a short summary of the financials for H1 as illustrated on Slide 5 to 7. Slide 5 shows the quarter-on-quarter development of our 2 KPIs, revenue and EBITDA pre. Q2 recorded revenue growth and a slight decline in EBITDA pre compared to the prior year period due to regulatory price adjustments impacting our PST business since September '22. Consequently, the EBITDA pre margin for the second quarter of 3.3% was slightly below last year's level, but we expect margins to recover in the third quarter of this year. Revenue in the first half increased by around 8% to a new record of EUR 854 million and EBITDA pre also amounted to a new record level of EUR 29 million, as shown on Slide 6. Most of our growth was attributable to organic growth. Falk will provide the details later. Slide 7 shows that we stick to our strategy of focusing more on the higher-margin patient-specific therapy segment to sustainably increase the margin of the entire Medios group over the next years. Year-on-year, the EBITDA free contribution of the PST segment remained stable, 43%, and is above our target share of 40%, as shown on Slide 7. Now let's move to Slide 8, which you probably already know very well. Our network of specialized pharmacies has grown further and now includes 750 partner pharmacies. We are clearly the #1 outsourcing partner for specialty pharma. This is an excellent basis for our further German expansion. Based on our increased capacity and the agreement of manufacturing for AfS that we mentioned before, we target to expand our compounding up to more than 400,000 individualized preparations in '23, depending on indication area. On Slide 9, please find an update on our ESG activity. We intend to voluntary adapt a nonfinancial consolidated statement to the new international standards as we -- and requirements already for the current financial year. In particular, to the rules of the corporate sustainability reporting directive, abbreviated CSRD, a further review of Medios, S&P and Gaia rating was carried out in the first half of the year, leading to a rating improvement in both cases. We are also proud of the award of Best M&A Direction for the Successful Acquisition and Integration of the NewCo Pharma Group. This was only possible, thanks to the efficient organization and cooperation of all working groups on both parties. Teamwork at its best. In July, we were also honored with the Germany's Best jobs with a future '23 award. This recognition is based on analysis conducted by the Institute for Management and Economic Research, IMWF, and Deutschland Test. They award companies that are both sustainable and economically successful and offer their employees a pleasant working environment. We are also very proud to be part of the peer group, including very renowned companies like Roche, Bayer or Sandoz and even outperform some of them. 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 '23 and on the guidance for '23.

Thank you, Matthias. Also welcome from my side. I will now give you an overview on the financials for the first half of '23. The full financial statement can be found on our website. Let's start with Slide 11. As Matthias already said, we had a successful first half '23. Revenues increased by 7.7% to EUR 854 million, a new half-year record due to continued organic growth in both operational segments as well as inorganic growth by the acquisition of bbw in January '23. Gross profit increased by 1.8% to EUR 54.4 million with a slightly lower gross profit margin of 6.4% compared to 6.7% in the previous year. This is mainly due to the regulatory price reduction in September '22. The increase of personnel costs by 8.9% to EUR 17.8 million, results from organic growth in both operational segments, the acquisition of bbw, continued buildup of central functions and scheduled salary increases. The increase of other operating expenses by 3.7% to EUR 10.7 million was mainly driven by higher IT costs, especially for software licenses. EBITDA pre grew by 1.9%, resulting in an EBITDA pre margin of 3.4%, which is slightly below the margin in the previous year with 3.6%. As already mentioned, this is mainly caused by regulatory price adjustments in September '22. The EBITDA pre was adjusted by extraordinary expenses in the amount of EUR 3.1 million. They are for stock options, EUR 0.7 million, EUR 0.1 million for M&A transaction costs and EUR 2.2 million for performance-based payments for the acquisition of compounding volumes. Depreciation and amortization slightly decreased from EUR 10.7 million to EUR 10.6 million. This includes already depreciation and amortization effects of the latest acquisition in the amount of 0.5 -- EUR 0.4 million. Drawings under the RCF to finance the bbw acquisition and working capital needs in an environment of rise in interest rates triggered an increase in financing costs by EUR 0.4 million to EUR 1 million. By end of June '23, an amount of EUR 45 million were drawn under the RCF, which is expected to be redeemed during Q3 '23. The decreased earnings per share as a result of the already described regulatory price and tax performance-based payments for the acquisition of compounding volumes and rising financing costs in the reporting figures. The negative operating cash flow of minus EUR 75.2 million is a result of the buildup of inventory in preparation for expected upward price adjustments in the pharmaceutical supply business. The development is also attributable to the sales-driven increase in receivables and performance-related payments for the takeover of compounding volumes in the amount of EUR 5.7 million related to the bbw acquisition. The inventory will be reduced significantly by [indiscernible] mainly in Q3 '23 with a corresponding positive impact on operating cash flow and margin. As stressed by Matthias, we expect a very strong third quarter already visible in July results. Investing cash flow of minus EUR 16.4 million resulted primarily from the cash component for the bbw acquisition of EUR 19.2 million. Financing cash flow of EUR 42.6 million resulted from the net drawings under the revolving credit facility of EUR 75 million. The loan drawings were used to finance the acquisition, the inventory buildup in PS segment as well as the payments for the takeover of compounding volumes, mainly because of the inventory buildup, cash and cash equivalents decreased from EUR 79 million at the beginning of the year to EUR 30.3 million at the end of the reporting period. The equity ratio decreased from 77.8% by end of '22 to 72.9% as a result of the loan growth. On Slide 12 and 13, we provide a breakdown of the organic and inorganic growth by segment for the first half of '23. Revenue grew organically by EUR 33.2 million or plus 4.2%. Inorganic revenue growth amounted to EUR 28 million or plus 3.5%, driven by the acquisition. Around 82% of the inorganic revenue growth were allocated to our PS segment and the remainder to PST segment. Organic growth of EUR 33.2 million occurred almost entirely in the PS demand. Slide 13 shows the organic and inorganic EBITDA pre breakdown by segment for the first 6 months of '23. EBITDA pre increased inorganically by EUR 1.5 million as a result of the [indiscernible] integration sale of EUR 1 million were allocated to our PS segment and the remainder to PST. The increased IT and personnel costs for central functions are reflected in segment Services. Let's now switch to Slide 14. Both operating segments contributed to a delta increase of around 8%. In the Pharmaceutical Supply segment, external revenue increased by 7.6% to EUR 734.1 million, of which EUR 23.1 million we attributable to bbw. External revenue generated by patient-specific therapies increased by 8.6% to EUR 118.9 million. EBITDA pre for the PS segment increased to EUR 19.9 million, which corresponded to an increase of 13.9%. EBITDA pre for the PST segment declined to EUR 12.5 million, minus 5.5% below the previous year. This decline in margin is mainly due to the already price changes in this segment. So overall, the margin in relation to external revenue in PS was up 0.1% to 2.7% whereas the PST margin is still double digit, but decreased from 12.1% to 10.5%. On group level, the EBITDA pre margin of 3.4% is slightly below previous year of 3.6%, but we expect group margins to recover in the third quarter '23. Slide 15 provides an overview of our current financing power. In total, we have more than EUR 100 million of free funds available, resulting from available cash and the revolving credit facility. Medios' net leverage ratio, net debt-to-EBITDA still offers further headroom for debt financing. For example, by taking advantage of the step-up option of the existing revolving credit facility by another EUR 50 million. On top of that, we still have authorized capital that can be quickly used for capital increase, which would further strengthen our financing power for future growth. Let's now switch to Slide 17 and 18. We again confirm our guidance for '23. Despite ongoing economic and regulatory uncertainties, we expect revenue to reach the range of EUR 1.6 billion to EUR 1.8 billion. EBITDA pre is expected to reach EUR 56 million to EUR 63 million. The guidance takes into consideration assumptions as outlined on Slide 18, for instance, regulatory price changes. The key message remains the same. The specialty pharma market is [indiscernible] with growth strategy. Also, our growth cost will continue. A summary of our strategic priorities is outlined on Slide 19. For this, I hand over to Matthias.

Thank you, Falk. Now some words to our extended growth strategy '25 comprehensively presented several times, so I will only provide a short update. Slide 19 shows the 3 pillars of our strategy. In addition to strengthening our core business in Germany, we intend to build a European platform and expand drug compounding operations into other European countries, and we plan to further diversify our business model by entering the production of personalized medicine. Our statements on how we intend to strengthen our business in Germany remain valid. We still want to close the white spots in our geographic coverage by acquiring respective labs and/or conclude cooperation agreement, and we will further diversify and expand our indication areas as implemented at the beginning of the year where we started to provide parenteral nutrition for premature babies nationwide. Now I will update on the second pillar of our strategic priorities. We are dedicated to geographically diversify our activities with the objective to create a pan-European platform for compounding. By internationalizing our activities, we will leverage our knowledge and capabilities, create synergies and cross-selling opportunities while at the same time, becoming more independent of German health care regulation. The focus is on value-enhancing acquisitions in Europe and on developing mutually benefiting partnerships in Europe as well. We are currently in ongoing talks with several European players active in the compounding space. We are excited about the development and will inform the market immediately when the first transaction materialize. Now some information on the third and last pillar of our extended growth story. Entering the groundbreaking personalized medicine market summarized under the term advanced therapies, meaning medicines based on genes, tissues or cells, all expensive and complex therapies. This fits well as we are already a trusted partner for high value drugs in Germany. Here, we are also already in talk with potential high-profile people that would join Medios. Besides that, we are in conversation with potential strategic partners. As outlined by Falk, we have a strong financial basis that enables the financing of our extended growth strategy. All this should lead to more than EUR 2 billion in revenues and an EBITDA pre margin in the mid-single digits in the medium term. We remain confident that we are well on the way to achieving these targets as outlined on Slide 20. I would like to conclude my presentation with an outlook and a summary of the key messages. See also Slide 21. We have achieved a solid performance for the first half and further strengthened our market leadership in specialty pharma. We were able to mitigate the impact from regulatory changes by diversifying our product and by focusing on synergies. In the first half of the year, we already focused on inventory management, this has paid off. First success already visible in July. We expect a very strong third quarter. We, therefore, confirm our guidance with full confidence up to EUR 1.8 billion in revenues and up to EUR 63 million in EBITDA pre. In addition, we are holding ongoing talks with several potential M&A targets in Europe. In a nutshell, our growth story is well on track, and we are looking forward to a good second half of '23. Thank you for your attention.