Uniphar plc (UPR) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining Uniphar's 2021 Full Year Results Conference Call. [Operator Instructions] Now I'd like to turn the conference over to Brian O'Shaughnessy, Group Director of Corporate Development, Uniphar plc. Please go ahead.

Good morning, and welcome to Uniphar plc's Full Year Financial Results Presentation, which covers the period 1 January 2021 to 31 December 2021. I am Brian O'Shaughnessy, Group Director of Corporate Development at Uniphar plc. Presenting our results today is Ger Rabbette, our CEO; and Tim Dolphin, our CFO. Before we begin, I would like to remind everyone that you can access the presentation either on our website, www.uniphar.com, under Investor Relations, or via the link sent to you when you registered for the conference call. The results presentation will last approximately 20 minutes and will be followed by Q&A. You can raise a question online through the webcast Q&A function. Please note, the full year results presentation may contain certain forward-looking statements, beliefs or opinions which are based on current expectations and projections about future events. Actual results may differ materially from those expressed or implied in such forward-looking statements. I would now like to hand you over to our CEO, Ger Rabbette.

Thanks, Brian. We'll start on Slide 4, which provides an overview of the group. Uniphar operates across 3 divisions, serving over 200 of the world's leading Pharma and MedTech manufacturers. We serve over 150 countries worldwide and have operations across Ireland, the UK, Benelux, the Nordics, Germany, Switzerland, and the U.S. Our business performed strongly in 2021, with gross profit growth of 26%, of which 8.5% was organic. Slide 5 illustrates the transformational growth that Uniphar has built up over the past number of years. Not long ago, Uniphar was a highly leveraged Irish-only supply chain business with gross profit margins of 5% and EBITDA of less than EUR 10 million. Today, we are a diversified international healthcare services provider, operating in higher margin areas in multiple geographies with EBITDA of over EUR 86 million with a strong balance sheet and significant growth opportunities right across each of our 3 divisions. If you move to Slide 6, we discuss our financial highlights. 2021 was once again a period of strong growth, demonstrating the strength of our business model and the ability of our talented teams to deliver in what continued to be a challenging business environment. EBITDA increased EUR 20 million to EUR 86.5 million. Earnings per share increased by 33%. Return on capital employed was once again ahead of our range at 17.6%. Reported free cash flow conversion was 77%, and we finished the period with modest leverage of 0.7x. We've continued to build our excellent M&A track record enveloping 5 acquisitions during the period, and we've also successfully integrated our 2020 acquisitions with identified synergies now being de-levered. During the period, we have advanced our robust capital structure by 2 new international banking partners, RBC and HSBC, to our syndicate. On Slide 7, we outline the continued progress we are making with our sustainability initiatives. Sustainability has always been at the very core of who we are. As a business, we are rooted in the communities we serve and our sustainability policy is centered around our strong core principles. Our people represent our first pillar. During the year, we've updated and we created a number of important initiatives, including our new group-wide equity, diversity and inclusion policy. We have continued to invest in our people at every level right across the group, which will be the appointment of 2 new roles, Chief People Officer and Chief Technology Officer. We've made great progress across sustainability, completing our first full CDP and climate change submission and announcing a target to reduce Scope 1 and 2 emissions by 50% by 2030. From a government's perspective, the group adopted the U.K. government's code in early 2022, in line with our commitments and IPO. And we're really proud to have supported over 40 local charities during the year with our flagship group-wide event, Relay for Hope, raising over EUR 350,000 for our children partners. Moving on, I will now bring you through a review of each division's financial and strategic progress during the year. On Slide 9, we highlight our divisional objectives. In Commercial and Clinical, we are focused on continuing to build out our pan-European platform, remaining disciplined in our Therapeutic area focus, and continue to differentiate ourselves via our innovative omni-channel solutions. In Product Access, we place a high focus on providing patient-centric solutions by continuing to develop our subject matter expertise and our digital platforms with the ambition of becoming a global leader in the delivery of unlicensed medicines and expanded access programs. In Supply Chain and Retail, we will continue to grow our market leadership position through our investments in our infrastructure and our digital and business solutions. Turning to Slide 10. Commercial and Clinical. This division provides sales, marketing and distribution solutions to both Pharma and MedTech manufacturers. This business is especially already focused in Pharma. We're insight-driven and leverage our unique omni-channel account management solutions for our clients. In MedTech, we deliver an integrated AMT model, managing the entire sales, marketing, and distribution value chain on behalf of our partners. Europe is a very budgeted marketplace and poses considerable challenges for specialty manufacturers who wish to enter. We remain committed to building out our Pan-European platform to offer our clients a one-stop shop for Europe. This strategy has been well received by our partners, and we now represent 67 clients across 2 or more geographies, an increase of 20 for the year. In 2021, we organically entered the largest MedTech market in Europe, Germany, and shortly after, we fast-tracked the progress here by the acquisition of CoRRect Medical. On Slide 11, you will note that this division, despite a very challenging comparative, grew strongly with revenue for the period to come in at EUR 300 million and gross profit increasing by 13% to EUR 104 million. Revenue is split, 69% MedTech, 31% Pharma, with 55% of the gross profit now generated from outside of Ireland. On Slide 12, Product Access. We're building the global capability to source and supply medicines, which are unlicensed, are in short supply, and to manage the needs of specialty medicines to specific patients on behalf of manufacturers. We see this as a huge opportunity for ourselves because of the growth in specialty pharma and the challenges governments are facing in affording these high-priced treatments. We adopt a patient-centric approach to provide access to these medicines and leverage our digital technologies and our skilled team to deliver a best-in-market service effort to our partners. We have worked on more than 65 exclusive patient programs to date and have delivered medicines to over 150 countries across the globe. On Slide 13, you see that this is our fastest-growing division. Revenue for '21 was EUR 157 million with a 36% increase in gross profit. We have continued to deliver double-digit organic growth in this division. Revenue split, 57% On Demand and 43% Exclusive. On Slide 14, we talk about the great market position we have in supply chain. We are the market leader in the key Pharma markets, servicing over 2,000 hospitals and retail pharmacies. This strong market position is supported by a network of over 378 owned and franchised pharmacies. We are focused on the delivery of a word-class supply chain and retail solution, or if you like, a pharmacy-of-the-future service offering with the potential to leverage this expertise and the digital platforms we have into other markets. This division also provides significant benefits to the wider group's capabilities through its high-tech distribution facilities, its capability of technology infrastructure, its long-standing manufacturer relationships, its highly skilled people, deep insights into healthcare ecosystem, and its strong ability to generate cash for reinvestment. Revenue for this division was EUR 1.5 billion with gross profit coming at EUR 129 million to have gross profit growth of 36% as we continue to grow share and outperform the market. The gross profit margin for this division is now close to 9% up from 5.5% at the time of the IPO. I'll now hand over to Tim to provide you with more color on our financial performance.

Thanks, Ger. I would now like to take you through the financial highlights for 2021. I am pleased to say that the group has delivered a strong performance during the period with gross profit growth across all 3 divisions. At an overall group level, we generated gross profit of EUR 274.5 million, up 26.3% from 2020. The group delivered strong organic gross profit growth of 8.5%, which was complemented by inorganic growth from our 2020 acquisitions. Our gross margin percentage has increased from 11.9% to 14.1%, and this reflects our continued growth into higher margin opportunities. EBITDA has increased by 29.7% (sic) [ 29.6% ]to EUR 86.5 million compared to EUR 66.7 million in 2020. This has resulted in a strong return on capital employed of 17.6%, outperformance guidance of 12% to 15%. Adjusted earnings per share increased by 33% versus 2020 on a like-for-like basis to EUR 16.2 and this was driven by strong operating profit of EUR 45.1 million. Moving on then to have a look at gross profit. Gross profit and gross margin percentage are the key financial metrics we use to track profitability at a divisional level. Commercial and Clinical delivered an excellent return for the period, falling off from a very strong performance in 2020. Its strong cash conversion ability and long-term relationships provides the financial profile to enable the company to constantly continue to reinvest in this high-margin vision. Our organic gross profit growth of 7.9% is at the higher end of its mid-single-digit growth guidance, reflecting the strength of our business, the deep expertise of our teams, and the diversity across our service offerings. This division contributed 38% of the group's gross profit for the period. Product Access, where we guide double-digit organic gross profit growth, also delivered a good return for the period, with reported growth of 35.8% and strong organic growth of 19.9%. Our investments in Durbin, Innerstrength, RRD, and Diligent as well as our Commercial and Clinical investments in the U.S. are developing a unique, high-value proposition for our clients, which we are confident will deliver double-digit organic growth in this division. Product Access represents 15% of group's gross profit. Supply Chain and Retail delivered a particularly strong performance with reported growth of 36.1% and organic growth of 5.8%, outperforming its medium-term guidance. The growth in gross margin to 8.7% from 6.9% in 2020 reflects the continued positive margin trajectory boosted by the Hickey’s acquisition. This division also had strong recurring revenues, plus a stable and robust gross profit profile. In terms of volume, we once again outperformed the market. This division represents 47% of group's gross profit for the period. In terms of margin, each division performed in line with expectations during the period, with Commercial and Clinical coming in at 34.8%, Product Access 26.3% and Supply Chain and Retail 8.7%. And we expect the overall group's gross margin to continue to increase. Just moving on to the next slide to have a look at net debt. At a high level, we finished the period with a net bank debt position of EUR 48.3 million, driven by [indiscernible] net debt position of EUR 34.4 million, strong EBITDA up EUR 86.5 million, offset by working capital investment of EUR 7.5 million, CapEx of EUR 14.4 million, including strategic CapEx of EUR 1.7 million relating to our platform investments, which we have outlined previously. Acquisition and deferred consideration payments of EUR 38.4 million, and other items of EUR 40.1 million, includes exceptional costs, interest, lease payments, tax, finance and dividends. We generated EUR 66.3 million of free cash flow, which equates to a 76.6% free cash flow conversion ratio. Normalized free cash flow conversion ratio is 64.2%, which I will cover in more detail on the next slide. Free cash flow. Our medium-term guidance for free cash flow conversion is 60% to 70%. We define free cash flow as EBITDA, less investment in working capital, less maintenance CapEx. Reported free cash flow conversion for the period was ahead of our guided range at 76.6%, with our normalized free cash flow conversion being 64.2% for the period, driven by efficient working capital management and net timing adjustments of EUR 10.7 million. Then just to finish up with that and look at liquidity. From a liquidity perspective, the group is in an excellent position, finishing the period with a 0.7x leverage, with a banking covenant of 3.2x. The group has a strong capital structure in place with significant cash resources available. At the end of December 2021, it had a net bank debt position of EUR 48.3 million, made up of EUR 78 million of cash and cash equivalents and EUR 126.3 million of bank borrowings. The group has access to ample financing to support growth via our banking facilities with access to EUR 240 million via committed and non-committed facilities, excluding overdraft. Our banking facilities have been further strengthened through the addition of 2 new international banking partners, HSBC and RBC. This expanded syndicate will continue to support our organic and inorganic growth in the years to come. Our capital structure is well positioned to support the execution of our strategy of doubling our 2018 pro forma EBITDA of EUR 46 million within 5 years from the date of the IPO. I will now hand it back to Ger.

Thanks, Tim. We're on Slide 23. Capital allocation has remained a key focus for the group as we adopt a very disciplined and balanced investment approach. We will invest in organic and inorganic opportunities across each of our 3 divisions, which support our strategic objectives and deliver the return on capital employed at or above our hurdle rate within 3 years. Leverage will be kept low to about 2x EBITDA. However, we will increase above it for the right transaction, provided we can get it back down within a 12-month time frame. We are committed to paying a progressive dividend to our shareholders and expect to increase this by 5% to EUR 4.4 million for the period. On Slide 24, we discuss M&A in more detail. We have completed over 20 transactions of significance since 2013, 3 of which have been transformational. Cahill May Roberts [indiscernible] is a significant turning point for the group. The transactions allowed us to [indiscernible] significant cost and working capital synergies within a matter of months, transforming the marketplace into a duopoly at that time we had in ForEx and market share. And today, we have grown this to over 50%. Sisk Healthcare acquired in 2018 provided a platform to go in Europe, where we have made a number of further acquisitions. Gross profit in this division has increased by 50% since this acquisition, as we have built out our pan-European platform. Durbin, which we acquired shortly after IPO, provides the global platform we needed to build out a market-leading expanded access service offering. Durbin has enabled the product access division to deliver double-digit organic gross profit growth in each reporting cycle since IPO. On Slide 25, you will see that these transformational deals are being supported by 19 bolt-on acquisitions, each of which accelerates our strategic objectives and brings new clients, expertise, reach, and talent into our organization. This continued throughout '21, where we announced 5 earnings enhancing transactions. In Commercial and Clinical, CoRRect Medical accelerates our reach to Europe's largest MedTech markets. BESTMSL broadened our service offering to include contract medical science liaisons. Innerstrength [indiscernible] and more important for the patients, prescribers and manufacturers across both the pre- and post-Brexit phase. E4H provides additional sophisticated commercial offering, which adds significant value into our omni-channel approach. In Product Access, Devonshire provides an entry point into MENA, having provided unlicensed medicines into that region for over 20 years. In time, this will enable us to build a platform to provide expanded access programs in the region. Lastly, in Supply Chain and Retail, Navi, who we have partnered with for many years, provides sophisticated digital offering and retail solutions to its customer base. Their technology will fast-track our innovative solutions, which combined with our existing tech and scale, will provide compelling offering to our expanded customer base. The completion of the Navi acquisition is subject to approval by the Competition and Consumer Protection Commission in Ireland. We look forward and we are confident that this successful track record of value accretive M&A will continue into the future, where we have the ability to identify assets with a strong culture and strategic fit that will deliver a return on capital employed above our hurdle rate of 12% to 15% within a 3-year period. So as we look forward, our business is on a strong growth trajectory, and we'll continue to invest to execute on the significant market opportunities we see for ourselves. Our medium-term guidance remains unchanged; double-digit organic gross profit growth in Product Access, mid-single digits for Commercial and Clinical, and low-single digit for Supply Chain. We remain confident that we will deliver in excess of 60% free cash flow in the medium term, return on capital employed between 12% and 15% or above, while keeping lower the average low. On Slide 27, we outline our investment case. As we see it, we are a well-diversified quality healthcare services business positioned to win in growth markets. There is no doubt that we have a compelling market opportunity driven by the increased demand across the globe for specialty products and a growing trend by Pharma and MedTech manufacturers to outsource to special drivers with well-established and proven infrastructure. In response to this, we have designed a built-in integrated model providing end-to-end solutions across the value chain and throughout the product lifecycle. For platform for growth in place, we believe we have a distinct competitive edge through our high-tech distribution facilities, our deep relationships with global manufacturers, our scale of our technology, our high-skilled people and our strong M&A track record. We have a very strong balance sheet, a great ability to generate cash and a highly experienced industry team. In summary, we are confident we have the strategy, the market opportunity, the platform, the competitive edge and the team in place to deliver on our strong growth plan for our business and to deliver on the comments that we made at our IPO just a little over 2.5 years ago. Thanks for listening.

[Operator Instructions]

First question comes from the line of Allan Smylie, Davy. Allan has 3 questions. First question. In the supply chain and retail division, you referenced the potential to leverage expertise in other markets outside of Ireland. If you could talk through what areas you specifically want to leverage, wholesale, consumer brand, pharmacies, and in what geographies.

Great question, Allan. So if you look at it from our perspective, we would say we probably could achieve from a very strong supply chain base in Ireland. And if you look at where we came from and where we are today, you can see the dramatic progress we've made as a group. So as we see, we have a world class management team now in this division, who have consistently outgrown the market, developed a very strong service offering and great tools, which we believe we can leverage in other markets. So in terms of geographies, we'd focus on areas where -- on markets where we know well and have performed well, and areas like the Nordics would be a good example. So absolutely -- and after what we've achieved in supply chain and retail, I think we could do this in other geographies.

Second question relates to Product Access. You called out a potential slowdown in the expanded access market this year on the knock-on impact of COVID in 2020, 2021, but you've also reiterated you're focused on delivering double-digit gross profit growth in this division. So if you can help us reconcile the 2.

Yes. So we've always called out here that the expanded access has a long sales cycle and independent of molecules coming through the various development stages of the approval process, which can be lumpy and the time lines are shaky at times. And obviously, if you look at COVID, COVID has definitely impacted that development cycle. When we look at -- we step back, we're still very confident we can grow this business double digits in line with guidance. We obviously like to outperform that. But as we go forward in the year, double digit is still our target. Brian?

Yes. I suppose it's important to add to that, and if you look at the growth we've actually achieved to date. And so in 2019, we had reached 19% growth in full year; 2020 full year it was 29%. Now we've just delivered a 20% growth. So while we're committed to growing at a double-digit organic gross profit growth, it is of higher base, but maybe not to the extent that we have delivered in the last 3 reporting cycles. But we are committed to continue to deliver double-digit organic gross profit growth for this division.

Third question. In Commercial and Clinical, most of your MedTech M&A into Continental Europe has been focused on Interventional Cardiology. How should we think about growth options in other therapeutic areas?

Well, I think we see strong growth opportunity for ourselves in this area. To date we've focused on building of our interventional business because in Europe now we have proved that concept. If you look at us at the time of IPO, [indiscernible] represented more than one geography, was in the mid-20s, now it's up to 67, which demonstrates the appetite our partners have for us to service in multiple geographies. So from our perspective, as we look forward, it's all about -- and we have a very strong platform now and it's all about how we grow our business both organically and inorganically, and we see a lot of opportunities for ourselves to do that across our key therapeutic areas of the 5 areas that we're focused on.

Next question comes from the line of Charles Weston in RBC. Charles has 4 questions. First question. Of the 378 pharmacies that are owned, franchised or supported, how many are owned and roughly what proportion of your pharmacy gross profit comes from the owned group? What will this number be post Navi?

So roughly, of the 378 pharmacies today we have in our owned, franchised, and supported customer groups, we own about 100 of those pharmacies. We have the divisional gross profit -- 60% of the divisional gross profit in retail. I'd say roughly 80% of as is in our owned shops. We have the -- post the Navi acquisition, I think that 378 would increase roughly to 450. But obviously, it creates a very strong platform for us to drive and deliver significant value for our partners.

Second question. Can you provide some color on the progress of cross-selling into Europe, our capabilities required in the U.S., for example, RRD or BESTMSL?

Great question, Charles. So we have been [indiscernible] building platforms and then scaling those platforms. So our acquisition of Diligent would be a really good example where in 2021, we expanded this service -- this U.S. service effort to Europe with a team now based in Dublin supporting the European program. We've also been engaged to recruit a number of MSLs before coming to Europe, and we could do that because of the significant expertise that BESTMSL has brought in into the group. So we see ourselves really [indiscernible] cross-selling an opportunity. But ultimately, every acquisition we've done, we've done with a view that's how we can grow and scale the business and [indiscernible] when you see very significant cross-selling opportunity for the group.

Three. Can you comment on any inflation and supply chain pressures you're seeing and how you're mitigating these.

Thanks, Charles, for the question. Operation inflation is something that we've already seen in 2021 and still mentioning in our figures as a healthcare services business, and we're not exposed to any demand hesitation. All inflation assumptions have been built into our forecast, and we're still outlining that our forecasts won't be changed for 2021. So I think the fact that we've already experienced operation inflation and it hit our figures in 2021 is an example of how [indiscernible] our business is and the strength of our business model.

Final question from Charles. It appears that consensus now expects Uniphar achieved its 5-year post-IPO EBITDA goal without any further deals. In light of your ongoing M&A, at what stage could we expect the [indiscernible] or long-term targets?

I think it's a great question, Charles. If you look at what we've done ever since IPO, we've been basically building a platform, investing in our people, investing in a business that can grow. So we have the infrastructure we have today. I'd say we have an infrastructure in place, which could run a business twice the size of [indiscernible] and how we looked at things and how we minded this. And we'd like to invest now so that we can basically go for the future. I think basically, I think it's too early to change from our -- the expected [indiscernible] level of IPO, but hopefully, maybe this time next year, we'd in a position to do that.

Next question comes from the line of Alistair Campbell, Liberum. Free cash flow conversion of 76.6% is excellent and ahead of your guided range of 60% to 70%. Should we be aware of any aspects of working capital that have been particularly favorable? And may some of this stress revert into 2022?

Thanks for the question, Alistair. As I said in the presentation, our medium-term guidance for free cash flow conversion is between 60% and 70%. Free cash flow is less investment in CapEx and what we have at EMA. We would expect that to be about EUR 10 million up our adjusted EMA when coming to 2022. So we normalized our free cash flow conversion. We came in at just over 64% of that, just tiny difference of EUR 10.7 million, and it reversed into 2022.

Second question from Alistair is in relation to Navi acquisition. When do you expect CCPC approval? And do you think it should be a straightforward process? Any insight yet from the process or it's still too early?

Thanks again, Alistair, for the question. Approval is expected at the end of H1. And we've built it into our figures that we would have it from the 1st of July, which is at the start of Page 2. We're in an [indiscernible] process at the moment. There is nothing out of door there. We'll just conclude the normal [indiscernible]. So we would expect approval coming, as I said, at the end of April.

Third question relates to Commercial and Clinical. It's good to see growing number of customers unifying multiple geographies. When you work with these customers, are there obvious geographies where you don't have operations, but these customers would like you to have? And does that help guide the direction of business development activity?

Yes. Great question. If you look at CoRRect Medical, it's a really good example. We did a great job for our partners in the Benelux and Nordics, and they wanted to enter the German market, which is obviously the biggest MedTech market in Europe. And we were focused on growing our existing family to the EU geography. So new strides in our existing geography base, that's how we see ourselves driving on with our growth across this division. But ultimately, it's both driven for your partners to do a good job in one geography, and it will help for the most and partner with them in whatever other geographies they have challenges in and wherever they want to enter.

Final question from Alistair relates to Product Access. After interims, you mentioned over 5 new EAP programs and now it's time for the full year, which suggests a slowdown in H2. You also discussed COVID related exception? Could you go into more detail about the interplay between number, duration and scale of programs? And is the upstream number of programs becoming less relevant?

I think, Alistair, it's a good question. So as I said previously, it's a long sales cycle in our Product Access division, which has been impacted by COVID, but we're still retaining our guidance at double digits. The duration of these programs can be between 2 and 3 years. And we are focused on providing this service and build out a specialty across the smaller groups. Now we want to do it with the bigger pharma guys and also the Danish players. So basically, as we look forward, I think we're seeing some great opportunities in this area as we build our expertise. But we are refocusing to do bigger programs -- to work with the bigger manufacturers because of the strength of our service offering.

Next question comes from the line of Max Herrmann in Stifel. Please explain the volatility of margins in the Product Access division. I know a low-margin contract was ended, but you get impacted by whether an EAP includes a charge for the drugs or free of charge.

Max, I'll take that question for you. All our programs include the cost to drill. So it's included in revenue, but it wouldn't have an impact on the margin side. So it obviously would have a significant impact on the revenue depending on the size of the program and price of the drug.

Second question from Max. With such strong growth in Commercial and Clinical from the Pharma business, what was performance of the MedTech business and what impact has COVID had on elective surgeries? What are the trends you're seeing in this division?

Brian?

Yes. I think the key point here, Max, is, as we've called out, the MedTech business has seen disruption from COVID. But ultimately, we continue to deliver on our results and that is because of, I suppose, the robustness and diversity of our business and product portfolio sets. So this allowed areas like elective surgery to be compensated by areas such as critical care. So we are seeing that normalizing now, but it's important to call out that H1 2021, we delivered a very strong result in Commercial and Clinical Pharma in excess of 20%, which creates a very difficult comp for H1 2022. And we are seeing the business return to normal levels with normal seasonality expected.

Final question from Max. Given continued outperformance versus your midterm guidance, do you think the outlook growth should be re-evaluated?

Same thing, guys. We are for the final mark at 2.5 years. We're determined to outperform and drive our business forward. And we're also determined to invest in our platform and create a very robust business going forward. I think as I said previously, we have the infrastructure now in place to run a business twice the size and that's our ambition. But I think we'd like to deliver our existing commitments before we enter new commitments for the capital markets, but we're determined to grow and to develop our business right across the 3 divisions.

No further questions on the line at this time.

So I would like to thank all our investors for the support you've given us through the year and all my colleagues who have worked hard for that and to produce a very strong set of results, and I hope we'll see you guys soon.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.