Uniphar plc (UPR) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining Uniphar Interim Results 2022 Conference Call. [Operator Instructions] I would now like to turn the conference over to Seamus Egan. Please go ahead.

Good morning, and welcome to Uniphar plc's interim financial results presentation, which covers the period from the 1st of January 2022 to the 30th of June 2022. I'm Seamus Egan, Head 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 everybody that you can access the presentation either on our website, www.uniphar.com, under latest results and presentations 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. 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, Seamus. We'll start on Slide 4, which provides an overview of the group. We operate across 3 divisions, serving over 200 of the world's leading pharma and med-tech manufacturers. We serve over 160 countries worldwide and have operations across Ireland, the U.K. Europe, U.S. and have now entered the APAC region. We've had a strong H1 with gross profit growth of 9%. Last month, we celebrated our third anniversary as a public company. And during these 3 years, we've reported double-digit compound growth across gross profit, EBITDA and adjusted earnings per share. If you move to Slide 5, we discuss our financial highlights. We're delighted to report that we -- that the diversity and robustness of our business model has fueled continued strong growth across each of our 3 divisions, with an outperformance in our Supply Chain & Retail division. At a group level, earnings per share increased by 20%, with EBITDA growing to EUR 45 million, return on capital employed was again ahead of our range at 16.6%. Normalized free cash flow conversion was 70% and we finished the period with modest leverage of less than 1. Post period ends, we successfully completed our planned refinance, which provides us with significant financial flexibility going forward. We've also continued to build on our excellent M&A track record, announcing our entry into the strategically important APAC region with the acquisition of Orspec Pharma. As you can see, our Supply Chain & Retail division has outperformed again this period, following on from a stellar 9-year track record, growing share from 24% to 53%. As we look forward, we believe that we could continue with the stronger momentum and this is why we are investing EUR 60 million in a new world-class distribution facility that more than doubles our capacity, reduces pick cost by 1/3 and delivers return on capital employed at 50% within 4 years and continue to grow strongly beyond that. This project will take approximately 4 years to commission and it will future-proof our business for 15-plus years, created a serious competitor for this highly cash generative business. On Slide 6, we outlined the continued progress we're making with our sustainability initiatives. It has always been at the very core of who we are. As a business we are routes in the communities that we serve and our sustainability policy is centered around our core principles. Our people represent our first pillar, and we're proud to have launched a number of initiatives to promote equity, diversity and inclusion right across the group, including the Women's Alliance and the Rainbow Alliance. We continue to make strong progress, completed our first Scope 3 carbon footprint, have exercised that we remain committed to reducing our Scope 1 and Scope 2 emissions by 50% by 2030. From a governance perspective, the group adopted the U.K. Corporate Governance Code early in '22. Moving on, and I'll bring you through a review of each division's financial and strategics -- to strategic progress during the year. On Slide 8, we highlight our divisional objectives in Commercial & Clinical, we are focused on continuing to build out our Pan-European Platform. In Product Access, we're focused on providing patient-centric solutions with the ambition of becoming a global leader in the delivery of unlicensed medicines. And in Supply Chain & Retail, we will continue to grow our market leadership position through continued investments in our infrastructure and our digital and business solutions. Turning to Slide 9. Commercial & Clinical. This division, as you know, provides sales, marketing and distribution solutions to both pharma and med-tech manufacturers. The business is specialty focused, in pharma, we are insight-driven and we leverage our fully integrated omni-channel model for our clients. In med-tech, we deliver an integration agency model that is the entire sales, marketing and distribution value chain on behalf of our partners. Europe is a very fragmented marketplace, pulls considerable challenges for specialty manufacturers who want to enter, and we remain committed to building out our Pan-European Platform to offer our ties a world stop shop for Europe. This strategy has been very well received by our partners. We now represent 75 clients across 2 or more geographies, an increase of 50 in a period. Our bespoke service offering in the U.S. continues to build the scale, and we continue to evaluate capital deployment opportunities in this lucrative markets. In the U.S., we want to invest in high-value service providers that fast tracks our strategic initiatives. On Slide 10, we launched the distribution grew strongly, with revenue for the period committed a EUR 162 million, with gross profit increasing by 10% to EUR 59 million. This is a very strong performance given the challenging cup, where in H1 '21, we grew organically by over 20%. On Slide 11, Product Access, we're building a global capability to source and supply medicines, which are unlicensed to very short supply and to manage the release of specialty medicines to specific patients on behalf of manufacturers. We've worked on more than 70 exclusive patient access programs to date, and we delivered medicines to over 160 countries across the globe. This year, we signed our first EAP in the U.S., but this has been a key focus for the group and marks a significant milestone. The success greatly aided by our strategic investment in the U.S. and post period, we entered the APAC region with the acquisition of Orspec Pharma. Turn to Slide 12. Revenue for the period was EUR 75 million, with a 9% increase in gross profit. This division has performed very strong since IPO, delivering compound organic growth of over 20%, and we continue to see this as a significant growth opportunity because of the growth in specialty pharma and the challenges government face in folding these high-priced treatments. While this division continued to deliver growth during H1, business development interruptions because of COVID combined with a large sales cycle for EAPs has caused that typically slow down in the level of growth during the period. But we look forward, we expect this division to continue to deliver organic growth for the full year and to return to double-digit growth in the medium term. On Slide 14, we talk about the great market position we have in Supply Chain & Retail. We are the market leader in a 2-player market. So it's over 2,000 hospital retail accounts. This strong market position is supported by a network of over 381 owned and franchise pharmacies. The division has once again outperformed with a medium-term guidance with revenue for H1 at EUR 755 million, with gross profit coming at EUR 66 million, delivery reported gross profit growth of 8%, as we continue to grow share and outperform the markets. The gross profit margin in this division is out close to 9%, up from 5.5% at the time of IPO. I'll now hand over to Tim to provide you with some more color on our production performance.

Thanks, Ger. I would now like to take you through the financial highlights for H1 '22. 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 146.1 million, up 8.8% from H1 '21. The group delivered strong organic gross profit growth of 4.9%. Our gross margin percentage has increased from 13.9% to 14.7%, reflecting our continued growth into higher margin opportunities. EBITDA has increased by 9.2% to EUR 44.9 million despite the challenging inflationary environment. And this has resulted in a very strong return on capital employed of 16.6% outperformed its guidance of 12% to 15%. Adjusted earnings per share increased by 20% versus H1 '21 on a like-for-like basis to EUR 0.084 driven by strong operating profits. Gross profit. Gross profit and gross margin percentage are the key financial metrics we use to track profitability at a divisional level. Commercial & Clinical delivered an excellent return in H1 '22. Final announcement a very strong outperformance in H1 '21 where the division grew by more than 20% on an organic basis. Its strong cash conversion ability and long-term relationships provides the financial profile to enable the company to confidently continue to reinvest in this high-margin division. Our organic gross profit growth of 4.2% is within its mid-single-digit growth guidance, reflecting the strength of our business and the deep expertise of our teams and the diversity across our service offerings. This division contributed 40% of the group's gross profit for the period. Its gross profit margin increased during the period from 33.9% to 36.1%. Product Access has delivered reported growth of 8.8% and organic growth of 5.7%. While under its divisional guidance for H1 '22, this division has performed exceptionally well since IPO, with organic compound gross profit growth above 20%. Our investments in Durbin, Innerstrength, RRD and Devonshire as well as our Commercial & Clinical investments in the U.S. are developing a unique high-value proposition for our clients, and we are confident, we will deliver double-digit organic growth in this division into the medium term. Product Access represents 15% of group's gross profit. Its gross profit margin increased during the period from 23.3% to 29.3%. Supply Chain & Retail once again outperformed its divisional guidance, with reported growth of 8.2% and organic growth of 5.2%. This division also has strong recurring revenues, plus a stable and robust gross profit profile. In terms of volume, we once again outperformed the market. This division represented 45% of the group's gross profit for the period. Its gross profit margin increased during the period from 8.4% to 8.7%. Moving on then to have a look at net debt. At a high level, we finished the period with a net bank debt position of EUR 73.8 million, driven by opening net debt of EUR 48.3 million, strong EBITDA of EUR 44.9 million, offset by working capital investment of EUR 19.3 million, CapEx of EUR 4.3 million, strategic CapEx of EUR 7.1 million, acquisition and deferred consideration payments of EUR 16.8 million and other items of EUR 22.9 million, which included exceptional costs, interest, restatements, tax, finance costs and dividends. We generated EUR 31.5 million of free cash flow on a normalized basis, which equates to a 70.2% free cash flow conversion ratio. Just having looked in the 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. Normalized free cash flow conversion for the period was just ahead of our guidance range of 70.2%. After adjusting for the partial reversal of previously discussed net timing adjustments of circa EUR 10.2 million. Efficient working capital management continues to be a focus of the group and reported free cash flow was 47.5%. Just moving on then to the next slide to have a look at liquidity. From a liquidity perspective, the group is in an excellent position, finishing the period with at less than 1x leverage. The group has a strong capital structure in place with a significant cash resource available. At the end of June '22, it had a net bank debt position of EUR 73.8 million, made up of EUR 68.3 million of cash and cash equivalents and EUR 142.1 million of bank debt. Shortly after the period end, the group completed a previously planned refinancing agreement. This 5-year agreement effectively doubles our current facilities, brings in additional international banking partners and provides the group with the firepower required to continue on our growth journey. Our leverage covenant has also been increased. 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 since the day of IPO. I now hand you back to Ger.

Thanks, Tim. We're on slide 22. Capital allocation has remained a key focus for the group as we adopt a very disciplined balanced investment approach. As we've always said, we will invest in organic and inorganic opportunities across each of our 3 divisions, which supports our strategic objectives as there was a return of capital employed at or above our hurdle rate of 12% to 15%. We have a strong capital structure with leverage below 1. Our new banking facility and the larger banking clubs gives us the financial flexibility and support we need to continue to invest across all our platforms. If you move to Slide 23, we're delighted to announce our plans regarding the strategic CapEx investments in a new state-of-the-art distribution facility in Dublin. This organic investments support our continued strong growth in Supply Chain & Retail, where we have grown market share from 24% to 53% over a 9-year period. The investment is underpinned by a very strong economy and a positive market demographics, including growing and aging population. The investment in Access, market leading service offering depreciating us from our competitors, has future-proofed our business by more than doubling our capacity. It also significantly increases our levels of automation, reduces pick cost by a hard drive efficiencies and protect us from future inflationary headwinds. And importantly, it also supports our sustainability initiatives. The investment of EUR 60 million will be phased in over 4 years, and will deliver a return on capital employed of 15% within 4 years of go-live and continued to grow strongly thereafter. On Slide 24, we discuss M&A. Post period end, we completed the acquisition of Orspec Pharma, making our entry -- market our entry into the strategically important APAC market. APAC is a significant market for unlicensed medicines and the highly experienced Orspec team having in a short period of time business, a strong track record of sourcing and providing lifesaving medicines into the APAC region for their homes in Australia, New Zealand and Singapore. Additionally, they have supported the rollout of expanded access problems, and they would be a key enabler mainly for growing our service offering in the region. The integration of our 4 acquisitions completed in '21 is progressing in line with plan. Our investments in the U.S. including BESTMSL continues to build a scale. The integration of CoRRect Medical is well advanced and we've launched a number of products in Europe's largest med-tech markets. E4H has allowed us to offer a more complete omni-channel offering and the Devonshire team has now been fully integrated and continue to provide a strong service offering to the longest MENA customer base. Finally, we continue to assist the combination of therapy with its review of the Navi acquisition, and we expect the acquisition to close later on this year. As we look forward, we are confident that the successful track record of value-accretive M&A will continue into the future. Over the past 10 years, we've developed the ability to identify assets with strong cultural and strategic fit that will deliver a return on capital employed above our hurdle rate. We work hard on M&A and continue to manage an active pipeline of acquisitions in order to add further scale and breadth to our existing platforms. If you move to Slide 25, our business is on a strong growth trajectory, and we will continue to invest to execute on the significant opportunities that we see for ourselves. We're mindful of the challenging macro environment we currently operate in. However, we will continue to mitigate these significant challenges by leveraging our scale and our ability to innovate and deliver value for our partners. Our medium-term guidance remains unchanged. Double-digit organic growth profit growth for Product Access, mid-single digits for Commercial & Clinical and low single digits for Supply Chain. We will remain confident that we will deliver in excess of 60% free cash flow in the medium term. Keep return on capital employed between 12% and 15% or above and adopt a very disciplined approach to capital deployment. On Slide 26, 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's no doubt that we have a competitive market opportunity driven by the increased demand across the globe for specialty products and a growing trends by pharma and med-tech manufacturers outsourced to specialist providers with well-invested and proven infrastructure. In response to this, we've designed and built an integrated model providing end-to-end solutions across the value chain and throughout the product life cycle. The platform for growth is in place. We believe we have distinct competitive edge to our high-tech distribution facilities, our deep relationship with global manufacturers, our scalable tech, our highly skilled people and a strong M&A track records. We have a strong balance sheet, great ability to generate cash and a highly experienced industry team. So in summary, we are confident that we have the strategy, the market opportunity, the platform, the competitive edge and the team in place to deliver on our strong growth plans and to deliver the commitment we made of IPO just over 3 years ago. Thanks for listening.

[Operator Instructions] No telephone questions so far. [Operator Instructions] There are no more questions. I hand back to Brian for the webcast questions.

Thanks, Nairobi. And so we have some questions from some analysts that have been sent in to us through the online portal. So we'll start with Allan Smylie from Davy. And so question one, you referenced inflationary pressures in the release this morning which are clearly managed well given continued strong organic growth. Can you talk through the areas of the business most exposed to inflation and perhaps quantify the expected impact from the inflationary pressures this year?

Tim?

Allan, inflation is something that we've been experiencing for the last, say, 18 months, and we've been able to manage to meet our targets and our expectations even taking that into account. If you were to look at the -- on a full year basis, the impact of inflation would be somewhere between EUR 4 million and EUR 5 million on our cost base. Our challenge in is actually to make sure that we pass that through to our customers in a managed way. So there's -- there are also going to be a lag between price pressures coming through and our ability to pass that through to the customer base. Well, we've been able to cover that by using our scale and the breadth of our offerings to make sure that we can be able to grow our gross profit to make sure that we can actually still meet our targets. And we're confident that we'll be able to do that for the rest of the year and as we look forward into next year. Now on a particular area, a, Supply Chain & Retail is probably the area where you have the biggest cost base impact, particularly energy and fuel costs. And then in med-tech, you probably have a big drive from manufacturer's trying to pass through their pricing pressures through to us. And then in Product Access, there wouldn't be any pressure at all. So overall, if we hadn't had inflation, we probably would have exceeded our expected figures for the last 18 months. The impact in the H1 results to date will probably be in the region of EUR 2 million to EUR 2.5 million. And as I said, on a full year basis, you're looking between somewhere between EUR 4 million and EUR 5 million of that impact on our cost base. And what we're doing, Allan, is managing that in a manner that we can pass it through to our customer base in a managed way so that we don't get any negative impact. And we've been successful in doing that. So part of the increase in our gross profit to date has been that exact thing we've actually been able to pass some price changes through. But in the main, the majority of the gross profit increase has been -- was used in our scale and growing the business.

Thanks, Tim. So next question from Allan in Supply Chain & Retail, how should we think about the phasing of returns on your EUR 60 million investment in the new distribution capability?

So Allan, this investment is because of the outperformance of the Supply Chain & Retail business over the last 3 years, a 9-year track record now of market share growth. So Tim, back to give some color on the phase of the returns.

Yes, Allan, it's, obviously, a big project that we're undertaking here. It's going to take 3 to 4 years to commission. And then it will take between 3 to 4 to 5 years to actually meet our hurdle rates. So after 4 years, we'll be at 15% return on capital employed. And by year 7, we'll be at 20% return. So it's quite a strong investment return. Part of the return on this is going to come from operational efficiencies, where we'll be able to reduce our pick costs by a tart. That's going to give us a substantial increase. And in the balance of the return that we'll get from market growth and our increase in our customer base as well.

And the final question from Allan. In Product Access, the market has principally focused on the opportunities in Expanded Access Programs. But the acquisitions of Devonshire and now Orspec also expands our global capability in unlicensed medicines. How should we think about your growth ambitions in this market?

Yes. I think -- a good question. So we've built a very significant under that business over the last couple of years. We see continued significant opportunity for us to grow this business. So the platform that we have in place today allow us to expand our existing platforms that you can get into Europe and now into APAC and the U.S. So Brian, do you want to add anything?

Just to add to that, Allan, our ambitions are to be a global leader across both early access and global access. And the capabilities required for both of these divisions are the same, and then we can also leverage that capability for the trading business of the unlicensed on-demand business. It's a long-term vision is to be able to retain our clients across the life cycle from commercial markets and noncommercial markets. And specifically, Devonshire expands our reach into strategic hospitals and accounts into the Middle East and Orspec now expands our capabilities within the important Asia Pac region. So the next questions in are from Charles Weston in RBC. So first question, in light of the strong recovery in elective procedures, will Commercial & Clinical med-tech acquisitions be more difficult/expensive to make?

I think what we're seeing, Charles, we seem to have spot over all hedge -- our assets today are expensive to acquire. That's been the case now for 3 or 4 years. So we have seen bad life paying more specifically higher than that we would be confident. But where we good at is sourcing opportunities off-market to our connections and paying multiple of our complements and that will deliver our return on capital employed. You can see again this year, Charles, that we've outperformed our guidance of between 12% and 15% of return on capital employed and I think we have a skill set to keep being that for despite the macroenvironment where people are paying significant multiple for healthcare assets.

Thanks, Ger. Question number two in from Charles is within Commercial & Clinical, what do you anticipate the mix of med-tech versus pharma organic growth rates on a go-forward basis to average the mid-single-digit guidance?

I think we look at this as a one division. It is a strong rotation for us. So we guide mid-single digits across both pharma and med-tech. That's our expectation. And we obviously have med-tech today is stronger. It's a bigger of the 2 divisions. But ultimately, we want to grow each of these platform mid-single digits.

Thanks, Ger. Next question from Charles. Given the EAP wins over the last year or 2, what visibility does management have now on recovery to double-digit growth in 2023?

Okay. As I said, our growth is delivering 20% compound growth since IPO in this division of our cost for getting back there in the medium term. The business development opportunity has been delayed because of COVID, delay in decision-making. But also, within the medium term, we're happy to we'll get back to double digits. Brian, do you want to add any more color?

Yes. And just to add to the point around Ger made that we have delivered significant compound growth since IPO, and then this is the first reporting cycle where we would be below the double-digit organic gross profit growth, which we would have flagged early last year around the impact COVID had on the sales cycle. And then other macroeconomic factors around biotech funding. But ultimately, we remain confident on our ability to double-digit organic gross profit growth into the medium term. The final question from Charles. What are the terms of the new debt facility? And why is it so large, given that reasonable leverage loan would apply substantially lower debt. Could you read anything into the timing of the new facility in terms of deals in the pipeline?

So I would say, basically, we are a high-growth business, and we want to grow our business. We've invested very heavily in our people, in our technology, in our facilities. I would say that a structure in place to more than double the business going forward, providing the proper opportunity to come along. So for me, it's just good business to make sure that we have the facilities in place if an opportunity comes along for us to really drive our other business. So each of our 3 divisions, we see significant growth opportunities for ourselves. M&A takes around time. We put a lot of effort in which it's our own conversations. And we just want to make sure that if the opportunities comes on, we're in a position to grab hold of them. But we would restate that we want to keep leverage between 1 and 2, we won't -- don't really want to go beyond 2, we have to have leverage, but we will -- the base we can get down very quickly. So basically, for me, it's just about making sure that we have the facilities in place to deliver our growth parts of the business. And if opportunities come out, we're in a position to grab hold of those opportunities. Tim?

Yes, Charles, on the terms -- a part of your question, all the terms are exactly the same as the previous arrangements we had in place. So interest grid, et cetera. There is only one change which would have been on the covenant side. So our covenant has increased from 3.2% to 3.5%. All other terms are expected to confident and the covenant.

I think there's one more question Charles just put on. In Orspec -- is Orspec more focused on-demand or EAPs? As we said at the -- to Allan Smylie's question, the capabilities across this division could across both early access and global access, which includes the on-demand or trading side of the business. So Orspec's capabilities across, I suppose, those 3 buckets of revenue opportunities, which why was an important strategic acquisition for sort of capabilities that they possess. I suppose they've recruited people from some of our competitors in that region and with the owner being a key role in driving the growth of Asia-Pac for one of our competitors. So it's an acquisition, we're very excited about. So next set of questions are in from Adam Barker of Goodbody Stockbrokers. So question one, previous results, you have mentioned the possibility of replicating the Supply Chain & Retail business in another market with similar characteristics to Ireland. Is this still a potential option?