Procaps Group, S.A.

Good day and welcome to the ProCAPS Group Business Update Call and Webcast. Today's conference is being recorded. At this time, I would like to turn the conference over to Chris Tyson, Executive Vice President of MZ North America. Please go ahead, sir.

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the ProCAPS Group Business Update Conference Call and Webcast. We appreciate everyone joining us today, and please note that the ProCAPS third quarter 2021 financial results press release was issued on November 19th, 2021, and the investor presentation can be found on the ProCAPS investor website at investor.procapsgroup.com. Please review the disclaimers included in the investor presentation. Before we get started, I'd like everyone to that statements made during this call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties. Any statements that refers to expectations, projections, or characterizations of future events, including financial projections or future market conditions, is a forward-looking statement. The company's actual future results could differ materially from those expressed in such forward-looking statements for any reason, including those set forth in ProCAPS Group's SEC filings. ProCap's group assumes no obligation to update any such forward-looking statements. Please also note that the past performance or market information is not a guarantee of future results. During this conference call and presentation, non-GAAP financial measures, including adjusted EBITDA and adjusted EBITDA margin, will be discussed. The company believes non-GAAP disclosures enable investors to better understand ProCap's core operating performance. Please refer to the investor presentation for a reconciliation of each of these non-GAAP measures to the most directly comparable GAAP financial measures. Hosting today's call are ProCaps Group Chief Executive Officer Ruben Minsky and Chief Financial Officer Patricio Vargas. Finally, this conference call is being webcast. A link to the webcast is available on the ProCaps IR site at investor.procapsgroup.com. I will now turn the call over to ProCAPS Group's Chief Executive Officer, Ruben Minsky. Ruben?

Thank you, Chris, and thank you all for joining us today on our first conference call for the ProCAPS Group as a public company. You have no idea how excited I am to finally be able to say those words 44 years after we began operations. This is Ruben Minsky speaking, the founder, chairman, and CEO of ProCAPS, I'm also very fortunate to be joined today by our new CFO, Patricio Vargas. Patricio has been hard at work over the last few months, getting up to speed on our business and helping us build the capabilities we need to be successful as a public company. For those of our many shareholders that know Patricio already from his prior roles, including as CFO of CFR Pharmaceuticals, I am sure you share the confidence that I have in his new role. For those that don't know him, I look forward to introducing him to you personally. Welcome, Patricio, to the team. As a general housekeeping, as Chris mentioned, all forward-looking statements are subject to risks and uncertainties, and our results could differ materially from these statements. With that said, I thought I would offer a brief perspective of the quarter and calendar year 2021 before I turn it over to Patricio to take you through the more detailed specifics of the financial statements. From there, We are both happy to answer Q&A, as well as accommodate to any further questions at a later time. As I look at ProCAHPS today, we are at an incredibly exciting time for our history, and there are four key messengers and messages that I really wanted to ensure that I properly conveyed to you. Has exceeded our internal expectations in 2021, and the fundamentals driving our growth remains quite healthy. When we started the PIPE fund raising process in January of this year, we were in the low 300 millions of trailing 12 months net revenues. As of September 30th, we are slightly above 400 millions of net revenues on a 12 month trailing basis, which is ahead of where we forecasted for year end 2021. This is quite encouraging. Four out of our five divisions are growing at double-digit growth rates in terms of revenue throughout the whole year, both to the quarter and the year, and our year-to-date growth rate is 33% versus approximately 20% that we forecasted. Our growth has remained consistent across our products and geographies. While we have repeatedly guided to the market that we are a mid-teens organic grower, we have seen accelerated growth in 2021 particularly in our Procaps Colombia, Cannes, and Kazan business units, where the increased demand across the board for a variety of our RX and OTC products has continued. Our new product launches have been key drivers of our growth. Our renewal rate, the percentage of our gross revenues from product launches within the last three years, is at 22%. The renewal rate is a key metric that I focus on to measure the health of our business as innovation on our proprietary oral delivery systems is very much a key to our success. As we look at the rest of 2021 and onwards, we continue to state that we expect to achieve a low to mid-teens organic sales growth rate. The second message is that our business continues to internationalize as the sales of successful products outside of Colombia continues to be one of our primary focuses. This is not to say that we are performing well in Colombia, where our market share continues to increase two times the market growth rate, and our sales are very robust. We have gone from 3.5% market share in terms of product sales to 5.3% market share in our local market as of September, as measured by IQVIA. Combining all our markets in LATAM, As of September 30th, we continue to be the highest growth pharmaceutical company in the region with a 2.4% market share. However, in addition to this local growth, we internationalized over 67 products this quarter, and our expected pipeline of over 600 product launches in the next three years will be a key driver for the years to come. We have built the commercial capabilities and routes to market to be successful outside of Colombia. We are also considering some opportunities to strengthen our CDMO business in the US market. As having manufacturing capabilities, it is today an important consideration to some of our business partners. We plan to update you shortly on these strategic issues. While our growth in Colombia remains strong, we continue to diversify by region and by product. The third key message is that we are investing significantly behind our innovative product launches to make sure that we are successful to fund future year's growth. As a considerable amount of our accelerated growth is from OTC and RX products, which require significant launch support, we have decided to increase our marketing expenses in order to take advantage of the favorable market opportunities. Giving our products a property in nature, ensuring their initial success, leads to long-term benefits to our company. The fourth and final key message is that we believe that we're properly funded to achieve our growth plans and currently have approximately $100 million of cash in our balance sheet, as well as an ample borrowing capability to achieve our external M&A and internal growth plans. As you can see in our filings, we completed our successful debt rate financing to lower our borrowing cost. Our cost of debt is meaningfully lower, which is one of the benefits to us being a public company. Currently, as we have mentioned in the recent past, we're actively looking at a few attractive investment opportunities that we are carefully evaluating. We will continue to be very disciplined and thoughtful in our M&A process, and Alejandro Weinstein and our team is set to finding the right strategic fits for our business. We are focused on value-creating opportunities to leverage our oral delivery solutions and technology with pharma companies that we can acquire. and geographically, we are focused on Mexico, Central America, and the Andean region. We will provide any updates applicable, but importantly, we believe we can achieve our stated goal of $1 billion in sales over the next five years, primarily driven by organic growth. We are fortunate to have a tremendous amount of deal-making and industry skills in our M&A team, and our capital structure is set up for success. With that, I will ask Patricio Vargas to review our financial statements before we take Q&A.

Thank you, Ruben. It is a great honor to join Procaps in my role as Chief Financial Officer, and I look forward to working with you and the team to deliver our growth plans. It is also exciting to work with Dr. Camilo Camacho and Alejandro Weinstein again as well, both of whom I worked with previously when I was the Chief Financial Officer of CFR Pharmaceuticals. By way of background, I came to Procaps having served in senior finance roles at SQM, CFR Pharmaceuticals, and CNPC. I was particularly drawn to the Procaps opportunity given its innovative product profile and accelerated organic and inorganic growth opportunities. I believe I have relevant experience successfully integrating add-on acquisitions, many of them with Alejandro Weinstein at CFR, and I look forward to having the chance to do so again in the years ahead at Procaps. I want to give you a summary of our third quarter financial results as of September 30th. Procaps demonstrated strong Q3 performance with a net sales growth of 35%. Our net sales growth was driven by strong demand across our branded RX and OTC business in both our existing products as well as from our continued rollout of new product launches. Our Q3 growth of 35% is consistent with the overall growth we have seen year-to-date of 33%. This trend we are seeing this year exemplifies our solid fundamentals for organic growth, which have driven us in the past few years and which we believe will drive us into the next years. On the gross profit line in the free queue, we have increased by $14.5 million year-over-year, or roughly 30%, to reach $62.3 million. Our gross margin fell by 200 basis points due to a business-unit mix, as we increased our sales to the institutional market in Colombia and OTC products in Cannes. Our adjusted EBITDA increased by 30% to $25 million compared to $19.3 million, and our nine-month adjusted EBITDA has increased 38% to $57.6 million compared to $41.9 million in 2020. Our EBITDA margins have been relatively consistent, although we have increased our investment spend behind new product launches. Finally, our net loss for the nine months and the September 30th was $54.6 million, which was primarily attributable to a one-time non-cash adjustment of $59 million to reflect the termination of the put options granted to certain shareholders and the valuations of these put options. We currently have a cash balance of $100 million, which combined with our leverage profile of 1.2 times net debt to adjusted EBITDA, we believe is sufficient to fund our growth plan, both organic and inorganic. Next, I wanted to take a deeper dive into explaining our net sales growth which was primarily driven by three reasons. First, we experienced higher demand of products manufactured for third parties. Second, there was also increased demand for both our RX and OTC products. And third, we complemented the role of our existing portfolio with new product launches. This slide provides a more in-depth view into our net revenue growth by SBU. First, our ICBMO business experienced strong demand from our third-party clients, as well as from other launch of new products in Brazil, and new products in our fantrician gummies line. Our net revenues grew 9% in the first nine months versus last year. While Q3 was only 3% growth, it was related to inventory reductions at our partner level and not indicative of sell-through growth. Second, Procaps Colombia, which encompasses pharma and clinical specialties in Colombia, experienced increased demand as a result of the reopening of the economy in Colombia in general. The launch of new products in select therapeutic areas such as monoclonal antibody, pain relief, and dermatology also contributed an incremental increase in revenues. Additionally, the business benefited from the launch and ramp-up in sales of anesthetic injectables for COVID-19-related issues in clinical use. Overall, ProCaps Colombia increased net revenues by 50% during the quarter and 55% versus the first nine months of 2020. Third, CAN, or Central American North, at 84% growth versus the same quarter last year, and 16% compared to the first nine months of 2020. We're seeing the benefits of reducing inventories or distributor levels, which was a one-time hit for the earlier part of the year. We're pleased to see increased demand for both our RX and OTC products in the region. Fourth, Kazan, or Central America South and Andean region, experienced a robust growth rate of approximately 67% for the quarter, and 65% in the first nine months of 2021 versus 2020. This increase was a result of higher demand primarily due to improvements in inventory turnover from distributor and sales channels, the rollout of new products in the region, the further development of new products, and the continued strengthening of our existing brands in key growth markets. Finally, at Diabetics SBU had an increase in net revenue of approximately 25% in the quarter and 28% during the first nine months. In fact, it had similar growth rates across both Q1 and Q2. Diabetrix benefited from a combination of factors, including the launch of new insulin products, continued demand for our blood glucose meters, new product launches in Colombia, and higher use of our digital health platform, Zootrix. In addition, we continued the rollout of our diabetes solutions portfolio in El Salvador. In summary, all of our business units grew, with four out of our five business units once again experiencing robust double-digit net revenue growth. On the next slide, we can see how our balance sheet has strengthened. The cash on hand combined with the re-profiling of our debt with the private placement carried out recently yields a net debt to adjusted EBITDA of 1.2 times. Our quick ratio is a metric that has substantially improved with the cash on hand, and if we give effect to the re-profiling of the debt with the private placement, we expect to have a performer ratio of 1.1 times. It is important to highlight that with the business combination, we have extinguished the debt related to the put options, which has removed the pressure from our equity, strengthening our balance sheet at the equity level. In summary, we now have a healthy financial position to carry out our organic and inorganic growth plans. And with that, I want to turn it back over to Ruben for some closing thoughts.

Thank you, Patricia, and thank you all for listening to our pre-prepared remarks. We're very pleased to have this packing part of our going public behind us, and we are looking forward to delivering results in the course ahead. Never before in our 44-year history have we been better positioned for success. We will continue to do our best to employ best practices as a public company, Even though we are exempt from filing quarterly interim financials as we are a foreign private issuer, we are committed to and expect to promptly publish quarterly financial information and carrying out the related conference calls. I remind everyone that we are a leading pharma player in LATAM in terms of social production capacity with global reach in a region that has significant pharma tailwinds and our innovative order delivery systems truly create differentiated products that will allow us to continue to grow substantially. As we have mentioned before, we expect our organic growth to continue in the next years in the low to mid teens. With that, I would like to open up for questions, please.

Thank you. And at this time, we'll conduct our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press the star key followed by the number 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, to ask a question, please press star 1 on your telephone keypad.

Our first question comes from Kemp Dolliver with Brookline Capital Markets. Please state your question. Mr. Dolliver, your line is open. Go ahead. Unmute yourself. Thank you. Good afternoon.

Good to hear from both of you. Quickly on the subject of the inventory management, Could you talk about the outlook, both in terms of any additional inventory reductions in the channel across all lines of business, and then also at your level, since you had made some efforts to reduce inventory over the last year or two?

Do you want to take that question?

Yes, yes, yes. I will take it, Ruben. And you can compliment if I'm missing something related to the history. Absolutely. So, Ken, we reduced the inventory days that we had in Central American art in Cannes and also in Kazan about a year ago, a bit more than a year ago. It was something that we thought it was a good practice in order to something that closely resembled in a better way what the market was going. And that impacted us in the first part of the year. And that's why you're seeing the benefits now. As the inventory has been cleaned, we're getting back to the previous level. That's regarding those two markets. We also mentioned that for the CDMO. We had some partners that wanted to reduce their inventory levels. And that also is why we had lower sales in the CDMO business in the 3Q. Going forward, we do not anticipate to have any more effects regarding inventory. We believe we are at a normal, healthy level, so you should not expect that coming again. I don't know, Ruben, if you want to complement that.

Yeah, no, absolutely. I think that's exactly what we are looking forward to. We feel very comfortable with the inventory levels all across our organizations.

That's great. Thank you. And just one additional question regarding the CDMO business. You referenced a desire to have a U.S. presence. Is it as simple as taking the steps to build or buy a U.S. facility, or do you need to do something more comprehensive?

We're very active looking into possibilities of either buying or setting up operations. We're looking right now into two possibilities and they look quite promising. So we most probably will go into buying a company in the U.S. that will allow our CDMO business to be present in the U.S. As we have We have found many of our customers today, especially with the new climate after COVID, that they would love to have a manufacturing site in the U.S., especially related to our specialized technologies, to our specialized oral delivery systems, which create differentiation in product launches. So we're following that step, and we're moving very fast on this.

Great. Thank you so much. Thank you.

Thank you. And just a reminder to ask a question, press star 1 on your phone now. We'll pause for a few moments while we poll for questions. Thank you.

And ladies and gentlemen, there does not appear to be a

Any additional questions at this time? I'll now turn it back to management for closing remarks. Thank you.

Okay.

Thank you so much, gentlemen, for joining us for this call. And we're, once again, more than happy to answer any other questions or set up any one-to-one meetings should you need more information. Thank you so much, and have a great day.

Thank you. This concludes today's conference. All parties may disconnect. Have a good day.