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spk04: Good day, and welcome to the ProCAPS Group Business Update Call and Webcast. Today's conference is being recorded. Please note that some statements made during this call may contain forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties. Any statement that refers to expectations, projections, and or 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 due to a variety of risks, uncertainties, and other factors, including but not limited to those set forth in ProCAP's group's FCC filing. ProCAP assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results. At this time, I would like to turn the conference over to Melissa Angelini, Investor Relations Director of ProCaps. Please go ahead, Melissa.
spk03: Thank you, and good morning, everyone. Thank you for standing by, and welcome to the ProCaps Business Update Call. This conference is also being webcast, and a link to the webcast is available on the ProCaps IR website at investor.procapsgroup.com. We appreciate everyone joining us today. Please note that our press release was issued yesterday and can be found on the Procax IR website. Please review the disclaimers included in the investor presentation. During this call, non-GAAP financial measures will be discussed and presented. We believe those 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 mostly directly comparable GAAP financial measures. Hosting today's call, we have Ruben Minsk, our CEO, and Patricio Vargas, our CFO. I will now turn the call over to ProCap CEO, Ruben Minsk. Please, Ruben, go ahead.
spk00: Thank you, Melissa, and thank you all for joining us today on our second quarter and first half of 2022 conference call. As an agenda, I wanted to provide everyone with an overview of our first half of the year's performance, as well as give an update perspective of our strategy going forward. From there, I will turn it over to Patricio to take you through some of the more detailed specifics of reference statements. At the end of our call, Patricia and I are both happy to answer any questions you may have. And additionally, please feel free to follow up as well with a post-call with either us or Melissa. Moving to slide five, I wanted to share some highlights of the quarter with you. On top-line sales and market share positions, we're doing quite well. Overall, our results show the resilience of our business's segments and portfolio diversification that continues to evolve with new products and new geographies. We posted a 14% increase in net revenues for the quarter and 12% for the first half of the year, with our CDMO business growing 20% in the quarter. In the B2C business, we posted an 11% growth in the second quarter of 2022, impacted by foreign exchange impact, supply chain challenges, and inflationary pressures. On a constant currency basis, our first half 22 growth was 18%. Our CDMO business is doing extremely well with an increase in sales of existing partners and the launch of new products. I'm also happy to report that our West Palm Beach facility commenced operations and we have seen some revenues from R&D services rendered. The investment rationale behind this acquisition was that it was incredibly important for Procafs to have a U.S. CDMO capability to better service inshore the largest pharmaceutical market in the world, as well as our European customers. We are already seeing progress on that end. The construction of our GOMI facility in the U.S. has been on track and we expect to begin operations in the first quarter of 2023. Our new divisions expect except, I'm sorry, for all our divisions, except for Diabetics, we're growing at double-digit growth rates in terms of revenue in constant currency. Our growth has remained consistent across our products, despite currency devaluation, as well as the launching of new products. Our new product launches have been a key driver of our growth, and I will share more light on this later on. Our renewal rate, that is the percentage of our revenues from recently launched products, is at 21%. This ratio is impacted by the facing of some regulatory processes. As you all know very well, the launch of a product in this industry depends on the registration approval. We do not have a specific date, only a time range. We believe the product will be approved. And today we have over 170 products under registration in different stages. As we continue to navigate through this dynamic operating environment, we remain committed to our investment to fortify our businesses' portfolio, organization structure, and value chain by increasing our production capacity, continued investment in research and development and new products, and expanding our geography footprint. On that note, as you know, during the quarter, we proudly announced the acquisition of Grupo Somar, on our entrance to Mexico. This transaction represents a very significant step forward for ProCast regional consolidation, expanding our reach into the second largest pharmaceutical market in Latin, and offers a unique opportunity to realize the significant synergies through cross-selling opportunities, leverage our innovative order delivery technologies, and cost efficiencies. Moving to slide six, I want to remind you all about the strategic rationale of this transaction. As I just mentioned, our entrance into Mexico, which is the second largest pharma market in La Dama, is an important, a very important milestone for us. First, Grupo Somar is well positioned to capitalize on the tailwinds underpinning the Mexican market and sustain a high and consistent growth rate across its different business lines. We also have growth leveraging Procaf's highly differentiated product portfolio in Mexico, and we expect to be strengthening our CDMO business with our know-how and patented technologies, which we expect to broaden our customer list and portfolios in Mexico. The second is the attractive product portfolio branded generics targeted to the private market and with leading market positions across key categories. Grupo Somara participates in segments familiar to Procaps, and both organizations complement each other's portfolio. Their well-diversified portfolio across other segments, therapeutic areas, and customers with no relevant product concentration creates also a great competitive advantage for us. Third, this will also help broaden even more the diversification of our revenues, not only with portfolio increase, but with the new region And it might upset some of the negative currency devaluation challenges that we are facing, minimizing possible operational risks. Four, increase manufacturing and research and development capabilities. Six manufacturing facilities in Mexico, which include three FDA-approved facilities, one of them being a soft-shell capsules manufacturing plant. Manufacturing capabilities for several pharmaceutical forms that will support our growth in the region. corporate manufacturing model to capitalize significant mid-long-term operational synergies based upon specialization, product capacity to fuel geographical portfolio expansion to all countries where we operate, and research and development expansion by integration with PROCAD's research and development team targeted at pipelines with very much of a regional reach. Fifth, we have a strong local management team, excellent team with ample industry experience and will stay with the company for years to come. Six, significant synergies through cross-selling opportunities and cost efficiencies. Finally, we expect to have approval by the Mexican authorities in Q3 of this year, and we'll start implementing our integration plan immediately afterwards. Moving to slide seven, another important driver to our future growth is research and development and new products. As I always say, I have said before, innovation around our proprietary oral delivery systems is very much the key to our success. We launched over 120 products in the region during the first half of this year. A few examples, deferral K, the first exclusive combination of vitamin D and K2 in Colombia and the region. We have also developed a Gumi version of this product, which has contributed to acceptance by the pediatric patients and medical community. MEN-C is the first specialized formulated oral pharmaceutical grade mint oil used for stomach intestinal disorders, such as irritable bowel syndrome. We have also launched an oncology line with Aludel, indicated as the first line therapy for men and prostate cancer, and no longer responds to hormone therapy or surgical treatment. We continue to invest close to 5% of net revenues in research and development, and we will continue to prioritize investments in our pipeline and businesses to realize the value of many near and long-term opportunities in front of us. With that, I will ask Patricio Vargas to review our financial statements before we take Q&A.
spk01: Thank you, Ruben. In the next slides, I would like to give you a little more color on the second quarter and first half 2022 results. Moving to slide nine, you can see our top line evolution. In the chart, you can see our season idea play, a sales increase in each quarter in 2021 and 2022. Looking at the 2022 figures so far, we showed a strong performance in the second quarter and six months, with a net sales growth of 14% and 12% respectively. The increase was mainly driven by positive performance in Cannes, Nextel, and Kazan business segments. As Rubén mentioned, we're facing some challenges external to our operations, such as strong currency devaluation, especially the Colombian pesos, which affects almost 50% of our revenues, global supply chain restrictions that impact availability and pricing of certain raw materials, and inflationary pressures and economic uncertainties. The diversified nature of our business helps us offset many of these challenges, which is helped by our ability to adjust prices in certain products and markets. This strategy, however, has some natural delays, so we may experience short-term pressure in our margins as we adjust. On a constant currency basis, our revenue grew by 19% in the second quarter and 18% in the first half. Moving to slide 10, I want to take a deeper dive into explaining our net sales growth. Our ICDMO business experienced a strong demand from our clients, as well as from the launch of new products and R&D services that started in our West Palm Beach facility. Net revenues grew 20% in the second quarter and 11% in the first half. On a constant currency basis, net revenues grew 28% in the second quarter and 13% in the first half. GAPS Colombia was the business unit most impacted by the currency devaluation, as Colombia is its biggest market. It experienced a decrease in the quarter in addition to the currency devaluation by a decrease of COVID cases directly impacting our clinical specialty slides. Looking at our OTC and RX lines, growth was approximately 20% supported by the performance of products launched last year and increased demand for existing products. Overall, although Procaps Colombia had a modest top-line growth in the first half of 4.2%, in cost and currency, that increase translated to 13%. Cannes, or Central America North, was positively impacted by the rollout of new products and portfolio expansion in several therapeutic areas, such as gastrointestinal and feminine care. Additionally, we have a low comparison base from last year, as we are now seeing the benefits of reducing inventories at our distributor levels, which was a negative impact for last year. Kazan, or Central America South and Andean region, grew 18% in first half 2022. The increase was the result of higher demand and the rollout of new products in the region, such as Ferrovas, in which we use our Uni-gel technology combining two different active ingredients for the treatment of mixed dyslipidemia in the elderly population. On a constant currency basis, net revenues increased 19% in the first half. Finally, our Diabetrix SBU decreased 20% for the semester, impacted by the closing of an important public health insurance provider in Colombia and currency devaluation. On a constant currency basis, it decreased 13% in first half. For the quarter, diabetics decreased 10%, and in constant currency, the decrease was 5%. Comparing with the first quarter of 2022, diabetics grew 30% in the second quarter, already showing signs of improvement. Moving to slide 11, on the gross profit line, we reached $120 million for the first half of 2022 and a 61% gross margin. This result is due to a positive exchange rate impact on costs of roughly 4% in the semester and the sale of some brands in Cannes as part of our portfolio management efforts. Our operating expenses increased by 22% in the first half versus first half 21 due to the return of promotional events and stronger commercial efforts. Increasing costs associated with higher personal costs and cost of being a public company. We are also structuring the company for the future growth with new hires and processes improvements. Our adjusted EBITDA increased by 13% to $37 million. Our EBITDA margin for the first half is flat when compared to the first half of last year, in spite of our investment spending behind new product launches and facilities improvement, and in the new team to handle our growth plans. We have seen an increase in absolute adjusted EBITDA, despite some unfavorable market conditions that are important to highlight. Currency devaluation generated a translation effect in our posted figures, and as our main markets are in Latin America, currency fluctuations are a part of it. We're also facing inflationary pressures and supply chain challenges. We're working on price increases, improving our products with new launches, containing costs so we can protect our margins going forward. We are very happy with our results so far and optimistic about our ability to deliver growth in the long term. should the present challenging conditions remain in the current levels we might face margin pressures that will be difficult for us to overcome in the short term and could potentially negatively affect our adjusted EBITDA guidance this negative effect could possibly be in the range of five to ten percent but we will keep working on different alternatives to make sure that we can offset all of these difficulties finally on slide 12 as of june 30 2022 We have a cash balance of $38 million and a leverage profile of 2.1 times net debt to adjusted EBITDA. Cash decreased as we paid down more expensive short-term debt and expanded the capex compared to the previous years. Additionally, cash has also been used to increase inventories to provide support for the supply risk we have seen worldwide. Our capital allocation priorities remain unchanged. We will continue to prioritize investments in our pipeline and business to realize the value of the many near and long term opportunities. We continue to develop new products and technologies to increase and complement our product pipeline. So as you can see, we're executing a strategy designed to deliver strong growth and establish the necessary building blocks behind our growth drivers to achieve our 2022 targets. We are ready now to finance and carry out the Soma transaction the minute we receive the regulatory authorization. With that, I will pass it back to Rubén.
spk00: Thank you, Patricio, and thank you all for participating. As I said before, our results are indicative of the health and resilience of our business units, a diversified portfolio that continuously evolves, a broad geographic footprint with strong positions in our largest markets, and of course, our highly motivated and dedicated employees who focus on delivering value to patients. We are demonstrating impressive resilience across all aspects of our business in a very challenging global environment with variables that are not always within our control. Of course, we remain quite optimistic and confident of our growth strategy, its focus, its significant moat, and its industry expertise. Thank you so much for listening. We welcome any questions that you may have.
spk04: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star, then 2. We will pause momentarily to assemble our roster. Our first question comes from . Please go ahead.
spk06: Good morning, everyone. Well, just three questions here on our side. The first one is regarding SOMAR acquisition. I wonder if you could give us more color on the timeframe for the conclusion of the acquisition. The second question is regarding Pro Caps Colombia. I mean, should we see the revenue growth resume in the division still within this year, or should we continue to see this revenue line pressured by the unfavorable dynamics with the phase out of COVID in the short term? And the last one, I think Patricio talked a little bit about this matter, but can you give us, again, the number of the organic revenue expansion in Q2 on a constant currency basis? I mean, you disclosed in your report the 18% growth of the first half of the year, but if you could give us, again, the number for the quarter. That's it. Thank you guys very much.
spk01: Okay. Thank you for your questions. I'm only confused about the second question. I wasn't sure. The first one was the Somar timeframe. The last one was the constant currency growth for second quarter. What was the second question?
spk06: Well, the second question was regarding ProCaps Colombia, right? We saw the get this revenues The top line in this division was down 4.5% in this quarter. And the reason behind this is mostly because of the phase out of COVID and the unfavorable dynamics with this phase out. But I just wonder if you think that we should see this revenue growth in this line resuming within this year, or if the short-term should remain under pressure for ProCAPS Colombia.
spk01: Okay. Thank you. So, regarding the Sumara acquisition, this is something that is, of course, no one really knows. This is a very complex process, always when you need to ask for regulatory approvals. We believe it should be relatively simple compared with other processes because there's not much overlap. There's practically no overlap between the two companies. So we think it should come relatively soon. Now, relatively soon could be within a month, a couple of months. I can't comment much about the process, but the process has been going, I would say, according to what we anticipate. So we said in the press release that we believe in the fourth quarter we should have news. Hopefully, it is in the earlier part of the fourth quarter. But again, we can guarantee that. Regarding the second point about clinical specialty, well, that's hard to say what's going to happen with COVID. It is true that it has come down and that has affected clinical specialties, but we have a broader weight of products and we have been diversified and reinforcing all those other products. So we think in time we're going to be able to overcome that. It's just a short term impact caused by the decrease of those type of products. So it should recover very soon from that point of view.
spk00: If I may just make a comment also very quickly on Procaps Colombia. I think that the most difficult part for Procaps Colombia to deal with is the devaluation of the currency. We have been able to spot some of the price increases, some of the devaluation to the final consumers, to the to the clients and to distributors. But this takes longer because there are some contracts still ongoing. If the devaluation stays at this level, we may have some difficulties, as very well Patricia mentioned. But the growth of the company in constant in local is very, very healthy. The demand is quite strong. And we do feel, as Patricia well said, we have quite a mix of products that will allow us to overcome any difficulties for one particular one. Please go ahead, Patricio, sorry.
spk01: Yeah, and the last question, the constant currency growth in the first half was 18%, and in the second quarter was 19%, one nine.
spk06: Okay, thank you, Ruben, and thank you, Patricio. It was very helpful.
spk05: Thank you.
spk04: Our next question comes from Kent Sullivan with Brooklyn Capital Markets. Please go ahead.
spk07: Good day and thank you. My first question relates to the contribution margin disclosures, which are very helpful. Could you give us some context with regard to how those margins should play out over time because you have, you know, different, you're in different, each SBU has its own investment mode and priority of growth versus profitability. So if you can give us some perspective on what to expect with regard to, you know, the margin behavior over the next few years, that would be very helpful.
spk02: Thank you for your question, Ken.
spk01: There are a couple of factors that will impact on the margin going forward. In the short term, I think we're going to be very much depending for the immediate time on the exchange rate because we have expenses in Colombian pesos. We have purchases in US dollars of our materials. So that mix is going to be affected by that. So it's kind of hard for me to tell you where, for instance, could be the second half. I guess for effects of your modeling, stable is something reasonable. Going forward, we should improve. As we grow in the different business areas and we put more capacity at work in the plants, we're going to become more efficient so that you should expect production-wise some efficiencies to be gained there. And both when you analyze Procaps and the loan and in the future when analyzing Procaps and Somar, we have a significant capacity to reduce and improve the costs of our different raw materials. So we expect an improvement across the line in terms of expenses. So that should have a margin expansion in the next year, hopefully.
spk07: Super. Thank you. You know, Catalan reported earlier this week some challenges with their soft gel business, you know, and yet your performance in the first half was much better. Could you talk about the differences in your business versus theirs and if there's, you know, if this is any competitive dynamics that we're seeing here that are working to your advantage?
spk00: Okay, that's a great question. We have found, I would say, the same difficulties. I think that they are real. There's real difficulties in the supply chain and management for our raw materials. For example, one of the issues with the gelatin increased by 40% the price because of the lack of raw materials. But we have been dealing with this. We have worked very much in cost efficiencies. We have worked We have high demand of our facilities, very high demand of some of the products from third parties. So we are very pleased that we were able to weather the storm in the first semester. We do expect for the second semester for this to lower in intensity, and we expect to weather the storm as well for the second one. these are challenging times, but nevertheless, we have been able to move very quickly and cover the difficulties.
spk07: Do you think you're gaining share from them?
spk00: It's very difficult to say that because there are no published public data for this. We have been moving along. We have be increasing our volume of manufacturing capsules, of capsules being manufactured, but it's very difficult to say what type of, there's no data published in this particular area.
spk07: Very good. Thank you. With Grupo SOMAR, has the management team remained stable since the announcement of the acquisition?
spk00: Yes, absolutely. We have found very talented people there, very good leadership. And yes, we have been able to work with them, and they will stay with us hopefully for years to come.
spk07: Excellent. Thank you for your answers.
spk00: Thank you.
spk04: Again, if you'd like to ask a question, please press star, then 1 at this time. Our next question comes from Jason Colbert with Dawson James. Please go ahead.
spk05: Congratulations. What a great quarter. I just wanted to talk you to talk a little bit about some of the valuation calculations and particularly how accretive GrupoSOMAR could be. if we look out beyond the year. And what I'm really trying to understand is the cross-product synergies that exist as you start to push a footprint into Mexico.
spk01: Thank you for your question. That's something we're really happy with. Not only going forward, but if you look at the first year, this deal is accretive for us. I would say marginally accretive in the first year. Of course, we're taking significant debt for what we had before. But even, of course, considering all of that, this is accretive. But if you go beyond the year, This starts to grow significantly given all the cross synergies that we have. Being so complementary the businesses and being such a nice fit for our rollout strategy, our rollout expansion capabilities. Just to remind everyone, the way our business model works is that we register different products from certain countries into the other countries and we register and we launch them. So bringing Sumara into Procaps is basically applying the same business model to what we're doing on a bigger scale. That is taking their products and registering our markets, taking our products, registering in Mexico. Of course, you have to take into consideration the timings necessary for the proper registration in each market. Each market is different, so it could go between two to four years. But accounting for that, the value that we can get for the group combined is huge, and that's why we're so happy with the acquisition.
spk05: Well, that's what I'm trying to understand. So if I were to look at your revenues outside of Mexico and I was to do a market comparison of the size of the country versus where you're in now, it's suggestive that there is a significant double digit growth rate and that I would be naive to model Grupo Somar based on their revenues. Instead, I have to model it based on the size of the market opportunity times the totality of the products of both companies, right? Is that the right way to think about it?
spk01: It is the right way with a caveat that you need to take into consideration working capital restrictions, capacities that we may need to invest on, timings, type of product. It's not correct to assume that all the portfolio of both companies can be taken into all the countries. There are some products that in some countries may be old products or that they may have too much competition. So we need to do a very careful pick of which product we're going to take into which countries. But that detailed analysis, we cannot do it until we are working with Samara. and we have the approval from the authorities. But the estimates that we have, they look very promising. Once we're in there, once we're inside the company, we will host a call at some point and update on this and give more granularity.
spk05: Yeah, that's what I was hoping, that in six months, once you're there and kind of familiar with both the company and the regulatory landscape in the country, that you'll be able to revise kind of the forward-looking accretion beyond a year, which would be helpful in terms of just modeling the revenue. Suffice to say, it's much greater than it is one year out.
spk01: Yeah, that's correct. And we will do that. We understand it is important. And if we don't give that information, it's very hard for you guys to make the analysis.
spk05: Perfect. Thank you so much. Congratulations on this first very critical step in the process. Thank you. Thank you.
spk04: This concludes our question and answer session as well as our conference for today. Thank you for attending today's presentation. You may now disconnect.
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