Fagron Sa Ord

Good day and welcome to the Fagron conference call regarding Fagron Trading Update Q1 2019 results. Today's conference is being recorded. At this time, I would like to turn the conference over to Rafael Padilla, CEO, and Karen DeYoung, CFO. Please go ahead.

Thank you, Operator. Good morning, everyone. Today is 12th of April and, of course, is a An important day for Constantine, right, Constantine? Absolutely. It's your birthday. Happy birthday. Thank you. Congratulations with your, of course, birthday and, of course, congratulations with the impressive work that you always do with a lot of passion and dedication. Congratulations on that as well.

Thank you. Great.

So we start with the presentation that we all have. We would like to start with the cover because, as we always say, culture is a very important element and factor for our company. We have a new brand identity shown in the webcast with nine dots, as you all see on the cover, and the nine dots represent the five values of the company, our current business in compounding on the left side down, and the three new segments that we're going in, being genomics on the right side, a very important one, of course. The dot in the middle is one of our five values that we set, and this is quality, and we understand quality as a very important value of our company, because, of course, we're handling with pharmaceutical products, very important, and also a high barrier to enter. We also have a clear purpose, and that is together, together with our stakeholders, together with our customers, we create the future of personalized medicine. So we move to the first slide, headlines of the first quarter of 2019. As you can see, we have a growth, a turnover growth of 12.7% at concept exchanges, Organically, we grew in the first quarter at 7.1%. We saw a strong growth in both North America and South America, Latin America. Also very nice to say that brands realized an organic growth of 14.8%. And as you all know, brands is a very important element in our strategy going forward. And of course, as we said in the webcast in the month of February, we expect further growth of sales and profitability for 2021. We'll go to the next slide. We see the turnover development in a bridge. We have a small headwind on the currency effect. Then we have, of course, the acquisition growth on the right side. And then on the three regions, we see slight growth in Europe and, again, growth from South America and North America. We go to the next slide. Now into the regions. The first region, Fagron, Europe. We see an organic turnover growth of 0.5%. This is a light growth, though normal as we had a great last quarter in 2018. We are confident that we will show at least the same organic growth as last year. Of course, we had the negative impact on the temporary reduction capacity at one of our Dutch compounding facilities, and as we said, we will see in the second semester recovery on that. Again, as we were saying on the cover, phagogenomics is a very important segment for us, right? We launched it at the end of last year. We see good developments in the start of 2019, and this, of course, helps because we link the both concepts, helps the brand sales that represent now in Europe 12.1% of the sales, and we have a nice growth of 22.3% in the first quarter of 2019 in Europe in the segment of brands. Then we move into Latin America. We see an impressive growth of 13.2% organically. And again, this is driven, as we always say and reiterate, in an underlying market growth on the compounding pharmacies. You know that mainly in Brazil, there are compounding pharmacies that do only compound. We see every month, every quarter, new compounding pharmacies coming. Of course, we work a lot on the operations in our Annapolis plant. We work hardly on having the product available that is crucial for our Brazilian South American strategy. And again, we focus on our own brands that is the locomotive of the business there and essentials go with it. Then we go into North America. We have a great growth of almost 22% organically. We have there identified the two business segments, the compounding service and the brands and essentials. Compounding service are performing well. We have an organic growth of 24% of constant exchange rates, having the Fagron sterile services segment at 44% and our Fagron personalized lifestyle and aseo at 13.2%. When we move into the brands and essentials, Both Fagron Inc. in Minneapolis and B&B grew at 15%. Very important to say that as we are doing in Europe and we see in Brazil the work that we have done the last eight years, we are focusing a lot on brands and represent now 15.6% of the sales with a growth of almost 30%. And last but not least, we need to say that integration of Hanco is now finalized. Summary and outlook of 2019. Again, we had a good start. Sales grew strongly in North and South America. The focus remains in brands innovation that drive organic growth. And of course, our discipline acquisition strategy. Again, not only brands and innovations, but quality, as we said at the beginning, that is one of our five values, stands in the middle of our brand identity, will help us to improve our competitive advantage. And again, we reiterate that we will have further growth in sales and profitability for 2019. So now we can open for a Q&A. Operator?

Thank you. If you would like to ask a question, please signal by pressing Starwood on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We will now take our first question from Matthias Vanhout from Kepler Chevron. Please go ahead.

Yes, good morning everybody. Can you hear me? Sure. So a couple of questions from my end. Sales from acquisitions helped turnover by $6.6 million, so about $7.5 million in U.S. dollars. That's mainly HumpCo. Are you happy with the performance of HumpCo? Can you talk a little bit about the earn-out? Will you pay it? And can you talk a little bit about the cross-sell synergies, both from an API perspective as the consumer brand? And then the second question is actually on Wichita. Very solid growth there in the fire and star services, 44%. Could you just elaborate a little bit on the product shortages of the top three products and the product ramp-up, more specifically for controlled substances? And then a third question is on your guidance. You aim for further growth in turnover and profitability in 2019. But looking at the results and the very strong performance of Brand and also the very strong performance of Wichita, is there any reason why we would have to assume that profitability will not grow faster than turnover? Those are my questions.

So thank you, Matthias. Maybe to start with the HUMCO earn-out, and I will answer that question, and maybe Rafa can say something about the business. Sure. So regarding the earn-out of HEMCO, I think we will continue to fully support the management of HEMCO to reach this earn-out. However, it's too early now to make any statements on the earn-out as the first earn-out period ends in June and is based on profitability of the business.

Yes, sure. And on the HEMCO operations, as we were saying, we have fully integrated the company and We have, of course, the back office and the front office. On the back office side, we have our plant in Texarkana. It is in Texas. And then there we are producing the creams, anointments, and the bases for the compounding and also our direct-to-consumer products. Then we have a plant, of course, in Minneapolis. That is a former FAUS, Fagron Inc. And there we are specializing the production of our APIs, that would be the essential. So that is 100% on track. Having said that, on the front office at Hamco, we have increased our API portfolio. So Hamco used to work with 34 items. Now we are over the 100. And this traction we see in the compounding business also with the double-digit growth. Then going to the Fagron sterile services, Matias, here we have, of course, said in the webcast that we had a time shortage of an API of one of our three top products. The API is now in our facilities. Of course, now we have the whole testing process and the whole formulation process. So we are confident that during the second quarter we will again start selling these products, of course, as everything goes according to the plan. And regarding the new product development, that's, of course, very important for our business model in the Fagron sterile services in the U.S. We are going to introduce the C2s. As we said, this year we have five in the pipeline. And when we follow the plan and everything goes according to the plan, during the second quarter we will introduce two of them. So we are also there on track. And we also need to say that during the first quarter we introduced two new SKUs. in our assortment, so we also see traction on that.

Yeah, and on your final question, Matthias, regarding the guidance, as you know, this is a trading update regarding sales, but we mentioned that we are really positive about the growth of turnover and profitability in 2019, and that's confirmed in the press release.

Okay, thank you.

We will now take our next question from Ludwig van Siedhuis from KBC Securities. Please go ahead.

Good morning, and thanks for asking my questions. Most of my questions were already answered in the previous round, so perhaps a last one from my side on the Fagron genomics business. Perhaps could you elaborate on which products are you expanding upon, which specific tests are you now pushing into the market, and how perhaps regional expansion is going forward in the in the coming quarter. Thank you.

Sure, Lenny. Good morning. So as we said, the fire and genomics, that is a new segment that we also see back in the brand identity on the right side, is already supporting the sales of our brand. So that is the main focus. We have now one product in our assortment that is a tricolour test that is for hair treatment, right? We are selling this test already in Spain and Portugal. As you know, Phagron Genomics is located in Barcelona. So we are selling in Spain and in Portugal. And we already started in other countries in Europe. This is Greece, Croatia, Italy, and France. During the second semester, we're launching the Trico test in the UK, in Germany, and in Belgium. And of course, as well in the Netherlands, when we have one facility that focus on the personalized lifestyle, in the Fagron personalized lifestyle, and we'll also carry this test in the market. Next to this, we are working on two new products that we will launch in the second semester, two new tests that are linked to our brands. One is called the TeloTest. It's for the biological age, so for the anti-aging specific application, and the other one is the NutriTest that is for personalized nutritional Compounding, right, where we are going to also launch in Europe. Next to this, we also started in South Africa with the TRICO test, and in the second semester, we will start in Canada as well. We filed all the documents necessary for the American FDA, and we expect also in 2020 to start there as well. Next to the standard assortment, we also need to say that we are starting some projects for the Spanish government in the hospital segment, and that's not related to our brands. That are genomic projects that are driven by public hospitals and are public tenders, so we had one, and we are very happy because this gives us a new dimension as well on our genomics business, not only supporting the brands, but also entering into the hospital system there.

Okay, thank you very much.

You're welcome, Lenny.

We will now take our next question for Frank Plassitz from the group Peter Kev. Please go ahead.

Yes, good morning all. One clarification. Rafa, I think you made a comment on the growth in Europe, that you are confident that you can reach the same growth as in 2018, if I'm not mistaken. Can you explain that a little bit? Is that despite the capacity closure, the capacity reduction in the Netherlands, you think you can accelerate growth in Europe? So that's the first question. And then maybe second question, what is the progress you've made on introducing a new software platform in the U.S.? I know that you've been very successful with this in Brazil. What is the progress there in the U.S.? ? And finally, M&A. Is M&A indeed higher now on the management agenda and what are the main focus areas there? Thank you.

Yes, thank you Frank. So on the first comment on the European business, yes, you are right. We are confident that in 2019 we will see at least the same organic growth as in 2018 despite the facility in the Netherlands. How are we planning to do that? What are we working on? We're working on two main projects. Of course, one is the question of lending on the genomics and the brands that we see traction there. And the second one, as you know, we started – I'm going to explain a bit about the U.S. and then I'm going back to Europe. So we started with our Far-Ground Sterile Services Strategy in the U.S., so that is the outsourcing of the – sterile compounding from hospitals into outsourcing facilities. We see that this is going to happen in Europe, so it's less mature in the U.S., but this will happen in Europe as well, and we want to invest on this. So we are working on a global strategy on Fagron sterile services, so not only in the U.S., but in Europe and in Latin America in the future, and this will give us traction for the European business. So therefore, we are confident for 2019 in Europe. On the final technologies in the US, that's very good that you said, because we invested in a new platform in Brazil. So there's a new coding language that is easy shifting from one language to another. So from Portuguese into English is the newest technology. And we're going to have this new coding of the software ready At the end of this year, of 2019, we already hired some people, some colleagues for the team of Fargon Technologies US that are now making a market research on what is there, on what can we improve, on the features of our software. So we expect to launch in 2020 or at the end of 2019, 2020, we expect to launch Fargon Technologies software platform and that is very important for our brand and essential segment because of course not only of the revenues that you can generate with the fee service in the software but also because we understand that it is crucial to help our compounding customers, right? So the compounding pharmacies, if they have a strong software, they will work not only internally in the process but also externally visiting the doctors and creating more prescriptions, and this is what we did in Brazil, and we want to translate the same model into the U.S., and the software, of course, helps on this. And regarding the M&A, we are working on it. We are, of course, always in constructive speaking terms with some parties. And we think that in 2019 we will see some development in that area. And, again, it's very important to say that we are focusing on our three key regions, North America, Latin America, and Europe. And, of course, it should be a cultural fit and a statistical fit. But we are confident that we will see development in 2019 in this area as well.

Okay. Thank you very much. You're welcome, Frank.

We will now take our next question from Anastasia Karpoza for TIPPEDS. Please go ahead.

Hi. Two questions, if I may. First, can you elaborate a little bit more on your efforts in penetrating chain pharmacies with Humco and upselling Fagron products to that market. And second, it's more of a housekeeping question, but you slightly changed your reporting on the U.S. compounding services compared to the last year. And I was wondering if you can help me triangulate between... the Fagron sterile services and Anasero brands as reported now and Fagron sterile activities and which are reported separately in the prior releases. So what is actually what to be complete?

Yeah, maybe to answer, to start with the final question Anastasia, I don't exactly understand what you mean because in previous press releases we also showed FSS growth, so sterile services growth for the U.S. market, and we elaborated on the growth of NSAO, so the more lifestyle-oriented part, and the sterile compounding part. So, indeed, we didn't make any big changes in reporting, Anastasia.

No, but in the prior press releases, even in your full year results, you referred to them as background sterile compounding activities. That would be, and then separately reporting Wichita growth. So our background sterile compounding activities is Wichita East and North, or like the Wichita facilities. or it's something else? I'm just trying to consolidate the numbers.

No, but it's in line with the previous one, and we can explain later in the next call if you need additional information on that. It's not on purpose that we change our reportings, Anastasia. Okay, cool. And then, Antoine?

Yes, sure. Maybe I may comment in this one. Of course, when we look at the business model that we have in the U.S., We have three divisions. That is, of course, brands and essentials. That is clear for everyone. So that is the brands essentials, the software, the genomics, so everything that supports our customers in the compounding activities. Then we have the Fagron sterile services. Those are the products that are meant for GPOs, IDNs, in the hospital market, right? And then we have the Fagron personalized lifestyle. Those are the compounds that are mainly driven for the prevention and wellness segment, right? So these are the three activities when you look at business model-wise, right? So I don't know, then you translate them into the numbers, of course, carrying on the reporting. But on a business-wise, those would be the three business models. And it is also related to the product as well, right? But more related to the customer segments that we are serving in. Right? So this means that brands and essentials would be compounding pharmacies, Fagron sterile services would be hospital and hospital systems, and Fagron personalized lifestyle would be direct to patients and, of course, to the clinics. So those would be the three elements. And as we were saying in the previous question, the Fagron sterile services, we see this has a potential, not only in the U.S., but we are – looking at opportunities in Europe and Latin America. On Hamco, we have, that's very well that you say that, Anastasia. We have the two segments. We have the compounding segment where we're saying that we have increased the API range. And then we have, of course, the consumer health. In the consumer health, we strength the team because we see opportunities of cross-selling of Brazilian products that we have now in the brands and essentials that we can transform them into more consumer-related, so finished goods. And we launched that line, we had some sales in it, so we increased the product portfolio there and we also made some new products that are for that segment. So we developed those products and now we want to go to the market, right? But though the focus, of course, lies in the compounding segment, but we are also developing this new line. And, of course, we are supporting the Hamco team in order to gain new tenders, new bids in the consumer side segment. So that's a segment that we are looking at, and that we are, of course, focusing on compounding. That's our core business, but we are putting some efforts there as well. So we increased our product line, and we increased also the traction to the market.

Great. And if I may follow up on your comments regarding... sterile services in Latin America. Can you elaborate a little bit more? How concrete are those plants? And on a general thinking, do we need to buy a facility? Can you ship the products from the US? Or do we need to build the facility from scratch to service the Brazil market? And is there infrastructure already in place for just to buy sterile services from you, from the hospitals?

Right. So in Latin America, of course, the market is very much immature when we compare to the US and also even with Europe. So it's very much immature, though there are some activities, much smaller, some activities there. And we are looking at some facilities that already exist. So the best way in Latin America would be to enter with an acquisition indeed. That would be the ideal situation, though it's not out of the plan to build a facility there. So if we can acquire with a reasonable multiple price, we would do that. But if that's not the case, we would invest in a new facility. And, of course, you asked about Latin America, but I want to take the chance to talk about Europe of the pharmaceutical services. Of course, we have some different markets, and each market is different. And in the Netherlands, we see that we can push organic growth with some of our existing facilities. So that would be one important. And in other markets, like the UK, like France, like Spain, like Germany, like Italy, it would be ideal, again, to start with an acquisition, but always having in mind the multiple enterprise. And otherwise, we might choose in one or in two markets to start building a facility there.

Great. Thanks a lot.

It's very helpful.

Thank you, Anastasia.

We will now take our next question from Stig. Mr. from ING. Please go ahead.

Yes, good morning. Thanks for taking my questions. I have three follow-ups on Wichita. I will ask them one by one. So on the 44% like-for-like growth in sterile compounding facility, can you disclose what the growth rate would have been without these supplier issues that you have experienced in the first quarter?

Um... Yeah, we estimate the impact that the growth will be slightly below 60% if we adjust for the one product that we have the supplier issues with.

Okay, and that is like-for-like growth at constant exchange rate.

Yeah.

Okay, thanks. Then knowing that the first quarter comp was relatively easy, Can you confirm that there has been a quarter-over-quarter decrease in sales, so compared to the fourth quarter of 2018?

Yeah, we see indeed a slight decrease in sales growth coming from a very good quarter last year, third quarter with 90% growth. But we are still confident and believe that we show nice growth rates at the sterile facility.

Okay. I assume or understand that these supplier issues will continue to weigh into the second quarter, probably not the entire quarter, but probably a few months. Do you expect that this reduced sales activity will have an impact on margins, as it is to assume that you continue to hire personnel and expense costs, whereas operational leverage is likely lower than you would assume according to your business plan?

Yeah, if we look at profitability, of course, this is a trading update, so we disclose sales. But as you can imagine, this is one of the bigger products there with a nice margin. So this could impact the profitability of Wichita for this period. But the impact will be not that big.

Okay. Should there be a catch-up effect in the second half? Do you expect to sort of catch up on these sales? Or is it just business as normal? Yeah.

Right. So, hello, Steng. Sure, in the second, of course, we have the introduction of new items and the controlled substances, as we were saying at the beginning, right? And the question of Matthias. So, we will see in the second semester an increase of sales due to this new product introduction. And as Karin was saying, we are very satisfied in our fire and sterile service activities in the U.S. We see a nice growth percentage. We have an internal plan. The plan is being followed. We are working In the sales side, we're working, of course, in the operational side because we can understand that with this extraordinary growth, also the organization internally needs to follow. We have our lab activities internalized. That is helping, of course, our bottom line, right, because we are internalizing those activities. And, of course, in the new product development, As well, so we are very much satisfied and we see, we expect 2019 to be also a very good year as it was 2018 for our 500 sterile services activities in the U.S.

Okay, okay, so on margins, I get that it's only a trading update, but is there any reason to assume that sort of the positive margin trajectory that you put out that it would be stable because of these issues in the first half? Or do you continue to expect higher margins year over year towards beverage or the U.S.?

Yeah, no, we continue to expect higher margin. And, of course, we had some product issues. But on the long term, we're not expecting any big changes in our margins.

Okay. Thanks very much. Thank you, Stijn.

As a reminder, to ask a telephone question, please signal by pressing star 1. We will now take our next question from Eric Wilber from ABN Ambro. Please go ahead.

Hi, good morning. Thanks for taking my questions. I was wondering about the main driver behind the sales of the European essential business being down 3% year-on-year in absolute terms. And secondly, also on genomics, I was wondering if you could perhaps shed some light on how much sales contribution you expect from this division by the end of this year, including sales from cross-selling tests and research. Thanks.

Thank you, Eric. On genomics, we expect to have, of course, sales of the test as well and of the projects that we are doing. And as being a startup, because it has been open at the end of last year. And of course, you have seen the facilities. So it will be a nice startup. So we would say between 500,000 and 1 million would be really a good start. So we are heading on that, right? On the test as well. So on the test being sold. And of course, each test generates approximately two, three prescriptions, right? On a run rate basis. So when the product is finished, you get again a new one, right? So we will see attraction on the brands there as well. And we already saw it in the first quarter. And then on the other question of Essentials Europe.

Yeah, so indeed, if you look at the European numbers, they're slightly down if you compare them to... to the last quarters, and maybe to elaborate, if we look at the fourth quarter of 2018, there was a really strong quarter for Vagron, so we see some impacts of that in the first quarter of 2019, but there's no specific reason. We are still really positive about 2019 on the European markets, and we continue our strategy for growth there based on brands and introducing new products to our portfolio.

Okay, very clear. Thanks. Thank you.

We will now take a follow-up question from Matthias Mudhut from Kepler Chevro. Please go ahead.

Yes, hi. Just a question on the Colombian business. It's been a couple of quarters that's performing pretty well. Can you just elaborate a little bit on that business, what is going on, and what is driving that solid performance? And then a more open question, if you look at present performance, I would say regulatory and the reimbursement environment. Are there any big changes that could potentially impact the business, either negative or positive? Thank you.

Thank you, Mathias. On the regulatory side, we don't foresee now any development. So it's calm water, both from the negative, as you were saying, and from the positive side. So everything remains the same. And the Colombian side... Colombian side, if we look a bit at the history, there were some acquisitions that we did in the year 2012, if I don't remember wrong, where smaller compounding facilities, local facilities, and as we were saying, we are shaping the business towards three segments, right? That is the brands and essentials, with the genomics, with the technologies, with the lab embedded there, and of course the brands and the APIs. Then we have the Fagron sterile services that we want to see at Europe and at South America. And now we are shaping, we are seeing that we have the Fagron personalized lifestyle, so direct to patients and direct to clinics. And those Colombian pharmacies were, at that time, selling to that segment, so products for the personalized lifestyle, so for prevention, right, for wellness. And as we are now shaping that business as well, we are strong in the US, and we're shaping that in some facilities in Europe. We are also now focusing in Latin America, especially in Colombia, because in Brazil, we don't want to enter in that segment. And the sterile services, yes, but not in that segment, because we understand what we need to support our current customers in Brazil. But in Colombia, we see that that is a very nice entrance for nice growth, right? So those would be all the business related to the prevention and to the wellness. And we are talking about hair growth, and we are talking about the identical hormone replacement therapy. So we are talking about those products, concepts that we want to focus in Colombia as well on the fiber of personalized lifestyle.

All right. Thank you. Thank you.

There appears to be no further questions at this time. I would like to turn the conference back to the host for any additional or closing remarks.

Thank you, operator. So thank you very much, all of you, for attending this call and for the good, excellent questions. And we see each other or we talk to each other in further calls. Thank you very much. Have a great day.

This concludes today's call. Thank you for your participation, ladies and gentlemen. You may now disconnect.