Fagron Sa Ord

Good day and welcome to the conference call regarding the Fagron Trading Update Q3 Results 2020. Today's conference is being recorded. At this time, I would like to turn the conference over to Fagron. Please go ahead.

Thank you, operator. Good morning to you all and thank you for joining the third quarter of 2020 Trading Update Conference Call Fagron. We will start with a short introduction by our CEO, Rafael Padilla. and then immediately open the line for questions and answers. Next to Rafael, also our CFO, Karen de Jong, is present to take your questions. Rafael will conclude the call with some closing remarks. Rafael, please go ahead.

Thank you, Constantine, and again, congratulations with the good organization of the day today, Constantine. Thank you all for joining our conference call. Despite the fact that this quarter was again much defined by the impact of the COVID-19 pandemic, we're pleased that we delivered again another strong quarter. Thanks to our product and regional diversification and our reliable supply chain, we're able to navigate well. Both in terms of turnover development and profitability, Fagron once again showed a good performance in the third quarter as demonstrated by 10.7% turnover growth at constant exchange rates. The demand for COVID-19-related products is keeping pace with the development in infection rate, which is rising again in a number of countries. Demand for elective care recovered in a number of regions, although it is being scaled back again in areas where the number of COVID-19 infections is on the rise. Our diversified portfolio allows us to respond effectively to both of these developments, as is evident by the strong performance in Latin and North America. The weakening of the Brazilian real and the Mexican peso had a severe negative impact, but at constant exchange rates, Latin America delivered, once again, strong turnover growth of nearly 24%. Also, North America reported good turnover growth of 6.6%, driven by the strong performance of essentials and especially the brand segments. Compounding services improved compared to the first half of 2020, showing a slight decline in turnover. Our rigid activities, although obviously also impacted by COVID-19 in the third quarter, are still on track to achieve stated long-term targets in 2022. The picture at EMEA was mixed with essentials and particularly brands performing strongly, while compounding services posted a drop in turnover. In the Netherlands, where we traditionally have strong position in compounding services, the impact of scaling back elective care is more difficult to offset by the increase in the amount of COVID-19-related problems. As from September 1, 2020, the European activities are being structured more efficiently to enable us to respond even quicker in the market. Part of this restructuring is going to lead the EMEA region, consisting of Europe, South Africa, and Israel. The flatter organizational structure will lead to better collaboration and more integration to further leverage our market leader position, allowing us to realize synergies, reduce costs, and economies of scale. For instance, in the field of procurement and supply chain. Agility and entrepreneurship should also result in quicker go-to-market strategies. We'll put even more focus on innovation and the development of brands and new products and concepts. Furthermore, we will sharpen focus in the various brands, which in particular applies to our multi-brand model in elements. Another important development remains consolidation, and we are proud to have further strengthened our group in the third quarter of 2020 with the acquisition of Pharma Tamar, a full service player in the Israeli compounding market with a turnover of around 8.1 million in 2019. We will continue to pursue possible acquisition opportunities that may arise in the current market dynamics. The coming quarter will also be dominated by COVID-19 and visibility is limited. Despite the rather limited and non-material impact of COVID-19 on our performance, the economic uncertainty persists. We will therefore continue to manage our investments, cost base and cash flow in a disciplined way while remaining keen on pursuing opportunities. We are proud of the commitment of the whole faculty, our entrepreneurial culture, and our proven resilience during these unprecedented times. Operator, now we'll open the floor for tuning.

Thank you. If you would like to ask a question, please signal by pressing star 1 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'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Frank Klaassen with DeGroove Petercan.

Yes, good morning all. Frank Klaassen of DeGroove Petercan. Three questions please. First of all on Brazil. sound growth in Q3. Can you elaborate on how much is volume driven and how much is price driven? Because I can imagine that the weakening of the Brazilian real has impacted your pricing policy. Secondly, on Wichita, could you help us? What is the impact of COVID on the Wichita operations? For instance, on the ramp up of the SKUs, new customer audits, Maybe also some words on the competitive environment. What is happening on the ground in Wichita? Some words on that, please. And finally, a question on your acquisition in Israel. Could you elaborate on the other multiples, the synergy potential, maybe the selling shareholders? Some words on that, please. Thank you.

Thank you. Good morning, Frank. On your first question on Brazil, We see again in the last quarter, as we have seen in the last 10, 11 years, quarter on quarter, that we grew in volume, as we always stated, on a high single-digit growth, almost double-digit, and also, of course, price-driven. And as you know, we adjust the prices even in the daily base in the right pricing. With the nice performance of the Brazilian team has shown that we have been able also to grow in volume, as we said, according to our expectations, so we are extremely happy with the team there. It's a resilient and a great team. And on the Wichita side, what's happening on the ground, first of all, we reiterate that the fundamentals in our business case remain there, so the outsourcing and the drug shortages. Secondly, that we have done our homework in the operations. Even now, we are installing, as we speak, a new machine for infusion bags, So we'll be able to also enter this nice product segment portfolio. And also, as we said in the last calls, we are finalizing building our sales team. So this gives us a lot of sales power. So we have done our homework there. On the SKUs that you asked, we are now at 130. And we're going to introduce in this fourth quarter 16, 16 more SKUs. and then related to the customer groups of course as we all know we always explain this we have two main customer groups one is the private clinics that of course have had some some headwind during this last month but we are fully we fully believe that when they are fully on track so we can keep continuing delivering with our private clinic sales team and then and that's very interesting from our side the the the other group and that is of course the biggest part also in our business plan. These are the hospital networks, right? The IDNs, GPOs, buying for the hospital networks, nationwide. And here in the last month, we have been able to win new customers also because the demand of some products for the intensive care so increased and new customers walked into our door. Yes, so they wanted our products and we're very happy for that and also happy to help them in these times and so this gives us the ground to be very confident on our business case on Wichita for 2022.

And then maybe on your last question Frank, so good morning. We indeed acquired Pharma Tamar in Israel in the third quarter. So Vagron and Tamar know each other very well. Tamar is the exclusive distributor of Vagron in the Australian market for over 10 years. There are approximately 1900 community pharmacies in Israel and 85 hospitals and the regulatory frameworks allows outsourcing for non-sterole and sterile compounding. So Pharma Tamar does essentials and brands that's approximately 60% of sales mainly in the essentials and then 40% is coming from that sterile compounding. We consolidate as of the 1st of August 2020, and sales in 2019 was approximately 8 million. We paid for the acquisition seven times EBITDA of 2019, and we do see a lot of opportunities in the Israeli market. It's a very attractive market to grow, so we see potential on innovations as well as back-office synergies and purchase synergies. We expect that the EBITDA level can move up to the VAR on average. However, this will take a couple of years.

Okay, thank you very much for your answers. Thank you.

Thank you, Frank.

We'll take our next question from Stijen Demeester with ING.

Yes, good morning. Thanks for taking my questions. My first question is on the Dutch compounding business. In the European compounding business, we've seen minus 25% in sales over the last two quarters. Can you break down what is COVID driven and what is more market share driven given the ramp up of this competitor in the Netherlands? Sort of get an idea of what is what. That's my first question.

Okay, yes. Good morning, Stijn. Thanks a lot for your question regarding the Netherlands. So we see a combination of drivers there. We would like also to say that during the third quarter, we have seen when we take the two product groups, as we report the premium pharmaceuticals and the compounding services, that the decrease has been less than in the second quarter. So we are very happy for that, right? Because we see somehow more traction on the elective care in the Netherlands. Of course, our compounding activities there are mainly... non-sterile so for example dermatological products so people could wait more before they go to the doctor though in the third quarter we see the decrease lesser than in the second quarter in the drivers of this of this decrease we have first of all this delay on the elective care secondly the introduction of some registration by other players in the market not only by one but different from other pharmaceutical companies because of course the compounds are listed in a list of course where people can develop their own registrations we also want to say that we have uh we are doing our homework in this respect as uh two three years ago we decided to enter into this segment with premium pharmaceuticals category and we have filed in the dutch authorities competent authorities our registration files So here, of course, we are waiting for the positive, of course, answer of the Dutch authorities. And the third driver, of course, is the new competitor that we discuss always during the course. And we're very happy to do that because, of course, when a new competitor comes, it brings new business dynamics. Of course, we stated at the beginning of the year that we wouldn't see materiality. And luckily, this is still the case. So there is a combination of these three elements listed, set in a rank of importance.

Okay, understood. As a follow-up on this, what do you think about the fourth quarter in terms of elective care, given also the fact that we are seeing sort of a new wave and potentially more restrictions?

Yes, that's true. And even we heard that today there will be new measures will be set. Though, of course, we are, you know us very well, we are a very positive and ambitious company with a lovely team. Our culture is very strong, very entrepreneurial. We have, of course, the non-sterile activities that may have a delay there in the elective care. Though in the Netherlands, what we always have, we have our Dutch Wichita, that is Hogeveen, and there we see good traction in our sterile activities, and we are putting also a lot of effort, and also saying that we want to support our colleagues in the Netherlands, so our hospital pharmacies, in order to help them, to support them, as we did in the first wave that we were delivering on a daily basis, 24 hours a day, we are here to support our customers. So our stellar activities, we are sure that they will give us very nice, yeah, very nice surprises, let's say it this way. Thank you.

You are also reining in on the MAS segment with some organizational changes. You mentioned the multi-brand portfolio in the Netherlands. Will that continue operating under different brands, which potentially, yeah, sort of harm your effectiveness?

Yes, sure, Stijn. So first of all, on the NEA organization, So, of course, we see that Latin and North America are continuously delivering strong growth, and we have also the ambition that this is the case in EMEA. Therefore, we took the decision together with Karin and Konstantin, of course, to have a streamlined organization. And then when you see the model that we introduced in Brazil the last year, and we also introduced in the US in the last two years, that is an approach where each company has its own specialism right so we focus on on product portfolios on specific product portfolios per company and therefore you get two very important business drivers on one hand that is efficiency because of course our portfolio is huge so we want to be very efficient and by giving one product portfolio to one brand you get this efficiency of course and the second specialism specialism when developing a new product, and also when going to the market. So with these two elements, we will be now also seen in the Netherlands, where we also took this Brazilian and American approach in the Dutch market.

Okay, understood. These were my questions for now.

Thanks. Thanks a lot, Stein.

And we'll take our next question from Manon Colon with Erasmus.

Hello. Just looking at the – thank you for taking my question, sorry. On the EMEA segment, I guess that the compounding deterioration might deteriorate your revenue margins as well. Am I right? Can you maybe give us – remind us the details between the margins between your different products, please? Thank you very much.

Yeah, so thank you for the question. If we look at the third quarter for EMEA, we see a bit of recovery in the compounding services segment. If you compare it to the second quarter, I think if you look at our margins in general, and then I talk about EBITDA margins, We see in the first two quarters of this year a nice development, so driven by gross margin staying in line despite the shift in demand from certain products. We also see that in the third quarter, so both in terms of turnover development and profitability, Vagron showed good performance in the third quarter, so gross margins stay in line. despite that we see a shift in demand still in certain markets, but it's very diversified between the different markets because regulation, especially in EMEA, changes regarding COVID and the measures they take in each market. So despite the fact that we see a shift, margins stay in line with the general FAFO margin.

Thank you very much. We'll take our next question from Eric Wilmer with ABN Abro.

Good morning, everyone. Two questions from my side. It's my understanding, Raphael, that you will directly lead the EMEA division, focusing on innovations and time to market. You just also mentioned a flat organization structure. I was wondering what to read from this. So do you feel that perhaps this time to market has been an important reason behind EMEA lagging somewhat? And second question, perhaps a bit of a lame question. Apologies for that. But what was the reason behind the September IT issues at Hamco? And could you perhaps give a flavor of the sales impact? Thank you.

Yes, sure, Eric. And good morning. Or regarding a new organization, again, reflecting on the Brazilian success story of the last 10, 11 years, and on the last very strong two years' performance on the U.S., that we really have a nice business build there. You reflect on EMEA, that is your home market. That's where we started 30 years ago. That's where we did our first acquisitions many years, right? And then we reflect and we say, we have the ambition, of course, to have this region shining as the other two ones. And we say, what is the first element? And of course, in a company, culture is everything. There are a lot of statements that culture is strategy for breakfast, right? And we have great teams in Europe. Though you think the United States of Europe should become one strong Europe within Fagron, And mainly also what we said with the question of Frank on the fact that our portfolio is huge. So we need a lot of operational efficiency there. So that's the reason that we took this movement in order to streamline these operations and to flatten the organization in order to bring, of course, the time to market, the innovation, the grants, but also to increase productivity. collaboration and cooperation within the different countries of Europe.

And maybe on your second question, Erik, on the IT issue at Humco. So at the end of September, Humco was confronted with an IT issue. It was related to the ERP system of Humco, and that impacted the order and production and shipment at the end of the month. And Humco always delivers big volumes at the end of the month, So what you see is that we saw some impact in September there. The disruptions were resolved in October. So in general, for the total year, we do not expect an impact. However, at the end of the third quarter, we did see some impact because they were not able to ship. So estimated impact is around 800K for the Humco sales in the third quarter.

Okay, thanks. That's very clear. And this is something that basically has been resolved, let's say, permanently, I assume.

Correct. Yeah, correct.

Perfect. Thank you.

Thank you.

We'll take our next question from Justin Scott with Lammergeier.

Yes, hello. I've got two brief questions. The first, a generalized question in terms of North America, where you've seen very, very strong growth in brands compensate for the headwinds in compounding, and the headwinds in compounding are due to the decline in elective care associated with COVID. Assuming that the elective care bounces back post-COVID, How much of your growth in the brands and essentials do you expect to keep, and how much of it is purely COVID-related, or is some of that some underlying growth which is growing at the same time? And I have a follow-up question about Israel.

Yes, sure. Good morning, Justin. And regarding the brands and essentials in the US, if you recall when we announced the acquisition of Hamco in 2018, the first quarter of 2018, we also had the business theory that was also a big conviction from our side that it was not acceptable, not at all, to be in number four to fifth position in the brands and essentials market in the U.S., being the U.S. the biggest compounding market in value worldwide. So, therefore, we decided to acquire HUMCO, and it has been a very likely decision, right, when you see it back and also when you see it forward, because the HUMCO team is really a great team. Congratulations for having the team there. We have really grown a lot, but we see also that the room for growth is enormous in the brands and essential business because we are not at number four or fifth, we are now at number three in the third position in the brands and essentials market in the US. And we have, of course, as you know very well, a very strong portfolio. We're introducing new SKUs, new products from different parts of Fagron, from other regions. Fagron Lab is a very good example of that. We have a dedicated and highly motivated team, sales team, innovation team. So we are very confident that we will see more structural growth to come in the brands and essential segment in the US. So of course, you have the COVID-related products offsetting the decrease on the electric car, though we are very confident that there is a lot of room for growth in the brands and essential segment in the U.S.

Justin? My quick question on Israel was I think Karen mentioned in the press release it said margins of 10% and Karen suggested that over a course of two years you would bring that up closer to the Fagron average and just using this as a model for other acquisitions that increase in margins Where does it come from? Where do you see the Fagron bringing margin improvements to its acquisitions? Is it your purchasing power that allows you to improve margins, or what are the other sources?

Yeah, so thank you, Justin. Yeah, indeed. So they're currently, Tamar Pharma is currently approximately 10% EBITDA. We see the opportunity to grow that business to indeed levels of the Fageron average. If that's two years, I think for some companies it will take a little bit more. We usually acquire family-owned companies. So some transition time is needed, especially in the first year of the acquisition. where we see potential for growing that margin is driven by the one side, indeed, purchasing, so we can add the volume to the Vagentotal volume, and in this case, increasing the purchase. We also have repacking facilities, which we can combine volumes, so they can again purchase cheaper on that side. And then thirdly, on the innovation power, so we have a lot of products for Tamar specifically not only on the brand side but only on the compounding side where on the branded side we can introduce those specific products and on the compounding part we can share our knowledge on sterile compounding and on non-sterile compounding and share product innovations with that company so a combination of those will help increase EBITDA margin besides of course aligning back office activities for certain functions, that the combination of those will result in an increase of EBITDA margin over time. Hope this answers your question, Justin.

Yes, thank you very much. Thank you, Justin.

And again, to ask a question, please press star 1. I will take our next question from Louis de Smet with Kepler Chevroux.

Good morning. Thank you for taking my questions. Two follow-up questions from my side. One with regards to the streamlining of the European organization. I was just wondering whether you have already communicated and stated a cost-saving target in that respect. And second question is concerning the M&A pipeline, know that Fargrant is back and active again in terms of external growth. I was just wondering whether we can anticipate some more activity in that respect in the coming quarters. Thank you.

Yes, sure. Good morning. Regarding the European organization, we have, of course, qualitative targets together with the team. We have set them, qualitative targets, so what do we want to do in each market, also the collaboration amongst us, and this is very clear. On the other hand, quantitative, of course, it's very early to say, though qualitative, we are doing really our homework in order to have streamlined organization in Europe.

And on the second question related to M&A, so indeed we did an acquisition in the third quarter, a small one, which company we know very well and have a long history with, so we were pretty comfortable in acquiring that company. We have a pipeline of small add-on acquisitions which we are looking at currently. But as you know, we acquire usually family-owned companies, so it takes some time in the process to acquire those. But we do expect to do acquisitions in the next couple of quarters that fit within the Vagrant strategy. And, of course, when the time comes, we will communicate about those.

And we'll take our next question from Maxime Prothone with Octogas.

Hello. Thank you for taking my question. I have three questions. First one is again regarding EMEA. Could you elaborate about the levers that you have to streamline the business? And also, could you elaborate about what do you mean by time to market improvement? And then about Wichita, I'm still wondering why are you still keeping this kind of uncertainty And what would be the catalyst to remove or to say that the long-term target isn't any more achievable? And the last one would be regarding the M&A. Could you elaborate about the size and the nature of the business that you are looking at? Thank you.

Yes, thanks a lot. Good morning, Maxime. Regarding what we mean with streamline, again, we need to see that our business, we have a very diversified portfolio and that is, of course, very good because you can always compensate and be very agile when serving our customer. So, first of all, it's streamlining the supply, the procurement and supply chain So, uh, many of our European affiliates companies have, uh, his, her own, uh, production and supply facilities. So the first thing that, uh, of course we did, and this is a project that we started, uh, some months ago is the new GMP repackaging facility in Krakow that will, this will bring us a leverage and also will increase our, our service within our customers. And then. Of course, the time to market that you referred very well. The power of Fagron is that we are a very innovative company. 10% of our sales come from new products. The brand segment is extremely important as this is our own development with our own R&D and this is sales that will not compete. We are in the blue ocean, in the blue sea. So our ambition with the MIA region is that we can create bring, we can develop, of course, but we can also bring these brands in a faster pace into the market. Right? So this is very important for us. We're structuring the companies in order to have people responsible for this. And this is, we are copying. In fact, what we're copying is the Brazilian model that we did the last 10 years or the American model in the brands and essentials that we showed the last two years. Right. And then on the Wichita question that you raised and what will be the catalyst for achieving the long-term target. So we need to always have clarity in mind that first of all, the two main drivers, fundamentals for a business case, that is the outsourcing and the drug shortage, they exist, right? They exist and now they are stronger than ever. So those two fundamentals are in place. Secondly, that's internally, of course, we did our homework with the operations. Of course, we have the new plan, so we have two plans there, the east and the west, and we have the new plan. We invested in operations, in automatization. We were saying that we even now have a new nice machine for infusion bags, so we are entering also in this segment. And next to this, also we have increased our quality capabilities, our quality control capabilities. So we insource our testing in a state of the art lab. And this gives us, of course, a lot of agility by keeping our high quality standards. So quality is the main driver for FSS in the US, but also in other countries like in the Netherlands. We also developed 130 items these last years, and we are planning to introduce 60 more. So we are also on track there. And then, of course, when you go to the customer groups, we have two main ones that are the private teams that, of course, have had some headwind during this COVID-19 pandemic. But when they come back, we will be totally on track to serve them. And on the other side, and that's where we are so positive on the hospital networks, those are the hospitals, the IDNs, The GPOs that buy from their affiliates, hospital affiliates. So we have gained new customers within the last month to serve them in these difficult times. So all these four ingredients give us a lot of confidence for the capitalism on the long-term target, Maxime.

So, and then regarding your third questions on M&A, so indeed we're looking, of course, at companies that have a strategic and cultural fit with Vagron, usually family-owned companies in which the former owners stay on for a longer or a shorter time to run the business and to do the transition. We're looking at sizes of maximum 30 million, so smaller companies, which we know can leverage our potential on purchase, production, but also innovations within those companies. We're looking at acquisitions in our current region, so EMEA, North and South America. Multiples are based on the growth potentials. Historically, we paid between 5% and 7%. for essentials and brands companies. If we look at compounding companies in the US, for instance, 53P, it depends a little bit on strategic positioning and growth potential if we decide to increase multiples on those acquisitions. But historically, for the essentials and brands, it's between the range I mentioned and the size, indeed, max until 30 million is where we currently are looking at.

Okay, thank you very much for your answer. If I may, I have two follow-up questions. The first is regarding the management, because you mentioned that Rafael would be dedicated to EMEA, so does it mean that he will be less focused on other regions? And the second is regarding Wichita. Thank you very much for all your elements, but I was more wondering if... you need one or two quarters to have more visibility and to say that you are very confident that you will reach the 2022 target for Wichita.

Yes, so on Wichita again, right, and that's a very good question that you are asking, Maxime, on the visibility on the quarters. Of course, in the third quarter, we saw further or a nicer development when we compared to the second quarter in Wichita. So this means that the impact, the headwind of the pandemic was lesser, right? And of course, what we were saying on the hospital side, we could see the traction that we wanted to see, right? So all this combination gave us a better picture on the third quarter and we are very confident that that the fourth quarter will be again better right so we are then setting the tone as as we say in the us i'm not american in spanish but as the americans say and you learn a lot from them right setting the tone for the development on the upcoming quarters of course when the when the pandemic is is lesser in the us and the first state by state we will see a further acceleration of this growth for sure. And then on your first question, maybe Karin, because I don't want to talk about myself.

Sorry for that. So maybe you need to come back. So Rafa has a lot of experience. He was area leader in Brazil and he also was area leader in the US when he just started his CEO position in Vagron. So he has proven that he can handle both jobs. He has a lot of experience throughout the group and with the business model. He has a strong leadership team around him. So we believe that he is absolutely good equipped to handle this position next to his CEO position.

Thanks a lot, Karim, for this. Thank you very much for your answer. Thanks, Maxime. Thank you. Thank you.

And we have no more questions in the queue at this time.

Well, so thanks, operator. To conclude, we would like to say that our entrepreneurial culture, our diversified activities, and our highly dedicated teams are a strong foundation to benefit from the favorable trends for personalized medicine. Prevention and lifestyle medication are getting more traction, and the COVID-19 pandemic even increases these awareness. We are extremely happy to be in the position to create the future of personalized medicine. Once again, thank you all for participating in our conference call. Operator.

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