Fagron Sa Ord

Good day and welcome to the conference call regarding the Q1 results of Fagron. 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 first quarter of 2021 Trading Update Conference Call of Fagron. We will start the call with a presentation on the highlights of the first quarter by our CEO, Rafael Padilla, and our CFO, Karen de Jong. The presentation can be downloaded at our website, investors.vagon.com. After the introduction of Rafael, we will open the line for Q&A. Rafael will conclude the call with some closing remarks. Rafael, Karen, please go ahead. Thank you very much, Constantine.

Good morning, all of you. We start the presentation at slide number three with a consolidated turnover of this first quarter of 2021, where we see a decrease of 4.8%, though an increase in constant exchange rate, total growth of almost 5%, and organically 2.6% at constant exchange rates. When we look at the regions, EMEA at almost 47%, Latin America almost 24%, and Northern America at 29.5%. Looking at the segments, essentials, of course, 50% of our revenues, FCS, compounding services, both sterile and non-sterile at 28.3%, our premium pharmaceuticals, niche pharmaceuticals, almost at 2%, and we are very happy to announce the 19.6% of brands that has increased also when we compare to last year. On the right side, we see a photo of one of our colleagues in one of our 11 Clearrooms in Wichita, Kansas, FSS US, working with one of the four robots that we have now for the IV bags. We move to the next slide.

Good morning, everybody. This slide represents the turnover development in the first quarter of 2021. Starting with sales of 141.6 million last year, we see a decrease of 10.6% in EMEA due to the delay in elective care and a decrease in the number of scripts because of COVID. In Latin America, we see nice underlying developments with a growth of 21%. The U.S. grew 9.4%, driven by B&E and Vagron compounding services. The ethics impact is 13.6 million, mainly because of the weakening of the Brazilian AI and the U.S. dollar. We see a small contribution of acquisitions, resulting in a sales of 134.8 million, which represents a decrease of 4.8%. Going to the next slide.

Thank you, Karin. And here we see a photo of the new facility in Chibinia, close to Krakow, our new GMP repackaging facility. And the transition, as we stated previously, starts in the second half of April 2021, and the first products will go out of the new facility in the month of June. So we're also very happy to announce that we are on track also there. And we can say that it's one of the nicest facilities that we have in the group. We have been there this quarter, and we're very happy. So congratulations with the work done by Wojtek and his team. We'll move to the next slide.

Here we see a geographical breakdown of the sales. We see strong operational performance in North America and Latin America, but impacted by sharp weakening of that AI and the US dollar. And may I show the decrease of 7.3% because of the decrease of prescriptions in the different European countries. Going to the next slide.

Thank you, Karin. We'll go now into EMEA. As Karin said, there is a decrease organically of 10.6% at contact exchange rate due to the strong decline in prescriptions because of lockdowns and other restrictive measures that negatively impacted the demand for essentials and compounding services. On the other hand, of course, we see a nice development of the brands, increasing at 24%, and the sterile compounding services, our sterile facilities mainly in the Netherlands, being also very strong. Last year, when we had the decline on the scripts regarding elective care, we saw also an increased substantial demand on COVID-19 related items, mainly in the protective site, disinfectant gels, mouthmasters, et cetera, that we didn't see during this first quarter. And as we now said, we are now also streamlining and working on the centralization of the back office elements in EMEA and Poland, the transfer of Poland is one of our examples. So saying that we are totally prepared for benefiting when the lockdowns are less restrictive, when the market opens again. So we will see a nice development in this area as well. Going to the next slide, we see what we were saying regarding the number of scripts and these official data from the Dutch pharmacy association where we see with the green line bottom up, that is the general practitioners, we see the first two months that the level is clearly down when compared to the first quarter of last year, but also when compared to the fourth quarter of last year that we also said during a full year 2020 results that we would see this impact in this region. Down we see in the dotted line the specialist number of prescriptions that we also see that is down compared to the first quarter and also slightly down on the fourth quarter of last year. And this is official data from the Dutch Association. You can also download it from the website. Going to the next slide.

Here we see the sales in Latin America. Latin America grew organically by 21.3% against concept exchange rates. In euros, sales declined by 6.7% because of the weakening of the Rai and the Mexican pesos. We experienced that despite the COVID measures, most pharmacies remained open. Brazil could leverage a strong position in the market and were able to grow in all segments. Essentials grew by 24% and brands with 12.4%. The compounding activity, which is a small part of the Latin business, shows nice recovery after more difficult quarters last year because of COVID.

Very good. Now we are at slide number 10 in North America, and we see here on the right side one of the four roads, again, filling the ivy bags, and we put a lot of attention in this new product group that we launched at the end of the first quarter. And, of course, we see a total growth of 1%, total growth at constant exchange rates at 10.4%, organically at 9.4%. Of course, the turnover has been impacted by the weakening of the dollar versus the euros. As Karin stated at the beginning, the brands and essentials grew almost 8%, and FSS in Wichita, we increased 15.3%, being a run rate now at this moment of 60 million March 2021. At this moment, we are very happy because we have 158 SKUs now in the portfolio, so a total assortment of 158 SKUs. We have introduced the 12 new SKUs, being the IVBACs, the most relevant ones, and we have 23 in the pipeline for this year of 2021. On the other side, we also explained that during the COVID pandemic in the U.S., we gained new customers that now are benefiting from the broader assortment, and something that we are also very satisfied with is that we are onboarding new customers on a weekly, monthly basis, so this gives us confidence in achieving the target that we gave in 2022. Anaseo, last but not least, Anaseo grew almost 7%, and this is a clear sign of our strategic choice on focus on lifestyle and prevention that is paying off. Now we move to the next slide, and this is the slide that you saw during the full year's 2020 results. That was also the last one slide for 2021. What would we see? And this, we do it every year, and we like it a lot to share this one with you. So we said that we would see Further growth in turnover and profitability for 2020, or we are going to see, right? Also about the streamlining of the EMEA region, what we said organizationally, also allocation of product assortment, the back office centralization, these positions as in a sweet spot when the market reopens. Again, that was the second bullet. The third, and we just said the leveraging the customers and the SKUs at FSS in U.S. Fourth, of course, we are focused on R&D and innovation on three pillars. One is focused aimed at prevention. We are developing our brands there. We saw also a nice development in brands during the first quarter. Second one, we repeated, again, the sterile compounds, including the IV bags, in the U.S., but also in other countries, as the Netherlands, as South Africa, as Belgium, important as well, as Israel. and the Global Rollout of Phagron Genomics in the month of March. At the end of March, we'll launch our first genomic panel that is a script generator for our brands segment in the US. So we're also happy to announce this one and the last bullet that we would pursue an active but disciplined acquisition strategy in EMEA and North America. And now we move to the next slide. So Q&A, and here we have four very nice colleagues from our Wichita facility in the U.S. Thank you very much. Q&A.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's star 1 to ask a question. We'll now take our first question from Matthias Meinholt from Kepler Chivre. Please go ahead. Your line is open.

Yes. Hello. Good morning. Can you hear me?

Yes, Matthias. Good morning. Good morning.

Yes. Hello. Good morning. Three questions from my end. First one is actually on the guidance. So you guide for a further growth in profitability and in turnover. Could you just maybe... quantify what we can expect and maybe break it down a little bit of what we can expect per region. And then also a question was if there's any FX assumption, maybe on the rate AI and the U S dollar, and that is underlying that guidance. Then a second question I had was actually on EMEA. maybe can you elaborate a little performance per country and also there in terms of the streamlining of EMEA and the actions you're undertaking do you see additional scope for cost savings on top of what you've already announced and then a third question is actually on Wichita again some SKUs launched still some in the pipeline you seem to be recovering in terms of sales could you maybe just elaborate a little bit more on how we should see defacing towards the 100 million target, and after the 100 million target, will you continue to introduce SQs, and is there maybe scope for further growth? That are my questions.

Yeah, so good morning, Matthias. Maybe to start with the guidance. So, indeed, we remain positive for 2021 in sales and profitabilities. So to specify, we expect total growth, excluding any future acquisitions we are doing. On the FX, we took into consideration, of course, the sharp weakening in the first quarter compared to the last quarter, compared to the last year, first quarter of 2020. However, we do expect that the AI would stabilize a little bit And so we do not expect a major further decline there, and that is taken into consideration in our guidance. Per region, we don't give any regional guidance. We saw, of course, good performance, underlying performance in the U.S., as well as in Latin America. In Europe, we encountered some impact of the number of scripts going down as a consequence of COVID-19. However, we do assume that somewhere in the second quarter that will pick up again and pick up again. And so because, as you know, an important driver of our sales are the number of scripts. So it's important that with the vaccination programs in EMEA and with elective care starting up again that the number of scripts will increase for that specific region.

Good morning, Matthias. Raf speaking regarding EMEA. A nice question on the performance by countries, and this we see as well. So we see the countries where the restrictions are tighter, are higher. So we see a lesser performance, and that is more the North European countries. On the other side, we also see the South European countries where the measures are less restrictive. We see there better developments. So this gives us also confidence on the fact that we said that when the market reopens again, we will benefit from it. What have we done? We have set the streamlined organization. So this means on the back side, we are gaining some efficiencies. That's very important for us. In the production side, but also in the administrative side, when we go to the front office, Of course, you know, we have a strong focus on brands. This is where we are different. Strategically, this is very important for us. And we have done an exercise on product allocation in countries where we have different companies acting in this market. And this will bring, of course, benefits. And when you were asking about other actions in terms of quantifying this action, of course, when the scripts go back to the level that we were used to it, we'll see clear benefits on that respect. Then we go to FSS in Wichita, and it's a wonderful question what you ask when we reach the 100 million in 2022, the extra ones. Are we aiming for more? The question is, of course, yes. We're not going to give any guidance for 2025 there, but we see that the market is there, the drivers are during the COVID times, not even remained there, but were enhanced. And this is mainly the drug shortages and the outsourcing. So now with 158 SKUs, 23 coming, we are really increasing production. I don't know if you remember when you were there, the fault that was there for controlled substances. Now it's totally filled. So that's very good. And we aim for more. We really aim for more. The market is very attractive there. Thank you very much for your three questions. Thank you. Thank you.

We will now move to our next question from Frank Klassen from the group Petercam. Please go ahead, your line is open.

Yes, good morning all. Also three questions please. First of all, Latin America, nice 21% organic growth and constant currencies. Could you roughly break it down in pricing and in volumes? That's the first question. And secondly, on the repackaging facility, the move to the new repackaging facility, the ramp up. Could you elaborate how long it will take and how much of the current European repackaging activities will move there? And how will that go? Some words on that, please. And finally, on M&A, we haven't seen M&A for a while. Is it indeed more difficult due to COVID? or what can we expect on the M&A front? Thank you.

Thank you very much, Frank. Good morning. Regarding LATAM, of course, we are very satisfied with 21% performance, and we look with a lot of confidence on the developments in the region. There's always, as you said, there's always a balance between the price and volumes. In this first quarter, we see the price being more... present there, and this is due to the fact that we have strength, our competitive positioning there, mainly in Brazil, of course. We're talking Brazil. That is a motor of our Latin business. Colombia and Mexico are performing very well, by the way, as well. So we have strength, our positioning there, and we are in a state of asking the right price more and more to our customers. So this is what we have seen in Q1. And then regarding the GMP repackaging site in Chibinia, close to Krakow, in the second half of April we will start sending the first orders and the first products will come out in the month of June. This is a process that will take approximately six to nine months that we have transferred all the assortments in the different production sites in EMEA that is very much scattered. Our aim is to be at the end of this six to nine month We want to have more than 75% of the production there in Chibinia, and the rest of the production stays somehow locally in order to serve the local demands. This is a product that is only specific, for example, for Greece or Croatia or Italy, mainly South European countries that have some specific volumes product, and we want to keep somehow flexibility, so it's much more efficient this way. But the rest of the assortment, approximately 75%, 80% into six to nine months will be brought into Chibinia, Krakow.

Yeah, good morning, Frank. On your question regarding M&A, we are not changing our M&A strategy. So we have a disciplined M&A strategy and we're actively looking in EMEA and also in the U.S., for small and medium-sized deal. And we look at all opportunities that come by. And if, of course, we can be more concrete, then we'll communicate this. We don't see any delays regarding COVID. Of course, we would like to travel to certain locations to see facilities and to talk in person to people. But we manage with online meetings and virtual tours. So there's There's no big delay on that side. So if there's anything concrete, we will, of course, communicate that.

Okay. Thank you very much. Thank you, Frank.

We will now move to our next question from Lenny van Steenhuys from KBC Securities. Please go ahead. Your line is open.

Good morning. Thanks for taking my question. I have two from my end. I was wondering, so we mainly see a decrease in EMEA revenue. You mentioned here an overall market circumstance as the amount of scripts was going down. I was wondering if there's also some effect of pricing pressure perhaps due to the increased competition of which we're hearing more and more. Should we also expect a bit of a margin effect on that side for EMEA going forward? And then secondly, we see that in Europe the brands still remain quite strong. I was wondering a bit about drivers behind that strong performance. Is that really still that new genomics division that's pushing revenue in the brand division, or are there other factors playing into that? Thank you.

Thanks a lot, Lenny. Good morning. Regarding your first question on the price pressure with new competition entering, of course, when we get new competition, we have somehow effect on this one. though when we look at, and that is mainly the Dutch market, of course, that we're talking about, that is relevant for us, of course, when we look at the setup of the customers, we have the customers grouped in four main wholesalers that serve those customers, also with those customers being part of those wholesalers with franchise or own pharmacies, right? And what we have done, and therefore we always stated... Since the beginning and so far has been the case that we wouldn't see materiality on the sales and margin related is that we were able to sign relevant contracts with a substantial part of the Dutch market. So this is the fact that allowed us to say this non-materiality of this new enter. And then on the brand side, and thanks a lot for this question because it's something that we like. We have a lot of passion. This is where we are different, and this is where Fagren should focus on the branded products. We see traction from our three genomic panels at this moment, right? So that's generating new scripts, also generating new brands, but also the rest of the brands are doing very well, and this is because the consequence is that We are focusing with our sales teams, the teams that also visit the customers, also from business leadership perspective. There is a clear KPI and targets for all of us in this respect, also divided by product group, so you see the effect of the focus of the organization also going to market, but also the genomics, as you said very well, into these results. Thanks a lot for the two questions, Lenny.

Thanks.

And just as a reminder, that is star one for any telephone questions, star one. We'll now move to our next question from Steen de Meester from ING. Please go ahead. Your line is open.

Yes, good morning. Thank you for taking my questions. I have a number on Europe, and I will ask them one by one, if you allow me. The first one is to circle back on Lenny's question on pricing. You mentioned the Dutch compounding activities, but there's also quite some sales loss in essentials minus 12% if I calculate it right. So is this purely volume or is there also a pricing element involved? That's my first question.

Sure. Thanks, Stein, for your first question. And essentials is throughout the EMEA region. This is related to volume. 100%. No pricing. We don't experience any pricing pressure here. We don't see it. It's more on volume.

Okay. Then looking towards the second quarter, if I may, also for Europe, do you see an improvement in these two markets, essentials and compounding as lockdowns potentially ease and elective scares come back? I'm trying to sort of gather whether Q1 should be the low point or you see sort of the same in Q2? Because if you look at the comp year over year, last year even had a stronger base. So, yeah, sort of look forward to the evolutions in the current quarter.

Yeah, that's correct. So in the second quarter, it was an increase of 4% approximately. Last year in the first 3%. We had, as we stated in the other calls last year, the demand for COVID-related items at that period of time, and we were able to serve the market diligently. When we look at this year, of course, we are dependent on how our governments will react on policies regarding lockdowns. What we see in this second quarter, what we all hope as well as citizens, is that the market reopens again. When we take example of the U.S., we see that after a successful vaccination program, except California and the Northeast that will be open in the month of June, the rest of the economy is 100% open. And we see it back on the elective care. So we are totally confident that when this reopens, the elective care reopens back again, we are in a sweet spot. We are very well positioned in EMEA with the homework that we have done in order to capture this market for sure.

Okay, thank you. Then a question for you directly, if I may. You have been appointed as head of EMEA as of Q3. Should we see that as a permanent appointment next to your CEO job, or would Fagin still be looking for another candidate to head this department?

Yes, thanks, Steiner. And, of course, you may ask all the questions to me directly, for sure. I like it a lot. Yes, when we took this role, the purpose was, as we did with North America, that is a job normally from 9 to 12 months approximately, the idea here was to streamline, to reorganize, to put the right focus and attention. We had an EMEA region very much scattered. So we worked on the cultural base to bring it together as one EMEA with the different cultural languages, of course. And then, of course, strategically to light the attention and focus on the branded products, on the products where we are different, and also going to the prescribers because we are a prescribing company and bringing innovation power in it. Something that we didn't say, but innovation is very important for us and we have a KPI of 10% of new sales. So this is something that we are focusing on, of course, globally, but also in EMEA. So this process, we understand that takes from nine to 12 months, and then we will, of course, give it to a colleague of us that will do a fantastic job as now the team in U.S. is doing, or the one in Latin America, where I have personally been in the two regions. Next to the work of the question of Frank on leading...

the the transition to the new gmp repackaging uh company in poland okay understood understood and then and one uh final housekeeping question if i may so these acquisitions of gaco and pharma in europe are these both accounted under essentials or uh partly also in compounding

So for GACO, GACO sells equipment, which is branded as, in some cases, FACO brands. So then it's reported on the brands. If you look at the Tamar acquisition, of course, it's fully reported on their acquisitions, but it's partly essentials, partly brands, and partly compounding essentials because they do the three activities. Of course, initially the brands are limited for Tamar, and as we integrate them more, the part of the branded products will increase because it's part of the strategy. But that's mixed over all three segments, Stijn.

Okay. So could we assume that about 3 million impact in sales positive impact is sort of roughly split evenly between the three divisions?

No, the big part is, yeah, I think you can split it. You can split it. I think the bigger part is on the essentials and the compounding and the lesser part on the brands.

Okay, okay, understood. Okay, thanks. These were my questions.

Thanks, Stein.

And just as a reminder, it is star one for any questions. We'll now move to our next question from Eric Wilmer from ABN. Otto, please go ahead.

Good morning, everyone. Two questions from my side. If you look at the pie charts for EMEA per product segment that you publish each quarter and you calculate the implied quarterly revenues per product segment, it actually shows that your compounding services business, which should be hit most by COVID, in EMEA has been stronger in absolute terms than Q2 last year and in line with Q3 last year. despite that you mentioned that the degree of elective care in Q1 this year has been lower than those quarters. So I guess this question is perhaps somewhat related to Stan's question. What is the reason that compounding services still were relatively stable in EMEA in absolute terms, despite the COVID headwinds? Or is this fully, it is indeed fully related to the Tamar acquisition? And secondly, how did margins do, broadly speaking, in Q1, and most specifically for EMEA, just broadly speaking? Thank you.

Yeah, so maybe to start with the last question. So on margins, you know, it's a trading update, so we don't disclose anything on margin. We were positive about sales and profitability development in 2021, but we don't give any indication on margins for the first quarter, Erik.

Yeah, and on your first question, Erik, we see a decline when we compare to the first quarter of 2020 of 18%, right? the on the compounding services and on the essentials about 15% so we we take this comparison and this is related related directly related to the lesser scripts so I hope that this answers your question yeah maybe my question wasn't that clear but with all the with all the

let's say headlines about increased competition, especially in the compounding services business. Uh, when you look at the quarter results, um, and you look at those, those pie charts, and if you try to dilute from that, um, the, the, any impact on compounding service business, it seems that in, in, I mean, Q2 and Q3 should be less hit, uh, the compounding services, uh, compared to Q1 and Q4, uh, because of, because of COVID, uh, I would assume. And it seems that your compounding services business was actually relatively stable in Q1 this year compared to Q2 and Q3 last year, which should have been stronger. So that was actually, I'm just trying to say whether it's related to the Tamar acquisition or is the competition not as bad as everyone is fearing?

Yeah, that's correct. You are totally correct, yeah.

Yeah, so it's currently the acquisition of Samar that's represented on the compounding services. Of course, we see a percentile decline at historic currency rates organically. So that was 18.8% in the first quarter. If we look at the last quarter of last year in the May, it was 15.1%. The absolute amounts are, for the first quarter, 15.5 million. For the last quarter of last year, 16.7. So we do see a decline in absolute numbers. If you compare it to the first quarter, it's around the same amount. So the contribution is partly because of the acquisition of Tamar. And, of course, the main reason, and you can also see that in the segment information for the first quarter, is that last year we could compensate for the decrease in product demand by COVID-related products. You see that in the growth in Vagrant Essentials last year in the first quarter, where you now see a decline of 15%. So the shift in demand that we experienced last year because of COVID, where we could compensate the decrease in elective care by selling COVID-related products, that is something that's more difficult in the first quarter because of governments but also other companies stepping into that market and not being competitive enough for us anymore. So there you see the impact for the first quarter in the essentials if you compare that to the first quarter of 2020 in that case.

Okay, understood. Very clear. Thank you. Thank you very much.

We'll now move to our next question from Alex Kogut from Kempen. Please go ahead, your line is open.

Hi, thanks for taking my questions, F2. With respect to FSS, what kind of run rate are you expecting at year-end? I'm just trying to understand kind of the curve of revenue acceleration there. And then a second question on EMEA brands. Could you also give us a sense of genomics test volume or some kind of metrics to quantify growth there? Thanks.

Yeah, good morning, Alex. So regarding the run rate of Wichita, of course, we shared the 60 million and we are very satisfied of this one. We have four elements and we reiterate those four elements. So the market picking map, again, our assortment and its automation that it's as we want it the customer portfolio that we're very happy on, and the last one, the drivers that we were commenting before. And this gives us confidence that we will see an acceleration of growth till the end of the year. So in Q4, we'll see a clear acceleration on the growth in Wichita. And regarding the brands and the volumes, we see volumes on the brands. And something that we are focusing on is the And that's something that the market showed us also during COVID. So we're in the right spot. That is the prevention and lifestyle. And the genomics is totally focused in this one. And this generates new scripts, let's say, this way, but always on the cash-based market. So not in the normal care, but in the cash market. And this gives us new volumes. And this is a Part of the business that we are focusing on, that's also where we are alone, so no competition. And this is what we're going to see also the upcoming months, quarters, years.

Yeah, I mean, I guess what I was trying to get at is what kind of volumes are you doing in genomics? It's pretty hard to understand where you are in the launch of those products.

Yeah, we have internal targets of percentage of sales with genomics. And this is low single digit, of course, because this is a new activity that we started. And let's say that many countries are reaching this target. We even launched it in the U.S., the first genetic panel. So when we get this low single digit targets in the countries we are active in, we will be very happy.

Understood.

Thank you. Thank you, Alex.

And just as a reminder, that is star one for any telephone questions, star one. We'll pause for just a moment to allow everyone to queue. It appears there are currently no more questions, so I'd like to hand the call back to our speakers for any additional or closing remarks.

Thank you very much, operator, and thank you very much, everyone, for attending these calls and for your very nice questions. We really appreciate. And just a last remark, we normally do this call the 12th of April when Constantine's birthday, so it was your birthday yesterday, Constantine. And, of course, as you all speak with him a lot and you do fantastic work, so you can have the chance to say thank you and happy birthday to him. Thank you, Rafa. Thank you very much, everyone.

Thank you. ladies and gentlemen this concludes today's call thank you for your participation you may now disconnect