Fagron Sa Ord

Good morning and welcome to the presentation of the first half year results 2022 for Fagrad. My name is Karen Burke. I'm head of investor relations and I'm here together with our CEO Raphael Padilla and our CFO Karen de Jong. They will discuss the results of today and afterwards there will be room for questions which you can type on via the webcast. And with that I would like to hand over to Raphael. Thank you.

Thank you very much, Karin. Thank you all for assisting to our webcast. We are pleased with the set of results that we delivered during this first six months from a both organic and an M&A perspective. Our 13.1% Revit DA growth shows resilient performance in a challenging operating environment with high inflation and supply chain disruptions. We execute well in our M&A strategy, having new four companies in the family, followed by the one in Boston that we will speak later on. We remain strong in the cash flow generation, giving us power for further growth in the upcoming years. When we move to the next slide in the operational update, we're very happy to welcome two new colleagues, Vera Bakker and Martin Pau, as COO and Area Leader EMEA. Vera Backer, of course, in the story, as she has been for the last year non-executive director, will bring strong operational knowledge to our company. And Martin, who has good managerial and commercial skills, will bring experience in the pharmaceutical raw material business. When we move into our procurement supply teams that we installed during COVID, we have been able to synergize our global footprint in order to limit the supply chain disruptions. Of course, we have executed on our Fagron global brand strategy with the launch of DiluCaps, the most complete, extensive and patent exhibiting lines in order to help our customers to compound hard shell captions. We have followed, congratulations, with our sustainability agenda as well. Going to the regions EMEA performed as planned, we have been able to stabilize the region and it's very nice to see our compounding services segment in the Netherlands showing now growth. This has been supported by the renewal of important contracts at wholesaler and GPO levels. As said previously, we've also been positively exposed to nice markets like the German one. And now we have totally completed the transition to our new police facility. For LATAM, it has been a challenging semester. Macroeconomic environment has put some pressure in the consumers that decrease the demand in general. This has been translated into an increased competitive landscape where price has been an important element in the real short term. We have reacted because we believe that we need to keep, protect, maintain our leading position and we have even grown at 4% in both volume and price. We are now integrating Mexico and Colombia, as you know, with new facilities, state-of-the-art CGM. When we moved to North America, we have seen strong commercial execution. We have seen growth in our three segments, the brands and essentials, the prevention and staff with Anazeo, and our sterile outsourcing facility in Wichita. Here, we have now a run rate of $83 million. operationally we have moved the warehouse across the street as we said we have now a greater post-production area we have installed the third shift we are now as we speak installing the semi-automated labeling machine and at the beginning of next year we will install the visual inspection one very important to remark that the global shortage of sterile syringes is something that we need to monitor closely in order to get to our 125 million dollar grant rated. When we move to the next slide, given the developments of our Minnesota facility, we want to start saying that we do not compromise quality at Fagron. High quality standards are extremely important for us as we see this as a great competitive advantage. As we said during the Capital Market Days, our operations in the B&E in the US have priority as we did with Brazil and Poland to have an upgrade. Of course, the acquisition of Letgo gave us a nice operational footprint. The warning letter accelerated this integration. and we might see temporarily a displacement of output of products. Specifically on the warning letter, in November last year, we did get an audit from the FDA. There, we did get some remarks. We closed a majority of them, remaining three. In June this year, we received a warning letter. We appointed an external experienced consulting firm to help us throughout this process. In the timeframe, we responded with the remedial action plan. And now, closely with the agency, we're going to inform on the steps we take in its implementation. When we move now into our M&A strategy, Johan and the team performed extremely well. We acquired LEDCO, that of course, next to the operational footprint, has also brought us to the second position in the Brands Essentials market, having a more extended portfolio. In Belgium, we acquired PharmaPak, the leading packaging supplier in the compounding market in the Belgian market. Now, we have a full and extensive product portfolio defending our leading position there. QDAFAR has been very interesting because for the first time, we have taken proactive measures in order to protect our compounding services segment in the Netherlands and shows now the first, or is paying now the first dividends. HyperScan, extremely important for us in the German market, has brought, next to the new technology that we implemented in our Fagron Lab division, commercial exposure to gain market share in the brand essential market in Germany. And of course, as we said before, during the first week of July, we welcomed our new AT colleagues into the family at the new Boston facility. This one is very important from a strategical perspective. We always said that we were a Tier 2 player in a very attractive growing market of sterile outsourcing services in the US. Now we can proudly say that we're a Tier 1 player with a strategic presence in the East Coast. This facility, a CGMP state-of-the-art facility, is set up for sterile-to-sterile IV bags, and this complements the product range of Wichita. What are we doing now as we speak? Four things. First of all, integrating the back office, the operational footprint, quality control, R&D, in order to generate synergies with the two plants. Secondly, we are now applying for a new state's license, and even though, of course, the strategic importance of the East Coast is there, We believe that we have opportunities also in important states like California, Texas, Florida. Third, we are bringing the product portfolio to an optimal level. You need to think that we want to have two sites having the same offering with the same process. That will bring, again, as we said in the first point, great synergies. And fourth, Of course, we are onboarding new customers, and this is something extremely important because now we can tell customers, look, again, you have the redundancy, East Coast, center of the U.S., you have total exposure. And now we hand the lead to Karin. Karin?

Thank you, Rafa. Good morning, everybody. So the financials provide a resilient picture in a tough macroeconomic environment. We see our sales growing by 18.8%, driven by growth in all regions and all segments. Our profitability margin is at 19.3%, representing the changes we feel in the operating environment due to inflation and supply chain disruptions globally. We'll come back on that later on in the slide deck. Our earnings per share grew by almost 30% to 48 cents per share in comparison to 37 last year. Our free cash flow, a very strong denominator of our business model, increased by 44% to 32 million in the first six months of the year. Net depth to MDA leverage slightly increased from 2.1 by the end of 2021 to 2.2 at the end of this semester, leaving sufficient headroom for acquisitions. In this slide, we see on the one side the sales bridge where we see the contribution of the different regions to our sales growth. See organic growth in EMEA by 2%, Latin America growing by 4% organically, North America growing by 18%. We have the acquisitions, 21 million in the first six months. Of course, mainly the acquisition in the U.S. Let's go drive this acquisition growth. And on top of that, we have tailwind because of the strengthening of the Brazilian RAI and the U.S. dollar against the euro in the first six months. Overall, 18.8% top line growth. And on the other side of the slide, you see the P&L for the first six months. Indeed, the 18.8% on top line growth, very strong development. Profitability, an increase of 13.1%. And if we look at the financial results, we see a positive result on the valuation of an IRS we have. impacting that line by 4 million and an effective tax rate around 20%, resulting in a net profit of 38% increase and net profit per share increasing almost by 30%. Moving to the segments sales development. So each segment we have contributes positively to our sales growth. We see the essentials being still the most important segment for us as a group, growing by 19.3%. Grow is driven by acquisition growth. As you know, we acquired Letgo, which is basically essentials growth. that we see contributing nicely to that development. We see also nice developments in EMEA, so organic growth against constant exchange rates at 4% for the essential business. On the brand side, it increased by 7.8%. Brands for Vagron, as you all know, very important. It's our innovation, it's our driver for new and being different in the different markets we are in. We see there the impact still of COVID products in 2021, positively impacting debt sales, but now having a slight negative impact for the comparison year. And on top of that, we disposed some of our CMO business, which was related to brands. If we carve that out and we expect, looking at the second semester, we expect growth there again. Nice developments for the brands in the Latin America region, and we'll come back to the dynamics of that market later in the presentation, but nice developments on the brand side for that specific region. And in compounding services, growing fastest of all the segments by 16.7% at constant exchange rate, growth driven importantly by the U.S., of course, so on both sides, NSEO and the Wichita facility, we see very nice sales development in the first six months. On top of that, we see stabilization in the European region with compounding services showing a total growth of 3% in the first six months. So overall, compounding services growing faster, and we do expect that brands will increase faster than essentials when we normalize the divestments and the COVID-related products. If we move to the revenue and profitability dynamics across the different regions, Rafa mentioned the operational developments. This is reflection of the results in the first six months. EMEA has mentioned 4% or 2% top line growth driven by product launches, better product availability, stabilization of the Benelux market. On top of that, some small acquisition growth with two acquisitions we did earlier this year. However, we do see that there's impact inflationary on our supply chain, which has an impact on our operating expenses throughout. With the contract structure we have with our customers in that specific region, it takes a bit more time to pass on price increases. That has an impact on our profitability in the first six months. However, as time passes, we are confident that we can pass on those price increases in the next couple of months, and that will have a positive impact on the profitability level for that specific region. If we move to Latin America, having a sales development of approximately 4%, if we look at the profitability, we see it at 17.4%, and it has to do with a softening in end-mark demand, and that's inflation-driven. We see demand decreasing in a very competitive market that has an impact on pricing. We felt that in combination with the ethics impact we face with our inventory and the AI strengthening against the dollar. So those two elements play into the profitability for the Latin American market. As we mentioned before, it's a very competitive market. It can go up and down every quarter. So last year we had a very good end result in Q4 for that specific market. So it goes up and down. We are very positive on the long term because the dynamics of that market are very positive for compounding. So we do believe that we will recover. However, quarter on quarter can show a bit of a different picture. Moving to North America, North America had a good first six months with 18% stop-line growth driven mainly by the compounding part of the business. We there also see an enlargement of our profitability going to 18.4%. Of course, we have a slight delusion because of the LATCO acquisition, which has, in general, a lower FDA margin as we do the acquisition. On top of that, there's also an inflation impact in the specific North American market. We can pass on price increases way more easily than in, for instance, EMEA, because of the contract structure we have in that specific market. However, as inflation rises month over month, you do see a short delay in that. However, we do expect that with the increase in volumes in the next couple of months and years, that leverage will create an increase in profitability margin on that side. Rafa alluded earlier on in the presentation to our Boston facility, so we acquired a very nice facility in Boston for FSS. We believe that that will accelerate our mid-term growth plans for that specific market, so we see a huge demand, and this is an acceleration of our capacity. However, integration will take a bit of time, as you can imagine, so currently it's a loss-making business. with a high single-digit four-year loss. We anticipate to bring that to break even in a period of 12 to 18 months. There's some timing uncertainty in that, and Rafa described it earlier. We need to get licenses in different states. We need to do a product enlargement within that portfolio. We need to transfer products and optimize the portfolios between Wichita and Boston. So we will provide some guidance on the longer term and the impact on our long-term sales trajectory for that specific market early February when we present the full year numbers for 2022 for Vagrum. Next slide represents the strong cash flow generation we had in the first six months. Despite the fact that we invested in working capital, we see that the first six months with the supply chain disruptions we faced globally, that we needed to invest in our inventory, so we did. We did it in EMEA, but we also did it in LATAM and the US. while we believe that we need to serve our customers as well as we can, so that had an increase on working capital to slightly over 12%. However, on the longer term, we believe that we can go back to the levels of 10% to 11% of sales on working capital, and this is a temporary increase to serve our customers and to be proactive in a very difficult supply chain situation. Capex was down by 27%, however, we do believe that this is a timing issue and we'll come back to the 3 to 3.5% guidance we have given on Capex. So overall free cash flow increased by 44% to almost 32 million. And if we then move to the evolution of our debt, we see here that we increased our debt position slightly, of course, driven by four acquisitions we have done in the first six months. And we see a slight increase of our net debt to EBITDA ratio. It's now at 2.2, so that leaves sufficient headroom for acquisitions. So we have an interesting pipeline of acquisitions, and there's sufficient headroom to do certain acquisitions. So overall, I think we had a good first set of results for the first semester, despite the circumstances we are in macroeconomically. And we'll give it back to Rafa to talk a little bit more about the outlook for the second semester of 2022.