Fagron Sa Ord

Good morning and welcome to FAGRAN's H1 2024 resource conference call hosted by Raphael Padilla, CEO, and Karen De Jong, CFO. Throughout today's recorded presentation, all participants will be in a listen-only mode. Later, we will conduct a question and answer session. If you wish to register for questions, please signal by pressing star one on your telephone keypad at any time. Post call, if you have any questions, please reach out to the investors relation email address that is investors at stagron.com. At this time, I'd like to hand the call over to Rafael Padilla, CEO. Please go ahead, sir.

Thanks Francois, and good morning all. We're very happy to see the continuation of our strong performance as we achieve 12.8% organic growth at CER, with revenues increasing to 429 million euros for the first half of the year. This growth was driven by positive contributions by all regions, and particularly accelerated by the exceptional performance in compounding services. Our revenue margin increased by 30 basis points to 19.7%, reflecting synergies from acquisitions and benefits from operational excellence initiatives. As we look ahead, we're upgrading our full-year revenue guidance to a range of 850 to 870 million euros, while still expecting an improvement in profitability year on year. Carin will give more color later on. Moving on to the regional dynamics, in EMEA, B&E's performance showcases the benefits of our diversified footprint across the region, and as announced during H2 2023, changes to the reimbursement system in Poland continue to impact results. The compounding services' impressive performance is supported by strong market demand and growth with the Netherlands benefiting from the new product launches and secular drug shortages. As mentioned, integration of Pagma product in Hungary and LSP in the UK is going as expected with both of them already contributing to the region's results. In EMEA, we see the underlying demand for compounded medication developing very well and it is strategically important to capture this opportunity while maintaining the highest quality standards. As a result, We will be investing 15 million euros in our FSS facility in the Netherlands. It will be a state-of-the-art one, enabling us to expand capacity, widen our product portfolio, and increase automation. Lastly, Costas Koulouridas will be leading the Enea region following Martin's departure to pursue other opportunities. We thank Martin for all his efforts and hard work and wish him all the best. Costas? Previously, the head of Southeastern Europe has been at Fagron since 2014, following our acquisition of Kertus. His very impressive track record and expertise made him the ideal candidate to take EMEA to the next level. Moving on to the next slide, during the last few conference calls, we have been providing updates on the changes to the reimbursement system in Poland. These changes result in a shift in market dynamics with customers now moving towards bigger units of measure, however, at the lower price point. As announced, Regulator will be implementing during the second semester price adjustments which are in line with our expectations. Also, as foreseen, the strategic initiatives we set out towards the end of last year have allowed us to clearly remain the market leader and better position ourselves in a market with strong fundamentals. Moving on to LATAM, we remain the market leader in this highly attractive and competitive market. Our operational excellence programs, especially around procurement and our strong innovation power, supported margin performance. B&E was able to capture the rising demand and drive revenue growth, mainly due to our heavy focus on innovations and broadening our product portfolio. All of this translated into a strong performance for brands despite the seasonality effect of Easter holidays. On the compounding services side, once again, Colombia has delivered impressive results driven by strong market demand and successful execution. Moving on to North America, the B&E segment saw sequential improvement quarter-on-quarter, resulting in a 4.1% organic growth. This is mainly driven by improvements on operational excellence and the consolidation of our lack of facility. Still at B&E, last year we announced a $20 million investment for the construction of a repackaging facility indicator. However, we have decided not to proceed with that investment and pursue an alternative by optimizing our existing facility through targeted upgrades while leveraging the robust capacity of our global network. We remain committed and confident of achieving our stated ambition of market leadership. In compounding services, FSS achieved exceptional results driven by capturing the underlying demand that is constantly expanding. Boston continues its outstanding performance and we can now shift to four or six states. Of course, we continue to onboard new customers and constantly look for ways to better serve. On Anazeel, Growth remains impressive as we continue to capitalize on strong underlying demand for prevention and lifestyle, coupled with benefits from the short-term drug shortages. We now expect this to continue into the second half of the year, and the revenue will be the same as in H1, that is $12 million. Our investment in Tampa's new facility is progressing as planned and is currently running its final validations. we expect the transfer of operations to occur during the second half of this year. During this transition stage, we will be running double cost in line with what we had communicated during our full year results. On both FSS and an ASIL, we're positioning the business to capture the rising demand while maintaining the highest quality standards. For this, we have been increasing our employee base, which will impact our operational leverage for this year. Also, we would like to announce a $39 million investment in our Wichita facility, which is in line with the announcement we made during our capital market stay and will support us in achieving our mid-term organic revenue growth target. This will allow us to increase capacity, maintain the highest quality standards, and better position the business to capture the rising demand. before moving to the financials on quality. This is a big factor in our industry, and we remain committed to maintaining the highest quality standards across all our regions in line with the rapidly increasing regulatory requirements. So far into the year, we had seven audits globally, including a two-weeks one at Wichita, which resulted in seven observations. Our team has submitted its data response and is working towards a satisfactory close. And now Karin will go through the financial highlights for the period.

Thank you, Rafa. Good morning, everyone, and thank you for joining us on this call. Let me walk you through the first half of 2024 financials and provide more color on the full year 2024 outlook. On this slide, we have the financial highlights for the first half of the year, during which sales grew by 15.5% to €429.3 million. All regions show a positive growth while North America once again reported the strongest growth of 26.2%. ROS margin improved by 19 basis points compared to the same period of last year, driven by better performance in the LATAM region and the product mix. Operating expenses grew 17.5% compared to H1 2023. This is in line to what Rafa mentioned earlier, that we have been increasing our workforce on the compounding services side in North America, to support the rising volume growth while maintaining the highest quality standards. A revenue margin expanded by 30 base points compared to the previous year, the rise in profitability mainly showcases our improved operational performance and the synergies from our acquisitions. Strong cash flow conversion reflects our solid cash generating capabilities, with operating cash flow improving 35% to 58.3 million euros, excluding the factoring impact. Lastly, the net depth to Avidata ratio increased slightly to 1.5 times, compared to 1.4 times at the end of 2023, leaving us ample hat room for future acquisition opportunities. The bridge on the slide shows the sales development during the first half of 2024. EMEA experienced a modest organic growth at CER of 3.3%. while North America witnessed a remarkable 26.2% organic growth at CER, as the compounding segment continues to drive performance. Meanwhile, LATAM saw a strong organic growth at CER of 5.7% due to the execution of our strategy. Our recent acquisitions of LSP and Pharma products contribute €9.6 million to the results, further confirming our disciplined and strategic approach to M&A. The P&L on the right side of the slide illustrates a 15.5% top-line growth, while EBITDA increased by 17.2% before non-recurring items. The financial costs have increased primarily due to higher interest rates on our debt and debt-like items. As a result, earnings per share increased by 22.2% year-on-year to 55 cents for the first half of the year. Turning to the next slide, In the EMEA region, we witnessed growth being supported by compounding services. EMEA continued to be impacted by the changes in reimbursement law in Poland, which was compensated by higher prices and benefits from registrations and drug shortages in other markets. Compounding services experienced solid revenue growth of 27.4%, driven by all markets and our acquisitions. Organic growth at CER in Q2 shows a slowdown after a very strong Q1 start. However, we expect growth to normalize through the year. In terms of profitability year-on-year, the EBITDA margin was impacted by the Poland developments. Looking ahead to the second half of the year, we expect the margin to improve in line with our strategic actions in that market. Lastly, on CAPEX, as Rafa mentioned, we will be investing €15 million in our FSS facility in the Netherlands. The project is expected to be completed by 2027, and this CAPEX is a one-off CAPEX. It will be on top of a regular CAPEX. We will be incurring a very small portion of the 50 million euros in 2024, but the majority will be spent in 2025 and 2026. Moving on to LATAM. Sales increased by 6.8% to 86 million euros, or 5.7% at CER. Letham remains a highly competitive as well as an attractive market, as we see rising underlying demand in the region. This resulted in higher volumes, which partly offset the lower prices that had to be implemented to sustain our market position. Overall, the essentials growth at CER was flat the first half of the year, though during Q2 it had a positive growth after many quarters. Brands saw a substantial growth of 19.5%, driven by new product launches and innovation. Meanwhile, compounding services continues its impressive growth trend, achieving a 42.3% growth rate year-on-year. Gross margin for LATAM increased due to increased brand sales as well as operational efficiencies. The revenue growth combined with gross margin expansion and a strong focus on cost savings in OPEX resulted in a 160 basis point revenue margin expansion for the first half of the year. Looking at the second half of the year, we expect a margin increase year on year. Turning to the next slide on North America, sales during the first half of 2024 amounted to 183.1 million euros, translating into a 26.2% increase. B&E delivered a quarter-on-quarter growth as we benefited from improving operational excellence and consolidation of the repacking activities. As Rafa mentioned, we will not be proceeding with the 20 million dollars CAPEX at Decatur. The better alternative is Capital Light and enables us to achieve our targets. Compounding Services continues to lead the sales growth as it delivered a 36% increase year-on-year, primarily driven by the outstanding performance at FSS and NSAO. FSS saw a 40.2% sales increase during the period attributed to increasing orders from existing customers, new order wins, and drug shortages. Our EBITDA margin increased by 130 basis points as we benefited from synergies and efficiencies from our acquisitions and improvements in operational excellence. Looking ahead, we expect full-year margin to slightly increase compared to the full-year 2023 due to extra labor force hired to accommodate our future growth and the double costs running at NSEA at Tempa, while we complete the transfer to the new facility. We have also announced a one-off CAPEX at Wichita of 39 million US dollars. The project is expected to complete it by 2027. And as this is a one-off CAPEX, it will be on top of our regular CAPEX. We will be incurring a small amount of the spend in 2024, while the rest is being incurred between 2025 and 2027. Moving on to our cash flow slide, Strong cash conversion remains as one of the strengths of our business model. Operating working capital as a share of sales increased by 290 base points year-on-year to 14.5%, reflecting the facing-out-of-factoring impact. Operating cash flow decreased slightly despite the EBITDA growth, though when adjusting for facing-out-of-factoring, it increased considerably by 35%. As mentioned during the full year 2023 conference call, we expect to reduce factoring by 50% in 2024. The reduction in factory will increase our receivables, but will decrease our debt levels, resulting on lower interest costs and banking fees. During the first half of 2024, CAPEX excluding one-offs amounted to 12.9 million euros. Free cash flow conversion was 54% when adjusting for phasing out of the factoring and the one-off CAPEX. Moving to the next slide, the bridge illustrates the evolution of our net debt during the first half of 2024, going from €234 million to €275 million. The €41 million increase is mainly related to the acquisitions and investments we have announced and the dividend payouts that took place in this period. Regardless of the increase, our net debt to EBITDA ratio remains at a healthy level of 1.5 times, which compares to 1.4 times at the end of 2023. Going forward, we will continue our disciplined M&A strategy while maintaining our internal threshold of Net Depth to EBITDA ratio of 2.8 times, which gives us ample room to maneuver. We remain focused and committed on maintaining a solid balance sheet while pursuing growth opportunities aligned with our strategy. Before I hand it back to Rafa, let me guide you through our upgraded full-year 2024 outlook. We are upgrading our full year 2024 revenue guidance to a range of 850 to 870 million euros. Additionally, we continue to expect our margin to improve year on year. Maintenance CapEx will be around 3.5% of sales, excluding the already announced projects and investments across the region. Regarding the long-term working capital guidance of 12.5 to 13.5%, by the end of the year, we expect to be within the guided range. I would now like to hand it back to Rafa for his concluding remarks.