Hypera Sa S/Adr

Good morning, ladies and gentlemen, and welcome to Ipera Pharma's earnings presentation for 2023. We have with us today Mr. Breno Oliveira, CEO, and Adomario Couto, investor relations officer. We'd like to inform you that this event is being recorded and you may access it on the company's investor relations website. ri.ipera.com.br. We'd like to inform you that all participants will be in listen-only mode during the company's presentation. After that, we will begin the questions and answers session when further instructions will be given. Before we continue, I'd just like to reinforce that some of the information contained in this conference call may have projections and considerations about future expectations of the company they are subject to known and unknown risks and uncertainties which may make these expectations not come to pass or to be substantially different from what was expected i'll now pass it over to mr breno olivera who will begin his presentation go ahead sir Good morning, everyone, and welcome to our earnings presentation for the fourth quarter of 2023. I'd like to start on growth on slide three. Our net revenue went up 6% in line with our sellout, excuse me, 3% in line with our sellout in retail. This sellout performance was lower than our initial expectation for the year, and it was impacted by a couple of factors. First, a reduction in 3% in our sellout in flu respiratory categories, which represent about one third of our total sellout, versus 10% for the market. In second place, we had decreasing inventories in independent pharmacies, especially in the fourth quarter, due to the lower level of credit given to these retailers. These two factors made for a deceleration halfway through the year, which also reduced our sellout. Our sellout in unrelated categories to flu and respiratory drugs was about 12%. The main highlight was the ones related to chronic and preventive care, such as cardiology, central nervous system, and women's health. In our innovation pipeline, we have several projects for these categories. Our IQV growth for the next six months is higher than the remainder of the market. We finished the year at 8.5% market share in retail versus 8.8% in 2022. It's important to highlight that we maintained our market share across categories in four years, and this was the result of the higher relevance in the flu and respiratory category for Ipera in comparison to the market. Even in a challenging scenario, we have added four brands to our power brand portfolio this year, as I'll show on slide four. Vitaminas Neoquímica, Simple Organic, Colfex and Flavonid were some significant line extensions and good investments in marketing these brands. The 25 power brands that we have right now show how diverse our portfolio is. They represent about 55% of our sales in retail. We have leading brands, We continue to invest in production, and this is essential to capture the main growth opportunities for the Brazilian market. In 2023, we invested over 600 million in research and innovation and 550 million in production capacity, and this includes that Behringer acquisition in Itapecerica da Serra in São Paulo. Continuing on slide six, we launched around 90 new products across all of our business units, and this includes line extensions in consumer health and skincare, as well as probiotics, vitamins, and medication that is focused on chronic and preventive care. both for prescription and generics. We also had new antibiotics and anesthetics launched in the national market. The average growth for recent launches has been surpassing our expectations. The products launched in 2022 and 2023 contributed with nearly 400 million in our net revenue. We also started to be part of the food excuse me, FTSE for Good Index Series in the London Stock Exchange and eDiversas in B3, meaning companies that have gender and racial initiatives. We are also part of the ISC B3 and the S&P Global Sustainability Yearbook, that includes the most sustainable companies in the world in the pharma industry. We launched two substations to increase energy distribution and reduced by about 20% direct CO2 emissions in our manufacturing complex. With this initiative, we are strengthening our energy infrastructure and our commitment to fighting climate change. Finally, we declared interest on capital of 779 million or 1.23 BRL per share, a dividend yield of 3.8%. We also posted record cash flow generation, 2.4 billion last year, and an EBITDA to cash conversion of 87% and a growth of 18% year on year. I'll now pass it over to Adal Mario, who will give us further details on the last quarter's results. Thank you, Breno. Good morning, everyone. With the deceleration we saw in market growth during the second half of 2023, we saw a reduction in retail sales in the fourth quarter. This reduction was seeking a higher alignment between sell-in and sell-out in the last months. Our net revenue was 13% lower, making our growth 5% for the year, as we heard before. We have to underscore that our income for retail and sellout are aligned according to the company's policies since 2019. Our sellout growth and net revenue growth are the most important indicators for the variable remuneration for the company's leadership, along with EBITDA targets, free cash generation, and employee turnover. In 2023, as in previous years, sell-in and sell-out growth was close. Sell-out grew by about 6% and sell-in grew by about 5%. Even with the deceleration of the market in late 2023, we were able to conserve the company's gross margin for the quarter and for the year. Maintaining gross margins is the result of the price readjustment that we carried out last year, and also the valuation of the Brazilian real versus the dollar. So that offset the increase in price for raw materials and processing last year. Marketing and sales expenses went up 3.6% versus net revenue last year. There's a lower dilution of fixed budgets or expenses and marketing expenses were about 16% of our net revenue, which is similar to 2023. The main marketing investments for the year were to expand our sales and sales points, increasing our medical visits team, and to distribute free samples to face the launches that we had in the company's prescription portfolio. To offset that, we had a reduction in seasonal campaigns such as anti-flu medication. A higher dilution of fixed operational expenses impacted our EBITDA margin, which remained below 33%. For the year, it was 34.5%, a small reduction of 70 basis points versus 2022. net income was 1.6 billion a reduction of three percent due to the higher operational profitability and also an increase of 307 million in financial expenses considering the higher level of debt we had last year continuing with cash flow This is the biggest positive highlight for 2023. We have record cash generation and a conversion of about 90% of our EBITDA in operational cash flow, which is far above last year's levels. We are still optimizing cash flow, reducing our raw material inventory, and we've been able to reduce it by over 200 million in the last year. Due to the deceleration in sales in the last quarter, our finished product inventory was higher than our expectation, and this will be adjusted throughout 2024. Our expectation for 2024 is to have an even higher conversion of cash flow into EBITDA as we adjust our inventories of finished goods and raw materials throughout the year. Considering that we didn't have any relevant acquisitions last year, and since we're working at a lower capex level, we were also able to generate a free cash flow of nearly 1.5 billion. which was more than enough to cover the cost of our debt and our interest on capital distributed to our shareholders. So gross debt at the end of the year was 7.4, excuse me, net debt. A leverage of 2.5 times EBITDA. In terms of liability management, we've been able to extend our debt very well with a reduction of the cost of debt. We had two issuances recently, a debenture issuance of 600 million with a total term of five years and a new line from BNDES for R&D investments, 500 million with an average term of seven years and a cost of TR plus 2.20 for the year. So I'll pass it over to Bruno for his final remarks. Thank you, Adomario. so growth on a quarterly basis was very volatile last year for the pharma industry this was impacted by what affected the flu and respiratory categories and also due to changes in the retail environment late last year despite that we grew with an expansion in volume showing the resilience of this industry in Brazil, and it should continue to grow on the medium term in 2024. The behavior of the pharma industry created additional challenges for our business, but we were still able to conserve our alignment between sell out and sell in and our market share in the categories we have besides that we also boosted the conversion of our results into operational cash flow and we continue to invest on our leading brands innovation and expanding our production capacity we understand that deceleration in market growth and in flu categories were temporary. They were not structural. For 2024, we are confident in the performance of the pharma industry and in our own growth. We've been seeing increases in sellout, low double digits in the first quarter, and this is in line with what we expected for this time of the year. Yesterday we published our guidance for 2024, which are net revenue around 8.6 billion, EBITDA from continuing operations around 3 billion, and net profit from continuing operations around 1.8 billion. We can convert this EBITDA into operational cash flow in 2024, reducing our inventories of raw materials and finished products. reduced sales in the fourth quarter were done to balance sell in and sell out. And that meant that we had a higher inventory of finished goods than we had initially foreseen. We will continue in reducing inventories in 2024 to boost our operating cash flow growth and free cash flow growth. We're confident in the potential of the Brazilian market and we're the company best positioned to benefit from it. We're the only one that is present across all segments of the pharma industry in Brazil. We are in 100% of the Brazilian pharmacies with a portfolio of leading brands, of which 25 are power brands. We also have an innovation pipeline with over 500 products to be launched in the next few years. and we have the biggest manufacturing complex in the pharmaceutical market in Brazil. All right, we'll move on to the Q&A session now. Thank you. Thank you. We will now begin the questions and answers session for investors and analysts. If you'd like to ask a question, please click on the raise hand button. If your question has been answered, you may leave the queue by clicking on the same button. Please hold while we poll for questions. The next question will be asked by Vinicius Figueiredo from Itaú BBA. Go ahead, sir. Good morning, everyone. Thank you for taking my question. I'd like to ask about something that Breno mentioned. We've seen that the industry has been growing at a higher pace than before. Generics are highlighted that. So you mentioned low double digits sellout in Ipera. So I just like to know if we will see similar makeup to the rest of the industry, or if you have some OTC segments that are rebounding after a week or year last year. And my next question is unrelated, but I'd just like to ask about institutional products. This quarter, you didn't mention them in your release. So if you could tell us a little bit about its growth, how much you've gained in margins and that vertical as well, that would be great. Thank you. Good morning. to answer your first question. Growth mix. We're very balanced this quarter across business units, so we haven't been seeing, at least in our portfolio, higher growth in generics, which tends to be impacted by gross profits this isn't what we're seeing we know that month-to-month growth levels are very volatile so we like to look at a longer period like a quarter or even more but we haven't seen that as much we are seeing a rebound for the otc category and respiratory products which uh were detractors last year I don't think anything changed in institutional products. We're still excited about that business unit. As I said, we're launching some new medication. like some products in anesthetics and antibiotics. So our portfolio is more for the institutional market, but it's still very small. It's still a small part of our portfolio representing about 5% of our total sales. But we're still very excited about it and we're very optimistic about the next few years. Our goal is to reach a higher percentage of sales on the medium to long term. Great. Thank you, Breno. Thank you, Vinicius. The next question will be asked by Leandro Bastos from Citibank. Go ahead, sir. hi i have a couple of questions first about the beginning of this year is cell in more better aligned with sellout this year so how has that been going in 2023 and if you could tell us specifically about adjustments to the channel, or if we're still expecting that middle of the year seasonal pattern to be clear on this part of the portfolio. So those are my questions. Thank you. Hi, Leandro, this is Tom. So we made a huge effort. I think our results show it. Like I said, And Adelmario said as well, our growth for sell-in and sell-out last year as a whole was in line. So that means that inventories are balanced. Just as we started the year, we're finishing the year. You asked specifically about drugs for acute use. We basically adjusted that, but we look at total inventory with our clients. Sometimes we have more or less of a product, and this balance is based on the average for the company. But with that being said, even with anti-flu inventories, sell-in was led by this kind of product. With that, our inventories are well adjusted for our clients. And referring back to your first question, in the first quarter, we expect to see this balance between sell-in and sell-out. For the first quarter, at least. Great, thank you. The next question will be asked by Stella Estrano from JP Morgan. Go ahead. Good morning. Thank you for taking my question. This is a follow-up question, but I'd just like to hear a bit more about the top line. You mentioned that your guidance is 8.6 and revenue a growth of 9%. So how are you seeing that distributed throughout the year? across the four quarters? And if you could tell us about what trends you're seeing for the first quarter? And if you're seeing any improvements in independent players considering their inventories? Are you seeing any incremental demand for antithermal drugs, which are a proxy for flu medication?

I'll answer your first question, Stella.

I think just like last year, we had a distribution throughout the year which was very different across the quarters, especially sell out. We had an impact from more acute products, especially anti flu drugs, which we hope won't happen this year. But how does that reflect on sell-in? Last year, we mentioned that we have to build this inventory, especially with seasonal products. So this is done in advance, and then we have to see how it goes, if sell-out goes according to our expectations. So it's natural that the first quarter of the year in terms of sell-in is usually weaker. and that will be stronger in the second quarter, which is the opposite of what happened in 2023. So we will probably see difference in growth between the quarters and we have to see how sellout is doing in these categories, which are a little bit more seasonal. But once again, we believe that we will go back to normal levels this year. We don't foresee anything too different from the norm this year. And Stella, to answer your other question on independence, we're seeing improvements for the market, but especially for independence. So as we heard before, It was a temporary movement for a couple of reasons. First, credit, which I think was important for distributors to be more conservative in providing credit for independent retailers, but also due to deceleration we saw in the entire market and how sellout is calculated. which is by selling from distributors to independent pharmacies. So there's a reduction. And as they reduce their inventory levels, this will have an impact on new orders being placed. But we do see this improving already. We have data from the first two months of the year, and we can see that there's a growth of less than 4% in the fourth quarter for independent retailers. And it's around 10% for the first two months of the year, which is a very positive sign. It shows that this movement has been concentrated in the second quarter, especially the fourth quarter of last year, as we expected. I don't know if that leaves any questions for you, but unanswered, but. Yes, and what about dengue fever? Have you been seeing additional demands from that this year? Dengue fever has a mixed effect for us because some products, some medication will be affected negatively. so corticoids which are not recommended for uh patients who have dengue but other analgesics like deep your own have a positive will have a positive impact but for now we don't see any major impacts to our portfolio but we have been monitoring this up close we're trying to see how it's evolving and what impact it will have on the company Great, thank you, Breno and Aldo Mario. Thank you. The next question will be asked by Gustavo Mieli from Goldman Sachs. Go ahead. Good morning, Breno and Adalmario. Thank you for this presentation. I have a couple of questions as well. The first one is about the guidance for 2024. If you can help us to understand the top line growth that you're presenting, it's about 9% year on year. So if you could tell us a bit more about what contribution you would get from future launches for 2024 recent launches in 2023, that would be great. And if you can tell us about how much of it will be growth in the legacy portfolio. And I'd also like to check if you are considering PIS cofins on ICMS credits. This is something that's being considered in the tax reform. My other question is also about your guidance, but it's more related to net profits. So what's the leverage target that you expect for 2024? What CDI are you considering just so that we can conciliate the business plan for these cases? Thank you. Hi, Miele.

Good morning. The market is that it's a little bit more accelerated for the quarter.

Like I said, low double digits. This is in line with other companies have been seen. On the other hand, in March, we also believe that growth will be lower, especially for a couple of reasons. I think it will be less attractive for retailers. Last year, increase in prices were at around 5.5%. So this year will be about 4.5%. So there is a lower trend there to increase inventory in our clients. And we also see a lower trend in march and that affects independent channels which basically want to sell from the distributor to retailers and um during working days and during holidays this doesn't happen so with the adjustments that we are expecting Some of it should be in high single digits, which is in line with what we have foreseen. For the market for this year, we seem to be growing along the same line. So that's basically the high-level assumptions that we have for sell-out and sell-in this year. You also asked about fiscal things and nothing really changes about our expectations here. I mean, nothing's going to change these tax issues. We talked a little bit about tax changes last year. Our understanding is that we have a firm ground on the previous ruling from the Superior Court of Justice, which is that our kind of tax benefit will not be taxed at a federal level. And PIA Escofins is a federal tax. So we have this... from income tax, we have this precedent and we've been talking to the major tax specialists in Brazil, who we are clients of, and we're very firm and confident about this stance. And that's how we'll continue to work. Adomario can also talk about net profits. So to tell you a bit about the assumptions that we're following, the leverage target that we have had a reduction of below two times. So as I said before, we finished around two and a half. I projected EBITDA of 24. in nominal terms, we're not going to be able to deleverage it as much in 2024. Operational EBITDA will be an issue, but we believe that for the next years, we will have a lot of capacity, given the company's strong cash generation, to deleverage faster, especially as we start to reduce our investment levels, our capex levels to a more normalized level. But for the impact of net income for the year and the guidance, we are foreseeing a growth due to the reduction in cost of debt. On our budget, basically, our assumption is that curve that will reduce in the market. So an average of 10 or 10.3% for 2024. So it will be around 9% at the end of the year. So basically that's the difference between net income growth and the company's top line. It's due to the reduction in interest rates, which we expect. Okay, that's very clear. Thank you, Breno and Adalmario. Thank you.

The next question will be asked by Samuel Alves from BTG Pactual.

Go ahead. Hi, good morning, Breno, Adomario and everyone. We have a couple of questions. First, we'd like to get a follow up on the previous question. thinking about top line growth and revenue mix if you could give us some color on some of the segments so for example you're seeing in your guidance a recovery for analgesics and flu above the consolidated number if you can give us some more information about those numbers if We're going to see a deceleration in generics. That's my first question. Just like to get some more color on the revenue mix for your guidance. And the next question is about your competitive scenario. I just like to get your impressions for 2024 on the competitive scenario for the company, if you have any indication that we'll see increased capacity and some business lines and that can affect your supply and demand. Thank you.

Samuel.

Hi, Samuel.

Good morning.

So basically what we're seeing, our estimation is to grow in line with the market. Considering flu and analgesics, we see slightly smaller growth than the market. excuse me, slightly smaller than the market average. And that's due to the uncertainties that we have on winter. Last year, the winter was very mild. We expect it to be normal this year, but we'll still see an impact from El Niño. And, you know, forecasts change, but it should go up until April or May, which is the beginning of our winter season. So we were a bit more cautious on making assumptions on flu growth, if the market is better. then we do have the potential to be higher than that. But that was the assumption that we adopted here. About the competitive scenario, we have some competitors who are expanding their capacity. Two of them have already concluded their expansion works. Some will still see more for the next years, but With these competitors, especially prescription drugs, we see that the main driver is not production capacity. Just like us, when we have some capacity, we're looking at the next 5 to 10 years of growth. And then we increase our capacity gradually. So, for example, we had a sterile plant recently and we filled three production lines and we have space for a couple of lines more in the future. And I understand that our competitors work like that as well. So I don't see increased capacity as a risk for the short term competitive scenario. With that being said, though, we do see an increase in the competitive scenario in some specific categories, especially generics, And I think that's more because of the inventory levels in company for us and for our competitors. So that might create some pressure for some molecules to sell more and to avoid waste. I mean, the impact that we had last year also affected our competitors so we see that happening in some specific molecules but we believe that this is a short-term thing as inventories normalize this pressure will decrease great thank you The next question will be asked by Caio Moscardini from Santander. Go ahead. Hi, everyone. Just a follow up question on competition. Do you see a lot of competition on medical visits? We know that there are some competitors that increased the number of visits. How has that impacted you? Does that impact you at all? and about inventories. When should we see inventories going back to normalized levels? Thank you. Caio, I'll take the first question and let Aldo Mario answer your second one. We saw with some competitors an increase in medical visits last year and their medical visits teams. But we didn't really see a higher market share or more sales, at least not for now. Some players that increased their medical visits are partially reducing it this year. This is also due to the performance that was short of their expectations. So that's something that we're monitoring. increased our medical visits teams last year. So what we're doing is having a gradual growth strategy. So as we have new products and new launches, we're gradually increasing it as our portfolio is expanded and we're always seeking efficiency. Whenever we increase our medical visitation teams, we analyze how much incremental sales they will bring in And we're always trying to maintain our margins. But with that being said, for now, we haven't seen an impact from this increase on our competitors side. We've actually seen a more recent reduction for one specific competitor. Adomari will answer your second question. So on inventories, both for raw materials and finished products, we've started this process of optimizing our inventory levels in 2023. I think we've been advancing at that. Sales at the end of the day in the fourth quarter were below what we expected. So they didn't contribute to our inventory reduction. We finished the year with more inventories of finished goods than we expected. But as we execute sales in 2024, we believe that we'll be on the right track to get to the inventory levels that we had before COVID. So between the end of this year and early 2025, we'll be very close to the levels that we had in early 2020, when you look at inventory to CPV. Last year, we finished at about 75% of our CPV in inventory. Our goal is to be closer to 50, 55% early next year. Great, thank you. The next question will be asked by Marcio Osako from Bradesco BPI. Go ahead. good morning breno good morning adal mario i have a couple of questions on my side first i'd just like to understand your growth guidance for revenue 8.6 for the year you said that in the first quarter it should be on high single digits but i'd just like to understand why the year isn't at a higher level than that considering the second quarter we'll see some growth in comparison to the first quarter. My next question is about working capital. I'd just like to confirm with you, with inventory normalization, what do you expect on working capital for 2024? We finished 2023 at 74, so what do you expect it to be in 2024? Thank you.

Hi, Márcio.

I'll take your first question, and Adalmario will take the second one. So we mentioned before that the first two months have been strong. We expected this. There was a comparative base that showed that direction, but we expect also March to be lower than what we saw in the first couple of months. The reasons, as I mentioned during another question, were basically that the number of working days is 15% lower in March than last year, which impacts our sellout in our independent channel. It's still a one-off, but it would reduce our growth to high single digits. And this is in line with what we had for the entire year. We saw a slightly higher acceleration at the end of the year, but it's not too relevant. So it will not be a surprise to see stronger growth for the quarter. In January last year, we saw basically zero growth. And in February, if I'm not mistaken, it was also high single digits. March was when we saw higher growth levels of about 20% for the market. So I think it's basically about the comparative base, which is making the first two months of the year stronger, but it doesn't change our forecast for the year. Adomaru will answer your second question.

Hi, Marcio.

We're looking at working capital to annualized budget. We will probably reduce these levels, especially You know, in the way we calculated basing the remaining of the year with the first quarter. As I said before, we're making a huge effort for 2024, especially in reducing inventories. In terms of suppliers, we don't have the benefit of increasing sales to a relevant degree. we're going to have a lower level for the year. And as we normalize our inventory, we'll buy more and we'll have a benefit of having longer payment terms. So that will provide us with higher contributions.

But we expect to be below 50%.

Okay, thank you.

That concludes the questions and answers session.

We'll now pass over to Mr. Breno Oliveira for his closing remarks. Go ahead, sir. I'd like to thank everyone for participating in our call. And our investor relations team is available to answer any questions you might still have. Thank you and have a good day. This concludes Ipera Pharma's conference call. Thank you for listening.