Hypera Sa S/Adr

Good morning, ladies and gentlemen. Welcome to Hipera Farmers' earnings call for the first quarter of 2024. We have Mr. Breno Oliveira, CEO, and Mr. Adalmario Couto, IRO, with us today. This is being recorded. The video can be accessed at www.ri.hipera.com.br We would like to inform you that all participants will be in a listen-only mode. We will then have a Q&A session. Further instructions will be given at this time. Before proceeding, I take this opportunity to reinforce that some information in this conference call may contain projections or statements about future expectations. Such information is subject to known and unknown risks and uncertainties that may cause such expectations not to materialize or be substantially different from what was expected. I'll now turn it over to Mr. Breno Oliveira. Mr. Oliveira, you have the floor. Good morning. Welcome to our Q1 2024 earnings call. I would like to start by talking about growth on slide three. Net revenue was up by 8%, reaching 1.8 billion reals, in line with Q1 expectations. Net revenue growth was driven mostly by recent growth of our retail sellout as a result of good performance in skin care, prescription products and similar products, cardiology, gynecology, respiratory system, pain, and nausea stand out. Sellout was up by 7% in the quarter. The retail market was 9%. That performance is driven mostly by slower growth in category related to flu, respiratory, pain, and fever that play an important role in our revenue than the rest of pharmaceutical industry. That was a 3% decrease on average, grew by 2% in Q1 of this year. The growth in another category, which combines most of our new pipeline, was about 10%, once again driven by chronic treatment and preventive treatment medications. Net revenue growth and our discipline on expenses management contributed to increase our EBITDA by 10%, net revenue 17%, and our cash generation in almost 60%. Adalmario will be giving you further details on our financial performance. We keep on substantially investing in research and development, innovation and on the expansion of our production capacity. We have maintained the compensation of our shareholders. Aiming at strengthening our product portfolio, we have introduced line extension in skincare and consumer health on the quarter, new vitamins, new respiratory system, drugs, and women's health. Still on the quarter, interest on own capital was 175 million 29 cents per share. We've also introduced our governance and sustainability committee. Its goal is to strengthen corporate governance and support our board of directors in defining ESG guidelines. I'll turn it over to Adal Mario for further results or further details on the results of the quarter. Good morning, Bruno. Good morning, everyone. Let me address the highlights of the quarter. This is on slide four. Net revenue was over 1.8 billion reals. Growth was in line with our sell-out level. That's again our commitment to maintain healthy inventory levels with our customers. Let me point out the importance of the new introductions. The past two years, these new launches accounted for most of the net revenue for the quarter. Products that were launched in the past five years, which is our innovation, index contributed to almost 400 million for the net revenue in this period. Gross margin was at 61%, down almost 3 percentage points, considering the idleness of the plant, given the rearrangement of the collective vacations for the employees, with more revenue from the institutional channels thermal products, cosmetics and similar ones. However, we had more dilution in more marketing and G&A lines. We have become more efficient in media expenses, focusing investments on digital media, which ensures more visibility to the entire portfolio of brands. We have a reduction on the production of free samples, but it should go back to normal levels in the second quarter. Most of the expenses dilution more than offset the pressure on gross margins. EBITDA margins was above 35%, therefore. Net income was 391 million, up by 15% when compared year on year. as more operational profitability comes in, as well as the 23% reduction in financial expenses with lower indebtedness level and almost a 2.5% drop in the debt costs for the quarter. On to slide five now, we have our cash flow. 479 was cash flow from operations, 60% above year on year. That's the record high for the company in the first quarter. The main driver there was the almost $230 million reduction in the inventory. That's the result of our strategy to bring our inventory levels down in finished products and raw material. Working capital investment was not only smaller because of the increase of receivables in the quarter. We had higher concentration of sales in the end of the quarter and the slowing down of the sellout in later 2023. Operational cash flow was up and contributed to help the company invest more significantly in innovation and in capex. Free cash flow generation was 319 million. compared to 93 million in Q1 of last year. And this lower capex level for the quarter was a one-off event, given the defacing of some of the expansion projects that might be resumed later this year. We had a positive financial cash flow of 330 million. because of the new debentures liquidation of 660 million. We keep on monitoring the credit market and with the latest improvements in the marketplace, we have room to reform our liability management strategy, aiming at extending the debt profile and at the same time reduce costs. By doing so, our net debt was 7.4 billion reals in the quarter or 2.5 times the expected EBITDA for the year. Now, I turn it back to Breno Oliveira for his final remarks. Thank you, Dom Mário. We've seen a normalization of the pharmaceutical market growth. According to our expectations, and as we had said in our previous earnings call, Q1 growth was associated with an expressive operational cash generation, a record high for the quarter, and it contributed substantially with more free cash flow for the company. Our top priority in the year is to grow sustainably, expanding our market share in the top categories through the pipeline of new products and our leading brands, not jeopardizing the profitability of our business, according to the guidance for 2024. We see an enormous opportunity to grow our operational cash flow to a much higher standard to that of the operational results, especially because of the expected inventory reduction for 2024. Thank you once again for attending, and let's move on to the Q&A session.

Thank you.

We'll now have our Q&A session. If you would like to ask a question, please press raise hand. If your question is answered, you can leave the queue by clicking on put your hand down. Joseph Giordano from JP Morgan asks the first question. Good morning everyone, Breno Adel Mario. Let me ask you about the Innovation level, it's about 21%. It used to be close to 30%. I know you have some acquisitions that would get in the way. So my question is, when do you expect to see a greater contribution from this innovation rate in the revenue line? My second question, I don't know whether you can quantify it easily, When you look at gross margins, when you had the collective vacation last year, how much deleveraging from the plants? Can you quantify that? And what is the mixed effect? And my last question, my question is about the revenue dynamics. When you take the last 12 months, it's somewhat Lower. When should it go back to normal levels, do you believe? Thank you. Joe, I'll answer the first one, and then I'll turn it over to Adalmar. As to innovation rate, there aren't major variations. This may vary from quarter to quarter, but just like you said, After the acquisitions, you have this new revenue from the portfolio of Takeda, Sanofi, and Buscopan. This is coming down a little. But if you were to exclude that revenue, the innovation rate maintains or remains at 30%. Again, it varies from quarter to quarter. So the quarter is to bring it back to those historical levels. So we keep on investing on innovation. especially on the capitalized portion of it. And I mean the development of new products that are not part of the company's portfolio yet. There are variations depending on the quarter. So the goal for the year is to maintain that same level and growing in line with what we did last year. morning joey let me address the second question about the gross margin i believe that the expected gross margin for the year is a little less than what we had last year especially because of the product mix and the production rhythm for the year because we are reducing our finished goods inventory levels in q3 you may recall that we had a higher level of finished products because we had some slowdown in the market towards the end of the year. But this quarter, things are back to normal. And we expect a gross margin a little below that of last year. We expect that for this year. We had a lower impact because of the idle times in the plants. It affected production costs, CPVs, free sample productions. But when you take into account the first half of the year, when compared to last year, it would be lower a little bit. And there are price adjustments. And now, starting in April, we had a price increase. That should bring some positive impact in margins for Q2. I don't know whether I answered your question or not. Yeah, you did. What about receivables? Should we pay attention to it, or is it more the effect out of the basics? Well, receivables are at the higher range level. The company's strategy is to maintain a healthy level of inventory in our consumers, about 110, 120 days. In a quarter, it was a little higher. but mostly due to the higher concentration of sales towards the end of this first quarter. And this slowdown we had in sellout back in November and even more strongly in December. It's a basic cause, but the strategy of the company remains the same. We'll maintain that range between 110 and 120 days. Wonderful.

Thank you.

Thank you. Mr. Gustavo Miele from Goldman Sachs asks the next question. Good morning, Breno and Mario. Thank you for the presentation. I have two questions. Number one, it's about medical visitation expenses. That was one of the highlights for the quarter. We would like to understand more qualitatively what is the limit for the dilution of that line in the following quarters and not representing risks on sales. The ramp up of prescription drugs, this is going well. That relationship with doctors is key in this vertical. Can we expect a similar level for the medical visitation lines further down the road, not jeopardizing revenue. Could you please elaborate on that? My second question is more objective. Let me go back to working capital. Let me address the suppliers topic. Are there any seasonal volatilities, something related to mix, that may justify this reduction in days like we have seen in recent quarters or is it something more specific anything related to the relationship with the top suppliers that may explain this more constrained limits hi gustavo i'll address the first question and then adal mario will answer the second one as to medical visitation I think I didn't make that very clear in our presentation, in the release, actually. But what we have here, we have promotions and others. It has to do with conventions we have with our representatives. These are internal conferences and with other sales personnel. And expenses were down. Our convention was a lot smaller. Just the managers, not everyone, not every representative, they were attending it online. So expenses were down. We had about 15 million reals. That accounts for most of the difference, on top of what Adão Mário said, free samples. It also falls within the same line. But that was the top driver for the quarter. Just last night, we had an increased team of medical visitation that was in the middle of the year, last year. And we have no plans whatsoever reducing the teams or distributing free samples throughout the year. This is something very specific that fell within the same line, within other. That explains 15 million. that would have contributed to marketing expenses growth. And on this line here, that would be even more so. Good morning, Gustavo. Let me answer the second question, actually. I think the main driver for the constrained payment terms, we're reducing our raw material inventories. When you take, for example, the API suppliers, they can give us more or longer payment terms. We have been reducing new purchases, and it's only natural that it would impact the average days of the payment terms. And other suppliers with smaller or shorter payment terms, we keep on purchasing normally. There's a minor reduction because of the mix, but this effect is minute. We are growing on our institutional business. Most products in this segment, new products, new launches are finished products. They had usually shorter payment terms, but this is a very minor effect. I think it's caused mostly because of the reduction of new API suppliers as inventory levels go back to normal towards the end these payment terms will extend i don't know whether the answer is clear no that's very clear thank you so much have a good day thank you mr bob ford from bank of america asks the next question good morning Reno, Antonio, congratulations on the results. I'm going to repeat a couple of questions. I don't know whether you've addressed them before. Can you elaborate on the improvements of the improvements of advertising expenses as well as marketing reductions and how soon do you believe you're going to stabilize the payment terms? And finally, what should you take into account when you think about the total addressable marketing when it comes to quality? Hi, Bob. Good morning. As to the marketing expenses, We've been trying to optimize these expenses now for quite some time in recent years because the market has changed in recent years. Back in 2018, we had less than 10% of expenses was in digital media. And for this year, last year actually, it was about a third. And for this year, it's about 60% of our Media expenses are focused on digital media. We're trying to become more efficient as far as these expenses are concerned. We can segment our target audience and we can reach those consumers directly. We had an additional group of six brands in OTC that did not receive any media investments. We're now investing exclusively in our digital channels. That's why we've been trying to optimize these expenses. But given the metrics, when we look at how much you can reach, this has been kept constant. This is more efficient expenses. We're spending less per target audience reached. The IR department can give you further detailed metrics and how we measure productivity expenses on marketing. Oh, that would be great. Thank you. Hi, Bob. Good morning. Let me answer the other two questions. The second question is bringing back the inventory days. And it has to do with payment terms with suppliers, right? Yes. Yes, that's right. By year's end, our inventory levels should be very similar to the ideal level. But Q1 of 2025, we expect that inventory levels will be very similar to that of the pandemic levels when we compare that to CPV. About 50%, 60% of our costs is in inventory. This is a healthy level the way we see it. unlike the terms we had estimated last year, but mostly because of the slowdown of the market at year's end that was extended more than expected. But again, it's in line with the strategy of what we expect until the end of this year. This will generate relevant cash flow for the company for this year, as well as for the start of 2025. As to the launches, we have about 70 new launches for the year. We remain focused on launches in some categories in which we had a reduced market share, continuous use, prescription drugs, and these are the most relevant markets. the ones that grow the most. And there's a good opportunity to gain market share and become more relevant in these segments. We have many new introductions for this year and for the following years too. If you take patents being terminated, the addressable market is over 10 billion reals. Molecules that will lose their patents in the next three years. And we have a pipeline underway to be the first one to market and even bring in incremental innovation to stand out in this market. So we are very focused on these new activities. Our strategy is also to extend the lines for those power brands and those that will become power brands. Innovation, new products, introduction, That's the best way to maintain the lifecycle of these brands. So we remain focused on investing on these activities. We have through launches of brands that are already power brands and that will contribute to performance and the sellout of those brands. So everything remains on track and we remain very optimistic about the pipeline we have. Bob, let me just add to what Adalmario said. There's a huge market value in the following trends, about 10 billion, just like Adalmario said. And we have projects underway to address over 90% of this new market. This may mean to us and to the entire market a very significant growth outside of these patents.

Thank you.

I'm very pleased with the answers. Thank you, Bob.

Leandro Bastos from Citi is up next.

Good morning, Breno Adomario. I have two questions, actually. Can you elaborate on your sales in April? And you're growing acute medication growth. Looking at 2023, what are the landmarks quarter on quarter? Does it make sense to see some more depressed quarters as the market evolves? and starts using other molecules, can you comment on this acute medications segment? That's my first question. Number two, can you talk about the competition with generic drugs? How are you managing that situation? Thank you. Hi, Leandro. The market is growing substantially in April, as expected. We have more working days in April than last April. March had fewer working days and the growth in March was smaller, a lot smaller than the average. And now we see a reversal of that movement in April. So high double and mid double digits growth. So again, in line with our expectations. As to the quarterly dynamics, I can't give you any indication on the acute drugs medication. That will depend on temperature and temperature variations throughout the country. We know that last year we had the hottest winter in the past 60 years, and it won't happen again this year, probably. But it's difficult to predict that dynamics, especially on a quarterly basis. But there are defects of that basis for comparison, because last year it was towards the end of the winter we had higher temperatures, and that should be better this year. As to the generics, I think we talked about it in the last call, that will vary depending on the molecule, and especially Because of the higher inventory levels, both from us and competitors, we ended up having higher inventory levels, given the smaller demand than expected. Some players, for some molecules, will adopt a more aggressive policy to move that inventory, and they are more commercially aggressive. We don't believe it's a long-term trend. We hear it from investors, from you, and questions about greater capacity and what the impact would be for competition. We believe it has to do with the availability of raw materials and finished goods rather than filling that capacity gap. Most players that are increasing their capacity focus way more on the prescription segment and OTC segment as well. And they struggle or they fight for the marketing media promotions with doctors rather than price because of capacity availability. I think we've answered all three questions, right? Perfect. Thank you, Breno. Have a good day. Mr. Mauricio Cepeda from Morgan Stanley asks the next question. Hello, Breno, Del Mario. Thank you for taking my questions. My question is about channel strategy. You said that sell-out is coming back. Based on Sindus Pharma data, January and February were strong months. But March, there's a mix between sell-in and sell-out in that market research data. March was a slow month, even for generic drugs. Do you believe there's a difference between network or independent drugstores? Neo Chimica adopted this channel. Is there something specific from the independents that would interfere in the market performance? My second question takes back on Bob's question, portfolio. You had 10 billion worth of patents being expired. Once they do expire, are they in non-retail or retail? If they are in retail, would you be able to reposition your portfolio for biologicals and maybe reduce the dependency on generic and similar products? Hi, Mauricio. Let me answer the first question about channels. We've looked at the independence that was somewhat weaker in Q4, actually the second half of the year, of last year. There are some specific cases, distributors that ran into financial problems, but they were very one-off events. But we believe that this has to do with the inventory level and how IQVIA measures that inventory levels. IQVIA measures sell-out at the distributors' sale to independent drugstores. And since demand was smaller than expected, these drugstores ended up buying less to reduce their store levels impacting Q4 and the entire second half of last year. More recently, we don't see that happening. There's a recovery going on from independence. Back in March, we had greater impact because of the working days. Drug stores buy and sell on working days, not on weekends. But this is going back to normal in April. I don't have the data on a per channel basis, but independents are growing even more than those from major chains. We don't see that as a long term trend. There aren't major changes in the dynamics playing out when we compare different channels in the midterm and long term. onto patents. These numbers we mentioned are for retail only. There's another amount that's for non-retail, and we're also addressing it through the new business unit from our institutional segment. I don't think demand will change dramatically because when these patents expire, there will be generic products as well. So there's room the way we see it to improve our prescription segment. Our goal is to introduce branded products for medical visitation as well as generics once these patents expire. I don't see any major change happening. Especially at the start of that expiration, there's less competition and margins tend to be bigger than when you compare to a generic that is more commoditized, in which you have several players fighting for that segment. Specialists in Temaglutides, which is most of this market, which you have patents being expired, the way we see it, the development of these new products are not as simple as that of oral and solid drugs. And there's more competition there. So competition for this molecule specifically should be smaller once that patent expires. Perfect, Bruno. Thank you. Thank you.

Luca Biasi from UBS asks the next question.

Good morning, Breno and Adomario. We have two questions. The first one may be a repetition, but if you could please elaborate, giving you more quantitative data What's your expectation from the growth from generics than prescription and OTC? And the other one with a longer term view, what are the main impacts of the tax reform? Luca, as to the first question, I think the growth capacity, not only prescription, actually, but also including OTC, we call them brands. The potential is huge. Maybe two thirds of the pipeline is focused on these two business units. And especially for prescription products, chronic medications specifically. That's our long term strategy. to further diversify our portfolio between acute and chronic medications. So the company's capacity is huge. So our expectation is to gain market share in this segment. Now on to the tax reform. It's still too soon. to make comments about possible impacts for the company. We've been working at it. We've been monitoring very closely since it was announced last Wednesday. But again, it's a bill. It has to be approved in both the House and the Senate. So there may be some changes in the draft proposal. We've been talking to other companies, with business associations to better understand the other players take and the tax burden for the industry, for the pharmaceutical industry. We don't see any major impacts especially with these preliminary analyses, we don't foresee any material impact. But still, looking at the detailed information, it has over 400 pages. We've been talking to external consultants, but at first, we don't detect any increase in the tax burden for the pharmaceutical industry. Wonderful. Thank you, Breno. Mr. Luca Marchesini from Itaú BBA asks the following question. Good morning. Thank you for taking our question. I'd like to ask a question about the gross margin. There should be impact for the rest of the year. Could you elaborate in that sense? maybe having less exposure to generics and the reduction of OTC in the mix, how can that impact growth margins for the remainder of the year? Thank you. Hi, good morning. As to the mix, we expect something smaller than last year. Because of the institutional channel that is growing more, than the rest of the company's portfolio. As we've said before, this institutional portfolio has smaller gross margins, but when you look at as far as the EBITDA margin contribution, it's very similar to other business units because it needs no a promotional effort, a very reduced sales workforce, so the impact is a little smaller than that of 2023, especially because of more growth coming in from the institutional channel. That was very clear. Thank you. Thank you. Mr. Samuel Alves asks the next question. Good morning, Breno, Dalmario and everyone. Two quick questions. One is about dengue fever. I recall that you said that you're expecting somewhat of a neutral performance for the company. There are some medications, AES and other painkillers that end up having a positive effect. So here's my question. What was the results? in the quarter. Was it positive? Was it negative? Do you believe that's cooling down in April? More specifically related to dengue fever. And the second question is about your plant capacity usage. In March, it was somewhat lower. If you could please share some data regarding to plant usage. Thank you. Hi, Samuel. The dengue fever had a slightly negative impact in the quarter. Three categories, AS, small, ibuprofen, which is bigger, especially with olivium for children's medications, and corticoids. So these three categories had a drop in sales, mostly driven by dengue, because when in doubt, there are few cases when you think about the entire population. Many people do not take the tests. They have the symptoms. Either the doctor or other patients themselves will look for other equivalent medication. The positive note, especially in southeastern Brazil, cases are coming down substantially, and we believe that there won't be major impacts in Q2. That's our expectation. As to the plant capacity, that will vary depending on the line, the type of technology. On average, Our capacity is about 70%. In previous years, we had to resort to a six by two shifts lines operating 24-7. That has been brought down. Almost every line in the company are down. Labor costs are lower, therefore. Again, on average, 70% capacity, 7-0. So in other words, there's room for growth if necessary, not requiring additional capex expenses. Our capex expenses are for very specific projects. We internalize Taqueda's portfolio production and Sanofi's portfolio as well. We are finishing Steris product line, and there's also the P&D, the R&D and oncologic products manufacturing, as well as producing raw material for IFA for Buscopan. Again, these are projects we are investing now, but looking at returns further down the road. New activities, but not to expand production capacity for current products. And you talked about capacity for March. There was no reduction in March. It happened earlier this year, just like we had collective vacation. Last year they were in April and this year they were in January. You have less production instead of transferring that expenses in the inventory, you have that variation on a quarterly basis. But overall, there shouldn't be cost impacts on average for 2024. Thank you, Breno. That was very clear. Good morning. This concludes the Q&A session. We'll turn it over to Mr. Breno Oliveira for his closing remarks. Thank you for attending, for being interested in the company's results. We remain very excited with the rest of the year. And our IR team is available to answer any questions you may have. Thank you once again. This concludes Ipera Pharma's earnings call. Thank you for attending and have a wonderful day.