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.