Hypera Sa S/Adr

Welcome to Ipera Pharma's earnings call for the third quarter of 2024. We have with us Mr. Bruno Oliveira, CEO, and Mr. Adalmario Couto, IRO. This event is being recorded. The video can be seen at the company's investor relations website, ri.ipera.com.br. We would also like to inform you that all participants will be in listen-only mode. We will then have a Q&A session. Further instructions will be given at this time. Before we proceed, I would like to reinforce that some information in this conference call may contain projections or statements about future expectations. This information is subject to known and unknown risks and uncertainties that may cause them not to materialize or to be substantially different from what was expected. I will now turn it over to Mr. Breno Oliveira. Go ahead, Mr. Oliveira, you have the floor. Good morning, everyone. Thank you for participating in our third quarter 2024 results conference call. I'll start by talking about our growth on slide three. Our sellout accelerated this quarter and grew by 11%, mainly due to the normalization of demand for products related to flu, respiratory pain, and fever. The normalization of demand in these categories, which is more relevant to IPERA than to the pharmaceutical market, has allowed us to accelerate our sell-out growth when compared to the second quarter of 2024, which was 6%. Sell-out growth in flu-related products was 11%, while in the second quarter of 2024, this category was down 1%. Demand normalization in this category also contributed to sell-out performance in Q4. In October, sell-out growth was 13%, resulting in an accumulated growth for the year of 9%. The sell-out performance is in line with the company's expectations for 2024 and was not affected in any way by the start of the working capital optimization process announced on October 18. Moving on to slide 4, I'd like to mention two highlights on the company's sustainability and governance front. We were once again featured in S&P Global's Corporate Sustainability Assessment, with a 10% increase in our Dow Jones Sustainability Index score. This recognition by S&P reinforces the robustness of our corporate governance, which stands out among the main global pharmaceutical industries, and the assertiveness of our recent ESG initiatives to ensure the sustainability of our business. It's also worth highlighting another important step forward in the development of the company's corporate governance, the completion of the revision of regulations of the Board of Directors and the advisory committees. This effort, coordinated throughout the year by the Governance and Sustainability Committee and approved by the Board of Directors, further strengthens efficiency among the company's governance bodies and transparency in our decision-making processes. I now hand it over to Adomario who will comment on the quarter's results on slide five. Thank you, Breno. Good morning, everyone. With the working capital optimization process starting in the last quarter, besides reducing our net revenue, we also had an impact to our income. As Breno said, our sales went down to work with lower inventory levels with our clients, which reduces our operational leverage on the short term. With our lower revenue, our fixed production costs were less diluted, but we were able to conserve our gross margin close to 60%. We are still investing on our brands to boost growth and sellout. Marketing expenses went up 6%. And we had more investments in media, online and offline, free samples and the medical visits team. Expenses with selling were 5% higher than last year. And this includes an R&D investment in line with what was invested in Q3 2023. excluding the benefits from the Lei Dubeng. General and administrative expenses went up 10%, with higher expenses with consultancies, digital and IT projects. With our lower short-term operational leverage, our EBITDA margin and net income went down this quarter, but our pre-cash flow generation grew 23%, and I'll mention this in detail on the following slide. Operational cash generation this quarter was 738 million, higher than our EBITDA for this period, with a lower investment in working capital, increase in inventories and receivables. capex investments represented 107 million especially in projects expanding our production capacity for the institutional market we also are internalizing brands acquired from takeda and sanofi and technology transferred to extracts copolamine the main raw material in you in producing buscopan r d investment is higher than seven percent of our net revenue which reinforces our commitment to constantly updating our portfolio through the innovation pipeline this goes for the retail market and also for the institutional market To conclude, we had a free cash flow above 550 million, which reduces our net debt by over 250 million in the third quarter. I will now hand it over to Bruno for his closing remarks. Thank you, Adamario. Before we continue with the Q&A, I'd like to give you an update on the evolution of our working capital optimization strategy. We're very satisfied with the implementation of the strategy so far. The feedback from our customers has been very positive. We've had a lot of support from them, and we're working together so that we have more efficiency in the chain with no impact on sellout, both for Ipera and for our customers. the sellout results for the months of September and October confirm that the strategy has no impact on the company's sellout. A good part of the adjustment to sales deadlines and customer inventories has already taken place by the end of the fourth quarter, and we expect to see the results of this strategy in the company's cash flow from the first quarter of 2025. As we said on the last call, we're quite sure that despite the negative short-term impacts, this strategy is the best for the company in the medium and long term. At the end of the process, we're going to have a much stronger company, and we see a lot of potential for generating value for our shareholders in the long term. Thank you, and we will now continue with the question and answer session. We will now begin the questions and answer 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 remove yourself from the queue by clicking on the lower hand button. The first question will be asked by Mr. Joseph Giordano from JP Morgan. Go ahead, Mr. Giordano. Hello, good morning, everyone. Good morning, Breno and Adalmario. Thank you for taking my question. I'd like to talk about lower inventories or rather inventory adjustments on your channels and explore your growth levers. I'm just trying to break it down. You mentioned that your sellout has been different. So how has it been behaving considering that you have new products, new launches, and how has it impacted your legacy portfolio? So that's my first question. My second question is, how do you see this happening in retail as well? Finally, lower purchases from the supplier side. Has that had any effect on the company's bargaining power or have you been spending more? Thank you. Hi, Joe. Good morning. So to answer your first question on growth levers, As I mentioned in the first part of my presentation, we see that demand has been growing for more seasonal products, and that includes most of our mature portfolio. So that is probably bringing us close to the market levels, actually slightly above the market level in some categories, when we look at the comparison in the same category. And a big part of our growth comes from new products. We know that for us and for the market, that the growth is coming from launches and we haven't stopped investing in them. Quite contrary, we're investing more and more and we're above the average for our competition. So we intend to continue doing that. That's what's going to boost the company's growth in the future. to answer your second question on bargaining power. We don't really see that impact, as I said. This process is neutral for our clients. When it comes to working capital investments, clients have less time to pay, but they also have a lower amount in their distribution centers. They have less inventory. So this generates efficiency. There's no loss on our client side, and we can capture this efficiency through smaller working capital investments. But just to summarize my answer, we do not have to invest more because of this strategy. Adding to Breno's answer. This innovation strategy means that not only are we investing on our pipeline with over 15 projects for the next years, but we're also collecting the results from all of the investments we've made in the past. So for example, this year, we're leading in new drug registrations. So this year we have over 12 registrations for medications and that's excluding supplements, cosmetics and other products. No other Brazilian pharma company has been able to do this much this year. So that also strengthens our position. Most of these new registrations are in categories where we had a more limited portfolio. So we're becoming more competitive. And that's really going to help us with market share gains across the categories that we have a higher stake in right now. Great. Thank you, Breno and Adol Mario. Thank you. The next question will be asked by Mr. Emerson Souza from Golden Saks. Go ahead, Mr. Souza. Good morning, everyone. Good morning, Breno and Adalmario. I have a couple of questions here. First, it was very clear that your performance quarter to quarter has been reflecting your optimization process, but it's difficult to see that in your accounts receivable because your quarter to quarter drop has been below the reduction in revenue. So how much of your revenue is already running in new contract terms and continuing on what was said What is your goal for the end of the next quarter? So that's my first question. The second question is also a follow-up on growth. You mentioned your innovation data, and we can see that this percentage has not grown year on year, despite this reduction in revenue. So can you tell us a little bit more about how your market share has been evolving in the products you launched recently? And how does it compare to your company's expectations? Also, if you can tell us about the competitive dynamic for new molecules and legacy molecules, especially for generic drugs. Thank you. Hi, Emerson. Good morning. I'll answer your first and third questions. so to answer the first question we optimize this process by the end of the third quarter in the last three weeks of the quarter so you still can't see it in the numbers the inventory levels uh shorter terms and the calculation is based on revenues so with that you have an increase in accounts receivable but that is does not correspond to reality so the sales that are being performed especially in october and november have a smaller term because our inventory levels are also smaller than the accounts receivable we're seeing here This is going to become clearer in the first quarter of 2025 will be at a lower level and much of the sales were doing in the quarter. Well, a good part of it will be in the next quarter. Considering inventory levels and the lower terms. And Emerson about how much has already been implemented. Is it being done client by client? This is being done generally, and as we mentioned, this is also gradual. With that being said, we started the third quarter and the plan, as I said, is to do most of this process between the third and fourth quarter. We estimate that about 50% of the adjustments will have been concluded by the end of the fourth quarter. And then the pace will go down and we'll fine tune this process throughout 2025. Also, you mentioned market share. So I think when we look at the OTC and consumer health category, we're leaders. So we have almost twice the share as the runner up in consumer health here in Brazil. And we have the same share levels as we had before. But our share fluctuates in this category depending on the seasonal flu products. So with this recovery we had in the third quarter, we also gained some share. due to how much this category represents in our portfolio. When we look at other categories, especially prescription drugs, which is where we have the biggest concentration in our pipeline, we have been growing significantly in chronic treatments, especially central nervous system, endocrinology, gynecology, where we also have a high concentration of products to be launched in our pipeline. We know that it's a smaller base, but these are the fastest growing categories in the market. But our launches have been growing above market levels in these categories. So this will be important in the future. It's a category that represents the biggest part of the Brazilian market, prescription drugs. And with the pipelines we have and patent breaks that will take place in the next years, we will probably continue gaining a share of the market. And the institutional market is also a new initiative. We started strong in 2024 and we have a good expectation for launches by 2028. Many of the products that have been approved will be launched by 2028, and this will make our revenue for the institutional market reach our goal of 1.4 billion by 2028. Do you have a comment on generics? Yes, so about the competitive scenario for generics, we still see a very competitive scenario. We've been very aggressive with this market. We've accelerated our growth in generics and we will continue strong with this strategy in the next quarters. Our focus has been growth and profitability in generics, but we still see a lot of competition here. We've talked a lot about this. There are many companies that have gotten prepared for a lot of growth buying inputs. So there's a higher availability of pharma inputs. And I think companies ended up having excessive inventories with us and with the competitors, and this competitive process continues. It will continue in the next quarters. Great, thank you. Thank you. The next question will be asked by Mr. Bob Ford from Bank of America. Go ahead, sir. Thank you. Good morning, Breno Adalmario. Thank you for taking my question. What are you doing differently in advertising and in the Salesforce to maintain the sellout levels? And what is your competition doing? Hi Bob, as we've been saying for some time, we've been changing how much we've invested in media, so we've been prioritizing investments in online media and this will continue in the future. Our goal is to accelerate our penetration in the digital channel, which we believe will dominate the market from now on. So that's an important point. We've been preparing our internal advertising agency. So we're hiring professionals with a new kind of profile to work efficiently in this new scenario. So this is an effort we've been making in the last years. In 2018, this was 8% of our investments in digital. So we can basically invest everything in digital in the next years. And we've been preparing ourselves for that. So that's the biggest change we've had in our way of advertising. And also the company varies to a certain extent. We have a number of marketing levers, so POS promotions, media, discounts for end consumers. So we've been balancing this portfolio and we hope to prioritize media, instead of commercial discounts, so that we can maintain our investments in points of sale, which we believe are very important as well. We need to have a lot of exposure, a lot of products in points of sale. So I think that's it. I think the changes we've been making is that in media, we've been focusing on digital media and we're balancing... by giving fewer discounts and having more media from now on. This is what you will probably see in the figures in 2025. And just a follow-up question, what percentage historically did not receive any advertising that is now receiving it through the digital channel? Great question. So in the last couple of years, we've been going up. So in 2024, we went from 10 brands that did not receive any investments in media in consumer health, and now we're investing in them. And starting next year, we're going to have even more brands about, or rather more than 50 brands will receive investments in media. So we've been making this effort. Very strong brands like Torrio, MerchioLatte, Jell-O. These were brands that did not have a lot of media investment and will now receive more investments. they have a lot of appeal for the population. So we see a lot of potential for these brands with the additional investments we're making, especially focusing on digital. So the digital world allows us to invest in smaller brands and accelerate their growth. Great, thank you. Thank you, Bob. The next question will be asked by Mr. Luca Marchesini from Itaú BBA. Go ahead, Mr. Luca.

Hi, everyone.

Thank you for taking my question. I have a couple. First, about foreign exchange. We've seen that the political scenario has been a little bit volatile. So if you could tell us a bit more about it and how you expect it to impact your company for 2025, especially your hedge policy. And secondly, I'd like to ask about CapEx, if you're focusing on the institutional side and how it compares between 2024 and 2025. Thank you. Hi, Luca. Good morning. I'll answer on exchange rate. So for this year, the impact that we've been having to our cost is still very small. The average exchange rate that affected our cost was about 5.20. in the third quarter of 2023 it was 5.13 so the impact is still low considering the inventories that we have of raw materials and inputs and next year there are a couple of points impacting our gross margins first How the exchange rate will be for 2025 and the other one is price adjustments. Which will probably be defined in February if our exchange rate remains at this level until then. Remember that calculation takes into account a high watermark and not only inflation. So with that higher exchange rate, we will probably also see some price readjustments. So I think that's something that we need to keep an eye on and that will help us build our margin again. Another important point besides that is the dollar listed price of raw materials. After COVID, especially in 2023 and 2024, we saw a reduction in raw material prices in US dollar terms. Many of these companies that are input suppliers increased their capacity during the COVID pandemic. And now with their higher capacity, we have been able to negotiate smaller prices. That also helps us to reduce the impact of the exchange rate. And Lucas, regarding CapEx, our focus remains, I mean, we've made big investments in expanding our capacity in the company in the last few years. And from now on, we've been focusing on three main projects. internalizing our portfolio from Takeda and Sanofi. This process will be concluded by 2025. Most of the investments will be made by then. the pilot plant and the oncological products planned for the institutional market this is a long-term project that was started in 2021 by creating the business unit so we've been working on it we've been expanding our portfolio and also including partnership programs but i think the Some of the growth will come when we have our investment capacity and when we are able to develop things in our innovation center. And the third project is the scopolamine production plant. so that's the molecule for our main product buscopan so we've mentioned these projects in the past and they're going to give us a lot of efficiency and cost improvements we now buy ifa from behringer so we're going to have an opportunity to reduce the cost of what we produce and also sell this product and export ifa for the rest of the world so these are the main products that we've invested in next year our capex will probably be at a higher level than the capex we had for 2024 but this is not very significant and from then on we will see a reduction of the capex for uh to a maintenance level and some increase for some of the company's specific lines great thank you the next question will be asked by mr rena prata from citibank