Raia Drogasil S.A.

Hello, ladies and gentlemen, and thank you for standing by. Welcome to RD Saludi's third quarter of 2025 earnings call. The slide deck can be found at the company's investor relations website at ri.rdsaude.com.br. This conference replay will also be made available later at the website. All participants will be on a listen-only mode during the company's presentation. After the presentation, we will have a Q&A session. Before we begin, we would like to inform you that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the company's management's beliefs and assumptions, as well as on information currently available to the company. Forward-looking statements do not guarantee performance. They involve risks, uncertainties and assumptions, as they refer to future events and therefore depend on circumstances that may or may not occur. Investors should understand that overall economic conditions, the industry's conditions and other operating factors may affect the company's future results. and lead to results that differ materially from those expressed in such forward-looking statements. Today with us are Mr. Renato Raduan, CEO, and Flavio Correa, Head of Investor Relations and Corporate Affairs. I'd like to turn the conference over to Mr. Raduan. You may proceed. Good morning, everybody, and welcome to our third quarter 2025 earnings call. It is an honor to join you this morning to give you more details of our numbers and help you interpret them. And, Flavio, first of all, good morning to you. Hello. Good morning, Renato. Flavio will be here to address your questions and give you more details as well. Well, first of all, I'd like to apologize because our release was published a little bit later than expected, so sorry for that. And now let's talk about the third quarter's results. Before talking about the highlights, I need to tell you that we are very happy about this quarter. I remember that in the fourth quarter last year and the first quarter this year, I was transparent and humble and said to you that the results were lower than our expectations, and I told you that we are going to turn the key in the second quarter, and now I have to tell you that we have solid results, and we are very proud of that. There are three factors that led us to solid results in the third quarter. First of all, we went back to the sales top line level. We were at a 12% growth, and we told you at the time that we needed to go back to 14%, right, Flavio? And now we are at 15.5% in the core business, the retail business. So that is the first factor that we are very happy about in the third quarter. And the second factor is the management of expenses. I believe that the market was positively surprised when we adjusted the costs in the second quarter, but people were afraid that the costs would go up again in the third quarter. But we managed to keep the same levels as the second quarter. We have a very healthy level of expenses in the third quarter, and we need to be proud of that as well. And the third factor, the most impressive one, is a 7.5% EBITDA margin in the consolidated results. If you look at the track record for a third quarter, it should be about 6.9% to 7%. Last year, it had been 7.5% exceptionally due to non-recurring one-off events, and if you were to exclude them, it would have been 6.9% to 7%. So the top line grew, costs were under control, and the structural EBITDA margin came to 7.5%, which is very solid, very consistent. And now I'd like to delve deeper into the results. First operational results, we finished the quarter with 3,453 units, 88 openings and 6 closures. Over the past 12 months, the expansion is at about 330 openings. But more important than that is quality. Our IRR is very healthy in the new stores. So this is one of the drivers that is keeping us moving ahead. And now we are almost at the level of 3,500 units in operation. We reached 51 million active customers, 25% of the Brazilian population. in the last 12 months, and we had 111 million tickets in the quarter. And again, we're not proud of the number of tickets itself, but rather the quality of the service, according to the customers themselves. You can see that the NPS is 91, and that's the customer saying that we are providing a great service quality. And we had gross revenue of 12 billion this quarter, a consolidated growth rate of 12.7%. And I'm going to give you more details about that on another slide. We shouldn't just look at the weighted average of retail and non-retail businesses. The two stories are different. And I think that the main story behind this is the 15.5% growth in retail. Very solid result with almost a 5 percentage point real gain in mature same-store sales. We had a record-breaking market share with 16.8%, almost 17%. Over the last 12 months, it was one of the biggest numbers that we had with almost 80 bps in only 12 months. And as for digital, we got a 3 billion revenue. If you annualize that, it would be 12 billion in digital revenue with a 62% increase in the digital business with a penetration of 27%. I'm going to give you more details about that later. Our EBITDA was $909 million, almost $1 billion, in line with the growth in sales of 12.5%. The EBITDA was stable. The EBITDA margin was stable at 7.5%. But we should remember that last year we had one-off events. And in retail alone, it was 7.9%. Our adjusted net income came to $402 million with a 3.3% margin, 2.2% higher than last quarter. And a free cash flow of 648 million. Now, let me give you more details about our revenue. The consolidated number shouldn't be interpreted on its own. We need to break it down into the two stories here. First, retail with a growth of 15.5%. and a drop in revenue of 17% in ForBio. And what explains this drop is the fact that we had a pendulum effect. We wanted to grow at any cost in the beginning, but then we told you that we wanted to balance things out. And now I think that we got a little too conservative in terms of growing sales to protect profitability. But half of that job is not even related to that. It is related to the laboratory. that we used in the state of Sao Paulo for distribution through the distribution center in Sao Paulo. And the lab decided to supply products to the state of Sao Paulo through the state of Espirito Santo. And we don't have a distribution center there. And that accounts for half this drop. And that happened in the middle of the second quarter. We had that effect in the second quarter, but now it hit us fully in the third quarter. And now we are signing a contract with a distribution center in the state of Spirito Santo to keep the supply coming to São Paulo, but also to use it for the other lines of Forbio. We already have an action plan in course to address that, signing a contract this week with a new distribution center, and also because we need to balance things out. And another factor here is the growth of 15.5%. I believe that we had some important wins here. If we look at last year, we had an increase year on year, but also quarter on quarter from the first quarter to the second and to the second to the third, we were stable for three consecutive quarters with 10 billion, and of course in the first quarter we have a negative calendar effect, and revenue had become stagnant for three quarters. But now we can see that there was an increase since the first quarter this year. And when we look at where this growth came for, of course, GLP-1 drugs factored in here, but not only that. We grew in HPC at 10.9%, which is a normal level. We did not need to invest more than we were already investing in the second quarter. For HPC, we continued the same level of investment and the results are now better, almost at 11%. And last year, it had been 6% and 8%. We wanted to go back to double-digit numbers. And now, here it is. and generics generics is not are not related to glp1 it grew by almost 20 percent thanks to competitiveness and prices but also it is related to the loss of a few patents and when a patent expires it benefits the generics but it has a negative impact on the brand name medications And our own brand products grew by 21%, which is very solid. And GLP-1, to be very transparent, is beneficial to us. It helps us. But, again, we earned it. Throughout our history, we positioned ourselves as the best store to serve the high income segment because we always invested in a good experience inside our stores. Some years ago, I remember that people asked us about the fact that we were so high income that we wouldn't be able to cater to the lower income segments. as if it were a bad thing. But I believe that we found our way of catering to the lower-income communities as well without losing that differentiating factor that puts us in a good position in the high-income segment. And now we are reaping the benefits of that. We are going to see a very high market share in GLP-1 drugs. And we earned it thanks to everything that we did in the past. So this is a very solid sales level, much higher than the past. And that took us to an increase of 7.8% in mature stores. There's a calendar effect here. This is a record-breaking growth in mature stores. You can see here that we grew by 7.8%, almost 5% above inflation, much more solid than the growth posted in the previous quarters. It's a very solid growth. And that takes us to an impressive level of 1.2 million per mature store. And we have just about 1,700 mature stores that are selling more than 1 million. So this is a very solid growth trend. And the last month in the quarter was better than the first, which points to growth as well.

When we go into the digital channel, we see 42% growth in our digital channels, getting to a penetration of 26.7. There is also a point here with the penetration and sales of GLP-1, which is offering more attractive prices in digital channel, but even without this effect, all categories have grown at least 30% in digital channels and have got improved penetration. GLP-1 analogs has improved our penetration numbers, but all categories have grown at least 30% in digital channels. Extremely robust. Of the 3 billion, 80% of it was from the app, which is a major strength of us, and 97% of our deliveries are provided within 60 minutes. So convenience to our customers, which is really a landmark. Customers are happier with our experience with NMPS in the app and also delivery, but we have 6 million digital customers. Of the 50 million customers, 30 million bought in the quarter, 6 million bought through digital channels, and they represent 41% of our sales. Online sales, 26.7, but digital customers who buy online, they amount to 41% of our sales. This is a very important strength. When you have nearly 40% of your sales of customers who are used to our app, who are operating in the digital channels, they really benefit from that 60-minute delivery period. Well, having customers migrating to other competitors would be hard because they would have to have an excellent offer, really a value proposition to make them migrate. So these are digital customers who are very well served by us. another important achievement in the quarter was the share 16.8 with 18 bips of growth and we have gained share in all regions highlighted sao paulo here it stands out we've got 120 pips highest rate of growth southeast 70 center west midwest 140 in the south, 20 in the northeast, and in the north, 60. Consolidated north, northeast is about 30 BPS or bits. In Sao Paulo, there has been an increased growth because we expanded the opening of pharmacies in Sao Paulo. In the northeast, let me find it here. It used to be 22, and then it went down. So this is part of our expansion strategy, but we have gained share in all regions. Another point that I would like to make out of the chart is the 30% sell-in, sell-out share. We have 30% of share in Sao Paulo with Drogaria and Drogazil. The second most relevant network in São Paulo would have 16%, 18% share. So there are two networks in São Paulo getting to 50% of market share. In addition to that, there are some small players in different areas, but this is a highly consolidated market. It's quite hard for new incumbents. Even for those that are already in the market with irrelevant share, with this kind of level of consolidation and strong brands, I would say that I don't believe competitors can benefit from any expansion of growth. State of Sao Paulo amounts to 30% of the medication market, and the market... is quite hostile to small players or new incumbents, and this is the kind of consolidation that we see in this region but not in others yet. So that, I would like to hand it over to Flavio, who's going to talk about profitability, and then I'll be back. Thank you, Radwan. Now, going into details about the financial results, let's go into gross profit. It was $3.3 billion, 27.4% margin. Year over year, we are talking about margin dilution of 20 BIPs. But last year, 27.6 included the benefits of CMS, of TAGS, of 20 BIPs. If we exclude that tax benefit, we are talking about stable margins year over year. And this is absolutely important. In 2025, we've had some tailwinds and headwinds concerning dilution because of GLPON analogs, which were more prevalent in the market, and because of... competition in HPC, which was really offset by other efforts and other initiatives. So much so that we got to the gross profit in the half year, similar to that of the third quarter, which is something offline because of the effect before the CMAT price adjustment. So we really should celebrate getting into such high gross profit. Now talking about expenses. Selling expenses was 17.3% in the quarter. Year over year, we are talking about worsening of 20 bps year over year, but last year, We had also emphasized in our meeting that our headcount was higher and we hadn't really captured the expenses with the new headcount because they had joined the team later in the year. We are talking about expenses normalized by the team that we had at that time in terms of personnel would be 17.5%. Comparing 17.5% with this year, we are talking about a normalized dilution of 20 bps, which is really important. The expansion of headcount, we are talking about 16.5 people per store as of 15.9. It was 0.6 headcount per store, which really provides better quality of service and also work and engagement of our teams in the stores. This is really important. Now, analyzing GNA, and this is the main achievement we have to celebrate, something that we have started capturing the second quarter and coming stronger in the third quarter, there was no rebound effect here. The SGNA in the quarter was 310 million BRL, which is less than the number that we had last year, which was 323. there was a significant dilution here of 40 bps year over year going from three percent to 2.6 There is stability of this level quarter over quarter because of some specific pressures related with tax provisions and other things which are expected in the operation. Our expectation is to keep on improving our performance in this indicator. Now, going into EBITDA, which is a sum up of all the other elements in a year over year, we are talking about stability of EBITDA margin of 7.5% in this quarter, getting to 909 million BRL. But if we exclude offset elements, 20 BPS of ICMS tax and the 40 BPS of personnel expenses, it would take us to a 7.5% performance as opposed to normalized values of 6.9% last year. Major achievement. This specific quarter is the best third quarter we've reached in terms of percentage APIDA in our track record since the COVID time. Major achievement. Operationally speaking, in our cash cycle, there was a decrease in our inventory levels and an improvement in cash cycle of three days. Now, below the P&L, we have financial expenses, which was 1.6% in the quarter over last year, which was 1.3%. This increase is due to the increase in interest rate, comparing those two periods. So this is the best explanation for this number. It gets us to effective tax rate of 0.4%. and this is a result of what we observed here at 4BO. This rate, if we normalize it by the default number, we would get to 18%, which is exactly what we would expect as recurrent tax rate for the future, or at least for the short and mid term. and it takes us to 402 million in adjusted net income or 20 bps increase year over year once again we are not considering normalization of the basis comparing last year in terms of head count and tax but still very good result And finally, this is free cash flow of $558 million, very much aligned with what we expected, similar to what we used to have last year. Our net debt went down from $3.9 in the second quarter to $3.4 in the third quarter. with an improvement in leverage levels getting to 1.1x EBITDA over our debt. And back to you, Radwan. Well, we've decided to have more time for your questions during this call, but here let me just emphasize our confidence in the quarter. In the first quarter of my management trying to explain what had happened, I had never thought that we would get to such a strong quarter. I knew that we had strategy to improve. I believed that the results would be better because I know of the strength and the quality of our management team. But in the first quarter this year, I wouldn't anticipate such fast recovery, and I'm so glad to celebrate that. It reinforces a number of our strengths. Yes, there have been few financial and operational deviations for two consecutive quarters, but we have really resumed our operational and financial strategy as a whole and performance. We have now the mature pharmacies performing quite well. We are going to have an overshare in GLP-1 agonists. It's here to stay. That's going to be part of our structure. But it also involves HPC, something that we were all concerned about, also acceleration of generic medication. So I believe we've really resumed our operations to very good levels. At the same time, despite that, we've been strengthening other elements of our operations. We've seen the amazing numbers of our Omnichannel, which we've grown 62%. And in addition, we offer a very good digital journey. 97% of deliveries made within one year. It's difficult to come up with a value proposition better than that if you don't have a good distribution and... solid operations such as we do. We have also shown that we can have an efficient management. We've managed costs without impacting deliveries, without impacting services or the corporate deliveries to pharmacies and the distribution center. We've proved that we can have very good operational management. Losses are starting to decrease, and we can see a downward trend, which is something that has impacted our gross profit. and why we were fast tracking and adjusting our operations. We have reached over 25% IRR, over 25% in all regions of the country. and we're still working on this wide distribution and logistics of our operations it's important to have presence and also to be located at the right spots or the right cities it's not only improving operations and believe that's going to you or to optimize sales forever you have to be placed at the right spots to sell more, otherwise you are just going to be limited to the potential of that specific venue. If you combine efficient operation and the best points of sale, then we can improve our operation. Our company has very robust financial health. We have very robust results. We are improving our inventory levels, cash cycle, controlled leverage, which gives us the possibility of coupon investing where we believe we are going to make a difference.

And on top of that, we try to be as transparent as possible with all of you. We are not here to sugarcoat things and sell a scenario that is more favorable than it actually is. And when things are not so good, it is also our role to help people see what we see. and that is added to all of the differentiating factors that we built over the course of decades with the right team and our execution capacity. And that is part of a perennial company, a company that is here to stay, and all of that is built over decades and decades of hard work. It is also impressive to see our ability to adapt fast. Maybe this year was the first year where we had to adjust things so quickly and we managed to do it and the results of the third quarter bear witness to that. And the market is going to continue to grow because the population is aging and also GLP-1 drugs and other medications that will come make the landscape for us very optimistic. We believe that there's a good trend that is leading us to the end of the year. And with that, we would like to start the Q&A session. We'll try to address as many questions as possible. Thank you very much. Just before we move to the Q&A session, there's one thing I always tell investors about. We were talking about how the entry point in 2025 was so tough with a lot of pressure on HPC and some other lines that were pulling our results down. And our ability to react, as you said, was so important for us to go back to a stable level. And that is going to be our proxy for 2026, 2027, and from then onwards. This is a very important position in the retail pharmaceutical market in Brazil. It is a very solid thesis as well when we think about how the population is aging. Now let's start the Q&A session. Thank you very much, Raduan and Flavio, for the introduction. The first question comes from Louise Guenise with BTD Pactual. Over to you. Good morning, Raduan and Flavio. I have two questions on my side, both about GLP-1 drugs. Raduan, if you could give us more color about the weight of GLP-1 drugs in your sales in comparison with the previous quarters. We can see that the number is increasing. It is getting to a high single digit or a low double digit. So that's the first question. And the second question about GLP-1, I'd like to know the effect of them on your working capital. Are you planning an aggressive policy to installment payment related to installment payment on those drugs? Please, Gwyneth, go ahead. The second question is about working capital. If you can give us more color about the effect of the growth of GLP-1 drugs on your working capital. And if you plan to offer installment payment in this category since starting next year, we are going to see generics coming in this segment as well. Thank you for your question. Well, the first question about penetration of GLP-1 drugs, your numbers seem correct to me. In the third quarter, we stood at a high single digit, not a low double digit. And in the past, it was 5%. Now, we are higher than that. And if you think about the potential of this molecule when we have a limited inventory, which didn't happen yet, I believe that we are going to move to double-digit results. But in the third quarter, we were not there yet. But there's a huge potential. And obviously, when we see the generic 2-LPO on drugs coming, the average price will go down, but access will increase. I think this will eventually become a category on its own, just like OTC, HPC, we're also going to have the GLP-1 category. That's how big the potential is. And about your second question. We offer different payment methods for these drugs. In some cases, we offer a six-installment payment method for customers, and by doing that, we can improve access. Part of the population cannot pay all of that up front in one single installment. But, of course, we need to be responsible. We shouldn't just generate bad demand and have problems in the future because of that. But good news is part of the industry is helping us fund that payment in installments because they want to increase access as well. And... Also, that puts pressure on receivables, but on the other hand, we are managing the inventory very well. We decreased our inventory significantly. We have been doing that throughout the year, and we see more room to do that, to continue doing that. It was a technical movement, a scientific movement even, integrating departments, and the impact on the cash cycle as a whole should not be that great because we have been decreasing the inventory coverage at the same time. Just to add another point to this answer about the potential, the growth potential of this category, we're talking about 1 million consumers of GLP-1 drugs in Brazil per month. Out of the 215 million in our population, 1 million people are the target audience for that product. And as the access increases, I'm sure that we'll be able to capture more of that. And we should remember that we have a very high market share in this category of about one-third, which is very positive. Thank you, Fabio. Thank you, Luis. Now the second question comes from Joseph Giordano with JP Morgan. Hello, good morning. Good morning Flavio and Raduan. Thank you for taking my question. I'd like to talk more about working capital. over the past two or three quarters we have seen an increase an improvement and rajwan talked about the coverage of inventory but i'd like to know more about the logistics what have you been doing in terms of allocating inventory in the different stores in the different neighborhoods i like to know if there's more room to improve that side of the business And also about 4Bio, we saw a 17% decrease in your revenue in that segment, and you said that part of that is related to one specific contract. My question is, when you open the distribution center in the state of Espirito Santo, should we expect 4Bio to go back to its previous sales levels? So after the contract is signed, the financial loss would be lower. Is that correct? Thank you. Thank you, Joe, for your questions. About the first question about cash cycle. Well, last year, considering the operating challenges that we had, they included logistics issues in some specific distribution centers, which led us to take a closer look at what was happening and also to improve our policies and inventory allocation. And we realized that part of the problem with the DCs was an excess inventory that build up at some point in time for specific reasons. And again, we had to be very humble to understand exactly what we needed to do to improve inventory management as a whole in procurement and also regular supply to distribution centers or the pharmacies themselves. And we started that very strong movement led by Marcelo, our COO, and he started to take care of the supply, procurement, and operations departments, bringing everybody together on the same commitment of reducing that inventory. Now we have an inventory coverage that is six to seven days lower than in the past with the same disruption level that we had. It's actually lower than the past four to five years. So we are actually improving the service to our customers with available inventory, but a lower inventory as a whole, which makes our operations easier. We are not going to have so many problems with expiration of medications and losses entailed by that. So I think that our management did a great job, and I'd like to take this opportunity to thank them for that. And there's still more to be done. I believe that there are other levers that are very clear for us to improve the cash cycle, which is very important when the interest rate is at 15%. So we're going to see the benefits of that on our financial expenses too. Now for a bio. Indeed, the DC in Espirito Santo is going to help us. We are signing the contract, and we are going to resume supply to the lab in the state of Sao Paulo, and that is going to decrease the drop in sales, and that should take place relatively fast. 4Bio is a solid business. It continues to make money, and the projection for revenue is more than $3 billion per year. now that we are adjusting things, now that we are not so conservative in terms of protecting our profitability at all costs, and after the operation resumes from the state of Espirito Santo, I feel certain that we are going to exceed 3 billion in annual revenues. Even without that DC, The third quarter had a better performance than the second quarter because of that balance movement. And ForBio continues to be a good business with an annual revenue in excess of $3 billion. we restructured our operations, we divested in some other businesses, and it was not the case with Furbio. We decided to continue with it, and we just need to adjust things to go back to the levels that we expect to have. And Araduan, if we look at the gross margin in the company that is fed by Furbio, of course, but other categories as well, I think the market gets a bit anxious about our gross margin throughout the year. If we look at the potential dilution of our gross margin due to GLP-1 drugs and due to 4-bio as well, if you do the math, you are going to see that the sales are growing. at about 12.5% and the gross profit is increasing by the same rate 12.5% so despite the headwinds we are still growing despite the potential dilutions we are still growing and if we have any additional performance that we can capture we are going to distribute even more value So I think the results are very positive across the board when it comes to profitability. Thank you, Joe. And now the next question comes from Mauricio Cepeda with Morgan Stanley. Hello. Good morning, Raduan and Flavio. I have two questions too. First about GLP-1 and the expiration of patents. Rajwan said a few things that are in line with our thoughts about the competitive landscape after the expiration of the patents. You said that there is low availability right now, but we also know that the national laboratories are going to start producing those drugs under licenses. So in your perspective, do you think that with the low availability the semaglutide price will continue to be high, at least in the beginning, or maybe that won't be the case. Maybe the competition will be very aggressive. And the players, for similars and the pure generics, do you think that they are going to offer you more discounts than other players? than what we see in the small molecule market. And the second question is, you mentioned in your release that the market is going generic because it took advantage of the recent patent expirations and that helped you grow, especially in the prescription lines. But now looking forward, we can see that there's less opportunity in the generic space with the exception of semaglutide. But we can see less opportunities of losses of patents. But do you continue to be confident in the contribution of generics? And how much can it exceed the contribution of brand name? medications because we can see that there are molecules that are very competitive. Some manufacturers have a huge capacity. So do you think that the unique contribution from generics will still be significant in comparison with the brand name medications?