Q3 2022 Procaps Group S.A. Earnings Call

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Hey, Paul.

Welcome to the.

The pro cap skirt business update call and webcast today's conference is being recorded.

All statements made during this call may contain forward looking statements.

Meaning of the private Securities Litigation Reform Act of 90, 95 and are subject to risks and uncertainties.

Statements that refers to expectations projections or future events, including financial projections or future market conditions support looking statements. The company's actual results could differ materially from those expressed in such forward looking statements due to a variety of risks uncertainties.

Other factors, including but not limited to those set forth in protest group our SEC filing.

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No obligation to update any such forward looking statements.

Please also note that past performance or market information is not a guarantee of future resolved.

At this time I would like to turn the conference over to Mr. Andrew <unk> Investor Relations director, Okay Hello.

Melissa.

Thank you and Hello, everyone. Thank you for standing by and welcome to the protest business update call. This conference call is also being webcast and the link the webcast is available on the pro cut or what.

At Investor doctoral cut group Dotcom, we appreciate everyone joining us.

Please note that our press release was issued on Monday and can also be found on the protest IR website.

Please review the disclaimers included in the Investor presentation. During the call non-GAAP financial measures will be discussed and presented we believe non-GAAP disclosures enable investors to better understand broke up core operating performance.

Please refer to things that's our presentation for a reconciliation of each of these non-GAAP measures to the most directly comparable GAAP financial measures.

Hosting todays call, we have real bend minsky, our CEO and Patricia Barton our CFO .

I'll turn the call over to broke up CEO . Please go ahead.

Thank you Melisa and thank you all for joining us today for our third quarter and first nine months of 2022 results conference call.

So the agenda I wanted to provide everyone with an overview of our performance for the period as well as give you an update perspective of our strategy going forward.

From there.

I'll turn it over to Patricia to take you through the more detailed specific is over our financial statements.

At the end of our call Patricia and I are both very happy to answer any questions that you may have.

Additionally, please feel free to follow up as well with Pascal.

Or us or with Melissa.

Moving to slide five.

I wanted to share some highlights of the quarter and the nine months with you.

Our top line sales and market share positions are right on track.

I'm very pleased with our results for the quarter and now they are on the year to date.

We delivered solid numbers on the back and the backdrop of significant foreign exchange another macro headwinds overall, our constant currency results showed the resilience of our business segments on our portfolio diversification continues to evolve with new products.

New geographies.

You will also hear from potential that we are very committed to structuring the company for future organic and inorganic growth investing in people and systems and in processes.

We posted an 11% increase in net revenues in constant currency for the quarter and 15% for the nine months with a C D and won't business growing 17% year over year.

Our b to B or B to C business, we posted a 40% growth in constant currency in the nine months of the year supported by the very positive performance of our Rx and OTC products.

All our divisions, except for diabetics are growing in terms of revenue in constant currency for the quarter and for the nine months.

Our new product launches have been key drivers of our growth or our renewal rate that is the percentage of our revenues from products launched in the last 36 months, you said, 24% year to date.

The construction of our gummy facilities in the U S is on track and we expect to begin operations in the first quarter of next year.

As we continue to navigate through the dynamic operating environment.

We remain very committed to our investments to fortify our businesses or the folio organizational structure and value chain by increasing our production capacity continued investment in our research and developing new products and diversifying our geographic footprint.

We also expect to close group of so Martha decision before the year's end.

Moving to slide six.

Another important driver for our future growth is our research and development of new products I'll.

I'll say I always have said innovation around our appropriately oral delivery systems is a very much of a key to our success.

As of September we launch over 140 products in the region continued to execute our geo expansion and diversification strategy.

The ramp up of these products is growing well.

We continue to invest approximately 5% of net revenues research and development.

And they are in a five day in the business to realize the value of the near and long term opportunities are very much in front of us.

Moving to slide seven.

I want to take a deeper dive into explaining business segments performance.

Our top line performance was broad based across several therapeutic areas.

The general main drivers for growth were increased demands for both of our Rx and OTC products.

The rollout of our existing portfolio with new product launches.

The higher market penetration in the Andean region in the South of the Central America region, and the higher demand for products and services for third parties.

Our top line growth is indicative of a worthy we're suffice for the folio Brandt our market share execution.

The next year business segment is growing consistently and the demand from regional and global business as partners remained quite strong.

Regarding Colombia was the business unit most impacted by the currency devaluation as Colombia is our biggest market today.

In addition to the currency devaluation it experienced a decrease in sales for the most relevant products or the ICU units, you know clinical specialty lines.

Looking solely or OTC and Rx lines in Colombia growth was substantial almost 20% supported by the performance of products launched last year and increased demand for existing products.

We were brokers Columbia as a whole grew 3% in the quarter of 9% for the first nine months on a constant currency basis.

That is the Central America, North West positively impacted by the rollout of new products and portfolio expansion in several therapeutic areas. So it just got some interest in testing now on feminine care.

The low growth for this quarter you saw most related to high comparison base.

In the third quarter of 19 point on 2021.

Can they started to increase its sales after an 18 month period of inventory normalization, the trade, which caused lower than normal sales in the previous quarters.

Sun or Central America, South in the Andean region grew 25% in nine months in 2022 in constant basis.

The increase was a result of higher demand on the rollout of new products in the region and increased market share with existing brands.

Well I know you are diabetes SBU decreased 16% in the nine months of 2022 and 22% in the third quarter on a constant current basis.

Impacted by the delay in the launch of one of our ethylene project, which was due to a product with a device supplier. The issue was there really hasn't been a radio resolved.

And we're very happy that the acceptance of the product looks quite promising.

We were also affected by the delay in Bema does the Colombian registration office to a registered products.

Being myself for some cyber security issues during this year and several registration process. It goes very much delayed for diabetes, we were specifically get waiting for a new follow on products that was going to replace all of the Roche is in the market.

Those brothers were not yet launched.

With that I will ask Patricia to review our financial statements before we take on Q&A.

Thank you Robyn.

The next slide I would like to give you a little more color on the third quarter and first nine months of 2022 results.

Moving to slide nine you can see our top line evolution in.

In the consolidated view, we ended the quarter with our net sales growth of 11% in constant currency and I think we will end up 15% for the nine months.

Greece was mainly driven by positive performance in the next deal and cause some business segments, and Rx and OTC products as well that nobody showed you.

Currency devaluation, especially in the last few months negatively impacted our revenues by $8 million in the quarter and by $16 million in the first nine months.

Although in the long term, we have ways to transfer most of these impacts to the market. We must continue to monitor the evolution of the currencies, where we operate but in particular that of the Colombian peso, even its weight in our results our fourth quarter revenues may be negatively affected if the Colombian peso that's not correct.

Moving to slide 10 on the gross profit line, we reached $68 million in third quarter 'twenty two at $187 million for the first nine months of 2022 with a 61% gross margin in both periods.

This result is due to a positive exchange rate impact on costs and a better sales mix.

We're also showing our consolidated contribution margin, which includes the impact of sales and marketing expenses here you can see that we have been able to defend the margin in this challenging markets that we are improving and that the business performance is solid even with the higher expenses, we have in the period.

Moving on to the next slide we have the breakdown of our SG&A.

In addition to the impact we had in the topline by the exchange rate in this slide you can see that SG&A is also impacting our EBITDA as we continue to invest in our brands to increase market share reinforcing the organizational structure and preparing the company for future organic and inorganic growth.

SG&A expenses increased by 16% in the quarter and 19% in the nine months of 2022. This was mainly due to the return to in person promotional events and stronger commercial and marketing efforts.

The increase in costs associated with higher personnel head count and the costs of being a publicly listed company and the fact that we have restructured the company for future growth with new hires systems and process improvements.

All of these expenses, which were not part of most of the year 2021 negatively impacted our adjusted EBITDA, which totaled $23 million in the quarter.

$60 million in the first nine months of 2022.

As a measure to compensate this we're working on price increases contract adjustments whenever possible improvement of our product mix with new launches and containing costs. So we can continue to protect our margins going forward.

We continue to grow as planned we will be diluting most of these expenses as well as reducing some of them as we become a more efficient organization in a new context.

Looking into the fourth quarter and beyond we see that the challenges we're facing will linger for a while we think it's reasonable to adjust our guidance now we believe with current market conditions, our adjusted EBITDA for the full year could well move closer to the low ninety's area negatively affecting fourth quarter 'twenty, two and even early 2023.

Despite these hurdles we remain happy with the results, so far and optimistic about our ability to deliver growth in the long term.

At the time being as we're not blind to these challenges we will continue to work in a disciplined and creative way to improve our results quarter over quarter.

Finally on slide 12 until September 32022, we have a view of our balance sheet. You can see that cash balance has decreased as a result of increased working capital needs.

To increase inventory to provide support to the supply chain challenges we have been facing.

Greece or capex to support the future growth and increased expenses associated with being a public company and financing M&A projects.

<unk>, our net debt levels have slightly increased with a resulting two two times net debt to adjusted EBITDA ratio, but we remain in a healthy financial position to take on the increased leverage that will come on the back of the group with some opposition.

In summary, although we're facing some challenging external store operations, such a strong currency devaluation global supply chain restrictions and inflationary pressures and economic uncertainties. We are confident in the fundamentals of our markets and we believe we will see operating leverage as we continue to grow our revenues and after executing and integrating our M&A deal.

With that I will pass it back to Ben.

Okay.

Thank you all for participating.

I said as I said before we are very proud of our performance our results support our belief that we have the competitive advantage of capabilities the right team and effective strategy to continue growing even in challenging scenarios.

We are demonstrating impressive resilience across all aspects of our business in a very challenging global environment with variables that are not always within our control.

We're growing in constant currency, and we are making the necessary investments in our businesses.

We also expect to see operating leverage as we integrate more M&A on the drive there are synergies.

The demand has remained consistent and the key growth drivers remain quite unchanged.

We will continue to benefit from population growth and aging trends and the related higher expenditure. This will continue to lead to double digit growth with our innovative product portfolio.

Thanks, very much for listening and we will.

Welcome any questions that you may have.

Thank you.

We'll now begin the question and answer question.

To ask a question you May press Star then one on your telephone keypad.

You're using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question please.

Alright, thank you.

At this time, we will pause momentarily to assemble our roster.

Our first question comes from Jan one with BTG Pactual. Please go ahead.

Good evening, Ruben Patricia him and he's Oh, well I just I have one question here on my side about per caps Columbia, we see here that there are too. Many fact pressuring net revenues growth in the business unit. The first one is the fact of local currency depreciation and.

And the other one is the sales of.

Clinical specialties product and.

Uh huh.

The distributor distributor stocks after the pandemic. My question here is regarding the timing for the normalization of demand right. So ex currency. When do you expect these organic growth of per caps, Colombia to resume back to normal levels.

That's it guys. Thank you.

Okay. Thank you for your question Yeah. It's it's a it's an estimate we need to make but we don't know the exact amount of inventories at the time what happened is that some of these distributors at the end of last year, where.

Yeah, I'd be nervous and therefore, they they they did stop themselves without a program they have been.

Pushing that into the market.

Yeah, I think I think it's too early to say or to have an effect in the fourth quarter I think it's more likely that we should be normalizing at this.

These levels, we should see more normalized levels by the first quarter.

For sure by the second quarter, maybe by the first quarter. Thank you.

Thank you that's pretty clear.

Yeah.

Okay.

I don't know if you'd like to ask a question. Please press star one at this time.

Our next question comes from Donald Berwick Brookline capital markets. Please go ahead.

Hi, Good day.

I have a couple of questions.

First question couple of questions relate to working capital.

Your days receivable have extended a little bit.

Since year end, how much of that is seasonality and how much of that is a reflection of.

The macro environment, whether it be the translation of receivables.

Or extension of terms to help our customers.

Hi, Kevin how are you. Thanks for your question.

I would say that most of the station we have had in Brasil, both is related to the current environment.

You can you can see and you can see in the in the air.

Whatever you look that there is a there's tightness or people preparing themselves for more complicated times. So you can see an extension of those of those receivables.

That's basically the deletions.

Great. Thank.

Thank you for that and then somewhat related is you had built up inventory.

Over the last few months to address supply chain issues.

You know how.

How would you rate the success of that effort so far.

I kept I think we have reached the point, where we feel comfortable.

We we have when you compare us with the bi and end of year end of 'twenty 'twenty. One inventories, we have increased by more than $20 million in terms of value.

So of course that that is not spread evenly across every business line. So there may be some adjustment that we still need to make but on average I would say we have reached the level that we want so we will not see much more pressure on this side and hopefully we can start.

Beginning next year to start to go back to more normal levels.

Great. Thank you and my last question relates to <unk>.

Reimbursement in the pharmaceutical business across the region.

How have the government.

Payment formulas adjusted with the higher inflationary environment is it.

The fact that.

Causing some pressure on your or have they adjustments been closer to.

Current cost increases.

Okay.

How are you.

We have been able to pass most of them to the to the system.

I'm very happy.

Whatever we have not been able to do and.

We have been able even to discontinue the product for them or you know just stop selling the product. So we have been able to move quite so good in a very solid way in this in this.

System in this ecosystem of high devaluation and high inflation rates on it.

The logistics difficulties, but the.

And then just to answer your question is that yes, we have been able to pass most of these.

The difficulties to this to the market in almost all the cases and some of them you will find.

We will not see them until probably first quarter of next 2023, the actual races in prices, but I would say more than 70% to 80% of all of them have been already.

Yeah.

We're already seeing them in the fourth quarter.

Great. Thank you.

Again, if you'd like to ask a question. Please press Star then one at this time.

Showing no further questions. This concludes our question and answer session.

Today's conference. Thank you for attending today's presentation you may now disconnect.

Yeah.