Q4 2022 Procaps Group S.A. Earnings Call
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Good day and welcome to the prototype scraped business update call and webcast. Today's conference is being recorded. Please note that some statements made during this call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 and are subject to risks and.
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Any statement that refers to expectations projections or future events, including financial projections or future market conditions is a forward looking statement.
Company's actual future results could differ materially from those expressed in such forward looking statements due to a variety of risks uncertainties and other factors.
In but not limited to those set forth in pro categories.
Our SEC filings.
<unk> assumes no obligation to update any such forward looking statements. Please.
Please also note that past performance or market information is not a guarantee of future results.
At this time I would like to turn the conference over to MS. Melissa Angiolini Investor Relations Director of <unk>. Please go ahead Melissa.
Thank you and Hello, everyone. Thank you for standing by and welcome to the pro cap business update call.
This call is also being webcast and a link to the webcast is available on the pro cut IR website.
We appreciate everyone joining us today. Please note that our earnings release and our 20-F, what's each were issued last Friday and can also be found.
What broke up the IR website.
Please review the disclaimers included in the Investor presentation. During this call non-GAAP financial measures will be discussed and presented we believe non-GAAP disclosures neighboring investors to better understand <unk> core operating performance. Please refer to the investor presentation sort of all reconciliation of each of these non-GAAP measures.
To the most directly comparable GAAP measures.
Hosting today's call uncle Ben Minsky.
Our CEO , but Fisher.
Michelle <unk>, our CFO and myself.
I will now turn the call over to Phil Katz CEO . Please go ahead.
Thank you Melisa and thank you all for joining us today for <unk>.
Full year 22 results conference call.
I want to start by embracing the negative effect of our results are impacted the second half of 2022.
Most especially the fourth quarter, which dose impacts were higher on a worse than expected.
As you can see the slide up to nine months of the year were able to compensate some business units performance with current evaluation with the over performance of orders.
In the fourth quarter, even with over perform you referred to the portfolio such as Rx. It was not enough to compensate the negative effect that we're even stronger quarter in this quarter.
The main impact COVID-19 related clinical specialty portfolio.
He is most players in the industry made the mistake thinking that the price the prices and demand with the army chrome guardians would be similar or higher than the first wave.
However, distributors or hospitals ended up with very high inventories due to the low demand for this type of product.
<unk> generated by these new values.
We learned our lesson, we have adjusted our forecast ryzen demand. According to this new reality.
Due to these we've made the necessary provisions on for 2023. This is a really a justice to the new demand forecasted.
The other major impact is currency devaluation.
Wanted for approximately.
28 million barrels of negatively impacting our revenues for the year and $12 million only for the fourth quarter.
As expected we have to comply with some of our contracts, which were agreed upon in the local currency preventing us from increasing prices fast enough to compensate the negative effect evaluation with Harbin our margins there.
We think it's worth, especially hit by currency devaluation and next year would have been impacted by July renewal.
With the still ongoing change of API manufacturing site and progesterone with ongoing by equivalent test.
Both matters affect the sales of 2022 since we cannot sell this product until those matters are resolved.
Both are expected.
Commercialization by the first quarter of next year.
We're very pleased with the execution of our value creation initiatives taking place. This year is an important measure to protect their margins our results going forward.
Looking ahead in 2023 with our focus on our strengths where growth and the substantial airports, we're putting in our strategic improvement initiatives.
I am cautiously confident.
So we are well positioned to achieve our near and long term goals.
We expect 2023 to be a year to stabilize the substantially improve our results. So we can continue with their expansion plans.
We reaffirm our guidelines, which you will see in the next slides, we will simply find challenges, but we're confident that we will be we will probably address each and every one of them as they appear.
Moving to say for our new product launches have been a key driver of our growth 100 of nearly $111 million with revenues from new products in 2022 and over 170 pro looks in that registration phase.
Our renewal rate that is the percentage of our revenues from products launched in the last 36 months was 27% in 2022.
We have now commenced operations in our West Palm Beach facility, providing are these services with a growing pipeline of contracts Rx and OTC products in development.
Packaging services start in our new manufacturing facility in Florida full production will commence in the second half of this year.
Additionally, we have implemented multiple initiatives to reduce costs improve margins.
Near term profitability as well as to expand our global reach with our rollout strategy and to fund our growth.
Moving to slide five I want to share and update it.
The value creation initiatives were announced at the beginning of the year.
The goal our goal is to achieve up to 15 million are recurring savings to be realized over the next 12 18 months.
The beginning of this year, we have been focused on these initiatives, including but not limited.
Two SG&A accretion C grosses operations to streamline R&D optimization and corporate expenses efficiency.
As of March 2023.
Total execution of our series got your rate was approximately 20% of our goal.
As of today I can tell you that we haven't got through more than 30%.
Moving to slide six another important driver for our future growth is research and developing new products.
So here, we sit innovation around our appropriately oral delivery systems is key to our success.
Our renewal rate that is a percentage of net revenues through new growth slowed to 36 months was 27% during 2022.
<unk>, just depend to registration approvals and regulatory agencies, and we could have faced even from quarter to quarter, depending on the time with these approvals.
We continue to invest approximately 4% of our net revenues in R&D.
And we will continue to prioritize investments in our pipeline business to realize the value of near and long term opportunities in front of us.
For <unk> 'twenty 'twenty through is quite strong high Navy by Edinburgh, Oncological prostate cancer, the olefin extra that's an OTC product mincey in Bali.
Popular Kurt in Colombia.
Can you explain just improving women's health cardiovascular industrial products or elsewhere.
Before me very well according to the ramp up three three.
Moving to the next slide.
Looking to the year 2023, combined with our cost reduction plans to optimize our business in the near term without compromising our long term objectives, we're forecasting our adjusted EBITDA range to approximately $90 million to $100 million in 2023 in constant currency.
In net revenues and <unk> and high single.
<unk> digit growth.
Adjusted EBITDA in constant currency.
Now I will pass it to Melissa who will share with you a little bit of our ESG progress.
Thank you for even with our focus on using science and technology for health and nutrition improvement to pharmaceutical and nutraceutical solution. It's only natural to reports of our accomplishments and golfing yet.
Our commitments and initiatives include advancing our health climate resilient future social responsibility within the company to support its philanthropic pillars and surrounding communities as well as United Nations sustainable development goals.
So that and we have several social initiatives in Colombia and throughout the region and here you can see one of them, which is called <unk>, which is close to 3000 patients.
On the people side, we continue to work for gender equality, and we recently launched a program to both female leadership in different areas and countries.
All the environmental pillar, we are working on our carbon neutrality strategy and we expect to be ready to share it with you.
We will continue to make significant progress across all of them.
Responsibility and we.
But to deliver our ESG report somewhat.
I will now pass it over to Patricia who will comment on our operating results.
Thank you Melissa.
Before discussing our performance for the quarter and full year I would like to take this opportunity to apologize to our shareholders and to explain the reason for being delayed and our 2020 took place.
We recognize these delays bad news, especially in a time with challenged results.
While at the same time, we're working to improve our systems and processes and build trust, that's a relatively new public company.
We expected our nuclear simulation system to be in place by December , but we were delayed in its implementation, especially and what it pertains to the interconnection to the different fleets.
We are now expecting it to be operational for our second quarter filings.
At the same time, we have continued working on when the gating our material weaknesses, which must be dealt with to keep the accounting and control standards, our investors demand from us.
We expect the remediation plan should be mostly implemented within the next 18 months or by the end of 2024.
Now moving to slide nine you can see our top line evolution.
Currency devaluation, especially in the last two months of 2022 negatively impacted our revenues by $12 million in the quarter and by $28 million into full year.
Excluding this impact in constant currency, we ended with an increase of six 8% for the full year 2022.
This was primarily due to an increase in demand for our products and services across three strategic business segments next year, Gershon, and Ken and the rollout of new products.
Our top line performance was broad based across several therapeutic areas in.
In general the main drivers for growth were increased demand for Rx and OTC quotes the rollout of our existing portfolio with new product launches the higher market penetration and beyond in region and higher demand for products and services for third parties.
Our top line growth in constant currency is a result of our diversified portfolio breadth and market share execution.
The Nexium business segment is growing consistently and the demand for our regional partners remains strong.
Colombia was the business unit most impacted by the currency devaluation as Colombia is our biggest market.
In addition to the currency devaluation it experienced a significant decrease in sales for the most relevant product for the ICU in our clinical specialties line.
Total broke up Colombia increased four 2% in 2022 on a constant currency basis.
Looking solely at our OTC and Rx lines in Colombia.
Lines are growing healthily supported by performance of products launched last year and increased demand for existing products.
Ken or Central America, North was positively impacted by the rollout of new products and portfolio expansion in several therapeutic areas such as countries gastrointestinal and feminine care.
The low growth for this quarter is mostly related to a high comparison base as in the fourth quarter 'twenty, one and started to increase its sales. After an 18 month period of inventory normalization in Detroit, which caused lower than normal sales in the previous quarters.
Net revenues in 2022 increased eight 9% versus 2021.
Impacted by positive performance in Guatemala, and Nicaragua.
Okay.
Or Central America, South America, and we do grew 21, 8% for quarter claims and to work with some basis and 23, 9% for the full year 2022.
The increase was the result of higher demand on the rollout of new products in the region and the increased market share with.
Okay.
Finally, our diabetes <unk> decreased 22, 9% in the fourth quarter.
18, 1% of the full year on a constant currency basis revenues were impacted by currency devaluation and lower sales volume of our differentiated met forming portfolio threatened by lower prices given the answers of multiple pure generic competitors lower prices for certain products due to more competitors and EPS budget restrictions.
To sustain our margins and the business in the long term, we have taken several metrics such as cost reduction initiatives lower volumes.
Mills to predict prices sales increase in the private channels price increases during 2023 development of new technologies for years to come with novel fixed dose combinations for onto diabetes portfolio and novel glucose monitoring system rollout of the beat that model to other countries. We have launched in a total army followed and we just received.
The one in Mexico, and we expect to launch during this year.
Although in the long term, we have ways to transfer some of these inputs to the market. We must continue to monitor the evolution of the currencies, where we operate but especially that of the Colombian peso given its weight in our results as a follow up for <unk> three our first quarter revenues have also been affected by currency devaluation.
Moving to slide 10 on the gross profit line, we would stick to $2 $3 million in fourth quarter play 22, and $239 6 million for 2022 gross.
Gross margin was 51, 5% for fourth quarter 22, and the full year gross margin improved to 58, 4%.
This result was mainly due to the product mix sold.
We're also showing our consolidated distribution margin, which includes the impact of sales and marketing expenses and we have been able to defend the margin in these challenging markets.
You can see that we are improving and the pieces margins are solid even with the higher expenses.
Good.
Moving on to the next slide we have the breakdown of our operating expenses and adjusted EBITDA.
In addition to the eight but with hot in the top line in U S dollars by the exchange rate in this slide you can see that SG&A.
Impacting our EBITDA as we continue to invest in our brands to increase market share, we're enforcing the organizational structure and preparing the company for future organic and inorganic growth.
SG&A expenses increased by 27, 1% in the quarter and 27% in 2022, mainly due to wrinkle medical impairment higher transaction expenses related to M&A and being a public company the.
The return will be burson promotional events and stronger commercial and marketing efforts and the pre operating expenses related to the west Palm Beach front.
All of these expenses negatively impacted our adjusted EBITDA, which totaled $10 $6 million in the quarter and $7 $1 million in 2022.
We are working on price increases contract adjustments improvement of our product mix with new launches and containing costs. So we can predict our margins going forward.
Also we continue to grow our plan, we will be there during most of these expenses as well as reducing some of them as we became a more efficient organization.
Context.
Despite these hurdles we are optimistic about our ability to deliver growth in the long term for the time being as we are not blind to the challenges. We will continue to work in a disciplined and creative way to improve our results quarter over quarter.
Turning to slide 12, our balance sheet and indebtedness our cash balance has decreased.
As a result of increased working capital needs increase inventory to provide support for the supply chain challenges we've been facing.
<unk> expenses associated with being a public company and additional expenses related projects increased capex as we returned to normal levels representing.
Lower cash generated by the business as we took a hit in our results for the recent we have already explained.
Due to these are net debt levels have increased with a resulting three five times net debt over adjusted EBITDA ratio.
An important issue you can see in this slide is how the short term debt significantly increase by the end of the year.
This was the result of us not being in compliance with certain of the covenants included under some of our loan agreements.
The decrease in our operating results combined with higher expenses due to the M&A activity with Arab year, both pressure on our financial ratios.
Although none of our lenders declare an event of default under the applicable of women's and we subsequently obtained waivers from such lenders for their respective noncompliance with these breaches resulted in the lenders having the right to require immediate repayment of the optical indebtedness.
Such we classify the respect the indebtedness amounting to approximately $139 million flung from long term debt to current liabilities.
Given that we already have the waivers we.
We expect to reclassify our debt back to long term in the subsequent filings.
The details on the calculation of covenants are included in our 20-F, which was filed on Friday.
In summary, although we're facing some challenges external collaborations such as 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 we continue executing our value creation.
<unk>.
With that I will pass it onto it.
Great. Thank you all for participating.
We are demonstrating.
Across all aspects of our business in a very challenging global environment with variables that are not always within our control.
We are growing in constant currency, and we're making the necessary investments in our businesses.
We also expect to see operating leverage as we continue to execute on our value creation initiatives.
We are absolutely convinced that the fundamental growth drivers are improving substantially.
Here's why we're confident that we will reach our 2023 goals and guidance.
We are on track with executing our value creation initiatives, we continue launching probes and we're expecting revenues of over $20 million for new bra launches only in 2033.
As well as continued rollout of our existing portfolio in countries, where we're present.
The healthy demand for our rigs in OTC portfolio of ours were.
We're partnering with local manufacturers in cost non region to increase market penetration.
We are very objective with our capital allocation and business is expected to have more cash generation.
We expect higher growth of our CBA more services and products focusing on highly regulated markets with the language of new products, our new <unk> facility in the U S.
And mostly in the second half of the year.
And in organic growth is still quite significant part of our strategy. We are working on appropriate stabilization and increase to regain our leverage capacity and continued with organic inorganic initiatives.
We're also investing in strengthening our grosses on resources to support our future growth, especially in our county area.
Finally.
I strongly believe that we have the competitive with it.
Is the capabilities the right team and effective strategy to continue growing even in challenging scenarios.
Thank you so much we're listening and we welcome any questions that you may have.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question you May Press Star then two.
At this time, we will pause momentarily to assemble our roster.
Today's first question comes from Samuel Alves with BTG Pactual. Please go ahead.
Good morning, Reuben Patricia Melissa I would wonder if one well I have I have two questions here the first one.
It is regarding the 2023 guidance that you guys maintain it.
When you look at the full year guidance. This implies a 30, 40% growth in constant currencies right. But are you guys are also guiding for the first quarter of the year flattish a bit you know so it's just schwag issue. If you guys could add some color here.
To the full year guide and the Ctrip guys expect a much better second half of the year.
It would be great. This is the first question and the second question regarding the the specialties.
When you look at the fourth quarter results, apparently the fourth quarter results.
Were negatively affected by a high inventory levels off here at our clients. So if you could at.
At least.
Share with US if you guys see.
See if these inventories already normalizing at the beginning of the year would be great. That's it. Thank you.
Okay.
For your question someone but this is speaking.
So going to your first question.
Yeah.
2022 was a very challenging year on the last part of the year. The last few months work.
Significantly more so.
Yeah.
There is some lag in recovering in the first quarter. That's why you don't see a better first quarter than what we are anticipating are giving to the market.
But that is only natural after coming from a very very tough fourth quarter. We are we mentioned cautiously optimistic about 'twenty three and we are standing by an aggressive.
The growth as you mentioned, 30%, 40% growth because we believe there are good arguments, let me try to share that with you.
We're trying not to be too long, but first one of the big impact we had last year was FX.
We.
Possible to predict what the FX will go but from what we're seeing now he has been more stable. The first four months of the year.
Different than last year, we have now implemented a hedge covering our net exposure for EBITDA revenues minus expenses we have.
Roughly 60%, 61% of our exposure cover with hedges now.
We took at the beginning of the year. So so from that point of view, even if there comes a new devaluation, we should not have such a big England. Okay.
And if there is an improvement well we should have some of the benefit with about 40% of that is not covered so that's one that's one issue.
Second issue we have this.
Value creation initiatives the cost reduction initiatives, we have discussed most of them have already been implemented we are on track with that the risk of achieving dose is very low it doesn't depend on anyone but I'm, keeping those expenses or costs down.
So that is a second point.
The third one.
Is that brought you here I'm jumping into your second question.
One of the big impacts in the year 'twenty two once the ICU problems, we had in the clinical division.
That was that was a very big impact in revenues and also in terms of provision for the fourth quarter, because we had inventories that were not going to be sold at the end.
But that is not a problem for the year 'twenty three we have already recognized the full provision of those inventors in 2020 two.
We do not consider in our guidance.
Increasing revenues in this market.
In this area. So so therefore, we don't have that negative from that point of view.
We do have stronger.
On trucks coming in place for our CMO Division in the second half. So there will be for that business unit are stronger.
Second half of 2023.
And going to the basic of our core business. When you look at the demand growth.
<unk> prescriptions Columbia on another markets also in Pakistan the growth you've seen.
Yes.
Roughly 20% depending on the country will be slightly low slightly higher but that's what we're seeing in the first part of the year and what we saw in the last quarter, even when you remove all of the additional.
The negative six so when you combine all of those slide reasons, we believe that although it's challenging it's a significant growth and is now one of ECM, we're going to have to make it everyday and we think there is some probability for us to meeting the guidance. We gave so we're standing by that okay. So so I hope that I answered your first question and the second one.
<unk>.
I touched it briefly before.
Given that.
Sold and prepared to sell significant product for ICU.
In products related to Covid hospitalization at the beginning of 'twenty, two and that did not materialize.
Both our sales.
Some of our competitors and our customers we were all.
Having are in possession of high inventories and dosing batteries after one year and after seeing that we're not going to have revenue saw significant revenues for that going forward, we have to make a provision for that in the fourth quarter. So the.
Bad news was real and it impacted us very strongly in the fourth quarter, but for the year 'twenty three we have.
Want to say like a clean slate going forward.
I think those are good questions.
Thank you for the color Patricia with morning, everyone.
The next question comes from Ken <unk> with Brookline capital markets. Please go ahead.
Thank you and good morning.
Have.
A handful of questions.
The first relates to the.
CMO business and that is.
Over the course of the last week.
Cadillac has.
And now they're taking a write off of part of the purchase price for <unk>, they've talked about end market weakness.
At the same time your business is performing better and you've just mentioned you're taking.
On some new contracts later this year or are you taking market share in this business.
Yes.
It is too difficult.
A difficult third whom there are statistics.
Firm that we are getting a larger market share, but definitely we are being especially with the U S start ups.
We're getting much more visibility and we are we are definitely behalf.
A lot of Rx OTC in Gumi provokes Imbibe language.
Great and I was confused for us that we are getting at that.
The answer is that we don't actually have that in our hand.
To be able to to confirm that our opinion.
Now as for Us.
Gasoline.
If I'm not mistaken there their comments are more related to other areas.
So much to social jumping capsules, which we see as a growing business. We do feel that we're growing much better than they are but there is not.
Is that related to specifically to this to the side of the business, which we're competitors.
Yeah.
Alright. Thank you second question is the.
Value creation program and when you talk about the savings that you're realizing.
So for instance in the press release, you mentioned $3 million.
It looks like you've already.
Yeah.
Moved that to four and a half million dollars.
Are those numbers annualized.
Such that if we're as we model we need to take that into account or are these.
Actual savings that we would see immediately as you report quarter story.
23.
Thank you for your question.
This is speaking.
That is already.
Sorry, if that is not an annualized value is the value for the respective quarters. So youre going to see when we report the first quarter.
Part of the number we gave us guidance those $3 million already in there are helping the business and.
The additional that we already see us capture in the in what we have so far in the quarter.
It's a realized funding.
So we are very optimistic about this plan.
Which entitled again, as I mentioned before.
It comprised initiatives or cash.
Cost cutting.
<unk>.
Another another.
The initiatives of like real measures that we implemented and have already been captured so what we're going to have that as a recurring value that we're capturing the following quarters.
Great. Thank you.
Next question relates to the biometrics business.
You had a difficult year U.
Articulate the challenges you saw in the fourth quarter.
How are you thinking about the prospect for this business long term because it looks.
When we first started talking about it looked like a very interesting approach.
Have something competitive.
Moats.
That seemed to have been Pearson recently.
So how are you thinking about it now.
Thank you.
So regarding diabetics it was a really tough year. If you remember we started with the with the bad news of one of our main customers going.
Technically broke so we lost a significant revenue in the first two quarters because of.
And after we start recovering from that we had some issues with their supplier of one of our products. We had a complete a new competition for either so it was about year for that specific business unit. We are optimistic for that one for the future not only for launching in new countries, which we stand by the by the.
By the beauty of that business model, we have and which in one business unit, we have everything related to diabetes diabetes.
But we're also completely.
<unk>.
More products.
More devices.
So thats where were soap.
Optimistic about this business going forward.
That's basically it.
Is there anything in there.
With regard you are launching that would help reestablish the proprietary nature.
Yes.
The offering that you had say.
Two years ago for instance, or a year ago.
Can we have some some new ideas coming but we can say it right now so so again, it's part of our optimism that new products will come but I can't say anything right now.
Okay. Thank you.
Two more questions first is with regard to your working capital levels.
What are your plans for reducing those back to normal levels.
That's a very good question and it's part of our efforts of our value creation initiatives.
We we underwent a significant increase in our inventories in the past year.
And we need to focus on that I think one of the areas where the company has been lagging behind is in cash.
So we have a team dedicated to try to reduce.
Working capital I cannot commit to a number here.
Yeah.
But we're going to keep you informed about that but it's one of the objectives for this area to reduce the working capital in the next two quarters.
Alright, Thank you and my last question relates to co and the.
Right down there could you just quickly elaborate on.
What happened there.
Okay.
Looking at the last part of the year and seeing what the challenges are seeing the cash consumption. We said, okay. We need to be very focused on where we want to allocate resources. So we decided we want to make efforts in focusing on others.
Divesting or getting out of reducing others in that sense, when comerica, which is we think it's a good business.
I think he is not the best business to be our two remaining our hands. So we decided to lower the efforts done in that business and when you do that of course your projections going forward are reduced.
Of course, when you reduce the predictions of a unit.
You need to make the necessary adjustments.
And that's why we had to record.
On impairment right now we're evaluating whether.
During the year, we should.
We get out of that business sell it or or or.
Or no continuous smaller version or shut it down we're still under evaluation.
We have already reflected the impact of any of those.
Measures.
Probably if we sell it and theres value there.
Recovered part but.
We're very conservative so.
We prefer to make that investment.
Which was by the way.
Right and just quickly what's the size of this business.
Terms of revenue or assets.
It's not a big business actually I don't think we have ever disclosed the figure so base.
I will jump my heads $10 million a bit more driven revenues, yes, sorry in revenues roughly $10 million.
It's a business we acquired several years ago.
Very good thank you.
At this time there are no more questions in the queue. This concludes our question and answer session as well as the call. Thank you very much for your attendance on this presentation you may now disconnect.
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