Fagron NV (FAGR) Earnings Call Transcript

Then a second question is on M&A. I noticed that at the end, you mentioned M&A going forward will remain a key pillar of the region. But you specifically mentioned EMEA and North America and not Latin America. Do you think your -- what's the main driver behind that? The fact that you will no longer look for M&A in Latin America, do you think your footprint is fully complete? Or are there other reasons?

Yes, Matthias, regarding this one, in Latin America, when you look at the market, the Brands and Essentials, we have consolidated the market in the last 10 years. So we touch all the segments of personalizing medicine, essentials, brands, technology, genomic testing. And now our purpose there, our mission is to continue this spectacular growth. The teams are totally prepared for this one. When we go to the sterile side, of course, there are some sterile players there, but the market is just starting. So we want to see and we want to evaluate how this further develops. So we want to see how this will go forward because sterile is one of our strategical pillars. And Latin America is, of course, important as well, but though we want to see how this will develop.

Yes. Maybe to add, we see a potential in the EMEA markets and U.S. markets. EMEA, we're focusing on markets where we're not active yet. So in Eastern Europe, there are some countries where we're not active yet. We're also focusing on countries where we have a relatively small position in the Brands and Essentials. So for instance, Germany, or on markets where compounding is allowed, and we have no position, again, for instance, Germany. And in the U.S., of course, we see the underlying markets evolving very good. There's a lot of potential for the outsourcing market. So that's also an important element in our acquisition strategy. And maybe to add on the Latin, of course, we also consider the currency risk and related to that region, when we make a decision for an acquisition going forward, as you can imagine, Matthias.

Yes. And then final question is on Wichita. Maybe 2 parts on it. Firstly is on the SKU expansion. Can you give us a little bit of a feeling on what the total addressable market expansion is there? And then secondly, on the target, I see you mentioned still the disclaimer of COVID-19, but I'm trying to understand a little bit on what's going to be the catalyst or the moment on which you will make a decision because COVID-19 is now there for a year? So how much further can this still impact your way to your EUR 100 million sales guidance by 2022?

Yes, that is a fantastic question because we are very enthusiastic with Wichita. We are taking clearly the right steps, Matthias. On the SKU side, we ended the year with for 146 SKUs. We added 40, and we're going to introduce 35. And as we said in the presentation, IV-bags are going to move the needle. So as we speak, we are developing and launching these ones, and they are very much appreciated by the current customers and also the new onboarded customers. So this COVID-19 unfortunate situation brought us in the U.S. fortunately, new accounts, very interesting accounts in the hospital networks/IDNs. And with the current portfolio that we have with the OR syringes, adding the IV-bags, we're going to move the needle in this year of 2020, clearly. Relating the COVID-19 situation, as we have said in other calls, we have 2 kind of customer groups. Again, this hospital network/IDNs, where we have developed extremely well during the pandemic. We have been, of course, next to the revenue evolution. We have been helping our customers, and this is, for us, very important on the -- on intensive care units with our sterile products. On the other side, we have the private clinics, right, where clearly, there has been a postponement. Of course, depending on the states, there have been lockdowns with clinics even closed for a period of time. And this will have seen back in our performance on the private clinics segment. That is relevant in our FSS business. Though to finalize here and to explain why we are confident with the disclaimer that you mentioned. We have the good ingredients in order to make a good compounding for Wichita. And these are new SKUs being one of them disruptive, and the other one is very interesting. Secondly, the new onboarded customers. So when you mix those 2 elements, we will see very good developments for our FSS U.S. activities.

We'll take our next question now from Lenny Van Steenhuyse from KBC Securities.

I was just looking to zoom in a bit on Europe. Several questions there. I was wondering about how market dynamics for the API business are developing in Europe? Are you facing an overall decline in market? Or is it remaining stable? Second question on that in the general region. Where is growth within Europe still to be found in the coming quarters? Will this mainly be focused on rolling out the Brands further in the region? And then lastly, on Europe, we see a bit of on margins there. Is this also mainly a product mix effect? Or are there other factors playing into that?

Thank you very much, Lenny. And regarding Europe, on the first comment that you made on the API market. Of course, we have the postponement or scale back, let's say, this way. There are clearly less visits to the doctors of the elective care. And this has impact to the Compounding Services that, of course, is very important in the non sterile of course, and in the countries where we don't have these activities on a on the API sale to the compounding pharmacies and also hospital pharmacies. So we see a decline there, though we have been able to compensate in the Essential segments with COVID-related items and branded items. And regarding the growth drivers for now going forward for the EMEA region, there are clearly 2 growth drivers. First of all, and we have shown also in the last quarters, the Brands. And therefore, we emphasized during the presentation, the strong innovation and R&D pipeline with branded products for COVID and to help to support our customers. So brands and innovation is, for the first time ever that we go with one face to the market in EMEA with our beautiful brands and innovations. And secondly, also what Karin stated before, we are exploring opportunities in the sterile markets where is, of course, possible to outsource. There's a new regulation that is a PIC/S, with a C, regulation in the European Union. And this will make that -- the landscape will evolve into more outsourcing, and we are totally well positioned there. And of course, countries like Germany, are a very good example of this where we should look at.

And then on -- coming back at your margin question, yes, indeed, our markets in Europe differ from each other for product mix, but also on profitability level. And we see that impacting our margins in 2020, where in certain countries where we have high EBITDA contribution, we see that activities are more negatively impacted by COVID, and we see that back in our EBITDA margins. We took, of course, other actions. Also, as mentioned earlier in this call, and as Rafael just elaborated on, to increase that again, but currently because of the COVID and elective care being postponed, we see that we have impact on margins.

Okay. Perhaps, if I may, last question, picking back up on the overall essentials market in Europe. Rafael, perhaps taking a more high-level view on that and removing the potential impact on COVID, do you anticipate that this is really a very stable market? Or is there still, let's say, mid single-digit growth in the overall essentials market in Europe?

Yes, sure. I mean you see it very well because historically, and now we see it. The supply chain is crucial and key and the broaden of the portfolio. And here, we can say that we are very well positioned. We have -- in all the European countries, we have a very nice and broad product portfolio and a very strong supply chain. And our current competitors are, of course, local competitors. And this has for us -- this is for us extremely interesting as we can consolidate activities like sourcing, like quality control, like repackaging. So we are extremely well positioned there. And as we also said, of course, Brands are the driver for Fagron as we are unique. Though -- but though, we want to say also that the consolidation in Essentials. And in some markets, we have seen it, with very nice developments in 2020. This is also very important for us going forward in the European region.

[Operator Instructions] We'll go to our next question now from Eric Wilmer from ABN ODDO.

Two questions from my side. First one, global shipping rates have gone up quite dramatically since December. I was wondering to what extent you expect this impact Q1 profitability of mainly the EMEA division? So to what extent can you pass this on to your customers, given the current market dynamics? And secondly, could you give some more color on the genomics roadmap? What kind of tests and how many tests and how many countries do you expect to add over the next few years? And maybe how many -- how are prescribers responding to this new offering? What is the feedback there?

Yes, Eric. So regarding the shipping, you are totally correct there. We see an increased shipping cost from our sourcing countries in Asia. Here, we need to say that we have somehow experienced in the logistics, right, not only in Latin America, where we have been historically very strong shipping the materials into Brazil, but also in EMEA. So we -- one part of the organization, we have tackled the sourcing and supply aspects of our company. So we have been able to consolidate some shipping charges in order to reduce as much as possible this effect and to, of course, to pass to our customer this price increase. So when this has been the case, we have passed successfully the price increase. So we are on top of it, and we monitor, of course, the margin on a daily base in the EMEA region. And on the second one on the genomics, that is, of course, a clear driver for our compounding activities. We have launched, as we said, the Tricho, that was our first experience. That was for the treatment of alopecia that is, of course, widely used worldwide. We have launched it in many countries where we are present. We are present in 35 countries, and we launched it in almost 20 of them being very much accepted in the prescriber community. As an example, we were -- we would be able to make the trade fair, right, last year in the ECA in Paris, and we had a very nice sell-out in -- during the 3 days of the fair, of 5,000 pieces. That is, of course, for us, very much relevant. And as we always said, not only the test, but also the prescriptions that are being generated. So the first year that we launched the genomics activity we see -- we saw a nice turnover development for being a new product, a new product range with nice EBITDA margin. Going forward, our second panel, as we say, is the nutrigenomics panels because here you can treat a lot the preventive and the lifestyle side of our business with integrative/auto molecular elements, and this has been launched in Europe, the last month -- the last months of 2020. And we are trying also to make business with these 2 panels in Middle East, also in Asia. So we have a dedicated team in order to broaden our country spectrum, not only in Europe, Latin and North America, but also in the Asia Pacific region. Again, let's emphasize that this is a very interesting driver for new compounding scripts and the doctors very much appreciate it.

We now have a follow-up question from Stijn Demeester from ING.

A follow-up question on what you said earlier on the EMEA landscape. You refer to a change in regulation that would allow more outsourcing. Could you elaborate a bit on this? And any comments whether you are willing to play this through organic efforts or through acquisitions?

Yes. Sure. So the PIC/Sregulation that already existed, staying there from a European level. What we see is that pandemic -- in the pandemic, the hospital systems have had more pressure in the daily activities, and it has been formally forced in order to follow-up this regulation. For example, in a neighbor countries like Belgium, that we see that it has been reinforced the usage or the execution of this PIC/S regulation that, as we said, already existed in the last 2 years, and we see this as a trend in other European countries. Of course, we have an effort organically. In the EMEA region, we have sterile activities successfully in the Netherlands. We're doing a very good job here in the Netherlands. As we sit in Belgium, that we are seeing very nice traction as well in the acquisition of Israel. We have these sterile activities in South Africa. So organically, we are going to invest there. But also, as you said now very well, we are exploring acquisitions in the European market because we see this as a golden driver for us going forward.

[Operator Instructions] We'll now move to Matthias Maenhaut from Kepler Cheuvreux.

Two follow-ups, if I may. First one is on capital allocation. Mexico was historically been a country in where you have invested quite some by the acquisition of Cedrosa, could you maybe update us a little bit on how the, I would say, the business and performance of Cedrosa is presently doing? That's my first question. And then the second question is actually on capital expenditures. What should we expect for 2021? Will CapEx go up? Or will it broadly be in line with 2020?

Sure, Matthias. Mexico, we had, at that time, when we entered there, a lot of expectations in the market because it's quite a huge market there. And fortunately, after the month there that we have our Mexican colleagues within the family, we have seen great performance. So we have seen an increased revenues on our Cedrosa/Fagron Mexico activities because now we have both brands co-existing Cedrosa/Fagron Mexico because we're transitioning into Fagron, Mexico, first of all. And secondly, also in our margin evolution. Of course, as we said, the margins were below our group's average, and Mexico is importantly relevant in the Latin American activities. And we saw there with the actions that we took, both on the OpEx side and also on the gross margin side, we saw nice evolutions there. Going forward with Mexico, as we said, we are going to finalize the rebranding into Fagron Mexico and we are introducing new products as we speak for compounding, that, of course, compounding market of Mexico is lesser than the one we have in Brazil, that is the biggest in the world, 1 million scripts. But though we see nice traction there into the personalized medication. So for Mexico going forward, we're going to invest in organic growth in our Cedrosa/Fagron Mexico activities.

Yes. And on your second question, Matthias, so the CapEx will be broadly in line with 2020. So as stated earlier, between 3% and 3.5% of sales will be a general assumption for our CapEx.

We'll now go to our next question from Justin Scott from Lammergeier.

I've got sort of 3 small questions. The first was, Rafael, you mentioned that you were selling the genomics tests to Asia. And one of the benefits of genomics tests is hoping to lead to prescriptions. Are you going to develop a sales force in Asia? Is Asia going to become a small part of your business going forward? And the second question I had was more for Karin, a little bit about how you see managing currency exposure over the long term, whether you're going to use the balance sheet to manage currency exposure with debt or whether you just continue to tell us on a constant currency basis and take a little bit the ups and downs of currencies? And yes, I think those are my 2 questions.

Yes. Justin, I think it's really early for you, right, there.

Yes, indeed.

What we're seeing in Asia. As we said, I don't know if you heard, when we started the presentation with the 2020 slide on the entering new partnerships, we have opened, let's say, this way, we have started with export activities in Fagron in the last quarter of 2020, right? And we are targeting this Asian region to explore and to fill the compounding industry there. There are compounders. There are compounders that historically have bought the raw materials into our competitors, mainly in the U.S. So what we are doing, we are targeting these customers, for example, in Malaysia or Singapore. And with the genomics approach, we are closing deals with local clinics and these compounding pharmacies. So we offer, of course, the genomics as a key in order to open the door to these new customers, and then we can sell to them the raw materials or the brands they use to -- in order to make the preparations, and it is going very well. So next to the new extra revenues that we generate, right, that we ship from Minneapolis, for example, from the Fagron U.S. organization, we also explore the opportunities we have for this new region for us that maybe in the future can play an important role.

Yes. And secondly, on the currency exposure. So indeed, especially in 2020, we saw that we had huge impacts on translation, mainly regarding the Brazilian real. If we look, in general, we operate in an international environment. Our activities are exposed to different types of currency risks. We will hedge transaction exposure if the amount is above a certain level. But we are also exposed to translation risk, and we saw that impacting our numbers enormously in 2020. We typically do not have translation risk, but we will use natural hedges. We have done that in the U.S. by having assets and liabilities in foreign exchanges and hedging that using natural hedges. For the Brazilian real, we do not hedge the translation exposure. It's expensive. So we don't do that. Currently, our net debt-to-EBITDA levels do not force us to take action on this. So for now, we decide to take the ups and downs for the Brazilian real as they come. We have sufficient room. We see underlying business -- we monitor underlying business, impact on margins. We see that market growing so basically, for the short term, that's our strategy. Of course, when we do acquisitions, we will definitely monitor the impact of certain investments in areas where there's a bigger foreign exchange risk, such as Latin America, we take that into consideration in our investment decision.

As we have no further questions at this time, I would now like to turn the conference back over to your speakers today for any additional or closing remarks.

Yes. Thanks a lot, operator, for helping us during this call. And again, thank you for preparing this one, Constantijn, Karin and Jessica here today. Of course, congratulating our teams worldwide for the fantastic 2020 and for the whole enthusiasm that we enter in 2021. Of course, we need to see how the pandemic evolve -- go. We strongly believe that we have done our homework in 2020, we have a diversified product portfolio, we have a diversified region exposure. We have managed our resources extremely well. We are very responsible with capital allocation. And of course, we have seen that prevention and personalization of treatments are key in the health care industry. Thank you very much also for attending, for your questions, and we wish you a fantastic day. Thank you very much.

Thank you. This will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.