Fagron NV (FAGR) Earnings Call Transcript

Hello, and good morning, everyone. Welcome to Fagron's H1 2026 Results Webcast. I'm joined today by our CEO, Rafael Padilla; and our CFO, Karin de Jong. Rafael will start by discussing the company's performance and a closer look at regional developments. Karin will then walk you through the financial results. We will open the floor for questions at the end of the session. With that, I will hand over to Rafael.

Thank you, Ignacio, and good morning all. We're pleased to report a strong performance with revenues reaching EUR 562 million. This reflects 3.1% organic growth at CER, 7% when normalizing the GLP-1 effect. Growth was driven by brands, Latin America, being in North America and EMEA. Profitability grew by 12.7% to EUR 107 million. The margin of 19.4% reflects an improvement in both EMEA and Latin America and temporary effects in North America Pacific Compounding Services. On M&A, we closed the acquisition of Amber in Singapore and Malaysia, completing 5 acquisitions across all regions in 2026. We also entered into a collaboration agreement with NutraConnect in Asia, which will complement our nutraceutical platform. Integration of earlier announced acquisition remains on track. We have also appointed Amy Jones to lead the North American Pacific region. Finally, we're also reiterating our full year guidance of mid- to high single-digit growth at CER and an adjusted EBITDA margin of around 20%. Moving on to the regions. In EMEA, performance was led by brands on the back of continuous strategic focus, while Essentials remained balanced. We saw again strength in compounding services through high demand for key therapies and our focus on operational excellence translated into better availability and procurement savings, supporting both top line and margin expansion. During the period, we completed the acquisitions of Pharmaviv, Maclab and Amber and are working on integrating them into the group. Pharma and Maclab will strengthen our European platform and enhance our market positioning, while Amber will help us further expand our footprint in Asia. Finally, we continue making progress in our capacity expansion project in the Netherlands. In Latin America, strong organic performance was led by the successful execution of our commercial strategy. In brands, our global R&D center in Brazil continues to be the engine of our global innovation. During the period, we completed the acquisition of PUiharma and Zepacum. Like in EMEA, synergies and efficiencies during the integration process supported the region's profitability. In North America Pacific, performance was led by Brands and Essentials, together with contributions from Curfirst and UCP. Revenue growth in B&E was driven by new customer wins, improved product availability, strong essential sales and continued operational improvements. Compounding services was affected by the normalization of GLP-1 related revenues and an industry-wide IV back record. Hental Wellness continued to deliver solid growth driven by high demand for personalized therapies and new product launches. On M&A, over the last 18 months, we have done 17 deals across all regions. So far, all previously announced acquisitions have been completed except for Interplast. During the first half of this year, we have focused our efforts on integrating this successfully. Our teams have achieved significant synergies during the integration process, as shown in EMEA's and Latin America's margin performance. We will continue to benefit from further synergies during the integration process, which usually last 18 to 24 months. In H1 2026, M&A contributed around EUR 69 million to the overall group revenues with all acquisitions performing as expected or better. And as Karen will comment, our balance sheet continues strong, and we remain open to exploring more opportunities across our regions and categories while maintaining a disciplined approach. On our expansion projects, as announced during our CMD in April last year, we plan to add EUR 500 million extra capacity by 2028. In the Netherlands, the Sterile facility with a EUR 15 million CapEx investment has a revenue potential of EUR 50 million. In North America Pacific, our new 5038 Tampa facility is already online with extra revenue potential of $100 million, while Wichita and Las Vegas, both 503Bs are ongoing with a combined CapEx of around $18 million and revenue potential of $315 million. All expansion projects are currently progressing as planned. The additional capacity positions us to successfully capture future growth opportunities. Moving on to the health and wellness activities. We have received a lot of questions regarding peptides. -- especially after the hearing that took place last week where the PCAC recommended the FDA 6 peptides for inclusion in the 503A book list. Given our existing infrastructure and our proven track record, inclusion in the 503A book list will be an overall tailwind. The time to market is variable and can range from 6 to 18 months post inclusion, depending on various factors such as qualifying the right API suppliers and performing validations. And finally, on our North America Pacific leadership team, Amy Jones has been appointed area leader after being instrumental in transforming our B&E business. She brings 15 years experience in pharmaceutical compounding and will help scale this region to the next phase of growth. Additionally, building on our existing quality infrastructure, we are happy to announce the appointment of Kenneth Bonnel as the Global Head of Quality. Ken brings over 30 years of experience working in the industry across quality systems, quality assurance, regulation and compliance. With this, we hand over to Karin.

Thank you, Rafa. Good morning, everyone. Thank you for joining this call, and let me walk you through the first half of the 2026 financial results and provide more color for the full year 2026. In H1 2026, revenues increased by 16% on a reported basis to EUR $552.5 million, driven by acquisitions and organic growth in the regions. Gross margin decreased by 218 basis points year-on-year, driven by acquisitions and change in North America Pacific product mix. Our operating expenses increased by 10% year-on-year, owing to our recent acquisitions, though as a percentage of revenue, they decreased by 230 basis points. At a group level, our profitability margin decreased by 60 basis points year-on-year to 19.4%, mainly due to lower production volumes in compounding services in North America Pacific. We maintain our strong cash-generating capabilities as operating cash flow improved by 10.8% year-on-year to EUR 58.1 million for the first half of the year. And lastly, our net debt-to-EBITDA ratio increased to 2.1x, largely because of payments for acquisitions. However, it remains below our internal threshold of 2.8x. Moving on to the next slide. The bridge illustrates our revenue development for the first half of 2026. EMEA reported a solid 4.1% organic growth at constant exchange rates, while Latin America posted an 8% organic revenue growth at CER, supported by strong performance of brands in Brazil. North America Pacific revenue was largely flat, growing at 0.2% organic at CER, where a strong performance in the Brands and Essentials was offset by soft compounding services. Our recent acquisitions contributed EUR 68.7 million to the revenue. And FX during the period was a headwind, mainly in the U.S. due to the weakening of the U.S. dollar. On the right side, our P&L shows a 16% revenue increase together with our adjusted EBITDA growing 12.7% -- depreciation and amortization increased by 27.6% year-on-year due to the recognition of acquired intangible assets on a larger asset base, reflecting both the acquisitions and continued investments in capacity and R&D. Our financial costs increased versus last year, driven by increased debt because of funding of the acquisitions and higher interest rates on our debt. As a result, earnings per share grew by 1.6% to EUR 0.63 for the first half of the year. Turning to the next slide, EMEA. Revenue growth reflected a solid organic demand across all categories and countries, alongside the contribution from acquisitions. Geographical diversification, along with a mix of price and volume increase drove organic revenue growth. And looking at the region's profitability, adjusted EBITDA margin expanded by 30 basis points versus H1 2025, supported by operational excellence initiatives, sales mix and integration benefits. And as Rafa mentioned earlier, we closed the acquisitions of Pharmait, Marilop and Amber during H1 2026. Moving on to Latin America. Sales increased by 38.7% to EUR 120.5 million, reflecting strong organic growth in brands and contributions from recently acquired companies, aided by a strengthening of the Brazilian real. Organic growth at CER was 8%, and it was largely led by a strong volume growth and recent product launches in brands in Brazil. We achieved a 120 basis points adjusted EBITDA margin expansion to 18.6%, supported by operational improvement and strong performance of the acquisitions, especially forum. Moving on to the next slide. Revenues in North America Pacific grew by 0.4% to EUR 213.2 million as strong traction in Brands and Essentials was offset the short-term headwinds in Compounding Services. Reported growth was also affected by currency movements. D&E continues to grow at a fast pace, mainly supported by operational improvements in product availability, leading to volume growth. Compounding Services performance was impacted by the reduction of GLP-1 production at our 3B facility and limited availability of the IV bags. Adjusting for the GLP-1 impact, the organic growth for the region will be around 10%. Our operating costs in the region increased slightly year-on-year due to acquisitions and ongoing investments. Overall, this resulted in an adjusted EBITDA margin of 17% in H1 2026. Turning now to our cash flow. Our business model has several strengths and one of them being the strong cash conversion. Our operating working capital increased by 310 basis points to 16.9% due to the recent acquisitions and higher inventories to support product availabilities in Brands and Essentials. Operating cash flow increased by 10.8% to EUR 58.1 million and maintenance CapEx ended at 2.6% of revenue when excluding the one-off projects. Our free cash flow conversion was 40.9% when adjusting for one-off CapEx, slightly below our guidance. However, we've seen during full year 2025, we expect it to correct towards the end of the year as working capital normalizes. Moving to our net debt evolution. The bridge shows an increase of EUR 222.1 million in our net debt, growing from EUR 283 3 million at the end of full year 2025 to EUR 505.4 million as of H1 2026. The increase is mainly related to acquisition and working capital movements. As a result, our net debt-to-EBITDA increased to 2.1x, however, still below our internal threshold of 2.8x, giving us ample room to pursue opportunities. So before I hand it back to Rafa, let me go through our full year 2026 outlook. For the group, we are expecting revenues to be in the mid- to high single-digit organic growth at CER with different dynamics depending on the region and a profitability margin of circa 20%. We expect maintenance CapEx to be at 3.5% of revenues for 2026, excluding the already announced one-off projects and investments. I would now like to hand it back to Rafa for his closing remarks.

Thanks, Karin. To conclude, Fagron is a unique global vertically integrated company operating in the fast-growing, highly fragmented market of pharmaceutical compounding with a defensive business model, predictable revenues and strong cash conversion. We have highlighted over the years the resilience of our business model and how it is reinforced by our diverse global footprint. This was clearly visible in H1 2026 when excellent growth in EMEA and Latin America more than offset the challenges in North America Pacific. These factors, coupled with demographic trends and our emphasis on personalization are the basis of our success. Our quality focus, together with our ongoing operational excellence initiatives will optimize our business through global synergies. While a disciplined M&A strategy remains a key part of our growth, sustainability is a paramount priority and a strategic cornerstone for us as together, we create the future of personalizing medicine. Let's open the floor for questions. Thank you.

The first question comes from Frank P.

I've got 2 questions. First of all, on the issue with the IV bag, the supplier, could you elaborate how much did that impact your Q2 or first half results? And when do you expect it to be solved? So that's the first question. And then secondly, on the situation in the Middle East, the turmoil, could you elaborate how is that impacting your business model? Do you already see inflation on raw materials, APIs or logistical costs? Could you elaborate on that situation?

Yes, so starting with your first question on the issue with the IV bag. So if we look at North America Compounding Services for the first 6 months, we see minus 8%. If we take the GLP-1 impact out of that, which, as you all know, normalized will be around 4% roughly. So this is below the guidance of high single digit, low double digit before any capacity expansion for that segment. So this gap was driven by the availability of the IV bags at our compounding services facility. And so that gap really is driven by, on the one side, the missed sales, you see that impacting Q1 and Q2, but also a CAPA that was initiated by the supplier and triggering a revalidation of us. So we expect to be back in the course of Q3 with the IV bags.

Yes. Frank, on the Middle East one, so far, we have not seen any disruption in supply. So we have -- as we have discussed before, and you always ask the operational question. So thanks for that. Our profitability is high. It's good. What we have seen on the raw materials deriving from oil an increase there, which, of course, we have the ability, as we also saw with COVID and the previous years that we have the ability to pass the price increase through. It's also true that at the beginning of the year, we took a strategic move, and we also discussed that during Q1 to increase our inventories for key items, mainly for the A items also, again, coming from this oil source.

The following question comes from Steiner from...

I have a couple. Maybe first on peptides. The PCAC hearing showed that support for these peptides is not unanimous given these drugs often lack some medical evidence and burner to self-medication. Nevertheless, the drive from the industry to grow this segment seems very strong. Can you address any concerns that there will be unfavorable evolutions down the line such as adverse results from using these drugs? That's the first question. And secondly, on the profitability outlook of circa 20%, can you decompose that a bit for the different regions? And then lastly, on the 503A2B development, to what extent are you currently benefiting from this regulatory change that was implemented a while ago? Could you maybe give some some examples on where this is boosting your business.

Yes. Thanks a lot for the questions, Stein. On the peptides, you have said it really well. So there are 6 peptides that were voted for inclusion in the 503A list. What's currently happening now is a great market, an important market from Asia of finished goods and people are self-medicating. So with this initiative, of course, if the FDA votes for because the last word is on the FDA, then this market will be regulated, will be produced compound in 538 facilities across the country and adverse effects. Of course, we cannot comment on this one as we are not technically capable to do that. We believe that we are well positioned to capture this growth opportunity as we have a nice network of 3. We have one in Tampa, as we said briefly today with a capacity of $100 million. We have first in the Northeast part of the country. And of course, UCP, our last acquisition in the U.S., in the West Coast, in San Diego. So we are well prepared to capture this growth. And of course, we have a good track record on that.

And on your question on guidance for profitability. So the first half of the year profitability was supported by strong performance in EMEA and LatAm, driven by solid underlying business momentum and also the positive contribution from recent acquisitions and early realization of integration synergies. So for H2, Enea is expected to maintain its strong performance with further integration benefits still to be captured. It is important to note that while a portion of the readily achievable synergies already being realized, our integration programs typically deliver the majority of benefits over an 18- to 24-month period, providing continued albeit more gradual potential for margin improvement. For LatAm, we expect to deliver further margin expansion in H2, supported by favorable seasonal trends as we always see, and the additional synergy realization of the acquisitions, mainly Beauty Pharma. And now moving to North America. The profitability was temporarily impacted by product availability constraints within Compounding Services. And as we said, we expect a gradual improvement during the second half as the production capacity is restored again and we recover our volumes, so we expect to step up also in North America. So overall, we reiterate our guidance of circa 20% adjusted EBITDA margin for the full year.

And on the last question, Stein, on the B2A developments, next, the fact that the underlying market is increasing rapidly, driven by telehealth. There are 2 drivers, positive tailwinds. One is outsourcing that we always comment. And the other one is the B2A phenom, and this can increase substantially our revenues in the U.S. in the upcoming years. Therefore, we took the strategic decision of investing in new capacity. We have explained that on the Pasel IIIB side of the business, we're bringing $350 million extra capacity in 2028 in both Wichita and Las Teras. We have identified already 20 items that we want to produce. Of course, we need to go through all the validation steps that you are very much aware of. And at this moment in time, we have already 1 item being sold. And we have 5 more in the pipeline ready to be launched during the second semester. So of course, when we get those 20 items that we expect to get during next year with extra capacity, this will be a nice tailwind for us.

The following question comes from Usama Tarik from ABN AMRO ODO BHF.

I just have 2 general questions. Number one, with respect to, for instance, yesterday's press release by Medios, they are expecting some trouble with regards to their pricing and margins, especially in the medical cannabis market. I just wanted to indicate I just wanted to ask, is there a trend that you are seeing in EMEA? Or is it something that is only related to the peer? And my second question would be with regards to the peptide market. I mean, I apologize for my ignorance, but if something really concludes for Fagron, if it's an opportunity going forward, when would be the earliest that you see some of it flowing into your sales? Would it be more like a 2027 opportunity or 2028? Some clarity there would be really great.

Yes. Thanks a lot, Usama. On your first one on cannabis, as you know, we -- for the last 20-plus years, we work together with DMC. That's part of the Dutch Ministry of Health distributing European scale cannabis. We also repacked that one in one of our facilities in the Netherlands. And so far, we have not seen any price erosion from that part of the business. And then on your second question on the peptides, after inclusion, that time between now and inclusion, there's uncertainty as we were discussing with Stein, it's an FDA call, of course. So after inclusion, it will take for us a period between 6 and 18 months and depends on 2 things. First is the sourcing of API supplier or a peptide supplier, of course, FDA register. And the second one is all the validation process that we always go through in our compounding facilities.

The following question comes from Michael Heider from Berenberg.

Most of them have been answered, but maybe you can shed a little bit more light on the margin in LatAm. I was positively surprised, to be honest, to see the progress already in the first half. You already explained that you had early synergies, but maybe you can give a little bit more detail here. How much of the synergies are already -- have already been seen in the first half? How much more do you expect to come? And how did you manage to realize them so quickly?