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Edited Transcript of HYPE3.SA earnings conference call or presentation 27-Apr-18 3:00pm GMT

Q1 2018 Hypera SA Earnings Call

Sau Paulo Jun 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Hypera SA earnings conference call or presentation Friday, April 27, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Breno Toledo Pires de Oliveira

Hypera S.A. - CEO

* Vivian Angiolucci

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Conference Call Participants

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* Guilherme Dias Assis

Brasil Plural Corretora de Cambio, Titulose Valores Mobiliários S.A., Research Division - Former Analyst

* Gustavo Piras Oliveira

UBS Investment Bank, Research Division - Head of LatAm Research & Latin America Consumer Analyst

* Irma Sgarz

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Joseph Giordano

JP Morgan Chase & Co, Research Division - Senior LatAm Healthcare Analyst

* Maria Paula Cantusio

BB-Banco de Investimento S.A., Research Division - Senior Analyst

* Ricardo Nasser de Rezende Filho

HSBC, Research Division - Former Analyst

* Tobias Stingelin

Crédit Suisse AG, Research Division - Former Director

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Presentation

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Operator [1]

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Welcome, everyone, to the Hypera Pharma's call to discuss results for the first quarter 2018. Today with us, we have Mr. Breno Oliveira, CEO, Ms. Vivian Angiolucci, CFO, and Mr. Adalmario do Couto, IRO. We would like to inform you that this event is being recorded. (Operator Instructions)

Today's live webcast is also being webcast over the Internet at www.hypera.com.br/ir. In addition, we'd like to inform you that forward-looking statements made during this call might include information about the future, which are based on the company's assumptions and are based on (inaudible) which may lead to the company's expectations to differ materially from those expressed in these forward-looking statements. I will now turn the floor over to Mr. Breno Oliveira, who will start the presentation. Mr. Oliveira, you have the floor.

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Breno Toledo Pires de Oliveira, Hypera S.A. - CEO [2]

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Good morning, everyone. Thank you for participating in our conference call to discuss results relative to our first quarter 2018. Before moving on to the numbers, I'd like to talk about recent events related -- or reported in the last communications in April concerning two search and warrant operations on the company's offices and the homes of some of our administrators.

To allow for exemption and -- in the investigations conducted by the competent authorities, we announced yesterday the volunteer leaving of the Chairman of the Board and Claudio Bergamo from the positions of CEO and board member for the period deemed necessary for our internal investigation and that of authorities. The founders of the company, and the men responsible for the company's success which actually -- which leads the company to be the most complete pharmaceutical company in the country. The positions which (inaudible) for some time meets the company's interests and those of those shareholders. We also announced the creation of a special committee -- independent committee to coordinate a new internal investigation about the facts. That committee will be made of 3 members, which will be chosen amongst independent professionals with known competence. As soon as we have this committee put together, we'll announce to market.

The company's management will remain dedicated 100% to the company's core business with no distractions and this special community will conduct the investigation of the facts on the side. The company is not negotiating any settlement agreements; there is no negotiations about that at all. We have nothing to add at the moment about those topics, so I won't resume those topics throughout the remainder of this presentation. Because of the facts above, we chose as a new Chairman of the Board Luiz Violland, which has been in the pharmaceutical industry for over 30 years and was the President of our previous pharma industry in 2017, and he was already a board member.

We also have changes in our executive management, which will continue to carry out the company's strategic planning, focused on organic growth with cash generation, profitability and return on investment for our shareholders.

As the CEO -- the CFO will now be Angela -- Vivian Angiolucci, she's been with us since 2013. She was the Director of Strategic Planning, and more recently, she was heading our Generics division.

For IR executive, we have Adalmario Couto, our Business Development Executive, and he has been with us since 2016. Lastly, the Board decided to create a new position, the Vice Presidency for Sales and Marketing, who will overlook the work conducted by our 3 business units. This person has been with us since 2012, first as our sales executive and then as the President of the old previous Consumer division and since 2017 as the President of the Consumer Health division. The point is to say that those changes were conducted using internal talent. The top management of the company has been working together for a long time and is ready to deliver results which will allow us to reach our guidance numbers.

Once again, there were no change in the shareholder structure and the control block remains the same.

Now moving on to the presentation itself. The results for the quarter, I'd like to mention first that starting on July 1, as we had announced late last year, will have -- contractually are going to be addressed differently. Because of that, some expenses which were originally considered marketing expenses are now being considered a deduction from the gross revenue starting in the first quarter, which led to reclassification in the numbers for the first quarter of 2017.

Basically that reclassification affects the net revenue and raises the EBITDA margin and the net margin as well, but it has no impact on the operating results for the period.

As for numbers, the company's net revenue grew 13.9% the first quarter as a result of an increase in volume and increase in price in the period. If we exclude that change, the growth would have been close to that around 14.1%.

As I mentioned before, our consumer's organic growth has been broadened to enter other markets in Brazil. Brazil is one of the most important pharmaceutical markets in the world, as you know, and in terms of the innovation index, in the past 12 months, it reached 29%, our innovation index, as compared to 28% which was posted last year.

The net revenue in the quarter was boosted mainly by the performance of the consumer health arm, with an important contribution from brands such as Benegrip, Doril, Coristina, Estomazil, Zero-Cal and Tamarine.

As for the prescription drugs, the highlights are especially the Mantecorp Farmasa products, including recent launches such as Velunid, Latolise, and Ofolato.

The gross margin for the quarter sat at 74.3%, 0.5 percentage points above last year, coming mainly from larger profits from brand product. It's worth remembering that an increase in medication prices for 2018, such as before, will affect the results only starting the second half of the year.

As for operating expenses, it dropped in the quarter because of the lower representativeness of administrative and marketing expenses. Marketing expenses were decreased by 2 percentage points over the net income, the net revenues, especially because advertising for football only increased in the second quarter, when we have the start of the national championships. Throughout the year, as you probably identified, general and administrative expenses fell 0.5%, resulting mainly from a decrease in physical expenses, which remained below the growth of the net revenue. Because of that, the consumer operations EBITDA grew almost 25% in the first quarter, reaching the level of BRL 363 million with a margin of 39.1% or 3.1 -- 3.4%, rather, above what was posted in the first quarter of last year. The financial result was posted at BRL 1.1 million, BRL 2.8 million below what was posted in the first quarter of last year and that drop was boosted mainly by the reduction in the interest rates and of the lower cash generation by the company in the first quarter of this year, which was basically driven by the payment of the [JCP] in January 2018 and the reduction in capital back in July of 2017.

(inaudible) company's net profit, or net income reached BRL 322 million with a growth of something close to 42% when compared to the first quarter of last year. This growth was driven by operating results mainly, and also by the reduction of the IRR income tax rate on March 31, in the amount of BRL 74 million, which will be paid out until the beginning of next year.

On Slide #4, the next slide, I have the cash conversion cycle. It goes, this cycle, at 178 days, because of the increase in number of days for inventory, because of the renewal of our semi-finished and (inaudible) tier products. (inaudible) to increase the inventory of finished products to demand -- to meet the demand for our products in the coming months.

When we look at the working capital as a percentage of net revenues, it sat at 38%, quite close to what we have been having in the past quarters.

On the next slide, the operating cash flow sat at BRL 253, impacted mainly by the payment of the last installment of BRL 100 million related to the football advertising schedule. Free cash flow was also lower, mainly due to the receivables of the first quarter of 2017 related to the sale of the Disposable Products unit. The free cash flow of the company then closed the quarter at BRL 483 million, after the payment of the JCP of the BRL 581 million earlier in the year.

So the first quarter shows that we are on the right path to reach our guidance for net income and for EBITDA, which had been set forth for the year.

In closing, I would like to remind you that in April, we turn 10 years since our IPO, and since then, we delivered 323% of growth, almost 16% on an annualized base, exceeding both (inaudible) and the CDI, which yielded 167%.

I would like to thank for the support of our investors, shareholders who are part of this history and we hope to continue to deliver results consistently with this new period starting off for the company.

Thank you all for participating, and we now remain available for questions or comments you may have. Thank you.

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Questions and Answers

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Operator [1]

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We now start our Q&A session for investors and analysts. (Operator Instructions) Our first question comes from Joseph Giordano from J.P. Morgan.

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Joseph Giordano, JP Morgan Chase & Co, Research Division - Senior LatAm Healthcare Analyst [2]

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I'd like to congratulate you, Breno, on your position as the company's CEO. My first question is, I'd like to have some more color on the inventory asset. You mentioned you have strengthened your inventory on finished project products, aiming at meeting demand. I'd like to understand what's the components' (inaudible) level? And also, if you could, give us some more color about the manufacturing expansion projects in Goiás, the state of Goiás, please.

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Breno Toledo Pires de Oliveira, Hypera S.A. - CEO [3]

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Joseph, thank you for your well wishes, and as for the inventory question, here's what we have to say. We have increased inventory for raw material and semifinished products, which we'll convert in an increase in the inventory of finished products going forward. As we mentioned before in previous quarters, in terms of capacity limitations, we already see a change in that scenario because of this new work. At the factory, we have already broken production records, month after month after month, so I do believe that in this quarter we haven't faced a bottleneck anymore. And besides, as we mentioned the former quarter -- in the previous quarter, rather, we were starting that 6 by 2 project at the factory. That was approved. It should be implemented starting in May, next month.

So the trend now is that we shall not have bottleneck problems going forward this year, for production. And we are actually reviewing our CapEx plan. We might be able to delay this plan -- delay, and even decrease it, actually, when we look at the initial plan. But if that comes to fruition, we'll make the proper announcements, but the trend now is for us to delay or even decrease the CapEx.

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Joseph Giordano, JP Morgan Chase & Co, Research Division - Senior LatAm Healthcare Analyst [4]

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Just as a follow-up in terms of growth, while the top line was quite strong, I'd like to listen to you in terms of the company sellout, when we compare the price increases we've seen in the market.

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Breno Toledo Pires de Oliveira, Hypera S.A. - CEO [5]

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Yes, you're right. If we look at the sellout data for the month of March, numbers are relatively low, because of better numbers in the previous years. On the other hand, that number might be recovered in April, we will have to look at that more closely. But for the quarter, specifically, we continued to grow above the market, especially when we look at the brands. Some of our brands grew by [13%], pretty much in line with the company selling as opposed to a growth in the market, on average, of 8%. So we did a -- quite alive with the sell-in and sell-out, all according to our strategic plan. In other words, we are gaining market share at a gradual pace.

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Operator [6]

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Next question comes from (inaudible) from BTG Pactual.

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Unidentified Analyst, [7]

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My question is about revenues. I'd like to understand, out of that 40% growth, how much came from the demand, which was somewhat suppressed from the fourth quarter, because of the production problems you had at the factory? And a second question, if you could comment on discounts, market prices. We know that prices were a driver of the top line growth, so I'd like to understand, how sensitive is the market now for price increases?

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Breno Toledo Pires de Oliveira, Hypera S.A. - CEO [8]

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We did not see major changes in those dynamics for discounts. It's quite stable as we understand. In our markets -- in this pharma market, when we increase the price, retailers also increase their prices at the same pace. It's quite different dynamics from this previous consumer market where we were before. So we have not seen changes in our discount policies. We remain as is, quite stable.

You also asked about prices and the sensitivity of the market. Basically, we do not see major impacts in terms of prices because, once again, a good part of our portfolio, especially when we talk about Consumer Health, we are not subject to price limitations on the part of [synergy]. So on that front, we have a little more flexibility, and we are, this year, trying to offset with increases slightly above inflation for those products which are not price controlled. Hence, we do not see major impacts in our prices when we analyze those numbers vis-à-vis prices or inflation rate.

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Unidentified Analyst, [9]

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Okay, just a quick follow-up. If you could, please give us more detail of how much of that growth in the first quarter was driven by that suppressed demand in the fourth quarter of last year.

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Breno Toledo Pires de Oliveira, Hypera S.A. - CEO [10]

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We did have an impact. But we always have an impact in that respect. We always, if we fail to deliver some product, production and shipping are not 100% hand-in-hand, but those 35 million we mentioned in the previous call, most of it has been delivered. So there's a small effect. But we have managed to reduce that level of nondelivered product.

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Operator [11]

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Our next question comes from Mr. Guilherme Assis from Brazil Plural.

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Guilherme Dias Assis, Brasil Plural Corretora de Cambio, Titulose Valores Mobiliários S.A., Research Division - Former Analyst [12]

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Breno, I'd like to explore 2 things with you. First, I'd like to have a breakdown of that growth you've shown -- growth above the market. You just had mentioned the sellout going up in line with the company's growth. For the rest of the company's revenues, broken down per category, how did the growth -- how did growth happen across categories? Did we have better categories than others? Did one outperform the others? That's one question.

My second question would be concerning marketing expenses and advertising. In this quarter, we saw an important dilution of those investments in terms of advertising expenses, but you also mentioned the football sponsorship, which represents a high amount of money. So going forward, can we expect those numbers to resume previous levels? And does it represent more of a burden on the bottom line, (inaudible)?

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Breno Toledo Pires de Oliveira, Hypera S.A. - CEO [13]

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As for a breakdown of -- for the selling part, again, our brand, our branded products have been growing at a pace above that of generics. So our strategy has been to be quite selective for generics in terms of providing this camp and "price wars." So we are willing to lose some market shift but retain profitability. That's our focus, our efforts. We don't want to fight for price, but we want to better manage our brand. So both for sell-out and sell-in. And of course, we see an effect on margins. Branded products have grown more, which, again, is quite in line with what we saw last year. And just to reinforce what I said before, generics, fewer generics, where we have much more competition, it accounts for 12% of our business and even lower level in our bottom line. Just to put things in perspective, the impact is relatively small in the company's results at the end of the day.

And the other question was about marketing expenses, advertising. In this quarter, as you mentioned, we were 2 points below -- 2 percentage points below, but that was driven by our mix, our media mix. This year, we have a larger burden on football, and the more expensive campaigns have to do with national tournaments or championships, which start at the end of the close of the first quarter, early second quarter. So you can expect that percentage to go up. We won't see that number go down 2% again like we saw in the first quarter when we go forward. And we are also promoting a few launches, we have launches to come in the pipeline, which will require media, marketing and this will happen with the feed starting in the second quarter.

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Guilherme Dias Assis, Brasil Plural Corretora de Cambio, Titulose Valores Mobiliários S.A., Research Division - Former Analyst [14]

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Breno, just one follow-up about marketing. Given the fact that you are sponsoring football on TV, new campaigns and so on, and new products in the pipeline, when we look at the consolidated year, am I right in assuming that marketing might be a bit more of a burden than it was last year? Or would you say that the expectation is to maintain the same correlation marketing vis-à-vis revenues?

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Breno Toledo Pires de Oliveira, Hypera S.A. - CEO [15]

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We expect to maintain the level we had where we saw last year. We do not expect major variations. So for the coming quarters, we should see numbers close to the ones we saw last year. But as I said, that has to do with the different balance between quarters, different allocations between quarters.

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Operator [16]

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Our next question comes from Mr. Gustavo Oliveira with UBS.

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Gustavo Piras Oliveira, UBS Investment Bank, Research Division - Head of LatAm Research & Latin America Consumer Analyst [17]

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I have a few questions. Number one, I'd like to understand a little better the new organizational structure. For the past 3 years, you have insisted on the fact that it was important to have 3 independent business units. We've talked a lot throughout the years. You've mentioned how that replicates costs. You had to restructure the organization, unfortunately. How will things work going forward? Will we still remain having 3 business units, or we'll have a more integrated form of units? In other words, there would be a possibility of smaller growth in the short run, but then you could think of higher profitability in the mid-run, until the situation is more -- is clearer. How do you see that going forward? And still about the company's organizational structure, I didn't see anything -- I forgot the name of the executive who worked for Prescription. Is he still around? Anyway, I'd like to understand the issues concerning margin, growth, innovation. Now we have the Head of Innovation going to Investor Relations. I'd like to understand how are you getting ready, prepared for this new strategy going forward?

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Breno Toledo Pires de Oliveira, Hypera S.A. - CEO [18]

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Gustavo, okay, let's get everything clear now. Good question. We will maintain the business units, 3 business units, 3 heads with the same responsibilities, sales, marketing responsibility as before. The only thing is that we'll have this new position which will coordinate the work of the 3 business units.

So going to your second point, the executive you mentioned is Marcos (inaudible), who is responsible for Prescription. He stays with us. Nothing changes in his business unit. We'll probably bring in somebody new now that we have moved. And for the business unit for Generics, we have already promoted someone internally, [Ana], who has been here in the company for a long time, and she will be taking Vivian's place.

As for innovation that you mentioned, Adalmario is responsible for business development. So each business unit has its respective innovation arm. And we have a person in R&D to coordinate the innovation processes. So Adalmario was one of those people who were involved in development. And we continues to do that. He is now accumulating business development and D&D. So there is no change -- or R&D, rather. So there is no change. So we anticipate very low impact in the operation. We have basically created a new position to coordinate everything to help business units focus better and search for new synergies among or across those units. Have I answered your question, Gustavo?

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Gustavo Piras Oliveira, UBS Investment Bank, Research Division - Head of LatAm Research & Latin America Consumer Analyst [19]

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Yes, okay. I understand. A second question now. There were 4 people under investigation, [Junior] and Claudio Bergamo, but 2 other executives in the company who are being investigated. You didn't mention their names. I don't need to know the names, but I would like to know what positions they held at the company? And if they worked in regulation with the National Medication Agency? Or that kind of thing. What were their positions, not their names?

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Breno Toledo Pires de Oliveira, Hypera S.A. - CEO [20]

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Okay, Gustavo. We talked about 2 peoples. We haven't disclosed the names because it's an ongoing legal process, which is under confidentiality. But what we can say, which is what is in the media, those are middle-management executives who were involved in the operational side. They had nothing to do with outside parties, regulatory agencies or the like.

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Gustavo Piras Oliveira, UBS Investment Bank, Research Division - Head of LatAm Research & Latin America Consumer Analyst [21]

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But can you perhaps mention the areas?

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Breno Toledo Pires de Oliveira, Hypera S.A. - CEO [22]

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Operational areas. Payments, contracts, but nothing, as I said, nothing to do with outside parties. They're administrative managers.

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Gustavo Piras Oliveira, UBS Investment Bank, Research Division - Head of LatAm Research & Latin America Consumer Analyst [23]

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Okay. About the lockup, [Junior] and Claudio Bergamo, they had an agreement. They are temporarily out of the company. Do they have a lockup to refrain them from selling their stock in this period?

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Breno Toledo Pires de Oliveira, Hypera S.A. - CEO [24]

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You refer to the control block, the shareholders agreement, right?

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Gustavo Piras Oliveira, UBS Investment Bank, Research Division - Head of LatAm Research & Latin America Consumer Analyst [25]

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No, I'd like to understand if they can simply sell their stock. Is there anything holding them from selling their stock in the company?

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Breno Toledo Pires de Oliveira, Hypera S.A. - CEO [26]

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As I mentioned, nothing has changed from the share structure. Nothing has changed. The control block remains the same. The shareholders agreement remains. And based on that agreement, it's the same rule. If you want to sell, you have to offer first, and you have 30 days waiting period, minimally. It all remains as it was. So there is no plan to sell stock or anything. So there was a change in the administration of the company, but not in the company's share structure.

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Operator [27]

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Our next question comes from Tobias Stingelin from Crédit Suisse.

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Tobias Stingelin, Crédit Suisse AG, Research Division - Former Director [28]

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The question was already answered. Congratulations, Breno, on your new position.

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Operator [29]

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Our next question comes from Mrs. Irma Sgarz from Goldman Sachs.

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Irma Sgarz, Goldman Sachs Group Inc., Research Division - Equity Analyst [30]

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Just one quick follow-up question. You talked about the launch pipeline, and you mentioned early in the year plans. Could you perhaps give us some more color about what's in the pipeline for the company? And where are you focusing more intensely? And what kind of investments in the short-term do you envision?

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Breno Toledo Pires de Oliveira, Hypera S.A. - CEO [31]

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Irma, we measure launches based on our innovation index. So we mentioned before that our innovation index has been growing quarter-on-quarter, year-on-year. Last year, the index sat at 28%, and year-to-date for this year, we are at 29%.

Our objective is to reach the 35% level for our top line, 35% coming from new -- newish product. And we have been working different innovation (inaudible) to be able to meet that goal. So that's where we are headed. We have our innovation committees. New ideas are always emerging. We have a very robust pipeline in that respect. And in the second quarter, we should have several new launches. We have some products which should be arriving at the market. CH, (inaudible) -- so several products which are now in the pipeline and which should be reaching the market in the short run, and the idea is to increase our innovation index. And that's how we see growth going forward, based on innovation.

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Operator [32]

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Our next question comes from Mr. Marco (inaudible) from Itaú BBA.

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Unidentified Analyst, [33]

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My question has to do with the Generics business unit. As I understand, this segment suffered a little more than the other segments of the company. So if you could give us some more color about the competitive environment, if we can expect changes going forward.

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Breno Toledo Pires de Oliveira, Hypera S.A. - CEO [34]

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I will give this question to Vivian as the new CFO, and she knows the market of generics.

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Vivian Angiolucci, [35]

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Good afternoon, everyone. To your point, we haven't seen the market change significantly -- the generics market. It is a market which has been seeing a growth below the market average. And for us, as part of our strategy of focusing on higher-margin products, we have been growing above market, and we are focusing on similar products which represents the larger share of that market. And we are growing selectively, as Breno mentioned, in Generics.

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Operator [36]

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Our next question comes from Mrs. Maria Paula Cantusio from BB Investments.

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Maria Paula Cantusio, BB-Banco de Investimento S.A., Research Division - Senior Analyst [37]

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I'd like to talk a little more about working capital. You mentioned inventory levels, but we saw a worsening in receivables. Are you extending your payments terms? What's happening there? And also, if you could update us on your partnerships with laboratories both in Brazil and abroad to develop new medicine or new drugs? And also if you foresee any acquisitions in the near future.

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Breno Toledo Pires de Oliveira, Hypera S.A. - CEO [38]

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Maria Paula, as for the working capital issue, as I mentioned, in other slides I showed, working capital as a percentage of net revenues have been stable. We saw slight growth in comparison to last year, but we are seeing the same levels quite stable, especially starting in the third quarter of last year. And our expectation is to have those to remain on those levels. We do not see major changes in that cycle, the cycle offered to clients. We expect to maintain the current terms, and as a consequence, we expect to maintain working capital levels where they are.

As for your second question, we already see results emerging from products that have been launched, [Rinidal], (inaudible), which is a product which was produced internally and which is now being produced through partnerships. Other products, (inaudible), the same. So we already see results coming from partnerships which were started by Adalmario. And there are other things to happen going forward. And we'll be announcing them when the time comes.

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Maria Paula Cantusio, BB-Banco de Investimento S.A., Research Division - Senior Analyst [39]

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If I can ask one more question? The high you've seen in the U.S. dollar, do you anticipate pressure on production costs towards the end of the year because of this foreign exchange pressure?

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Breno Toledo Pires de Oliveira, Hypera S.A. - CEO [40]

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No. That impact is quite limited unless we see something like we saw in 2015, a very quick change in the dynamic. But given our margin and the cost, (inaudible) is just part of the number. But That's much more relevant to us. We are talking about the BRL and for cost, approximately 1/3, or 25% to 1/3 is tied to the dollar. And we also have, of course, a hedge, or hedging for our -- for all our payables. So the impact tends to be low. Of course, we are keeping an eye, a close eye on it, but as I said, our hedge should be enough to cover for that.

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Operator [41]

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(Operator Instructions) Our next question comes from Mr. Ricardo Rezende from HSBC.

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Ricardo Nasser de Rezende Filho, HSBC, Research Division - Former Analyst [42]

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Just a follow-up question about CapEx. You might delay or even reduce the value for CapEx. You mentioned that there was a possibility of selling property that you have. Could we expect any change in that, too, should there be a delay?

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Breno Toledo Pires de Oliveira, Hypera S.A. - CEO [43]

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No, we are going to sell the property anyway. It's not an operational property. It belonged to one of the companies that we sold. So that doesn't change our strategy. We are going to sell that property anyway.

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Operator [44]

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The Q&A session is now over. I give the floor now back over to Mr. Oliveira for his final remarks.

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Breno Toledo Pires de Oliveira, Hypera S.A. - CEO [45]

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Thank you all for participating in our conference call. And we remain available. Myself, our executive management, our IR team, we remain available to clarify questions or listen to comments you may have. Thank you, and see you next time.

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Operator [46]

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Hypera Pharma's conference call is now over. We'd like to thank you all for participating. Have a nice day, everyone.