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Edited Transcript of HYPE3.SA earnings conference call or presentation 20-Feb-17 3:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Hypermarcas SA Earnings Call

Sau Paulo Feb 20, 2017 (Thomson StreetEvents) -- Edited Transcript of Hypermarcas SA earnings conference call or presentation Monday, February 20, 2017 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Claudio Bergamo

Hypermarcas SA - CEO

* Martim Mattos

Hypermarcas SA - CFO

* Breno Oliveira

Hypermarcas SA - IR and Treasury Director

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Conference Call Participants

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* Alex Robarts

Citibank - Analyst

* Ricardo Rezende

HSBC - Analyst

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Presentation

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Operator [1]

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Good afternoon. Welcome to the Hypermarcas fourth quarter of 2016 results conference call. Today with us, we have Mr. Claudio Bergamo, CEO; Mr. Martim Mattos, CFO; and Mr. Breno Oliveira, IR and Treasury Director. I would like to inform you that this event is being recorded and all participants will be in a listen-only mode during the Company's presentation. After Hypermarcas' remarks, there will be a question and answer session for investors and analysts with when further instructions will be given. (Operator Instructions)

We would like to inform that questions can only be asked by telephone. So if you are connected through the webcast, you should email your questions directly to the IR team at ir@hypermarcas.com.br. Today's live webcast may be accessed through the Company's Investor Relations website at www.hypermarcas.com.br/ir.

We also would like to inform that statements during this conference may constitute forward-looking statements. Such statements are subject to known and unknown risks and uncertainties that could cause the Company's actual results to differ materially from those set forward in the forward-looking statements.

Now I'll turn the floor to Mr. Claudio Bergamo, who will begin the presentation. Mr. Bergamo, you may begin your conference.

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Claudio Bergamo, Hypermarcas SA - CEO [2]

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Thank you very much. Welcome all to the conference call about our results regarding the fourth-quarter 2016 which also represents for the full year of 2016. The year of 2016 was very transformational for Hypermarcas. During the year, we secured it and finalized a series of divestments of our traditional consumer goods businesses such as the cosmetics, condoms and diapers. Through this processes, we recapitalized the Company about BRL5.5 billion, coming from a net debt position from BRL3.8 billion to a net cash position of about BRL1.7 billion after the closing of the diapers deal. This process allow series of short-, mid- and long-term advantage for Hypermarcas' shareholders.

The Company started distributing dividend in a consistent way and now see now BRL0.65 per share regarding the fiscal year of 2016 of which BRL0.06 as interim dividends which have already been improved and an additional BRL0.05 to be approved in the shareholder meetings. These dividends represent 100% of our net profit after legal deductions.

Also Hypermarcas through all these transactions has been able to foresee it's pharma business become a pure pharma pharmaceutical opening starting off 2017. In a strategic terms, this change are rights relevant that create many advantage for our shareholders, given that the favorable growth projections and perspectives in the mid- and long-term of the pharmaceutical market in Brazil.

The Brazilian market expected to enter a phase of ageing of the population with a mature increase of older people. Also we expected to increase the penetration of net [nutrishment] and also to do new medicines that are not branded in Brazil. According to IMS Health, the Brazilian market is expected to be the second fastest growth in the world for the next years only behind India. It's also expected to become the fifth largest pharmaceutical market in the world in the coming years.

To face as many opportunities in the market, Hypermarcas is quite well positioned. On the top of being the largest company in the sector in Brazil in the pharma retail market, the Company also has the most complete product and brand portfolio of the market. We did the shipping many -- several of the many segments. In addition to, the Company had a very solid and competitive global market platform being the lowest cost producer with a comprehensive nationwide distribution network with relevant presence both in mom and pop stores as well the drug store chains.

This position allow us for a natural strategic hedge in moments of economic crisis such as the one we had been experienced in the last two years. We also lost (inaudible) of synergies of scope and scale which is the foundation of a sustainable organic growth. Just for example, the performance of our continued operations in the fiscal-year 2016 demonstrates the resilience of our pharmaceutical business.

The Company grew a 11.2% even in the middle of the biggest economic, social, political crisis in the Brazilian history. We also closed the year with an EBITDA of BRL1.133 billion representing a growth of 19.2% over 2015 figures. These results are slightly above our guidance and also doubles our guidance of EBITDA. Also in terms of net income, the Company reached BRL675 million of our continued upgradation, representing a 95% growth vis-a-vis 2015.

To take advantage of this huge opportunities of -- and create value as we move forward, we started in 2016 -- whereas we also already started 2016 a chain product to strength our business even further. We should highlight two mainly respects of this changes that we have been carrying out in Parana to our restriction of our portfolio. First of all, we had been strengthening off our business in connections with the creation of three business units. One from consumer health, another one from branded prescription, another one from branded generics.

We complete this process in the quarter with the verticalization of the sales and trade functions. Now starting of 2017, all our business units will have 100% of the functions required to define and execute their own business strategies. These changes will be transformational to Hypermarcas in the next years to come and to allow not only significant improvement in our execution, but also the increase focus we will be -- we will provide and give opportunities to conduct different strategies for different segments which has different key factor success.

Also this new product of [form] and configuration will help in the develop of a new innovation plan that will be more consistent and more impactful in the years to come. Strengthening also in the innovation capabilities had been also a major area of focus during 2016. We have stipulated the pre- and post-registration of -- because one side that to gain greater focus on develop of new products for the key registration and the other one to face the ongoing increase of technical regulatory demands in the markets for the post registration.

In the previous illustration area, we create a new (inaudible) bringing in the most competent professionals in the field of expertise. We also started the creation of new innovation center (inaudible) with state of the art technology which should be opened related to second quarter of 2017. In parallel, to (inaudible) of our internal development capability, we also had been structuring a new business development era as never has been seen before in the Company.

The combination of strengthening of our business intelligence with our increased innovation in business develop capabilities creates the conditions for a new sustainable organic growth cycle for the Company. Thus that's for sure that we are very certain that we will bring good fruits mid to long run to our shareholders. Once more, I would like to thanks the support of our shareholders, market analysts, portfolio managers among other stakeholders.

On our end, you can count our hard work and continuous focus on value creation. We believe we can always do better whatever we had been doing already well and by believing that the possible is possible, we will reach new levels of performance and excellence.

Thank you very much for all. I pass over Martim to talk more in details about the numbers.

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Martim Mattos, Hypermarcas SA - CFO [3]

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Good morning everyone. Martim speaking. As usual I will quickly summarize the main results of the fourth quarter and the fiscal year of 2016.

Starting on page 2 of the presentation, growth was 11.5% in the quarter, being about one-fourth of this growth from volumes and the remainder from price increases. Gross margin increased 30 bps because of price increases and mix which came slightly above the cost increase effect in the period.

Operating expenses contributed 3.7% percentage points to the EBITDA margin with gains coming from all lines of expenses. Thus the continuing operations EBITDA was BRL262 million in the quarter, a 31% increase and a 3.9 percentage points margin gain. Financial result was positive in BRL7 million reflecting the new capital structure of the Company even before the growth came from the sale of the disposable business.

Therefore, the continuing operations net income amounted to BRL197 million, 2.5 times greater than the net income in Q4 2015. In discontinued operations, we made an impairment of assets related to the sale of the disposable business based on the value of the sale of this business of BRL1 billion, which accounted for the greatest portion of the loss in discontinued operations. The Company's net loss was then BRL213 million in the quarter.

As stated on the page 3 of the presentation, the results for fiscal-year 2016 was a net revenue growth of 11.2%, virtually totally composed by price. Gross margins fell 50 bps in the year mostly given the impact of the FX evaluation on the COGS in the first half of the year. Operating expenses, just as in the quarter, were diluted and/or reduced representing a margin increase of 3.1 percentage points. Thus continuing operations EBITDA amounted to BRL1.133 billion.

The financial result was negative in BRL192 million under great impact of BRL109 million in early payments of debts leading the continuing operations net income to BRL675 million, virtually twice as much as what was posted in 2015. Continuing operations net income was BRL500 million as due to of the capital gains from the sale of the cosmetics and condom businesses in spite of the impairment of the disposable business.

Last, the Company's net income was BRL1.175 billion also virtually twice as much as the net income in 2015.

I would like to invite Breno to discuss the next slide of the presentation.

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Breno Oliveira, Hypermarcas SA - IR and Treasury Director [4]

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Hi, good morning everyone. Starting on page 4, in 2016 cash flow from operations was BRL883 million, 2.7 times higher than the previous year. This combined with lower CapEx investments and the proceeds from the asset sales of BRL2.5 billion led us to end the year with a gross debt of BRL908 million, a reduction greater than BRL4 billion during 2016.

The net cash position was BRL1.348 billion which when added to the BRL352 million of non-realized hedge gains led us to close the year with a net cash position of BRL792 million. Considering the proceeds from the sale of the disposable products business and the announced dividends, our pro forma net cash position was BRL1.382 billion.

Going to page 5, after the divestures of the consumer business this last year, we had started to pay dividends to our shareholders. In 2016, we paid BRL0.50 per share and in 2017 we should pay BRL0.65 per share of which BRL0.60 next Friday and BRL0.05 after approval at the shareholder's meeting. This represents a 30% growth of the dividends paid in 2017 compared to the previous year and a dividend yield of about 2.4%.

Lastly, we informed that as we have done over the past years along with the earnings release we introduced an EBITDA guidance of around BRL1.2 billion for the fiscal-year 2017 for our continuing operations.

Thanks every one for the attendance. We will now proceed to the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Alex Robarts, Citibank.

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Alex Robarts, Citibank - Analyst [2]

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I did want to just ask two things, one about the guidance and also the second on capital allocation of the Company.

So I guess we gathered earlier in the Portuguese call that when we think about the new guidance of EBITDA this year which is I guess about 8.5% EBITDA growth down from high teens last year, this deceleration in growth that you're suggesting for this year in EBITDA, is it fair to assume that it really is linked to the fact that we've got a 4% price increase in April versus the 12% in last year's April increase? Is it fair to say that that's kind of the main driver? And in the guidance if you could just share with us the implicit FX rate that you got? Thank you.

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Claudio Bergamo, Hypermarcas SA - CEO [3]

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This is Claudio Bergamo. Yes, I think it's one of the main drivers for expected lower growth. It is the lower price increase expected for 2017 vis-a-vis 2016. As you know, the 2016 the average price increase was around 12%. These are [then] an expectation of 4% for 2017. So, to keep up the same growth, same pace of last year, we need a very substantial volume growth for the sector which at this point we cannot anticipate how much of that will really come into the market.

There are many, many positives if you look in the macroeconomic perspective that points to a recoverage of some pattern in terms of volumes given that the very low inflation rates that we are experienced as well as expected the deduction of interest rates going forward. Despite that, unemployment is still very high and we would need to see both the low inflation, low interest and low unemployment really to be a little more, let's say, optimistic in term of top line growth for the time being.

So as -- saying that, we have to continues in looking as we move forward in the year to see how the construction will developed. Also it's important to highlight that based on the things as we say that we have been investing in a new structure of our business units as well for a new structure for our innovation capabilities which we will increase about 1%, 1.5% in terms of percentage of still our expenses. So, the combination of these two things lead us to a BRL1.2 billion guidance which in our perspective is not conservative, it's very different.

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Alex Robarts, Citibank - Analyst [4]

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Okay. And so just to the FX assumption implied in that, sorry, is it the current level BRL3.1?

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Claudio Bergamo, Hypermarcas SA - CEO [5]

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We have a BRL3.2 in our budget as the assumption.

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Alex Robarts, Citibank - Analyst [6]

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Now thank you very much. That was helpful. The second question is just on capital allocation of Hypermarcas this year. As you stated earlier in your remarks, last year was a transformative year. Congratulations on that. I mean, I guess in certain ways, it kind of amounts to a downsizing of the Company, focused on pharma.

And what was interesting is the messaging around the proceeds of the recent M&A deals, you've opted to payout a dividend in mostly recently. And I'm just wondering, you talk about the Brazilian market, the second fastest growing one after India. It's very fragmented, you've got a 11%, 12% share. How should we think about Hypermarcas in the non-organic growth outlook for this year?

Is it safe to think that you would -- you are looking for M&A opportunities that in addition to organic you do have some non-organic aspirations or is it really that perhaps maybe we read through this recent dividend announcement that currently the targets or the potential assets in this very fragmented market are perhaps not attractive or overly priced and just kind of if you could help us think about what is the non-organic outlook for you guys, if there is one? And how you're thinking about putting capital for that? Thanks very much.

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Claudio Bergamo, Hypermarcas SA - CEO [7]

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Well, one aspect that the Company and the controlling Group wants to continues the consistent policy of dividend distribution not only in the short term but also in the mid to long run. Said that, still you are right, we have spacing in our capital structure to eventually if any good opportunity arrives as we have kept a structure to finalize it.

On the other hand, we don't see now this many consolidation opportunities on the existing Brazilian companies for manufacturers. Among them, the value of many of these companies expected too high. We don't believe that also their portfolio will be very complemented to our portfolio. So as we have shown over time, we are quite disciplined in terms of only embracing opportunities that really add shareholders value.

So, from now, I think most -- a part of our effort is less probably Brazilian consolidation and more trying to become a partner of choice for other companies, pharmaceutical companies which do have technologies which are not present in Brazil. There are many, many things that has been already explored outside Brazil in many markets, that still going to present in Brazil and which Brazilian consumers could benefit from these technologies outside Brazil.

That type of transact not necessarily has to be with capital or M&A. They might be with different type of transactions such as eventually licensing, eventually other types of distribution, and eventually if we think that we could buy on a technology that would help us a lot in many of our project, we would consider. But nothing that's really have a form, it's just thinking out, but the things that we are aware. I think the Brazil has a major, major opportunity to introduce many of these technologies in the marketplace.

Hypermarcas now that has become the fifth pharma player is the only one which it has -- which is public, which has a governance -- professional governance. We don't have a direct owner in the management. So, I think there are many advantages why Hypermarcas should be the partner of choice for many of this technologies that exist outside Brazil. But because of some way we had been strong in the business in the consumer market, we are not well known still on some of our pharmaceutical side, not becoming only pharmaceutical and start visiting and also through the new area that's the business development we developed.

We have already had some initial early stage signs that there are lots of opportunities out there that eventually we can take advantage of it moving forward.

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Operator [8]

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Ricardo Rezende, HSBC.

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Ricardo Rezende, HSBC - Analyst [9]

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So, just trying to following up on the capital allocation question but looking more of it in leading to long-term horizon. Without the sales done and the transformation to pharma completed, how much time is the Board expanding discussions kept allocation? Is there a preference for dividends or buybacks?

And then on the second question, just also following up on a question that was posted during the Portuguese conference call, you mentioned that one of the great opportunities for generics is entering the larger retail change -- the larger towards retail change. If that's the case, should we expect an impact on your working capital?

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Claudio Bergamo, Hypermarcas SA - CEO [10]

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First, no. Actually the opposite, we -- the terms for all our similars and generics are much lower than the terms for the branded products. So, if by any reason, we start growing faster that division, that there is other ones that would reduce our -- actually our working capital, which I am not saying is the case. At this point, we see that all the three areas has somewhat the same perspectives of growth for different reasons. So -- but that's not the case.

Regarding the capital allocation, I said in the Portuguese call that we believe that up to BRL500 million, it's thought from a company perspective would be more than enough in terms of as a minimal cash that would well position. So, anything about that is in a discussion at the Board level, which -- what will be the options and what are the decision, how to -- what to do with that capital. So, there are many, many discussions on the table. Among them there is the discussions as a share buyback, as dividends, there is a limitation. So we cannot go further than we have gone. So, that's not a out of the question at this point.

There is also other discussion such as capital reduction. And then there is -- at this time, there is not many M&A. So, that's pretty much where we are at this point. But remember that we haven't closed yet, on track. So people like to talk about the money that they still don't have. So as the managers, our focus is to close, they don't text you first.

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Ricardo Rezende, HSBC - Analyst [11]

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Okay. Thank you. It was very helpful. So, just one follow-up, the BRL500 million in cash that you mentioned, is that a net cash position or is there an operational cash?

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Claudio Bergamo, Hypermarcas SA - CEO [12]

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Net cash. When I said this, up to BRL500 million in net cash. Don't forget that we had been kind of generating quite a healthy cash flow from operation. But again it's just from a management Company perspective the BRL500 million Because you know that we don't benefit from taxes on interest. So at this point, it's not beneficial to have a debt in the Company. That might change in the next two years to come. But at this point, there is no benefit.

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Operator [13]

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(Operator Instructions) Thank you. The Q&A session is now closed. I would now like to turn the floor back over to Mr. Claudio Bergamo for his closing remarks.

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Claudio Bergamo, Hypermarcas SA - CEO [14]

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Thank you all for participating in our call. And then we will be more than glad to answer for the questions through our Investor Relations area, if you still have it. And have a nice day and bye-bye.

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Operator [15]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.