U.S. Markets open in 7 hrs 38 mins

Edited Transcript of PFRM3.SA earnings conference call or presentation 13-Nov-19 2:00pm GMT

Q3 2019 Profarma Distribuidora de Produtos Farmaceuticos SA Earnings Call

Dec 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Profarma Distribuidora de Produtos Farmaceuticos SA earnings conference call or presentation Wednesday, November 13, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Maximiliano Guimarães Fischer

Profarma Distribuidora de Produtos Farmacêuticos S.A. - CFO, Chief IR Officer, Executive Officer & Member of Board of Executive Officers

* Sammy Birmarcker

Profarma Distribuidora de Produtos Farmacêuticos S.A. - VP of Board, CEO, President & Member of Board of Executive Officers

================================================================================

Conference Call Participants

================================================================================

* Felipe Reboredo

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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen. Welcome to the Profarma Distribuidora de Produtos Farmacêuticos S.A. conference call, where we'll discuss the third quarter 2019 earnings results. (Operator Instructions) This call is being recorded and simultaneously translated into English. (Operator Instructions) The audio will be available on the company's website at www.profarma.com.br/ri. This conference call and the presentation are being simultaneously broadcast over the Internet and can be accessed at the company's website.

Before proceeding, we would like to mention that the forward-looking statements that may be made during this conference call related to the company's businesses, prospects and forecasts as well as operating and financial targets related to its potential growth, are based on management's expectations about the future of Profarma. These expectations are highly dependent on domestic market conditions, the general economic performance of the country and international markets and therefore, are subject to change.

With us today are Mr. Sammy Birmarcker, CEO; and Mr. Max Fischer, VP of Finance and Investors Relations; and the Investor Relations team. Now I will turn the conference over to Mr. Birmarcker. Mr. Birmarcker, you may begin.

--------------------------------------------------------------------------------

Sammy Birmarcker, Profarma Distribuidora de Produtos Farmacêuticos S.A. - VP of Board, CEO, President & Member of Board of Executive Officers [2]

--------------------------------------------------------------------------------

Good morning, everyone. Thank you very much for attending this conference call. In 3Q '19, although some Brazilian macroeconomic indicators showed improvements such as job creation, the economic activity is struggling to recover, especially on household consumption. However, in our results released yesterday, it is possible to see that once again, the company outperformed the industry and grew more than the average of companies in the segment. Our efforts resulted in a 14% increase in the group's net revenue and 34% in EBITDA year-on-year.

Another front that we have been acting on, and those who have been with us around us have noticed that it has to do with capital discipline. As a result, for the second consecutive quarter as well as year-to-date, we were able to generate positive cash flow in addition to maintaining net debt at the same level in absolute numbers for 3 quarters, even with a 15% growth or BRL 119 million compared to the third quarter -- the first quarter 2019, rather.

The integrated model has consistently quarter after quarter proved to be key in the delivery of value to our shareholders. We have been growing revenue, reducing costs and also reducing the need for working capital.

On Distribution, I would like to highlight the 18.5% increase in revenue, there was no working capital increase. We also experienced a significant 41% growth in EBITDA, which reached BRL 25 million.

In Retail, the optimization of the store portfolio and the increase in gross margins have been continuously reflected in the contribution margin, which increased by 0.5 percentage points year-on-year.

Finally, I would like to highlight the partnership signed between the Profarma Group and UNICEF. This is the first time UNICEF has partnered with a pharmaceutical distribution and retail company in Brazil. And more importantly, the partnership is in line with our goals to contribute to our children's education and health. We are once again proud of who we are and what we do.

Now to talk more specifically about the quarter's results. I'll turn the floor over to Max, our VP of Finance and Investors Relations. Thank you.

--------------------------------------------------------------------------------

Maximiliano Guimarães Fischer, Profarma Distribuidora de Produtos Farmacêuticos S.A. - CFO, Chief IR Officer, Executive Officer & Member of Board of Executive Officers [3]

--------------------------------------------------------------------------------

Good morning, everyone, and thank you for your attendance. I will begin the presentation on Slide 2, which shows that for another quarter, we were able to grow the gross revenue, which reached BRL 1.5 billion, 15% higher year-on-year.

The increase in revenue and the reduction in the share of operating expenses in relation to gross revenue led to the company to a 35% increase in EBITDA, which totaled BRL 31.6 million.

On the next slide, we show the evolution of revenue and gross profit. Consolidated revenue was 14.6% higher quarter-on-quarter. This improvement is explained by the performance of the Distribution division, which increased its customer base and purchase frequency. The change in revenue impacted the gross profit of both divisions, which grew by 9.9% year-on-year.

In Distribution, we had an increase in sales, and the gross margin remained stable year-on-year. In Retail, the gross margin grew by 1.3 percentage points.

On Slide 4, we present our operating expenses, which totaled BRL 159 million, accounting for 12.6% of Profarma's group net revenue, a 1.2 percentage point decrease compared to the 13.8% in 3Q '18. In this quarter, we reached the lowest percentage since 2016, which indicates an efficiency gain in both divisions.

On Slides 5 and 6, you can see our EBITDA, which excluding IFRS 16 was BRL 31.6 million with a margin of 2.5%. This result accounts for the 34.8% growth year-on-year with increases in both divisions: 42% in Distribution and 19% in Retail.

It's worth highlighting that in the Distribution division, there was an increase in revenue with the dilution of operating expenses and in Retail, an increase of 0.5 percentage points in the store's contribution margin. The increase in this metric positively impacted the company's leverage ratio, which is shown on Slide 9.

Over the last 12 months, consolidated EBITDA reached BRL 111.8 million, 60% higher year-on-year. The net debt-to-EBITDA ratio stood at 4x at the end of the quarter, the lowest leverage level since the acquisition of Rosário in 2016.

I would like to emphasize that the company has been growing above the market while maintaining the same level of net debt for the past 3 quarters and therefore, contributing to the continuous reduction of financial leverage in order to return to our historical levels. This progress confirms the recurring improvement in the company's operating performance as well as the optimization of working capital, which is a result of the 7-day drop in the cash cycle.

On Slide 10, we highlight our operating cash generation. For the second consecutive quarter, cash generation was positive, reaching BRL 24.7 million. There was a year-on-year growth of BRL 60.9 million in cash generated by operating activities since in 3Q '18, the company posted a BRL 36.2 million consumption in operating activities. It is directly related to the progress in operating results and the reduced need for working capital in the period.

In 3Q '19, we invested BRL 4.4 million. Out of this amount, BRL 3.3 million were invested in the Retail division for the expansion of 3 stores and infrastructure for the 2 new stores.

Before I wrap up my comments on our performance, I would like to invite you to our public meeting that will take place on Thursday, November 28. The following slides show some details about the performance of each business unit. We continue to seek increased business efficiency and profitability while maintaining a solid and firmly leveraged balance sheet.

And now Sammy and I will be available to take your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question comes from [Paulo Ricardo], [Ricardo Condor].

--------------------------------------------------------------------------------

Unidentified Analyst, [2]

--------------------------------------------------------------------------------

First of all, congratulations on your results. It's great to see that you posted profits once again. And I would like to know more details about the next levels of performance. You have been continuously improving so I'd like to know more details about your expectations for the future.

--------------------------------------------------------------------------------

Maximiliano Guimarães Fischer, Profarma Distribuidora de Produtos Farmacêuticos S.A. - CFO, Chief IR Officer, Executive Officer & Member of Board of Executive Officers [3]

--------------------------------------------------------------------------------

This is Max. I think that the results that the company has been posting for the 4 past quarters speak for themselves. The company has improved its results quarter-over-quarter in both divisions.

And the second important point is that while we're growing, we have also been able to manage working capital, which was a very important point in our efforts to reduce leverage since our capital increase. Last year, we have been working very hard on both fronts that have a direct impact on leverage, which is operating results, growing and sustainable growth. And at the same time, we have to make sure that we reduce the rate of our absolute debt. So the figures speak for themselves, and we have a great history behind us that will take us to even better results in the future.

--------------------------------------------------------------------------------

Unidentified Analyst, [4]

--------------------------------------------------------------------------------

And do you have any targets for deleveraging in 2012 -- 2020, rather?

--------------------------------------------------------------------------------

Maximiliano Guimarães Fischer, Profarma Distribuidora de Produtos Farmacêuticos S.A. - CFO, Chief IR Officer, Executive Officer & Member of Board of Executive Officers [5]

--------------------------------------------------------------------------------

We don't work with a guidance but we have a debt policy, which is around 3x. And this is an old policy, actually. It's been like that since our IPO, and we have been working very hard to reach that reduction level in our leverage for the next years.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

The next question comes from Felipe Reboredo with Brasil Plural.

--------------------------------------------------------------------------------

Felipe Reboredo, Brasil Plural Corretora de Cambio, Titulose Valores Mobiliários S.A., Research Division - Analyst [7]

--------------------------------------------------------------------------------

I would like to focus on Retail now. I would like to know your perspective about the mix. We can see that there was a drop in OTC and also Rx. We saw that gross profit increased. It was very positive this quarter. Now in terms of top line, when should we expect increases in top line given the changes in the mix?

--------------------------------------------------------------------------------

Unidentified Company Representative, [8]

--------------------------------------------------------------------------------

In our growth history, we can see that some actions that we implemented in the past 12 months were very important. They include repricing actions in some categories and also a mix adjustment for store closure, and that does not happen overnight, right? We are now going through a second wave in that movement specifically for each region. So I believe that we have been growing sustainably, and the answers in each category will come as a result of those actions.

Now when it comes to top line, we have information from ABRAFARMA that tells us that we can grow top line with opening new stores. The last figures that we had access to show that the growth in the pharmaceutical market in Brazil comes from new stores, and mature stores are being offset by each region -- by the results in each region. We have been opening some stores very aggressively, taking opportunities in the regions where we are present. For example, Rio de Janeiro and the Northeast. So I think that this equation has to address that point.

And also, we have goals to achieve in terms of average sale per store, especially in Rosário. We have been expanding some stores in Rio de Janeiro and the Midwest because those stores are still smaller than our average, and we can have a larger return on your investment when you expand the store. For example, renting the store next door and doubling the size. And that brings very positive results, both in terms of average sales and also the contribution margin per store. So we can see that there are results coming from the product mix and also the expansion. And the new stores as well, we have been very selective when it comes to opening new stores and taking advantages -- advantage of opportunities when they present themselves.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

(Operator Instructions) I would like to close the question-and-answer session now and turn the floor over to Mr. Max for his final remarks.

--------------------------------------------------------------------------------

Maximiliano Guimarães Fischer, Profarma Distribuidora de Produtos Farmacêuticos S.A. - CFO, Chief IR Officer, Executive Officer & Member of Board of Executive Officers [10]

--------------------------------------------------------------------------------

I would like to thank you all for your participation in the conference call on Profarma's 3Q '19 results. Our Investor Relations team is available for further questions or clarification. Thank you very much.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

That concludes Profarma's conference call for today. Thank you very much for your participation, and have a good day. Thank you.