Warner Bros Discovery Inc

NASDAQ:WBD

Good morning, ladies and gentlemen, and welcome to Hypera Pharma's Earnings Call for the first quarter of 2025. We have with us Mr. Breno Oliveira, CEO; and Ramon Silva, CFO and Investor Relations Director.

We'd like to inform you that this event is being recorded. You may watch a recording of this on the company's Investor Relations website, ir.hypera.com.br. [Operator Instructions] Before we continue, I'd just like to underscore that some of the information contained in this call may have projections or statements about future expectations. They are subject to risks, uncertainties that may make them not come to pass or to be substantially different from what was expected.

Now I would like to hand it over to Mr. Breno Oliveira, who will begin the company's presentation. Go ahead, sir.

Good morning. Thank you for being here for our earnings call for the first quarter of 2025. I'd like to begin on Slide 3. Our sellout grew 7% in the first quarter of 2025. In the institutional market, this represented 21%. And in the retail market, it was 6%. We continue to grow significantly in the non-retail market with a huge market share for 1 additional quarter. Sellout in retail grew around 5.8%, which is in line with the operating market. And this is due to the strong performance of patented medication that grew 28%. The first quarter was a bit weaker than expected.

Due to this pretty high, which was lower than expected, we expect to have faster growth in the next quarters due to some important launches for the year, which will contribute to a growth of about 8% in sellout as we expect for 2025. Our sellout growth was not translated into net revenue due to our working capital optimization process. For this quarter, net revenue had a reduction of about 40% as expected. I'd like to underscore that the working capital optimization strategy aims at boosting our cash generation by reducing inventories with clients and reducing account receivable days. Moreover, we hope to reduce inventories in our customers' distribution centers, maintaining availability of products in points of sale without compromising sell-out growth.

I'd also like to underscore that thus far, we have not had any supply problems in points of sale due to this strategy. We have reduced inventories with our clients significantly this quarter. And we advanced in the working capital optimization strategy with a significant reduction in receivable term. This has already impacted our operational cash growth, which has already grown to BRL 560 million, a record level for a first quarter in the company.

Besides these significant advances in the working capital optimization strategy, this quarter, we also posted interest on capital of BRL 185 million. And we reinforced our portfolio with important launches such as line extensions for significant brands. In sunscreening, we launched Sun Aqua. And in pain killers, we launched muscular Neosaldina, which is playing in a new market. Ramon will give us more details about this quarter's results on the next slide.

Thank you, Breno. Good morning, everyone. For the first quarter, our net revenue reached BRL 1.08 billion, a reduction of around 41% versus the same quarter last year. This lower sales level is due to working capital optimization as we have mentioned before and is in line with our plans for the year. Gross margins -- excuse me, gross income was BRL 580 million, which led to a gross margin of about 47%. This reduction in gross margins is due to the lower revenue level, which reduces our operational leverage by diluting fixed costs. The company's gross margins should go back to historical levels after concluding the working capital optimization process.

Marketing expenses came to a total of BRL 367 million, 40% higher than the same period last year. Selling expenses grew at a higher level than sell-out due especially to the lower level of expenses as we saw in the first quarter of last year and also investments in point-of-sale marketing to boost sell-out growth for our brand portfolio. Selling expenses had a growth of 42%, especially due to increase in commercial expenses, which is closer to what we saw in the last 12 months. General and administrative expenses reached BRL 86 million this quarter, which is also similar to what we saw in the last quarters.

With that, continuing operation EBITDA was negative by about BRL 149 million, and net earnings from continuing operations was negative BRL 139 million as expected given this optimization in the working capital process. Continuing with cash flow, we had a higher -- the highest level of operating cash flow in our history even with the reduction in EBITDA. This cash flow was 19% higher than the first quarter of 2024, especially due to advances in the working capital optimization process. Our growth in operational cash flow has allowed us to continue to invest significantly into innovation and expanding production capacity. And we reached a free cash generation 9% higher than the first quarter of 2024.

With this free cash flow and interest on our indebtedness, our net debt at the end of the first quarter was at BRL 7.5 billion, in line with what we saw in the first quarter of 2024. This is the level expected for the quarter. And we do not believe that we will not comply with our covenants. As a reminder, our covenants are reviewed on the first and fourth quarter of every year, considering the highest value in the EBITDA in the last 12 months and the normalized quarter's EBITDA. Covenants are only not met if we are above 3.75x net debt to EBITDA in 2 measurements in a row.

Now I'll give the floor to Breno for his closing remarks.

Thank you, Ramon. As I mentioned in the last call, we're very happy with the working capital optimization process thus far. This has had a significant impact in our short-term results, but it will create huge benefits for the company in the next months. We are concluding this quarter with 70-day terms in March. And in April, we made a final adjustment, reducing the average term to 70 days. And as of May, we will be normalized in our operations, selling in as much as sellout.

This was a significant moment for Hypera. And with the conclusion of this process, we're going to combine sustainable growth and better returns on invested capital with a significant reduction in working capital. And this will give great opportunities in value generation for our long-term shareholders.

Thank you, and we will now continue with the questions-and-answer session.

[Operator Instructions] The first question comes from Leandro Bastos, Citibank.

We will now continue with Mr. Bob Ford from Bank of America.

Now that you have reached your goals and accounts receivable, how should we consider gross sales and EBITDA evolving in the second quarter? And my next question is, what is behind the increases in marketing sale expenses and G&A in this first quarter? And what should we expect for the rest of the year?

Bob, I'll take the first question, and Ramon will answer the second one. So by concluding the process now, we still have impact in the second quarter, but I think the second quarter will already be much more normalized in comparison to what we saw in the past. And that goes for gross margins. We expect it to be above 60%, give or take. And also EBITDA margin is expected to go back to the same levels that we had before, 35%. So we are starting to see these results in the second quarter. And the company's results will be cleaned from these adjustments.

Bob, thank you for your question. Considering the second question, this increase in expenses that we saw in the first quarter, this is due to phasing in the first quarter of 2024. If we look at the first quarter of 2024, the first quarter of 2025 has expenses in line with what we observed in the previous periods. So we should see much more level expenses throughout the quarters versus what we saw before. In the next quarters, we will probably be closer to 1/4 of what we expected for the quarter.

Just adding to that, Bob, in marketing, we changed our strategy, and we're trying to do always on marketing. There are some peaks, of course, especially in the second quarter because of our seasonal portfolio with flu medication, but from now on, we expect to see a distribution of these marketing expenses. And this should be much more balanced throughout the quarters because of this dimensioned distribution throughout the year.

Great. And how important was this launch of muscular Neosaldina, and how does it compare to the launches you had last year?

Bob, this is a very important launch for the company. It's still early to say, but this is going according to plan. This market represents about BRL 1 billion for this molecule alone. There are some strong competitive brands in this market. And we intend to play with the muscular Neosaldina. We have our ambassador, which is [indiscernible]. And we're going to use him a lot, and we're also investing in marketing this product. We're very excited about the potential results of this launch.

The next question will be asked by Leandro Bastos from Citibank.

I apologize. I have 2 questions on my side. I'd like to go back to expenses, especially considering these expenses in marketing. I think you explained this a bit, but do you -- what are the other levers for margins to go back to the historical levels once the sell-in effect is normalized? So this is my first question.

Secondly, you mentioned that in April, you have been running with sell-in above sell-out for 60 days. So a couple of questions. Is your sell-in for the second quarter posting growth already? And after April has sell-out accelerated? So these are my questions.

Leandro, I'll take your first question. Considering expenses for the year, Leandro, we're seeing this trend. In brands, as we've mentioned in the last call, we're seeing some migration from commercial discounts into investments into media and point-of-sale marketing. And this, along with our recent launches, have boosted our growth. This level of marketing expenses for the first quarter will probably be sustained for the next quarters as well. And counter to that, as we mentioned before, the generics market has grown with more commercial discounts. So with working capital, we've been able to free up some capacity on the short term. And so we produced more generic drugs so that we could gain some space in this market as well, looking at growth in generics specifically.

On the other hand, we're trying to pursue efficiency in other lines with other fixed costs that are less correlated to sellout so that we can counterbalance this increase in expenses and sellout. So this is what is sustaining us in the next quarter. And this is what is keeping us at a very good level with our adjustments in working capital.

To answer your second question, Leandro, the month of April has not had any significant data points, but our first review is still showing low growth in April for the market. About 2% for the entire market. But this has been impacted, I believe, by the number of working days. April has a few holidays but in May and June, this will change and we will probably see a much higher growth level for us and for the market. That's it.

The next question will be asked by Vinicius Figueiredo from Itau BBA.

I'd like to ask about your competition. So due to this current adjustment where you are communicating to your clients that they will now have faster payment terms.

I imagine that some competitors might eventually try to make use of this opportunity understanding that they might have some sort of leverage, negotiations.

So I'd just like to ask if you believe that any other competitors are extending their terms, are they trying to provide better conditions for different distributors to try to be more competitive against you? Have you seen anything of this sort?

Yes, it's difficult to know if there are any trends in specific competitors using this strategy. Conditions change, and we have been unable to see if this -- if anyone is doing this consistently and concurrently. But if they are, we don't believe that this impacts -- well, it might have a very short-term impact, but we know our strategy here and how important -- the success of the implementation of our strategy shows that we had a lot of investments in inventory, and that does not necessarily impact our sell-out. It may impact our sell-in, but high inventory levels with our clients are not necessarily translated into sell-out increases.

And over the last few months, we have seen that. We've been able to reduce our inventory significantly without impacting our sell-out results.

The next question will be asked by Mr. Raphael Elage from XP.

We also have a couple of questions. First, I'd like to understand if you can give us some more color about the increase in inventory for the quarter. We'd like to understand if this is a direct effect due to the reduction of sell-in for this quarter and how we should see this line behaving in the next quarters? That's my first question. Also, I'd like to ask about CapEx. Considering cash flow, if you can give us some more details on that, that would be great?

Raphael, this is Ramon. So I'll answer your questions. First, considering inventory growth, yes, with the reduction of sales in the first quarter and with the adjustments in working capital, we had an increase in our inventory of finished goods. The plant is not reducing its speed. In order to be efficient, it needs to be constant in its speed. So we are maintaining a higher inventory level, but in the second and third quarters, we'll be closer to levels we saw in Q2 and Q3 2024 and possibly below that at the end of the year.

Considering CapEx, the main investments we made in this quarter were related to our Jundiaí site. We're building a pilot plant for products in the institutional market. We have an R&D lab focused in this lab, and we also have the oncology factory, which will support our launches for the non-retail market. Besides that, we also have an expansion that we are concluding this year in our Itapecerica plant to internalize Takeda's production. We still see some of these products being produced in a supply product, which will be concluded this year. And some of the investments this quarter were concentrated with these 2 projects. Any questions?

No, that was very clear.

The next question will be asked by Gustavo Miele from Goldman Sachs.

I also have 2 questions. First, I'd like to hear a bit more from you about this category of products that use semaglutide, such as Ozempic. I think that's the most well-known example due to the size of its sell-out. I'd like to understand what you are foreseeing for the size of the market in this category next year when the patent is dropped? We understand that there will be a higher volume, but prices will probably go down. So what do you believe will be the size of the market? And how will this category impact your sell-out growth? If you can give us some color on that, that would be great. That's my first question.

My second question is, throughout the first quarter, we have been seeing a significant growth in dengue diagnosis. Does this change the company's sellout levels? Does that impact any specific categories? If you can tell us that would be great.

Thank you, Miele. To answer your first question on semaglutide, basically, when we talk -- when we say that the patent market grew 28% this quarter, this molecule is definitely what is leading this growth. It represents about 80% of patented medications. And it continues to grow strong. According to recent news, in June, we will see new molecules from Lilly. So that may accelerate the growth of this market even further. This market represents about BRL 4 billion or more. And there was a lot of concern from analysts about our growth if it is below the market level, but considering that this is being pulled up by the patent market, we see it as an opportunity because our plan is to launch this medication once the patent has dropped.

And the bigger the market, the bigger the opportunity for us. We mentioned this in the last call, there are other companies that have filed for it in ANVISA. But again, due to the difficulty, the low availability, and this is a product that has a lot of demand around the world, we believe that we will not see a reduction in prices once the patent has dropped. So this is a category that we can keep an eye on because it will have a significant impact for the company between 2026 and 2027.

To answer your second question on dengue cases, there's a significant drop with regard -- with comparison to last year. The number of cases is still higher than in 2023. We had an impact, especially with ibuprofen. Its brand name is Alivium, and it's often used with kids. So last year, this molecule was not prescribed as much and the same goes for this year. Despite this reduction in the number of cases, we're not seeing a reduction in the product. It's breaking even, but we still haven't seen an increase in demand. It's at lower levels than 2023.

So we believe that over time and with this concern about dengue fever going -- decreasing, the demand for Alivium and ibuprofen as a whole will grow.

The next question will be asked by Yan Cesquim from BTG Pactual.

I have a couple of questions on my side. First, about promotional discount levels. There was an increase in discounts to boost your sellout this quarter. So I'd like to understand if you expect this strategy to continue on the short and medium term? That's my first question. The second question is about CapEx. Can you share with us your expected CapEx for the year?

Yan, this is Ramon. So let me answer your questions. First, on commercial discounts. We explained this from the second and third quarter, we have been accelerating our participation in the generics market, and that means that we had to increase the discount level. Our discount level is below what we saw in the third quarter of 2024. So this is probably what we will continue using. A slight reduction after the second quarter, but this is not too different from what we have been seeing in our numbers here.

Considering our CapEx, we cannot give a guidance, but it should be below what we saw last year on CapEx and in intangibles.

The next question will be asked by Mr. Artur Alves from Morgan Stanley.

So I'll talk about something we didn't mention before. In the non-retail market that you have invested a lot, what are the current trends in margins? And what do you expect for the long term? How do you believe it will affect the company's margins, especially this year and next year?

My second question, and this continues one of the previous questions. From the moment you start with semaglutide, how much do you expect it will reduce your spread from growth in the retail market? Do you have any expectations?

Artur, to answer your first question, institutional margins, this is usually accretive both in gross margins and EBITDA margins. Because the portfolio that we should expand, we started playing in this market with the pre-existing molecules in our portfolio, especially generics, which have a lower gross margin, but also Dramamine, injectable Dramamine was an acquisition by Takeda -- excuse me, from Takeda, and we've been growing with this molecule. And this has been helpful with the margins and the launches that we will have starting next year.

Our products dedicated to the institutional market, especially oncological products, which is a category that we're starting to go into that have much better margins than our current institutional portfolio. So it will contribute with revenue growth and marginally maintaining our margins or maybe at least growing it a bit with the institutional market.

Considering your second question about semaglutide, it's hard to estimate what the impact will be, but it will definitely be very positive. First, because it will create -- I mean, we will have growth in this molecule. This will contribute to our growth, and it will reduce the market overall growth because only few players have been benefiting from this. And this will start to be divided with other -- shared with other companies in the market. So the spread will reduce. It's hard to know how much -- so it's hard to see how much this will affect prices. We don't believe it will affect it significantly, but it's hard to say right now.

The next question will be asked by Vinicius Strano from UBS.

I'd like to ask about sellout. If you can tell us a little bit more about its performance with generics, OTC and prescription medication, and what do you believe can be a driver to increase sellout in 2025 to this expected 8% level? My next question is about net debt. How do you believe this will advance throughout the year?

I'll answer your first question. It was very balanced between the different business units. Maybe there was a little bit more of weight in generics and similars, but it was not a very big difference. Consumer health and prescription is in line with our medium or average growth, generics are a bit higher and skin care is a little bit below the average, but without any major variations in the company's 6% average. And Ramon will answer your second question.

Vinicius, this is Ramon. Considering net debt, we imagine that at the end of the year, it will be very close to what we saw late last year. Our cash generation is higher as we mentioned before. At the end of the year, we also saw an increase in cash flow. So this is a part of our expectation. But on the other hand, we still have significant investments this year. So the CapEx level is still a bit higher and interest rates this year are still growing. So these 2 factors will probably sustain our net debt closer to the level we are seeing right now, at least for this year. I don't know if that answers your question, but this is what we are foreseeing.

And a follow-up question. Do you expect sellout will accelerate in 2025?

Well, I think I mentioned this in my presentation. This -- there will be launches. And our market was affected in the first quarter, especially pain killers, and we don't believe there will -- that this will be sustained from now on. So our market -- this market should improve. This market should accelerate and there's also muscular Neosaldina, which I mentioned. We're going to compete with [indiscernible] and some of our own medications and similars and prescription -- excuse me, consumer health. There will be new launches in Neosaldina, Epocler, which are known brands, and we will see some significant launches for the year.

The next question will be asked by Caio Moscardini from Santander.

So continuing on sellout. Have you been seeing any changes in how people consume medication? Are people buying a molecule less? Are they buying fewer products than before? I'd just like to understand if the industry is growing differently due to these numbers for the overall industry that you mentioned? I'd also like to ask about the generics market. We've seen that tariffs have been imposed by the U.S. Are you going to -- are you under risk? Do you believe that, that can create a risk for some of the companies that might seek new markets for their own production? Or do you believe that the Brazilian market does not attract global competitors?

So we're not -- to answer your first question, we're not seeing many relevant factors here. There was a small deceleration in the pain killers market in general, in the first quarter. And this had happened in the fourth quarter, but we don't believe that this is a trend for the future, and there is a migration of a few molecules. So we mentioned a reduction in demand for ibuprofen, especially due to dengue fever, and that goes for last year and this year. And we saw an increase in demand for other molecules, especially dipyrone.

For us who play in all markets, I mean we have all of these pain killers. Of course, we're stronger in a couple of brands, but we're playing across the field in brands and generics. So this is mitigated -- the impact is mitigated due to our diversification. So I don't believe there's a big trend that we can highlight for you.

So to answer your question about generics, it's still early to tell what's going to happen with these tariffs, but the suppliers of raw materials and finished goods for all of the world are India and China. And the U.S. is one of the biggest consumer or is the biggest consumer market. So we're looking at this up close. We are talking to our partners and suppliers, but if there is a significant tariff increase, this might be an opportunity for us because they will have more products for other parts of the world. So we're looking at this, maybe the supply will be higher and prices will go down for active ingredients and also finished goods with our partners.

We see this as an opportunity of cutting costs and having more availability in Brazil. But we still have to monitor and see. These impacts are usually long term. We're in a regulated market. So any changes will depend on authorization from the health authorities in each country. So any changes here will be slow and will require approvals with suppliers, raw materials and finished goods.

Thank you. This concludes the question-and-answer session for Hypera Pharma's conference call. Thank you for listening, and have a good day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]