Fagron BV: Full Year Results 2015 Company: Fagron BV Conference Title: Full Year Results 2015 Hans Stols (CEO) and Jan Peeters (CFO) Presenters: Friday 5 th February 2016 Date: Operator: Good day and welcome to the Fagron Full Year Results 2015 Conference Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Hans Stols, CEO; and Jan Peeters, CFO. Please go ahead. Hans Stols: Good morning and welcome to Fagron’s Conference Call regarding the Annual Results 2015. I am Hans Stols, as you know I am the CEO of Fagron since December 2015. With me here today are Jan Peeters, CFO of Fagron; and Constantijn van Rietschoten, responsible for Investor Relations. I would like to share with you the highlights of the year under review and give you an update on our financing, probably the main topic of your interest today. We have prepared a presentation that is available on our website, investors.fagron.com and after taking you through the presentation we will take your questions. Let’s go to slide 1. Looking at 2015 we had a challenging and difficult year. Turnover increased by 5.8% to €473 million and REBITDA decreased by 10% to €106.5 million, both within the revised guidance announced in October. Although our annual results are in line with this revised outlook, the majority of our operations performed well. We experienced several negatives during the year. The main issue impacting on our results is the change in the reimbursement system for non-sterile preparations in the US which became apparent in May 2015. This was also the cause for the impairment we had to take, €225.6 million on the US operations Bellevue and Freedom. This impairment causes the net result to turn negative over the year. The issue we encountered in the US also caused problems for our covenants and we had to give priority to our refinancing and I’m glad to announce that we are close to a sustainable solution going forward. I will come to that shortly. In light of our financial situation we propose not to pay out any dividends over that year. Ref 5119479 Page | 1 05.02.16
Fagron BV: Full Year Results 2015 Let’s turn over to slide 2, our financial situation. As announced in October, when we revised our forecast we have also addressed our financial situation. We had engaged in discussions with parties that indicated their interest in a potential acquisition of Fagron which continued for quite a period. In December 2015 we announced to give full priority to discussions with our banks and to concentrate on a potential public or private capital raising. By the end of the year we were able to announce that a waiver for covenants on the revolving credit facility and the US private placement developed until the end of March gave us time to work on a sustainable solution. It is calculated that we need approximately €220 million to be able to operate well within our covenants going forward and to execute our strategy. We are currently in exclusive negotiations with a cornerstone investor for part of this amount and in an advanced stage of preparations for an equity raise. At this point we will not be able to give the split in more detail and timelines but we will communicate that in due course. Turning to slide 3, recapping the important events of the year, many of the operations performed well. We were hit by the worsening of the Brazilian real and the change in reimbursement system in the US. We will go into some more detail later on. We continue to invest and to expand our business. We invested in new facilities in the US and in the Netherlands and we have done acquisitions: AnazaoHealth and ABC Chemicals during the year under review. I mentioned already that the decision of the board in December 2015 to no longer give priority to discussions with private equity parties for an offer of the company, after which decision Ger van Jeveren stepped down as CEO and I succeeded him in that position. As said we then negotiated for a waiver on our revolving credit facility and on the US private placement and are very close to a sustainable solution to our financing going forward. Going to slide 5: now to our operational view. We show turnover growth of 5.8% at constant exchange rates or an organic decline of 1% mainly as an effect of the change in reimbursement system for non-sterile compounding in the US and a further weakening of the Brazilian real. The negative effects on turnover of the change in reimbursement systems in the US were approximately €49 million over 2015. To counter the negative developments in the US several initiatives were taken: new concepts and trademarks were launched mainly focused on the cash market in the non-sterile segment. In the sterile segment we are investing in an integrated national sales team to fully use the capacity of the new sterile GMP compounding facility in Ref 5119479 Page | 2 05.02.16
Fagron BV: Full Year Results 2015 Wichita that will open shortly probably in the month of March. We also initiated a company- wide cost saving programme with the aim to structurally lower our cost level with approximately €10 million on an annual basis. Going to slide 6, here we present the bridge that explains the development of the turnover in 2015. We wanted to show you how the change in the reimbursement system affected the business in the US. You can also see that in Europe and Brazil against constant exchange rates our turnover showed healthy growth. The next slide, turning to Fagron’s speciality pharma services, we saw a strong turnover growth of 27.1% at constant exchange rates with an organic increase of 7%. We also saw strong growth in Europe, Colombia, South Africa and the sterile activities in the US. The increase was driven by an increasing demand for sterile compounding. The non-sterile activities in the US declined due to the negative effects of a change in the reimbursement system for non-sterile compounding in the US. Our REBITDA margin decreased to 21.9%. As mentioned before we have invested in two new facilities, our new antibiotic facility in the Netherlands opens in June of this year while the new sterile facility in the US will open next month. Trademarks in the year, we saw a turnover growth of 10.3%. This increase is mainly driven by global trademarks like SyrSpend. The REBITDA margin decreases to 31.1% of turnover due to the weakening of the Brazilian real. I am particularly proud to see that there is an exceptionally high demand worldwide for SyrSpend. SyrSpend is developed in-house based on active suspension technology, results of the largest independently conducted stability study showed that SyrSpend is compatible with almost all medicines. We have a strong and extensive R&D pipeline and our global presence boosts our cross-selling and innovation capacity. Going to slide 9, Fagron Essentials. We saw a decline of turnover of 8.1% or an organic decline of 9.1%. We concluded the acquisition of the Belgian company ABC Chemicals which is consolidated from July 2015. The acquisition further strengthens our market leadership in the sale of pharmaceutical raw materials. In the US we suffered from the changes in the reimbursement system as explained; while in Brazil the weakening of the real impacted our Ref 5119479 Page | 3 05.02.16
Fagron BV: Full Year Results 2015 turnover. Our REBITDA margin decreased to 21.6% of turnover and by going to slide 11 I would like to hand over to Jan for our financial review. Jan Peeters: Hi, good morning from my part. So we are on slide 11. So notwithstanding the situation in the US, we saw a 7.4% increase in the gross margin to nearly €310 million. It’s important to mention that also in percentage of sales the gross margin developed very well and increased over the year 2015 by 90 basis points which I think is a good result, showing that all the operations we currently have generate an increased gross margin despite the situation in the US. On slide 12 we see the evolution of the REBITDA which is a decline of 10% for the full year which is mainly caused by an increase of operational costs and these increases in costs were mainly driven by acquisitions in the 2015 year. As mentioned by Hans we initiated a cost saving programme to take out about €10 million in costs on an annual basis started towards the end of the year and of which we will see the main impact in 2016. On slide 13 depreciation and amortisation. As a consequence of the change in the reimbursement system during the year 2015 we have taken an important impairment on the US operations, so the businesses Bellevue and Freedom have been impaired for €225.6 million. The other depreciations and amortisations were €23.6 million which is a 24.1% increase compared to 2014. Then on slide 14 I will probably spend a little bit more time on the net debt, given the fact that net debt came in at €523.8 million at the end of the year which is higher than most of the analysts expected, so on slide 14 you see the bridge between the end of June and the end of December, so at the end of June the net debt stood at €455 million. We see an operational cash flow of €47 million negative in the second half of 2015. Acquisitions amounted for €66.3 million which is I think higher than most of the people expected and this is due to the fact that we basically have paid nearly all our earn-outs and deferred payments over the years 2015, so you will remember that at the end of 2014 the contingent liabilities in the balance sheet stood for roughly €100 million and now we only have a little more than €3 million left for the next three years, so that’s why this amount is higher than most of you expected. The capex stood for €11 Ref 5119479 Page | 4 05.02.16
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