São Paulo, May 14, 2014. Brasil Pharma S.A. (BM&FBOVESPA: BPHA3), one of
the largest retail drug companies in Brazil, today announces its results for the
first quarter of 2014 (“1Q14”).
The Company’s consolidated financial statements were prepared in
accordance with the BRGAAP, Brazilian Corporate Law and the International
Financial Reporting Standards (IFRS).
Gross revenues of R$929.3 million, an increase of 15.7% over 1Q13;
Gross margin of 18.8% on gross revenues;
SSS of 15.8%, with 12.2% for mature stores;
EBITDA of R$-141.0 million, with an EBITDA margin of -15.2%;
Net loss of R$185.3 million;
With the opening of 2 new owned stores and 17 franchises, we ended 1Q14
with a total of 1,223 stores, 723 of which are owned stores and 500
Gross Revenues 803.467 929.299
Gross Profit 232.932 174.829
% Gross Margin 29,0% 18,8%
Ajusted EBITDA 34.763 (141.005)
% Adjusted EBITDA Margin 4,3% -15,2%
Adjusted net profit 2.585 (185.296)
% Adjusted net margin 0,3% -19,9%
Summary of Results (R$'000) 1Q13 1Q14
As discussed recently Brasil Pharma has been facing innumerous operational challenges as a result of the integration
of the acquired pharmacy chains over the last years.
Since 2009 Brasil Pharma has acquired 8 regional chains, leaders in their respective regions, expanding its store base
to 1,223 stores. With the scale obtained through acquisitions, the challenge of the Company became to integrate all of
them into one single platform, in order to obtain the gains from the unification of procurement, reducing back-office
costs, tax and logistics optimization, among others. Although challenges were expected, the process has been slower
and more challenging than originally anticipated.
In this context, the beginning of 2014 was still marked by the effects of the operational difficulties experienced last
year, especially regarding the systems implementation and stabilization and the replacement of distribution centers.
The promotional campaigns intended to balance the inventories, held throughout the three months of this quarter, also
impacted the Company’s operating margins despite resulting in the desired reduction of inventory levels from 107
days in 4Q13 to 88 days in 1Q14 and in the adjustment of product turnover curve. The losses incurred due to product
obsolescence also put pressure on the margins in 1Q14. In addition, the Company recorded an increase in selling
expenses because of substantial adjustments to labor and rental contracts, closings of stores, replacement of
distribution centers and increase in its store employee base mainly to meet the challenges of relying a lot in
distributors during 2013.
Despite the challenging macroeconomic environment and operational issues arising from the integration process, the
Company recorded gross revenues of R$929.3 million in 1Q14, which represented an increase of 15.7% compared to
the same quarter of 2013, with total same-store sales (SSS) of 15.8% and 12.2% in mature stores, one of the highest
growth in same store sales for listed companies in the Brazilian retail sector. The Company believes that strong
growth in a period marked by operational challenges reinforces the thesis of investing in regional platforms with
leading brands and demonstrates the persistence of the attractive fundamentals of the retail pharmaceutical industry
In 1Q14 2 new stores were opened and 12 stores were closed, in line with the commitment to increase profitability of
the store portfolio and reversal of the cash consumption trend. As of March 31, we had 1,223 stores, 723 of which
were owned stores and 500 franchises. As anticipated, this year we plan to slow down organic expansion rate until the
operational and capital structure improvements enable growth resumption. The Farmais franchise chain remained on
a strong expansion path, with the opening of 17 franchises in the quarter, consolidating its presence in the Southeast
The Company’s management is working hard with the goal of improving the Company's profitability. Major initiatives
such as the nomination of José Ricardo Mendes da Silva as CEO of Brazil Pharma, installation of WMS in the
Company's distribution centers, increasing the efficiency level and reduction of inventory levels in the DCs and
organizational restructuring of the Company, with a focus on cutting costs, particularly in the reduction of the corporate
and regional structures seeking increase in profitability, were already completed in 1Q14. In addition, the process of
spreading the culture of "accountability" of the regional operations was initiated. Each one shall be individually
responsible for their own P&L.
The focus for the new administration for 2014 is to recompose the margins and increase profitability. The Company
believes the future benefits of a work focused on increasing business intelligence after unification and stabilization of
the systems and is confident that, once it overcomes the above mentioned specific effects, it will be possible to
reestablish profitability levels recorded in the past, while simplifying business processes to achieve greater efficiency
in the management of working capital.
The compression in operating margins led once more the Company to breach the restrictive clauses (covenants) on
the two debentures. In order to offer to Brazil Pharma the opportunity to reach their full growth potential a private
capital increase was approved in May 6, 2014 in the amount of R$400 million, with additional warrants in the amount
of R$200 million as an advantage for the subscribers. The funds raised under the transaction will be used to
strengthen the capital structure of the Company and enable access to important growth opportunities in the coming
years. BTG Pactual, demonstrating its long-term support to the Company and its belief in the investment thesis,
undertook to subscribe for all the remaining shares not subscribed by shareholders of Brazil Pharma in the capital
increase. In recent weeks the Company met with the bondholders to negotiate the conditions not to be led to an early
maturity of the debentures.
Once more the Company would like to thank its clients for the preference, its talents for the dedication and
contribution on the construction of its culture, and its suppliers and shareholders for the long partnership, trust and
support in the last years.
We operate through a chain of owned stores and franchises in the five Brazilian regions. As of March 31, 2014, we
had 1,223 points of sale, 723 of which owned stores and 500 franchises.
1)Includes 12 stores operating under the Guararapes brand.
The operation of owned stores is made under the Big Ben/Guararapes, Rosário, Sant'Ana and Mais Econômica
chains. The chains preserve their local characteristics in accordance with the consumer profile in each region, and
hold positions of leadership in the regions where they operate, except for the South. At the end of 1Q14, they totaled
251 stores operated under Big Ben brand, 128 under Sant'Ana brand, 154 under the Rosario brand, and 190 under
Mais Econômica brand.
As anticipated, it was planned for 2014 a slowdown in the expansion rhythm compared with the past five years,
underpinning our commitment to operation profitability and cash flow. We believe that financial discipline in a
challenging scenario is the proper attitude to ensure a high level of return on the investments made to date. As the
Company's operating and financial position improve over the next few quarters, organic growth can be reaccelerated,
seizing opportunities in the regions where we are present.
In 1Q14, 2 new owned stores were opened and 12 were closed, of which 4 of the Mais Econômica and 8 of the Big
Ben chain. The closings in the last two quarters in the Southern region were part of the plan of boosting profitability,
resulting in 32 stores closures.
As a result of the growth presented in 2013, in late
1Q14, of the total of 723 owned stores, 254 (or
35.1%) were not yet mature, i.e. had been operating
for less than three years.
Until they reach maturity, stores do not achieve their
full potential for sales and profitability, which is
expected to occur by the 36
month after opening.
In the subsequent quarters, we expect to see faster
store portfolio maturation due to openings slowdown.
The franchises work under the Farmais brand, with presence in the Southern, Southeastern, and Midwestern regions.
Farmais franchises added up to 500 stores at the end of 1Q14, and concentrated mostly in the Southeastern region,
where the state of São Paulo accounts for the largest number of stores, 299 (59.8% of the store base).
In 1Q14, 17 new stores were opened and Farmais continued experiencing a strong growth rate. From a strategic
standpoint, franchises strengthen our national presence without requiring the use of equity capital and ensure our
geographic presence in the largest drug market in Brazil. In turn, from an economic point of view, franchises are
important tools to provide us and our franchisee partners with better purchasing conditions from both industry and
distributors on account of the volume of traded goods.
The gross revenues from sales and services come from the operations of owned stores and franchises.
Revenues from owned stores come mostly from the sale of brand-name drugs, generic drugs, and non-drug items,
which include, among others, perfumes, personal care and beauty items, cosmetics and skin treatments (these items
are also referred to generically as “hygiene and personal care” or HPC). Revenues from the franchising business
come primarily from royalties.
Gross revenues reached R$929.3 million in 1Q14, an increase of 15.7% over R$803.5 million for 1Q13.
The quarter's sales performance was due to our employees' efforts, as from November 2013, to improve store service
levels and to the year-end promotions we held at all chains throughout the quarter. Such actions, although impacting
the gross margin for the period, were important to help adjust our seasonal product inventory (HPC and others,
especially in the Big Ben chain) and excess products. Additionally, we are already noting the improvements afforded
by the stabilization of the distribution centers in supplying our stores, reducing the inventory shortages and lost sales
we had seen over the past year.
In addition to the factors explained above, the growth in gross revenue can also be explained by the following factors:
Organic growth: In the past twelve months, we registered 14 net openings (58 gross openings);
Growth in same-store sales - SSS: Because of the reasons detailed above, same-store sales showed improvements
in the quarter. Total SSS in 1Q14 was 15.8%, or 12.2% considering only mature stores. SSS for the quarter was
influenced positively by the actions taken to boost store portfolio profitability since, of the total 44 closings in the last
twelve months, 41 were stores that had been operating for more than a year. The high level of SSS for our mature
stores shows the strong potential for expense dilution, as they grow well above the inflation for the period.
Increase in average ticket. Our average ticket was
up by 13.8% between quarters, from R$32.4, in 1Q13,
to R$36.9, in 1Q14. Contributing to the increase in the
average ticket were, in addition to the annual price
increases, higher HPC item sales in promotional sales
we conducted during the quarter, and the increased
share of brand-name drugs.
Change in Mix. In 1Q14, non-medicine item sales increased by 22.5% over a year earlier, increasing their share in
our sales mix by 1.5 p.p.. This increase reflects, primarily, the promotional activities carried out throughout the quarter
in the sales of HPC items and other non-drug items at all chains, especially Big Ben. In drugs, the share of generics
continued to decrease, in line with the previous quarter, at a 2.7 p.p. drop in comparison to 1Q13, albeit sales volumes
remained steady in the comparison between the periods (0.4% drop). This loss of representativeness is the outcome
not only of the faster growing non-drug item categories, but also of the effect the "Ruptura Zero" (Zero Disruption)
program had on all chains, as it prioritized branded drug industries. As in the previous quarter, Mais Economica was
the most affected chain, with a 4.7 p.p. decrease in the share of generics, which dropped to 13.4%, from 20.5% in
volume. Nonetheless, over 1Q14 we were able to see the fruits of the interventions made, which pushed the share of
generics up from 19.8%, in January, to 21.4% in March. As the effects of the promotional campaigns decrease, we
should expect to see the share of generics returning to the prior levels.
Finally, brand-name drug sales were up by 21.4%, with a 1.2 p.p. increase in the total sales mix.
Our gross profit totaled R$174.8 million in 1Q14, with a gross margin (on gross sales) of 18.8%, and R$232.9 million in
1Q13, with a gross margin of 29.0%.
Among the usual factors affecting profit and gross margins, we can highlight the sales mix, which varies according to
the range of products offered at the stores; trade marketing funds that we received under contract from the industry for
merchandising actions at our points of sale, and the supply strategy, which can vary with direct purchases from the
industry or from local distributors.
In 1Q13, still seeking to reduce inventory turnover, we continued to hold promotional activities during the first quarter
of the year. These were important to adjust the inventory of products soon to expire and other specific excess
products. While they were strategically important for the moment the Company was in, they continued having a
significant effect on profitability. Still, we posted losses due to the expiration of products during the period as a result
of the procurement strategy adopted last year. Since early 2Q14, the Company has been engaged in a renegotiation
process for volumes of pre-expired products with "Ruptura Zero" (Zero Disruption) program partner industries with the
intention to reduce losses in subsequent quarters.
In 1Q14 procurement volume was reduced as the Company was controlling its inventory level. As a result the volumes
of fees received from the industry diminished as well, contributing to margin contraction.
Additionally, the same effect noted in 4Q13, of approximately 0.5% in the gross margin for the period on account of
the decreased share of generics in our sales mix remains, primarily as a result of our mistaken brand positioning at
the Mais Economica chain. With the adjustments we made to the chain over the last quarter, and with the end of the
promotional activities, the chain's sales mix and the share of generic products are expected to gradually return to
Our expenses include selling, general, and administrative expenses, those involving our employees' profit sharing
("PS") program and other operating revenues/expenses.
SG&A expenses were R$315.8 million (34% over gross revenues) in 1Q14, against R$198.1 million (24.3% over
gross revenues) in 1Q13, an increase of 9.3 p.p.
Selling expenses are mainly related to the operation of our stores and distribution centers. In 1Q14, these expenses
totaled R$225.1 million (24.2% of gross revenues), compared to R$150.0 million in 1Q13 (18.7% of gross revenues).
During last year, we opened two new distribution centers to replace the old ones; one in the State of Pernambuco (in
2Q13) and another in the State of Rio Grande do Sul (in 4Q13). The new distribution centers, in addition to being
more modern, have greater capacity to support our future growth, despite putting a greater burden on our short-term
structure with higher rental and staff expenses. However, we believe that these structures will dilute their costs in
accordance with the organic growth of our operations and the maturation of our distribution centers.
The Company’s reliance on the wholesale segment in 2013, along with other known factors , such as the closing of
stores, replacement of distribution centers and substantial adjustment of labor and rental costs, lead the Company to
increase its selling expenses structure mainly adding more employees at the store level.
In addition the Company increased the commission of its store employee during the period in which the promotional
campaigns were ran to help further decrease in inventory level. This fact also contributed to the observed increase in
General and administrative expenses (“G&A”) are related to supporting our operational and administrative activities,
the purchasing department, the Corporate division and the Shared Services Center (SSC).
In 1Q14, our general and administrative expenses totaled R$66.7 million (7.2% of gross revenues), representing an
increase over R$48.1 million (6.0% of gross revenues) recorded in 1Q13.
The Big Ben operation accounts for a significant portion of our general and administrative expenses due to the fact
that it has an independent administrative structure as it has not yet been integrated with the rest of the company’s
operations. Integration of this back-office operation with our Shared Services Center is not expected to take place
before the rest of the platforms are operationally stable.
In 1Q14 the Company stopped adjusting SOP expenses as non-recurring expenses in G&A. These expenses, which
have no cash effect, totaled R$1.2 million in 1Q14 and are reflected in the number showed above. In 1Q13 SOP
expenses amounted R$2.8 million in the 1Q13.
The expenses with employee and management profit sharing (“PLR”) exceeded the amount accrued in the previous
year and, therefore, R$0.8 million were recorded in 1Q14, whereas in 1Q13 no such provision or payment was made.
In 1Q14 R$23.2 million were recorded in other operating expenses primarily related to (i) write-off of commercial
agreements receivables and (ii) write-off of fixed assets due to store closings. In 1Q13 no amounts were recorded.
We did not record any non-recurring expenses in 1Q14. For 1Q13, we maintained the adjustments disclosed on that
date. These adjustments equal R$2.6 million relate to non-recurring expenses with the integration of the platforms.
The table below shows the reconciliation of our adjusted EBITDA, excluding the effects of equity income of our
subsidiary Beauty’in. In 1Q13 the expenses/revenues that we considered to be non-recurring and SOP expenses
were also adjusted.
Note: Margins are calculated in relation to the gross revenues.
Net income (loss) (6,985) (185,296)
(-) Income tax and social contribution 566 11,152
(-) Financial result (18,920) (24,996)
(-) Depreciation and amortization (16,462) (28,591)
EBITDA 27,830 (142,861)
(-) Results from equity accounting (1,523) (1,856)
(-) SOP expenses (2,816) -
(-) Non recurring income/expenses (2,594) -
Adjusted EBITDA 34,763 (141,005)
% Adjusted EBITDA margin 4.3% -15.2%
EBITDAreconciliation (R$'000) 1Q13 1Q14
Mainly as a result of the lower gross margin registered in the quarter due to the promotional campaigns and the fact
that losses remain at high levels, our adjusted EBITDA totaled R$141.0 million in 1Q14 (EBITDA margin of -15.2%),
compared to R$34.8 million in 1Q13, (EBITDA margin of 4.3%).
Our depreciation and amortization expenses totaled R$28.6 million in 1Q14. This amount represented a 73,3%
increase when compared to R$16.5 million recorded in 1Q13. No adjustments were made in regard to points of sales
The equity income expenses totaled R$1.9 million in 1Q14 against R$1.5 million in 1Q13. These expenses relate to
Beauty’in, an incubator of new brands, still in development phase, and therefore does not generate positive results
In 1Q14 R$25.0 million negative financial result were recorded, in comparison R$18.9 million in 1Q13. During the
quarter, despite the R$1.7 million increase registered in financial revenues linked to the cash raised by our second
issue of debentures in October 2013, we recorded an increase in financial expenses, as a result, among other things,
of the discounting of receivables and the extra balance of the second debenture.
In the first quarter of 2014, we did not make any adjustment to the Company’s result. In 1Q13, we recorded the
adjustments presented on that date in accordance with the results disclosed at that time. Therefore, in 2013 we
adjusted net income to exclude the effect of non-recurring expenses/revenues, SOP expenses and the effect of
amortization of the intangibles (commercial establishments).
1 – Portion related to commercial establishments amortization and brand amortization (1Q12).
Due to the above mentioned, we recorded net losses of R$185.3 million in 1Q14, compared to net income of R$2.6
million in 1Q13.
Net income (loss) (6,985) (185,296)
% Net margin -0.9% -19.9%
(-) Non recurring expenses 2,594 -
(-) SOP expenses 2,816 -
(-) D&A Commercial establishments¹ 4,160 -
Adjusted Net Income (loss) 2,585 (185,296)
% Adjusted net margin 0.3% -19.9%
Net Income reconciliation (R$'000) 1Q13 1Q14
The table below summarizes our cash flow for the periods under comparison.
1- Working capital variation includes variations in accounts receivable, suppliers and inventories.
In 1Q14, the Company recorded R$270.7 million consumption from operating activities, which was largely due to the
already mentioned effects that compressed the operating margins together with the normalization of the working
capital structure. Investments in fixed and intangible assets related to our operations totaled R$33.9 million, most of
which linked to the refurbishing stores and investments made in IT/SAP system.
During the quarter, the cash flow from financing activities was negative by R$6.9 million. As a result, our cash
variation in the period was positive by R$307.8 million.
Cash flow Statement (R$'000) 1Q13 1Q14
EBT (7,553) (196,448)
(+) Depreciation and amortization 16,462 28,591
(+/-) Others 24,389 19,572
Operating cash generation 33,298 (148,285)
(+/-) Change in working capital¹ (83,142) (110,467)
(+/-) Change in other assets and liabilities (13,181) (10,682)
Cash consumption (96,322) (121,149)
Income Tax & Social Contribution payed (600) (1,235)
Net cash generated by operating activities (63,625) (270,669)
(-) Capex from operations (24,922) (33,934)
(-) Acquisitions (80,903) 3,688
Net Cash from investing activities (105,825) (30,246)
(+/-) Loans and financing (15,431) (7,167)
(+/-) Equity funding / Dividends - 299
Net Cash from financing activities (15,431) (6,868)
Change in cash and cash equivalents (184,881) (307,783)
Cash and cash equivalents - opening balance 368,751 405,914
Cash and cash equivalents - closing balance 183,870 98,131
Working capital 1Q13 4Q13 1Q14
Accounts receivable 24 6 15
Inventories 108 107 88
Suppliers 56 77 57
Working capital in days 76 36 46
Our working capital was 46 days in 1Q14, denoting a 30 day drop in relation to 1Q13, mainly as a result of the efforts
we made to bring the Company’s inventories down over the course of the last two quarters and the partial
normalization in the number of accounts receivable days, an effect that was mainly seen in the last two quarters
before 1Q14 due to the actions we carried out in order to minimize the working capital structure and maximize short-
Our inventory cycle was 88 days, 20 days less than at the end of 1Q13 and 19 days below the level registered in
4Q13. With the aim of reducing our inventory volume in order to reduce pressure on working capital and not
compromise sales, we have focused on a number of actions, such as promotional sales campaigns to reduce stocks
of seasonal products and one-off excesses, as well as investments in logistic systems and in the modernization of our
existing distribution centers. The Company still has excess inventories, mainly in our stores, and as we increase
efficiency in product distribution and improve the product mix that can be found at the stores, we will be able to
significantly reduce current levels.
The supplier payment terms remained stable in relation to the same quarter of the previous year, showing an increase
of just 1 day. One can observe a 20-day decrease against 4Q13, mainly due to the elimination of the one-off effects
seen in the last quarter of 2013. As we channel purchases of products in the industry, the trend is for our payment
period to be reduced over the course of the quarters. Tenors on receivables increased from 6 to 15 days from 4Q13 to
1Q14, gradually normalizing the working capital of the Company as a result of the decrease in the volume of
advancements on credit card receivables, which we had been carrying out in order to cope with the need for cash for
the purpose of meeting the our short-term obligations.
At the end of 1Q14, our total debt was R$916.8 million, comprising R$204.9 million of loans and financing, R$555.3
million of debentures and R$156.6 million of accounts payable for investment acquisition (future installments of
Our cash position closed the quarter at R$98.1 million, which was lower than in the previous quarter partially due to
the reduction in the volume of advancements of credit card receivables. As a result, our net debt position totaled
R$818.6 million at the end of the year. It is important to mention that there was no significant increase in gross debt
over the previous quarter, only the above mentioned effect on credit card receivables.
The debentures issued by the Company contain covenants establishing maximum levels of debt and leverage, as well
as minimum coverage levels of our net financial result, as follows: i) net debt/adjusted EBITDA ratio equal to or less
than 3.0 times; and ii) adjusted EBITDA/ net financial expenses equal to or greater than 2.0 times. As a result of the
effects on gross margin together with the huge increase in expenses, the Company once again failed to comply with
the restrictive clauses agreed for the debenture issues.
Due to the non-compliance with the covenants the Company recorded the total balance of the debentures in the short
term. In 1Q14 86,1% of the Company’s debt was recorded as short term debts. However, the Company had already
been negotiating with our bondholders and fiduciary agents so that this non-compliance did not constitute accelerated
maturity of our two debentures issues.
Considering the capital increase approved at the Meeting held on May 6, the Company does not have a solvency
problem. The very negative results in the last two quarters will prevent the company from complying with the
covenants in the next few quarters, as it is calculated on the basis of a period of 12 months in the past.
During the first quarter of 2014, the performance of BPHA3 suffered as the result of the combination of a downturn in
the market coupled with the major challenges from the process of integration, unification of systems, replacement of
our distribution centers and their impact on the earnings presented. During the year, there was a shift toward a
revision in expectations for the stock short-term appreciation and the change in the profile of our investors with the exit
of foreign investors. As of March 31, the market capitalization of Brasil Pharma totaled R$987.1 million, with the stock
quoted at R$3.85, a 43.0% depreciation during the year, against a 2.1% depreciation recorded for the Ibovespa.
Accordingly, the average daily trading volume of BPHA3 was R$4.4 million in 1Q14.
Source: Bloomberg, as of March 31, 2014.
The Company’s IPO on June 24, 2011.
Cash position and indebtedness (R$'000) 1Q13 2Q13 3Q13 4Q13 1Q14
(+) Loans and financing 169,079 160,228 247,170 209,490 204,884
Short term 44,864 41,694 150,963 124,507 125,800
Long term 124,215 118,534 96,207 84,983 79,084
(+) Debentures 258,937 253,964 260,704 549,809 555,276
Short term 10,427 5,348 11,982 15,249 555,276
Long term 248,510 248,616 248,722 534,560 0
(+) Accounts payable for investment acquisition 264,430 232,581 179,652 147,837 156,615
Short term 82,833 81,986 82,681 70,300 108,039
Long term 181,597 150,595 96,971 77,537 48,576
(=) Total Indebtedness 692,446 646,773 687,526 907,136 916,775
Short term (%) 19.9% 19.9% 35.7% 23.2% 86.1%
Long term (%) 80.1% 80.1% 64.3% 76.8% 13.9%
(-) Cash and cash equivalents (183,870) (162,205) (213,132) (405,914) (98,131)
(=) Net Debt 508,576 484,568 474,394 501,222 818,644
Net debt/Adjusted EBITDA (LTM) 2.7 X 2.5 X 2.5 X 3.3 X NA
BPHA3 31.03.14 Market closure
Shares outstanding 256,384,419
Price (R$/share) 3.85
Annual Performance -43.0%
Ibovespa Index -2.1
Perfomance since IPO¹ -21.6%
Ibovespa Index -17.4
Market Cap (R$ Million) 987.1
Average daily trading volume in 2014 (R$ million) 4.4
As of the beggining of 2014 the Company entered in a new phase. After the construction phase of the strategic
geographical positioning (until beginning of 2012) and after almost 2 years focused on integrating and preparing the
Company for future growth, we have entered a period where the main goal of the new management of Brazil Pharma
is to increase profitability on the investments made in the past and reversing the trend of cash consumption presented
in previous periods.
In this new phase the organizational structure of the Company was redesigned to combine strong management
experience and industry and product knowledge to an experience focused on pharmacy retail and a reinforcement of
the Finance Department structure.
Accordingly, the Company intends to strengthen the control over operations, increasing the interaction of the various
departments with the Financial department and add commercial intelligence to the business with the specific
knowledge of products sold. The Company will also focus on increasing the precision of control over the industry fees
(commercial agreements), sales to PBMs, volume and trade discounts, tax and other indirect costs optimization and
feasibility test in opening new stores.
In this new stucture the spreading of the new culture in administrating the platforms, in which the Company transfers
larger responsibility greater responsibility to each of the regional managers, in conjunction with an alignment of their
goals and compensation to the profitability of each operation has started. Accordingly, the Company will implement
the "accountability" for each platform, as they will be responsible for their own P&L.
In 1Q14, we continued with our efforts to integrate the chains. The stabilization and unification of systems continues to
be the most important issue for us to be able to develop the Company’s commercial intelligence and take advantage
of the benefits of scale from a combined business model. It is our belief that the greater part of the transformations are
already behind us and that we rapidly need to ensure profitability of the assets, which have been negatively affected,
to a very pronounced degree, by the effects described.
On the logistics front, following the opening of two new distribution centers in 2013, there are still a number of barriers
to improve the performance of the Company’s distribution centers. The stabilization of DCs operations will be very
important to provide support for the recovery of the operations’ service level and sales, which has been negatively
affected by the inadequate supply structure. Over recent years the Company has significantly expanded into regions
outside the distribution centers’ radio and the new scenario requires a more detailed study of the tax opportunities that
we have in each of the states we are present. As soon as we can stabilize the current distribution centers operations
during the first half of this year, we will be able to focus on seeking these gains.
On the Trade Marketing front, during 2013 we focused our efforts on the Southern operation, continuing with the very
successful layout and mix adjustments made in 2012 at the Guararapes (currently Big Ben) and Sant’Ana chains. As a
result, we have already registered another quarter with an increased share of non-medicines in the mix of these
chains. For 2014, our aim is to recover the profitability of the regional chains by the recovery of growth in generics
share in our sales, particularly in the South, and by minimizing working capital, focusing our attention on optimizing the
variety of products present in our stores. We believe that with the increased efficiency in the distribution of our
products through our distribution centers we will be able to optimize the number of products registered in each chain’s
stores, while always observing the regional differences existing between them. The unification of the commercial
management systems in the platforms, planned for July with the implementation in Mais Econômica will make this job
a lot easier. In addition, we will work to increase the pricing intelligence of the inner space in our stores in order to
maximize the return on the investments made in points of sales.
As for Procurement integration, after the recent changes in the Company’s management, the Company has taken the
first steps towards starting the negotiation of specific categories in conjunction with the N/NE platform. This platform
accounts for roughly 45% of the Company’s total volume and since our purchasing volume is still totally divided we
currently do not benefit from our total scale potential that we have with an integrated model. Before the end of 2014,
we intend to start taking advantage of the unification and optimization of the current commercial conditions of this
current two business units.
Administrative Department: Systems: SAP – BackOffice Module
2013 was an important year for the consolidation of our Shared Services Center (“SSC”) structure in Brasília. In a
further step toward simplifying processes and capturing operating synergies, we began implementing the SAP system
in order to unify the back-office systems used at the SSC. By the end of last year the system had already been
deployed in the Midwestern and Bahia platforms. By July 2014, we will also have the system deployed in the Mais
Economica platform, completing its installation in the chains that are currently integrated in the SSC.
As was previously stated, we believe that although the implementation of the SAP system in phases takes longer and
is more expensive, it offers less risk to our operation.
The back-office activities of Big Ben operation should be incorporated into the SSC after the SAP has been stabilized.
Once all back-office activities of the Brasil Pharma chains are running on a single system, starting in 2015, important
gains are expected over the next few years, including both greater speed and quality in accounting and business
information as well as the elimination of duplicate structures and highly manual and very unproductive operating
Operations Integration – Training and Culture
The continuity of the Company’s training program for its sales force is important to standardize the consumption
experience of its different regional chains. In addition to offering employees an opportunity of professional
development and a career plan, continuous training is an efficient way to maintain and guarantee customer service
For 2014, the Company plans to reduce and, at the same time, focus its training on knowledge of the products sold in
order to work with a more profitable mix of products and, at the same time, minimize the amounts invested, prioritizing
the company’s profitability and cash generation.
On May 6, 2014 we informed the market that approval had been given for an increase in the Company’s capital, within
the authorized capital limit, by private subscription, with a subscription bonus to be granted as an additional advantage
to the subscriber of the shares underlying the capital increase.
The Company will increase its capital by R$400.0 million, by issuing 106.7 million new shares at a price of R$3.75 per
share, setting a 10.29% premium over the quoted price of the shares at the close of business on April 8, the day prior
to the Board Meeting that recommended the capital increase . In addition, there will be a 0.3409 warrants issued by
the Company, adding up to a total issue of up to 36.4 million warrants. Each bonus will give the holder the right to
subscribe for 1 common share, will be valid for 2 years counting from the issue date and will have a strike price set at
R$5.50, therefore potentially representing an additional R$200.0 million on top of the capital increase.
The Company’s shareholders of record on May 6, 2014 will have a period of 30 days to exercise their preemptive
BTG Pactual assumed a commitment to underwrite 100% of the remaining shares that have not been subscribed by
the Company’s shareholders, reinforcing its long-term commitment to and total confidence in Brasil Pharma’s
potential, in the Company’s investment case and in its operational recovery.
* Reflects the adjustment of industry trade marketing fees made in 1S13 retroactive to the
Income statement 1Q13* 1Q14
Gross revenues 803,467 929,299
Deductions (65,806) (76,190)
Net revenues 737,661 853,109
COGS (504,729) (678,280)
Gross profit 232,932 174,829
Operating (expenses) income: (220,042) (344,425)
Selling expenses (153,065) (225,119)
General and administrative expenses (51,940) (66,699)
Other operating (expenses) / income 1,425 (23,232)
Profit sharing (784)
Impairment - -
Depreciation and amortization (16,462) (28,591)
Income before financial results 12,890 (169,596)
Results from equity accounting (1,523) (1,856)
Impairment - -
Financial result (18,920) (24,996)
Financial income 5,693 7,414
Financial expenses (24,613) (32,410)
Income before income taxes (7,553) (196,448)
Income and social contribution taxes 566 11,152
Current (407) (9)
Deferred 973 11,161
Net income (6,987) (185,296)
Asset 1Q13 1Q14
Current assets 1,165,265 1,130,690
Cash and cash equivalents 183,870 98,131
Accounts receivables 214,063 152,286
Commercial agreements 91,627
Inventories 607,990 666,239
Advance to suppliers 25,112 25,613
Tax and social security credits 67,308 45,966
Other short term assets 66,922 50,828
Non current assets 1,656,152 1,677,438
Investments 31,875 7,339
Property, plant and equipment 186,013 215,455
Intangible assets 1,347,764 1,339,285
Deferred taxes 71,719 59,660
Other long term assets 18,781 55,699
Total assets 2,821,417 2,808,128
Liabilities 1Q13 1Q14
Current liabilities 681,469 1,379,675
Loans and financing 44,864 125,800
Accounts payable for investment acquisition 82,833 108,039
Accounts payable 313,797 429,412
Onlendings payable 40,972 345
Deferred income 12,419 5,082
Tax liabilities 6,223 3,850
Other taxes and contributions 45,926 40,554
Personnel liabilities and social charges 60,621 2,520
Debentures 10,427 555,276
Other short term liabilities 63,387 108,797
Non-current liabilities 600,999 204,722
Loans and financing 124,215 79,084
Accounts payable for investment acquisition 181,597 48,576
Provisions 9,918 42,769
Other long term liabilities 36,759 34,293
Debentures 248,510 -
Equity 1,538,949 1,223,731
Capital 1,382,379 1,392,657
Capital reserve 179,693 183,885
Profit reserve - 273
Accumulated results (23,123) (353,084)
Total liabilities and shareholders’ equity 2,821,417 2,808,128
Cash Flow Statement 1Q13 1Q14
Cash flows from operating activities
Income before income and social contribution taxes (7,553) (196,448)
Adjustments to reconcile to net cash generated by operating activities 40,851 48,163
Depreciation and amortization 16,462 28,591
Interests and FX variation 10,804 10,005
Others 13,585 9,567
(Increase) decrease in assets (97,799) 23,287
(Increase) decrease in Accounts receivable (2,806) (93,772)
(Increase) decrease in Inventories (59,474) 100,306
(Increase) decrease in Advance to suppliers (8,474) (11,235)
(Increase) decrease in Deferred taxes - -
(Increase) decrease in Other assets (27,046) 27,988
Increase (decrease) in liabilities 1,477 (144,436)
Increase (decrease) in Accounts payable (20,862) (117,001)
Increase (decrease) in Taxes liabilities 15,812 10,165
Increase (decrease) in Personnel expenses and social charges payable (7,277) 4,455
Increase (decrease) in Other liabilities 13,804 (42,055)
Income Tax & Social Contribution payed (600) (1,235)
Net cash generated by operating activities (63,625) (270,669)
Cash flows from investing activities
Acquisition of fixed assets (12,755) (17,493)
Permanent interest in other entities (80,903) 3,688
Acquisition of intangible assets (12,167) (16,441)
Capital increase for subsidiarie acquisition - -
Net cash used in investing activities (105,825) (30,246)
Cash flows from financing activities
Loans and financing taken out 5,627 2,452
Payment of loans and financing (21,058) (9,619)
Capital increase - 299
Dividends payables -
Net cash used in financing activities (15,431) (6,868)
Increase (decrease) in cash and cash equivalents (184,881) (307,783)
Cash and cash equivalents
Cash and cash equivalents - opening balance 368,751 405,914
Cash and cash equivalents - closing balance 183,870 98,131
This document may contain forward-looking statements in relation to the Company and its subsidiaries reflecting the
current outlook and/or expectations of the Company and its management regarding its performance, its business and
future events. These forward-looking statements are subject to risks and uncertainties in respect of factors that cannot
be controlled or precisely estimated by the Company, such as market conditions, competitive environment, currency
fluctuations and changes in the inflation rate, alterations in the regulatory and governmental bodies and other factors
affecting the Company’s operations. As a result, the Company’s future results may show material differences from
Readers are warned not to make any investment decision exclusively on the basis of these forward-looking
statements. The forward-looking statements do not represent and should not be interpreted as a guarantee of future
performance. The Company does not undertake to publish any revision of these forward-looking statements, or to
update them in the face of events or circumstances that may arise after the date of this document.
This document contains operational information and other pro forma management information that is internal to the
Company and not derived directly from the financial statements. This information has not been subject to a special
review by the Company’s independent auditors and may involve assumptions and estimates adopted by management.
This information should not be taken in isolation as the basis for any investment decision and should be read in
conjunction with the Company’s financial information that has been subject to limited review or audit, and which is filed
with the Securities Commission (CVM).
The Company and its subsidiaries, as well as their board members, officers, agents, employees, advisers or
representatives accept no liability for any loss or damage arising from the use of the information presented or
contained in this document, or for any damage resulting, corresponding or specific thereto. Data included in this
document was obtained from internal research, market surveys, information in the public domain and business
publications; the Company has not confirmed the reliability of this data with the respective sources.
José Ricardo Mendes da Silva
CEO and IR Officer
Telephone: +55 (11) 2117- 5299 / 5230
IR Website: www.brasilpharma.com.br/ri