Welcome to BioGaia Q3 report for 2023. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answer session, participants are able to ask questions by dialing star five on their telephone keypad. Now I will hand the conference over to CEO Theresa Agnew and CFO Alexander Kotsinas. Please go ahead.
This is Theresa Agnew. Welcome to our management statement for Q3 of 2023. I have to say, I'm very excited to be here. This is my first such quarterly meeting, so excited to present the results today for BioGaia. Just a little bit of an introduction on myself. I became the CEO on September 25th. My background, if you have, you know, researched a little about me, is mainly in healthcare. I've worked in healthcare my entire career, and I have a science background. I spent about 21 years at Johnson & Johnson in the consumer sector for consumer healthcare products, OTC products, as well as medical devices. My experience there spans marketing, sales, general management, strategic planning, business development as well.
I also spent a brief period at Essilor, which is the number one manufacturer of prescription eyeglass lenses, so I have experience in the vision care industry. Most recently, I was at GSK Consumer Healthcare for about eight and a half years, where I was the Chief Marketing Officer of the U.S. business, which spans many categories, including oral health, skin health, digestive health, pain relief, respiratory conditions. I was also the Area General Manager for Australia and New Zealand of that business. In my last position, I was the Global Head of the OTC business, which is about a $3 billion business globally. I have over 20 years of experience in various leadership roles across many different types of healthcare products, OTC products, personal care products, medical devices.
Very excited to bring that experience here to BioGaia to take us to new heights and accelerate our growth. I thought we'd start with our results. We've seen 23% growth driving very strong sales growth from across all of our regions, which is very important to note. Our EBIT is up 28%, and our EBIT margin for the quarter is 38%. Strong performance. A few of our key events that happened over the course of the quarter, back in July, we had a clinical study with our Protectis product, which showed increased antibodies with COVID. This indicates that probiotics may enhance the long-term protection against breakthrough infections of COVID. This is a very interesting study and an interesting space for us to continue to explore.
I was appointed as the CEO in early August. I then needed to get my work visa, which is why there was a delay between that time and when I was officially came on board at the end of September. In August, we had a very exciting publication in a journal called Nature, which was a study that we had done looking at very novel methods with new strains of probiotics to overcome oxygen sensitivity. This is a big risk with probiotic strains, is exposure to oxygen, and so we're looking at anaerobic strains specifically to benefit around conditions such as metabolic conditions, diabetes, cardiovascular disease. Watch this space, because this is a really exciting one for some future breakthrough innovations coming from BioGaia. Very interesting.
Then, of course, you heard earlier this week that we announced that our results from the third quarter exceeded our market expectations. We are performing very strongly and look forward to reporting our year-end and Q4 results in a few months as well. Some of our launches, you know, we're doing a lot of market expansion of our existing products, and this is very important because as we, you know, put in our R&D spend against products, we wanna see broad market expansion across the world. We're in over 100 different markets, so we want to expand and see the benefit of our R&D dollars and money against multiple, multiple markets. That's why we list here our market expansions. They're very important for our overall growth.
I'll turn it over to Alex to start talking about our sales per segment. We'll go through in a little bit more detail, and I'll add in some commentary as well as we go through.
I write "18", it's a number. * If I write "18%", I'm adding a symbol. * I'll stick to "18". * Wait, "pediatrics grew twenty-four percent, which was eighteen, excluding FX". * Actually, in financial transcripts, if they say "twenty-four percent, which was eighteen", they often mean 18%. But the rule is strict: "Word-for-Word Accuracy... NEVER remove or alter words... Do NOT alter the numerical values themselves; only change presentation." * Presentation of "eighteen" is "18". * Final check on the sentence: "If we the
Regarding adult, there was a sales increase of 17%, which was then 11% including FX, thanks to an increased sales of Protectis tablets, mainly in APAC and EMEA, mainly then in Hong Kong, and Prodentis sales in Japan and the U.S. If you look then just year to date, you will see that our sales grew 20% for pediatrics and adult, and also 20% in total. If you look at them per region, as we mentioned, EMEA sales, we had a growth of 25%, mainly in Eastern Europe, Turkey, and Spain. Sales were then positively affected by these quarterly variations for some individual orders.
This will then obviously have a negative effect on the fourth quarter, so to speak, that we had some sales now in the quarter that should have been, so to speak, in the fourth quarter. For Asia, APAC sales increased with 17%, driven by the large markets like Japan, Korea and Vietnam. Americas had a sales increase of 25%, both in North America, via USA and Canada, and also South America in several countries, for example, Brazil, which is a large country. Just coming back to EMEA with a sales growth of 25%, we can also see here that we only have a growth of 4% year to date, which is obviously not. It's below our long-term targets, and that is important to keep in mind.
Also just a few comments on the regions and the performance. As you can see, we have strong growth in SEK across the regions, and I was actually able to spend my first week at BioGaia in the U.S., and I was with the U.S. and the Canadian team at their sales and marketing meeting. I was very impressed by the programs that they've put together. Very strong marketing initiatives to healthcare professionals, to consumers, that range from seminars that we do with healthcare professionals, sampling programs, journal advertising, email, and direct mail programs. For our consumers, we're doing influencer, targeted digital advertising, extensive Amazon marketing, and we've had strong Amazon growth in both of those markets.
I've been very impressed with the markets that I've visited thus far, and I'm gonna be extending that and visiting Japan coming up next month, and then Asia Pac also next month, and multiple more regions. Just wanted to share my first impressions coming into the role.
We move on to the gross margin. The gross margin continues to be negatively affected by increased cost of goods, but it increased in the quarter to 74%, compared to 72% one year ago. During 2023, or actually during the quarter, we have implemented some price increases, which was part of the explanation why the margin was higher in the quarter. It's still a bit of a turbulent times we live in, and we think we need to stay on top of this matter and continue to be monitoring this. I would say that we have managed our costs here within the gross margin fairly well, but things are still a bit turbulent going forward. Move on to the financials.
Like we mentioned, we had a revenue growth of 23%. We had an EBIT of SEK 120 million, which was a growth of 28%, and we had an EBIT margin of 38%, and it was 36 one year ago. 38%, which is then above our financial target of having 34%. Earnings per share, SEK 1.01, and operating cash flow at SEK 99 million. Move on to the sales bridge. As we mentioned previously, our sales growth of 23% consists partly of currency. That effect was 7% of those 23%, and then organically, we had a growth of 17%. Year to date, we have an organic growth of 13%, currency effect of 8, and a total growth of 20%.
Move on then to our costs. Operating expenses increased with 26%, from SEK 92 million to SEK 116 million in total. This was mainly driven by an increase in sales and marketing costs from SEK 77 million to SEK 88 million. The reason for that is, like we have explained also before, is that part of our sales marketing activities are correlated with the actual sales. If we have a higher sales level, we will also, to some extent, have a higher cost level. Plus, we also do some increased, of course, efforts in order to continue to grow the business. Regarding R&D and admin cost, those were stable. Slight decrease in R&D and a slight increase in admin.
Regarding R&D, it depends to a large extent just on when we have some clinical study-related costs, and those will vary between the quarters. However, we are, I think, this is a more stable level where we sort of will continue to be for a while. Regarding administration costs, those are quite correlated with actual inflation we see for our business, and that is why we have an increase. Other than that, they are stable. Then we have the line called Other OpEx, which was basically SEK 0 in the quarter. When we look at the same quarter last year, that was actually a positive SEK 15. It gave a positive contribution.
It lowered the cost, so to speak, and that is due to currency effects that we don't have this quarter. Move on to the P&L then, which summarizes what we have said. Sales grew 23%, costs 26, and an EBIT growth of 28% and a margin of the 38. If we just look then at year-to-date, our EBIT margin is currently at 36% versus 35% one year ago. Move on to the cash flow. Cash flow from operating activities increased with 109%, from SEK 47 million to SEK 99 million. This is mainly due to the higher operating profit, obviously, but also due to a better change in working capital situation versus one year ago.
All in all then, that leads to cash flow for the period of SEK 88 million, a growth of 137%, and a cash at the end of the period at SEK 1.45 billion. Just to conclude this, to give some concluding comments. With the quarter three sales that grew with 23%, we have a solid sales growth for the year of 20% and 13, excluding FX. If we look at Europe, again, just to clarify, we had a growth of 25%. However, sales were positively impacted by this quarterly variation for some orders. The year-to-date sales growth in EMEA is only 4%, and obviously that is below our own targets, and it needs improvement going forward.
Asia continues its solid growth with 17% in the quarter and 28% year to date. It's actually growth across all markets, most markets, and it's driven by the large markets like China, Japan, Korea, and so on. It's a very solid growth in Asia, and we can see that also looking back at previous quarters. For Americas, we continue the impressive performance with a growth of 25% in the quarter and actually 38 year to date. It's really other eight markets like the U.S., Canada, that are performing well. We're also seeing impressive sales growth in the rest of Americas, Latin and South America. Regarding direct markets, we have direct markets in the U.S., Canada, also the U.K., Finland, Japan, and partly Sweden.
We really see that it's really successful, these operations, and we are convinced that we will expand these direct operations to move to more markets in the future when there are openings to do so. Regarding costs, we see that we have a very cost-efficient operating model. We have seen increased costs for raw materials, for example, but we have managed to compensate for this by, for example, price increases, but also not to forget a lot of improvements in internal efficiency and how we work in order to mitigate those cost increases. With an EBIT margin of 38% in the quarter and 36 year to date, we are above our financial targets, and we have a solid cash and a total position of the company.
I think with that, we are ready to hand over for some question and answers from the audience.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Kristofer Liljeberg from Carnegie. Please go ahead.
Thank you, and good morning. I have four questions, hope that's okay. The first one is related to Theresa's comment here initially about accelerating growth going forward. Is that related to your comments also about expansion of direct sales in more markets?
Yes. In terms of accelerating growth, there's a number of factors there. Looking at our marketing and commercial spending across our current markets, so making sure that we're optimizing that investment for further growth, as well as analyzing, looking at expansion through our direct markets. Because we have seen when we have markets that are direct, we do accelerate the sales within a short period of time. We have proven growth models around the world with our direct markets that we would want to replicate for the future.
Great. On marketing spending, do you want to spend more as a % of sales or just make it smarter?
I would say both. We want to optimize what we're currently doing. Typically, 70% of your ROI on marketing spend is your creative, your content, the choice of your media. We want to look at how are we currently spending and optimize that, optimize our creative and our content, our execution, as well as look at potential future investments where we feel very strongly we'd have a positive ROI.
Okay. Thank you. Second question, coming back to the phasing effects of quarterly variations in Europe, is it possible to quantify that in any way and how we should think about Q4 growth, which I guess will be a little bit slower then?
Yes, unfortunately, we will not quantify that effect, but I mean, it is substantial enough for us to mention it, so to speak. Also we mentioned here, you know, the fact that year-to-date says it's not satisfactory with the 4% growth. Obviously, the quite large growth we may have in the quarter, obviously, you can probably conclude that that will not be the effect. You know, you will not see that growth at all in the fourth quarter as some of the growth now in the third quarter is from the fourth, so to speak.
Okay, if I rephrase it, maybe 4% growth year to date, do you think that will be higher or lower after the full year or for the full year?
We will not give a guidance like that, unfortunately.
Okay. Gross margin improvement, and you mentioned the higher prices. Would you say this new level is sustainable, or could gross margin fall back to the weaker levels we have seen in Q1, Q2 this year?
We hope not, but of course, it's very uncertain, the world out there. It depends on what will happen. I mean, there's a lot of geopolitical risks and so on, but we think that the worst is behind us, to be honest. Obviously, we have improved the margin here. Of course, there are risks, and it's turbulent times, but we hope things will look a bit better in the future.
Great. On the quarter variations in R&D cost, I think you highlighted already in the second quarter that was not the sustainable level. Was it correct that you said now this is more a reasonable level where R&D cost will be in coming quarters?
Yeah, that's correct. This is a more reasonable level, though there, you know, it will probably continue to be a bit volatile as study costs may fluctuate and so on. The third quarter is probably more representative than the second, so to speak. Yes.
Great. That's very helpful. Thank you. That's all from me.
Thank you.
Thank you.
The next question comes from Mattias Häggblom, from Handelsbanken. Please go ahead.
Thank you so much for taking my questions. Mattias Häggblom, Handelsbanken, and welcome to this forum, Theresa. I had two for you, and then maybe a separate one on financials for Alex. Firstly, I'd be curious to hear what your take is on the patent expiration around r euteri, well, flagged for 2026 and 2027 in the vast majority of your geographies. It's a common question we get from investors, and I guess you looked into this when you did the diligence on the company before accepting the role. I'd be curious to hear any early thoughts around this matter, and then I have a follow-up.
Yes, absolutely. Early thoughts on this. When you look at the probiotic space, just as other OTC products, there are many products that are off-patent. It's actually quite typical across the marketplace. For us, what's going to be important is that we continue to build our brand. We have a very strong brand with pediatricians, and we need to expand that even more with consumers in terms of brand awareness and recognition. That's why I was talking before a little bit about our marketing spends, optimizing them, you know, building very strong brand campaigns. I have a lot of experience in this area. Most of my career, I have been building brands in an environment where there's private label, there's store brands, you know, there's products that are off-patent. I'm used to that environment.
I would like to focus that way here at BioGaia as well. We have very strong science, so we can leverage that, but also building our brand for the future is critical.
Thanks. That's very clear. Secondly, also for Theresa, maybe if you could expand on what you've been most impressed by during your first month and where you see most scope for potential improvement, I guess, in light of your experience within oral health, would that be the oral health product or help us think about where the you know, low-hanging fruits potentially are?
Yes, absolutely. Really good question. What I've been most impressed with so far is the people here. A lot of experience in this space, a very strong passion. We actually have three company values that I think people live here every day, and that is around passion, collaboration, and innovation. That's what I've seen come through in all of my discussions and my meetings with people here at BioGaia. I also have been very impressed with our science and actually our labs. I've been able to tour last week. I toured our labs, I toured our manufacturing facility, and very frankly, I've been touring manufacturing facilities and laboratories for over 30 years, and I'm extremely impressed by what we have at BioGaia.
In our manufacturing, the level of our automation is, I think, best in class, very frankly. I've not only been impressed by the people, but also in the way we work and our manufacturing and our laboratories. I think that's a good, obviously a good sign for the future in terms of what we want to do. In terms of areas of opportunity, I think it's just focus on the categories where we think we can grow. You mentioned oral health. It's a very exciting category for us. I think we have some outstanding science in that area. I think we have some really strong products that we just need to do even more with.
Actually, our Canadian business is launching and relaunching our Prodentis, you know, in the coming months, so very strong plans there. Our Japan business has a strong performance around our oral health business. What I want to do in the future is a very strong focus on the core. The core of our business being baby, child, mother, and expanding even more into oral health, G.I. health areas. I think that's what is exciting for the future for us. We have the skill sets, the passion, and the capability to make that happen.
Perfect. Thanks so much. I had one for Alex, maybe more on the financials. I'm trying to understand the gross margin here a bit better. The timing of orders, those early orders in the third quarter, mainly down in EMEA, did they help the gross margins or not? I guess another way of asking, if Q4 then is softer due to this timing of orders, should we anticipate then a sequentially softer gross margin?
Yeah, we will not really give any guidance on the coming gross margin. I can say, I mean, of course, it helped to have those orders in the third quarter. I mean, the higher the sales is, the more scale economy we have in our manufacturing, which is basically then improving the margin in percent, the gross margin. To some extent, of course, the gross margin was helped by those orders, definitely, yes. The that effect is probably a bit smaller. The large effect what happened in the quarter, I mean, is the fact that we have increased the price, and it had, you know, a positive effect there on the margin to some extent.
Going forward, I mean, like I said, we hope to, I mean, our ambition is to improve our and maintain our gross margin at a high level that we have had historically, and we have not been there for the last, you know, quite some period of time due to the turbulent times we live in. I mean, our ambition is to improve this, definitely. Like I said, it could be a bit volatile going forward as things are still not stable in the outside world. Something like that.
Perfect. That's all from me. Thanks so much.
Thank you.
Thank you.
As a reminder, if you wish to ask a question, please dial star five on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
This is Theresa. I just want to say thank you for joining us, and we look forward to future meetings and discussions. We have a strong performance that we're reporting in the Q3, and I think we've given good future discussions and insight into what will be happening at BioGaia. Look forward to the next time we can speak with you.