Earnings Call: Q3 2020

Oct 23, 2020

Thank you, and good morning, everybody. Welcome to Birgela's Quarter 3 Presentation. So you have already heard about our Q1 results on October 12 when we issued our profit warning. But Alex and I are going to explain you today what is behind the figure. So to start with, we are facing a total sales decrease by 21%, which is minus 17% if you exclude the currency impact. And this is mainly due to COVID-nineteen. The main reason is that our distributor in the world, the sales force that are mainly medical sales force visiting doctor, have not to the same extent being able to visit the doctor, the health care professional or the pharmacy. So and that's where in most of our markets, that's where we operate. If we look at this region, I mean, basically, we are facing a decrease in all regions, but not at the same pace. And you will notice that Americas is facing a lower decrease, thanks to the omni channel strategy we initiated in the end of 2018. In terms of products, here as well, we could notice a decrease of Biogalia protective drops, Biogalia Prodentis and Biogalia Gastric. If I just comment on Prodentis here already, the main problem is Japan. Only channel almost in Japan for ProDentist is the dental clinics. And they have been heavily locked down, so they've been closed. So no one could go to the dentist, and therefore, no one could be recommended on the spot by the dentist to buy ProDentist and nobody can buy it. So the part of the business in OTC has been hurt, but not that much. But for ProDentist lozenges only sold ill dental cleaning in Japan that has been a major issue, obviously. Next page, Japan that has been a major issue, obviously. Next page, please. Key events, we communicated on the rest of September that we will not have any extraordinary general meeting. And we have in mind perhaps 21 to decide either or not we should distribute the extra dividend. And we the Board decided not to distribute any extra dividend this year due to the context. Good news, if there are some good news, is that we have a new clinical study published in functional abdominal pain for children, which is very close to our focus area, pediatrics product, with very good results showing that we've protected to our mainstream DSM-seventeen. We could I mean, we were the only probiotic showing reduced pain intensity, so which we were very happy about. Then on September, October, you all know we established our profit warning. Next page, please. Despite COVID-nineteen and heavily lockdowns everywhere in the world, we've been able to secure digitally 8 new launches. And I'm not going to comment all of them, but I would like to underline 2. The first one is the launch of gas trues in France, which is has been a long discussion with our distributor, Pediac. France is doing very well. Pediac is extremely talented to promote our product for children within midwife, But we decided in 2019 to launch gastric, and that's another type of doctor they have to visit. So they really focus on the gastroenterolog. And they have really the gastroenterology Association recommended to use gastritis. And based on that, they have been able to launch in pharmacies. And the first results are really, really promising. So that we are very happy about. The second one I would like to emphasize is in U. S. Via Evaridis. Evaridis represented, presented before our oral health portfolio, but just presented adults. And I was a bit kind of slipping SKU because they were focusing mainly on the drops and unprotected and then launch of Fortis. But the American Pediatric Association has recently decided that it is up to the pediatrician to look at the children's oral health, which is very new. So now when you when the American goes to their pediatrician for the control of their children, it's up to the pediatrician to look at their mouth as well. And obviously, if they see something, then they send it to the dentist. As this is a type of doctor, everybody is self worth is visiting, for us, it has been very easy to launch protective preventive kits. So while they are promoting the drop already, then at the end they say, okay, by the way, do you remember you are in charge as well as the all of the children, and we have put them to it for you. So now we've been, I mean, launching the whole portfolio to both for adults and for children. And in as well one specific target group for children, like children with problem like autism, these children, they cannot grow their teeth. They cannot, I mean, articulate and they cannot, I mean, grow their teeth, which is always a fight with their parents. So we propose the Prodentis tablet for these children. So it's a nice taste with April flavor. So it tastes good. It doesn't help them. So they just have to take it, and it works as a protection against caries. So the first result from the market, both the pediatrician and the dentist, has been really strong. Next page, please. If we look at our sales per segment, so both Pediatric and Adjacent are decreasing. The Pediatric are decreasing slightly lower. If you look at the year to date, we are stable. So we can see a slightly resilient coming from our Pediatric product, but anyway, decreasing heavily in the quarter 3. Next page, please. In terms of gross margin, here, you have probably noticed the higher decrease behind the Jetix product. So it's the first reason is a product mix where the drops were decreasing a lot compared to the tablet, and that's where we have our highest margin. And secondly, it's a one off unfortunate event where we received a batch from the NISCO that in term of culture that respected the specification. But during manufacturing, when we checked before launching, we noticed that we didn't have the right number of living bacteria in the product and therefore destroyed the batch. And that explains 1% of the decrease in margin. Year to date is stable for the whole portfolio at 73%. Next page, please. In terms of geographic markets, if we look at the quarter, all the regions are decreasing, but as you can see, at different pace. So if I start with EMEA, that's minus 25%, and it's mainly due to some of our biggest markets, namely Italy and Spain. And here, the first reason is the COVID-nineteen. These two markets has been in a really strong lockdown where consumer has not been able to go as usual to their pharmacy. Our distributors have been very reluctant to start our online strategy even if it was our recommendation. Their whole model is based on medical marketing. So their sales force could not visit the doctor, as I mentioned in the introduction. So if you add up all this, I mean, it has a very bad impact on our sales. But I have to admit that in Italy, it has well a problem to be a distributor. We have a distributor which is extremely conservative that we are trying to push to open new way of promoting probiotics to consumer, and it takes a bit of time. If we look at APAC, it's a bit disappointing compared to the super nice figures we always disclose for APAC. But I have to say that it's mainly because of the phasing of order regarding China. So one order that will have ended up in Q3 end up in Q4, which is the reason of the decline in China. First, Korea, here, we I think I already mentioned, we are changing distributor. So every time you change distributor, there is a phasing issue as well, to be honest. If we look at America, so we decreased only by 6%. We have a year to date at plus 5%. And here, it's different if you look at South America and if you look at North America. And actually, here as well for U. S, it's mainly a variation of order effect. Our sales are doing very the sellouts in U. S. Are extremely good and will continue to be good. So I really would like you not to look at the minus 6% as something which is a problem because it's not. And I can even disclose that we received the biggest ever order from Amazon for the drops. You will get another 40,000 units of drops. It has never happened before. So on the sellout side, the U. S. Is doing very well, same for Canada. Regarding Mexico, though, here, they are, I mean, really, really badly impacted by the COVID-nineteen. And we know that because we have a lot of researcher working for us in Mexico, and they say that it's really, really bad. And here, it's not only the oldest people dying, that's when the younger. Old people having obesity, suffering from metabolic disease, and they are young, they are 35. So it's I mean, it's almost impossible for us to focus on sales of probiotics when the whole country is, I mean, impacted so badly by the COVID-nineteen. Next page, please. Yes. So if we go to Slide number 9, we look at our costs, the OpEx. We see that our we had a cost the OpEx in the quarter was about SEK 62,000,000 versus SEK 72,000,000 in the same quarter last year, which is a decline of the costs with 14%. And as you can see, our costs in the core, the core is our costs excluding our subsidiaries, Metaprogen and Via Gaia Pharma. In these areas, we see cost decreasing versus last year in basically all areas. And this is then again, it's mainly relating to COVID-nineteen. So in sales, for example, we have a lower activity level in terms of the number of congresses, customer visits, etcetera, that we do. And that is one of the reasons why the sales and marketing costs are lower this quarter compared to a year ago. The same goes for R and D. We have a lower level of activity in terms of our clinical studies due to delays relating to COVID-nineteen. So all in all, we have a decline in our OpEx of 14%. Then regarding the noncore OpEx, the Metabogen and the Biopharma, we have an increase of 8%, and they are fairly unaffected by COVID-nineteen. So move on to Slide number 10. Then to conclude, we can see in our P and L, we have a sales decline of 21%, our OpEx declining, as mentioned, with 14%, which leads to an EBIT decline of 45%, which is, of course, we are not satisfied with this. So our total EBIT was SEK 27,000,000 versus SEK 49,000,000 in the same period last year. And this leads to an EBIT margin of 20% versus 30% last year. Year to date, we are at 33%, which is more in line with our long term ambition. Looking at the EPS, it's SEK 1.18 per share versus SEK 2.19 in the same quarter last year. We then move on to Slide number 11, the cash flow. We see that our cash flow from operating activities before changes in working capital was SEK 15,000,000 versus SEK 41,000,000 last year. And the main reason is obviously the lower results for the quarter. In terms of the working capital, we see that the changes in working capital was SEK 41,000,000 versus SEK 20,000,000 in the same quarter last year. And the main explanation is, of course, the decline in sales and the fact that you then release working capital. So the cash flow from operating activities was NOK 55,000,000 versus NOK 51,000,000 last year. And all in all, the cash flow for the period was NOK 50,000,000 versus NOK 51,000,000 last year. And our cash at the end of the period is solid at NOK 292,000,000 versus NOK 213,000,000 in the same period last year. Thank you. And moving to the conclusion. As I mentioned at several occasions, our I mean, our biggest markets such as Italy and Spain have been facing very strict lockdowns. It has been a problem both for our distributor sales force to visit the doctor but as well for the consumer to reach the pharmacy. So where we add our traditional business model, purely medical marketing, will be really impacted. But in countries such as the U. S. Where we are initiating a new B2C strategy supported by omnichannel distribution possibility, namely having a possibility to buy online, then we have not been suffering that much. And I think these markets, on the year perspective are not going to be impacted at all. So this comfort us that we will be able to go out from this health economic crisis. And that gives me as well a kind of strong argument to be able to go back to our traditional market to say, well, I think you've been noticing that if you would have opened yourself to the Amazon or your local marketplace platform, we might not have been in that situation. And here as well trying to see all this doctor online network, how we can reinvent ourselves and use the COVID-nineteen as an opportunity to fast track our digitalization. In the meantime, many ways, as well, have been trying to monitor our costs as much as we could. On a year to date basis, you might have noticed as well that our core OpEx costs are decreasing by 7%, but our sales are flat. So we really try to monitor the costs in order to face this difficult time and not being impacted too much. So even though the lower sales is very unfortunate, we believe that it is mainly related to the COVID-nineteen, and we are still confident that our long term ambition are achievable. So now, operator, we are ready for questions. Thank you. Our first question comes from Christopher Liljeberg from Carnegie. Please go ahead. Your line is now open. Thank you very much and good morning. Four questions somewhat related. The first one is, would it be possible to quantify how much of your sales is coming from e commerce and how that was doing in the quarter versus physical stores and pharmacies? Then you mentioned this large order in U. S. A. Was that received in now in Q4? And also related to Q4, it seems the weakness will continue. I don't know if you could give some more color whether you expect the group sales to be declining in the 4th quarter as well? And then the final question relates to costs. And given how much you order, they have reduced costs year to date due to the COVID and in general, the less traveling, etcetera. What more could you do on the operating costs for the remainder of the year to compensate for lower than expected sales? Thank you. Thank you, Christopher, for David for question. To quantify Internet, that's something we try to consolidate with Alex. We don't have all the sale out figure divided by channel we would like to get from our partner. Some we have a total transparency. We know exactly what it is. Some we don't. So we have not been able to quantify for our 109 countries what is on or offline. What I can say is that where we've to focus on, namely China and U. S, where there were 2 pilot markets, The sales of on Internet in China is more than 70%, and in U. S, I think now it's more than 80%. Vietnam is transforming itself into 100% online market. If we look at South Korea, we are changing partner because they could not have any sales online, and they were not willing to, pure pharma thinking. And though we change from distributor, and they are mainly selling online. So mean, we are changing our I mean, our distribution strategy, but I cannot consolidate figures. It remains at the level of the old company, not I mean, the majority because we are still Italy and Spain and Brazil, all these heavy markets where they're not ready. And not they start to be willing, but they are not ready with that. So that's to answer to your first question. Regarding your second question Sorry, sorry. So but still China, you said China now 70% Internet sales, U. S, 80% of sales from e commerce channels. But still, both those countries were still down for you in the quarter, but that then is only due to timing of shipments to distributors, right? Exactly. It's just a prioritization issue, which is to answer your second question, the Amazon order we received for the U. S. Is indeed a Q4 order. So Okay. Yes. In terms of lending, I don't think I'm allowed to disclose the lending for the whole year. It's I mean, that will be difficult to go back to a strong increase with quarter, which is at minus 21. So I think our effort is really to try to do as good as we can. We had 2 good Q1, Q1 and Q2, and at both of my at least plus 10%. And now we are at quarter end minus 21. So I mean, you can have a hint about what it's going to be for the lending. Regarding your cost, the question about cost, I'm sorry, but Alex asked me something at the same time, so I didn't hear the question. Could you please repeat it? Yes. Yes. I think you had mentioned both in the press release last week and then the report that you are trying to adjust the cost base for the lower than expected sales. But what I wonder is, we have as costs are already down so much this year because of less traveling, less trade exhibitions, etcetera, what more could you do on the cost really in the short term? In the short term, not that much, to be honest, but we had the 2 strategy days yesterday with the Board and I had 2 strategy days with the management committee in September. So we are looking at it on a broader perspective, how to be more efficient in our way of working, perhaps how to integrate better mesavogen pharma and Biogaya more on the operation side. So we are looking at it on a broader perspective to be able to be more efficient to support the whole organization. But it's not it will not be like a magical effect on Q4, no. Okay. Thank you for that clarification. That's all for me. Thank you very much. Thank you, Kristofer. Thank you. Our next question comes from Matthias Baertsen from SEB. Many of them were already answered, but I have 2. So firstly, can you just repeat the number of units in the large orders to Amazon to come in Q4? Yes, it's 40,000 units. 46,000. Yes, which is for 1 order of trust, I mean, the historical one. So this one, we will frame it. We hope we will get a lot of them in the future. Yes. Thank you. My next question relates to protective drops, which has been also weak if you look on a year to date figure. Can you just talk us through the dynamics in terms of sales and marketing of this product versus sales of the other products that you have in general? Is this product likely to see the main shortfall also into Q4 here? Or how should we think about it? Thank you. Yes. I mean, the drops, on my opinion, are almost, I would say, secure SKUs. If you have a baby with colic, COVID, the low COVID, you're going to buy your drops. So you have and for I mean, parents are really ready to do anything possible for their babies. So you have resilience towards any type of crisis. But our job is really to make them available. So the problem is not the demand. The problem is the availability. So I'm not at all worried about the set of the drops. I have to say as well that when the COVID started, the focus has been for us and for our partner to get their products on their market. We were all afraid that we would not be neither be able to manufacture because of closing down of the factory or whatever or not being able to ship the product because all the country were closing borders and that was difficult to find transport. So we asked our BOGA prediction to work in 2 shifts instead of working in 1 shift to be able to secure that all the product at least will reach the market. And that had worked very well and that explained the Q1 and Q2. But unfortunately, in terms of visibility, then it has not been available to the consumer. So you have this slowdown due to non availability of the product to the consumer. But now the markets are open again. I mean, we don't know how long, but for the moment, it has been open during at least all summer. So this sellout effect will be absorbed slightly. And then we don't know. I mean, now Ireland closed again 6 week and France is in a big curfew. So it was that I cannot control. I don't have the idea, but the impact. But availability has been the key problem. Okay. Thank you very much for that. Can you just elaborate a little bit more? I mean, what is the main concern when you ship the product and then for it to reach the end consumer? Can you just elaborate a little bit more on that? Normally, the usual way for parents to hear about that, oh, your baby has colic and we recommend you to buy these probiotics magic biogaire drops to stop the colic and stop the crying. The parents, they were not going to the doctor. I mean, if you say people were not going to the doctor at all, so they didn't meet their pediatrician as they used to and didn't get heard about the drops and about our product in general. And another impact for the drops and here I speak mainly in Italy and Spain is that they recommend the drop together with antibiotics. So if your children is sick, they will have antibiotics. And then they say, oh, by the way, don't forget antibiotics will kill all the bacteria, the good and the bad. So don't forget to take your probiotics to nurture your good bacteria and stimulate your immune system. And that has not happened as well because people have been less sick. They have been at home. They were not going to school. They have not have all the small disease that you normally get requiring antibiotics. And therefore, you didn't buy your drug either. So there has been a lot of impact that together explain the decrease for the Q3. Thank you very much. That's very clear. That was all from me as well. Thank you, Marcella. Thank you. Thank you. There appear to be no further questions. I'll return the conference back to you, speakers. Well, Thank you so much for listening to us. And thank you so much for your interesting question. And we hear you for Q4.