Earnings Call: Q3 2021

Oct 21, 2021

Welcome to the BioGaia Audio Cost with the Teleconference Q3 2021. Today, I am pleased to present CEO, Isabelle Ducyel and CFO, Alexander Korssiena. For the first part of this call, all participants will be in listen only mode and Afterwards, there will be a Q and A session. Speakers, please begin. Yes. Thank you so much, and thank you for attending the the Engineering Management statement. So we are actually pretty pleased with the 3rd quarter with a sales of €174,000,000 that represents an increase of 32%. And if we would exclude the foreign exchange, an increase of 35% and an operating profit of EUR 67,000,000. I mean, we are pleased with the Q3. We can see 3 external reasons for the good results. Firstly, an increased demand from consumer ahead of the winter season. I mean, people know that it's going to be cold, time for back to school, back to work, all the various things are outside waiting for us and people are working on prevention and buying probiotics in advance. Secondly, thanks to the lifting of pandemic restrictions. So that has led to a rise in visit to doctor and pharmacies. So both the consumer are back to pharmacies, are back to visit their GPs, the mother are back to the pediatrician, but as well our distributor in the world and their sales force has been able to visit again the health care professional and speak about Biogaya probiotics. And then thirdly, the same way that the quarter 2 has been impacted by orders that have been shipped under Q1 instead of Q2, we have actually exactly the same phenomenon, but the other way around this time. And we had the big customer about to be out of stock that I asked us to shift Q4 orders under Q3 and that has helped to generate this very nice increase of 32%. In the region, we have a sales increase in EMEA, so it's a bit like the light at the end of the tunnel and still growing in APAC, very growing strongly in North America. And last time we look at that a bit later, a bit down, but it's more a phasing issue. So if you put that together, we can show an increase of the EBIT by 148%. Next page, please. So we've been communicating 4 times to the market during the quarter. We've had a press release in July to announce the fact that now we have the full ownership of Metabogen. So Metabogen is our subsidiary based in year to boy a specialized in anaerobic strain. And for us, it's extremely strategic, so we are very happy to welcome the full team of metabolism at Biogayat. In September, Biogayat Pharma announced as well that they're proceeding with their clinical study in 2 areas, 1 for ulcerative colitis and 1 to treat constipation in patients receiving acute therapy for the treatment in September, and that's probably the greatest news of this quarter. We announced the fact that we are going to we have opened Via Gaia UK. So in the UK market, we had 1 Manchester distributor, and we do believe that the UK project market is extremely interesting and that with our own setup, we can really gain market share and grow pretty quickly in the market, in the UK market, both via our own ecom, our web shop that we are going to open on November 1. And then while being on the marketplaces on Amazon and we intend to be on Amazon U. K. Mid of November. And then of course as well starting to a look at the specialized drug store in the U. K. So more to come here. I'm very happy to have U. K. At least on the map of Billogaya. And the last communication that was basically to announce that we are going to be a bit better than the market for Q3 as you've noticed. Next page please. Regarding launches, so you see a long list of 12 launches, but I just would like to attract your attention on Finland because that's where we've launched the old portfolio under our own brand. So a lot of activities there, a lot of visits to pharmacies. So now we've already the I mean, main listing in the main pharmacy chain. So very happy with the launch of Biogaya brand in Finland. In the U. S, we launched the immune boost portfolio and here as well very good timing with the Baptist School campaign. And the 3rd launch I would like to underline on is the ProDentist pediatric kids and baby. So that's line extension. We had CODENTIS for adults and for pregnant women, but now we are focusing on pediatrics and that's where our distribution network is the best at. So we see DUET to contact with moms to be able to speak about oral health for their baby and for their kids. So we start with launch in the U. S. And in China, but you will see more of it coming as well in the coming months. Next page, please. Looking at segment, I think the good news is that we keep saying that we want to focus on adult. Obviously, we want to maintain our leading position within pediatric, that's obvious, but we want as well to increase our penetration within the adult segment. And we've been struggling year after year, but this year, if you can see if you look at the quarter 3, if you look at the year to date or at the ENT, you see actually a bigger increase of the adult and the pediatrics, obviously, from a smaller base. But I'm pretty happy and I think it's encouraging to see that switch. Next page please. The geography. So I was mentioning it during my introduction. So we see the light at the end of the tunnel at EMEA 11. So a very big increase during the quarter that doesn't it's not enough compensate the year to date of the MAT figures, but at least a very strong Q3. And that's mainly thanks to our problem countries that we've been mentioning, Italy and Spain. Then in France, then in Turkey, in Russia, we see nice growth. That was the case before, but Italy and Spain back on track, so that generates an increase of 51%. APAC here as well a very strong quarter plus 53%, mainly driven by China and Hong Kong. So China, I mean, we keep being out of stock, so which is a very good signal that the demand is very strong from the consumer side. And Hong Kong, it's more basically because the problem with the COVID strict restriction and lockdown in Hong Kong plus all the demonstration and political problems. So they are the very tough year, so they are just back on track. In Japan, increase of our sales year to date, not for the quarter despite here as well a prehistory lockdown. And the interesting thing is that in Japan, our sales are increasing thanks to our own web shop mainly and the dental clinic that we visit by ourselves. So that was interesting to notice. For the Americas. So we had a very strong quarter last time for last time and therefore now it's more a prioritization issue of order mainly in Brazil. So it was not increasing during the quarter, but the North America and especially our distributor, Everardis, Israeli doing it very strongly. And you could see at MAT level. We are plus 19, yes we did plus 22. So we that's really the hero of the year 2021. And that has an impact here as well. I mentioned our strategy to minimize the risk per region, we were extremely dependent on Europe, actually what I joined 3 years ago. And now as you can see on the year to date, Europe is 43% of our turnover when APAC is 24% and Americas is 33%, so very nice split per region now. If we look at the next page and the gross margin, I mean, not that much to mention. We are able to mention gross margin at a pretty high level, you have 74%. It's pretty stable per segment. Adults are always a bit under the level of profitability than the PayJet Fix product because we are new into that business, the volume are smaller and there has been some product mix and campaign effect. But nothing more to add on gross margin. If we move to the financial, Alex? Yes. Thank you, Jesmel. So we move to the slide called OpEx. So our total operating expenses were 3% lower than last year. Our sales costs increased mainly due to increased marketing activities and personnel costs as we are moving out of the pandemic. R and D costs, excluding Metabogen and Bigeye Pharma, increased also slightly due to mainly due to higher cost clinical studies. And again, this is also partly an effect of the return to a normal after the pandemic. So we have those cost increases, and this was then, however, compensated by positive currency effects of SEK 4,600,000. We have positive currency effects this quarter. And in the last same quarter last year, we had negative currency effects. So that explains mainly why we have slightly lower operating expenses in the quarter. We move on to next slide, the P and L, which is basically a summary of what we have gone through here. As Isabel said, we had an increase in sales of 32% and even 35%, excluding the currency effects and a gross profit of SEK 128,000,000, which is then an increase of 43%. Operating expenses, SEK 61,000,000 minus 3 percent an earnings before interest and taxes of SEK 67,000,000 versus SEK 27,000,000 in the same quarter last year, which is then 148% higher. And we had an extraordinarily high margin of 39% in the quarter, which then gives us a year to date margin, EBIT margin of 35% versus 33% last year. And we then also Mention adjusted EBIT. This is our EBIT excluding restructuring costs and M and A costs. And as you can see, those The EBIT is the same in the quarter. However, year to date well, year to date, we have about SEK 10,000,000 higher adjusted EBIT and a margin of 36% then. Good. So if we move on to next slide called cash flow, We see that our cash flow from operating activities was SEK 52,000,000 versus SEK 15,000,000 in the same quarter last year, It is a nice increase. It's mainly due to the increased profits. And cash flow for the period at EUR 50 EUR 5,600,000 versus EUR 50,000,000 in the same period last year. If you look at the cash flow from investing activities, We see that it's higher in this quarter, and that is due to the acquisition of the remaining Metaburgen shares. And also cash flow from investing activities in the year to date figures. It also includes the investments in Bonprogs and SKINOB of approximately SEK 20,000,000 in total. So cash at the end of this period then is SEK 1,530,000,000 versus SEK 292,000,000 in the same quarter here. So with that, I hand over to Isabelle for concluding remarks. Yes. And the main conclusion is that we are very happy with the strong Q3. It's always nicer to present such a good quarter than Q2. And the good thing is that it's mainly due to increased consumer demand, which is the most important and the impact of this order that we shifted from Q4 to Q3. EMEA starting to recover. We are happy about that. APAC has a very good growth and America is on fire. So we We are so happy to see the reactivity of the U. S. Market. We've launched a lot of new products that the consumer and the health care professional are very happy about. I mean, based on the job we've been doing on the drug we've managed to establish Biogaya brand in the U. S. Very strongly. And now we can leverage on the power of the mother brand being able to penetrate new target group, a new type of healthcare professional. We are accelerating our B2C journey with the establishment of Biogaya UK, and that would not have been possible if we would not have, I mean, created our B2C marketing that is in full operational since August this year and the creation of Biogare Digital because as we are operating on our own, we need the competency, especially on the digital side to be able to penetrate the promising UK probiotic markets. So in a nutshell and as a conclusion, I would just say that the global market for Publicis growing in terms of sales and consumer recognition, that the life the pandemic will lead to an increased focus on preventive health care. And based on these trends and based on the work we've during our organization, we are very confident for the future of Biogaya. So I thank you for your attention. Thank you for your confidence. And I will be happy to take any questions. And we have received the first question. It is from Christoph Leung, Bank Hornwerg. Your line is now open. Hi, Chris. Hi. I have a few questions here. First, is it possible to quantify this large order or order phasing effect and whether that was from one customer or several? Okay. So to it was mainly from APAC mainly from China, but as well in Indonesia, where we see I mean, Indonesia is an interesting market because the demographic definitely into our favor. I think we count about 4,600,000 newborn every year, getting more and more digital. We have a good partner there and an acceleration that we didn't foresee. So they ran out of stock. So that was one of the countries. And China, I mean, they just accelerate the sales every time. So here as well. So that's the main cue part from APAC mainly. And but I don't want I mean, of course, I can't quantify, but I'm not doing that. But I think in the report, it's also mentioned that there were 1 large Water Inn in Spain. That's what's supposed to happen. Yes. No, I mean, in Spain, here we have with our distributors, the cordati. And they had our strain under their own brand forever. And here we had a lot of discussion because we would like to have Biogaya present in Spain a bit more visible. So we agreed on a new threat dress, a new communication campaign and it's so we use both their brand because it's very well recognized by the healthcare position and the consumer, but with the signature of the Eugeoia. And therefore, so it took a bit of time to put that in place to agree to our distributor, but now we have a strong campaign back to school that Frank Horvaty is doing for us with the new Biogare tagline. So it took a bit of time. But now I mean now we're there with the new product. Okay. But was so there were no water in Spain that were Supposed to happen in Q4 that now happened in the Q3. Is that what you're saying? Yeah. No, I mean, we have anticipated I mean, it was supposed to be shipped in Q4 and that's been shipped last week of Q3. Regulatory to Matter of the Copel update. Yes, yes, trying to understand because I think You might not said that in the report now, but in the press release the previous week, you also said that because of the high Despite the high sales in the 3rd quarter, you were I don't know exactly how you phrase it, but you The door of what full year sales would be lining with expectations. And I guess then that you might refer to consensus. If I do the math correctly, that would imply virtually no growth in the Q4. Is that correct? Or Hello? Yes. Hello? Yes. Sorry, you're back. Yeah. Did you hear my question or? I mean, yes, I think I did and I think I won't the answer is that we our expectation for the year is online with the general expectation from the market. Okay. My last question relates to R and D costs That were down quite a bit lower in the Q3 than in the first and second quarter. I think it was the same 2020, but before that, it was pretty evenly spread between the quarters. So is this a new type of seasonality Explaining this or something else. No, there is no seasonality. In here, we are very pragmatic. We have some I mean depending on the possibility to recruit patients that you cannot foresee. I mean we've healthy patients, you can recruit anytime. But when you are really targeting a specific type of patient, then they have to show up at the hospital. And so we don't have any seasonality in that sense. And we had some difficulty to start new or even to pursue some ongoing clinical study because the hospital were closed. There was only COVID-nineteen patients allowed. Bernawi back on track. So we have postponed some clinical study and now they are all up and running. So do you think it's fair to assume R and D costs will be up to the same level maybe as in the 1st and second quarter than in Yes. Now in the Q4. Okay, great. Yes. Okay. Thank you very much. Thank you, Christophe. Have a nice day. And we have another question. It is from Matija's last Vork's BMS. Your line is now open. Hi, there. I would try to not phrase this question the same way as Christoper did. But I mean, obviously, difficult for you to know the sales level in Q4 right now. But I mean, How should we assess the potential, in your view, to reach the sort of H1 level on a quarterly basis around SEK 200,000,000? I mean, I'm thinking headwind obviously from some periodization of orders, but we have lifted restrictions compared to H1 overall. And As you said, demand of immune health products ahead of winter could help a bit. Just some general thoughts at least around the potential for Q4 would be very I mean, we normally don't disclose the coming quarter. To be honest, we have a very clear view because we deliver at 90 days. So we start to have a pretty clear view about how the year is going to look like, but that's not something we normally disclose. So to be able to answer to your question, I mean, I don't expect I mean, I think Q4 last year was not very strong. We were absolutely paralyzed due to the pandemic. This year will be easier. So that there will be a better quarter for us than last year. And if you put together Q1 and Q2 and that's basically what we said when we in January, we said Q1, Q2 going to be tough, Q3, Q4 going to be easier if you compare with last year. And that's what is going to happen. Thanks very much for that flavor. You're welcome. And another question we have received is from Andreas Ekblom, Bank of Bank. Your line is now open. Smarter Seggdom, Handelsbanken. Good morning. I was curious if you could spell out I missed a number for the growth in the U. S. I think you did that in Q2. Americas, obviously, was weak, but that was due to LatAm, and you You seem very pleased with the U. S. Performance. So can you spell out U. S. Or U. S./Canada together for the quarter? We normally don't do that, Matthias. And that's something we are asking ourselves if we should do it for next year. So but for the moment we aggregate the All Americas in 1. And for the U. S, I mean, U. S. Is going to be our number one market in 2021, I mean. So and here, I think we can we want to have €100,000,000 market plus and I think U. S. Will be the first one. So going strong. And that's just the beginning. Yes. But in the Q2 report, you spelled out U. S./Canada growth of 43%. So should we think about that ballpark figure? Or is it at least double digit growth? Or And any color you can help us with, the performance in the U. S. That would be helpful. Yes. No, but on the year basis, U. S. Is going to be a very strong double digit growth. So that I can easily disclose and we will have sales more than €100,000,000 for the U. S. Market. I mean per quarter is not really relevant to go into detail because what I look at every day, it's basically their sellout to make sure that we don't have any problem with stocks or without of stocks. And we see a really a snowball effect starting from the drop going into other indication and now we are able to go out from the pediatric to go to the adult. So that's really, really encouraging. So we are the major sampling campaign for the immune boost launch. So and we see how the Care Professional has been reacting when they received the samples, and we've never seen that. I mean, even their website just collapsed because there were so much people looking at it and they want to do order the samples and so on. Now what is how is it going to be in terms of sales in the future? It's a bit premature to say that at least the reaction from the healthcare professional regarding the launch of the immune is extremely encouraging. And the same has happened on Prodenti's kids and babies. Here, they don't have that many products for oral health for kids. And the need is huge, both in terms of easing and carries and they got a lot of call from dentists that normally never call us because we have never been targeting the dentists before. So something is happening there, but it's not turning into selling figures as we speak, but we are very optimistic. And a follow-up question to that. I mean, obviously, U. S. Is a large market in terms of populations. You have historically had the biggest penetration in I think you have the Finnish market, but anything you could help us with thinking about the opportunity for the longer term in the U. S? You said it's SEK 100,000,000, I assume I'll start. Yes. No, I mean, we looked at the we just did the math prior to our strategy meetings that we are having today with the board. And even if we are selling in great quantity in the U. S. The drop. If you look at the penetration, it remains very limited. So sometimes when I'm I want to be extremely positive. I take the penetration of 3, 4 bottles per newborn that we had in Finland multiplied by the low penetration in the U. S. And then the figures are just fantastic. It's a bit too naive to believe that we are going to reach 3 bottles per newborn in the U. S. Tomorrow, but we are working on it. So here in terms of potential, there is a lot of things that we can still go up even on the drops. And that's basically what we do with all our market now. We look at the number of newborns, we look at the penetration of the drugs we are to see to identify where we should invest for the future. So we allocate in the right market the resources we have because we are we remain pretty small and we are very global, so it's important for us to focus on the right stuff. Good. And on the strength in Italy and Spain, do you have any information from your distributors there to what extent in market sales growth was visavis stocking effects with the distributor. I'm trying to understand if patient demand is returning In those markets or is it still only stocking? No. I mean, they stocked in Q2 prior to the pandemic. And we had if you remember, our Q2 2020, we had €245,000,000 in sales. And that was really this massively order from all our distributors, mainly in Europe to say, okay, everything is going to go down. We have to get this stuff now. But now they have had almost 4 quarters to deplete what they had in stock. And they are I mean, why again? So they are repurchasing because they don't have anything in stock. And we thought that they would that to rebuild our stock in Q2 and they basically did it now. And many in Italy and both Ricobati and Nous are 2 distributors an in Spain. Good. Last question for me. Any update you can give us on the M and A process? I mean, you have SEK 1 €5,000,000,000 in net cash on the balance sheet. And it's a very low interest environment we're in, so it's not generating a very strong returns. So I guess you're working on that, finding options to deploy that capital. Anything you can update us on? No, just that we are working on it. Yes, that keep us awake at night and date. Hope to be able to come up with good news in a close future, but nothing more I can say unfortunately today. Good. Thank you so much. Thank you so much, Matthias. There are no further questions at this time. Please go ahead, speakers. Thank you so much. Thank you for your attention and have a very nice end of the day. Bye bye.