Earnings Call: Q4 2020

Feb 4, 2021

Yes. Thank you, and good morning, everybody. Isabelle and Alex here. So we're going to present you the quarter 4 2020 and speak about the whole year 2020. So if you go to Page 2 regarding our executive summary what is important to remember. First, our total sales are minus 10%, but we have really to emphasize the fact that we've been particularly helped by the weak Swedish krone, especially towards the dollar. So if you exclude this currency impact, the sales are down on the Q4 by only 4%. And obviously, as we said before, the main explanation, I mean, on top of the exchange is the currency is as well the COVID-nineteen. So if we look at the full year perspective, our sales are down with 3% and 2% if you through the currency impact. Looking at region. The sales decrease in EMEA and APAC slightly, but the increase in Americas, and that is mainly thanks to the omni channel strategy that we started to implement 2 years ago. Looking at the product. The sales decreased somewhat for Biogare protected tablets, Jean, you might have read the press message, I mean, yesterday evening. The Board proposed that the upcoming Annual General Meeting on the 6th May 2021, approved an ordinary dividend according to the policy of €3.41 per share compared to 3.75 last year. Next page, please. Well, the Quarter 4, what has happened? So basically, on the 12th October, we already warned you that the estimated sales we'll be negatively affected both in quarter 3 and quarter 4. On the 30th October, we announced that we have successfully completed a direct issue, and the direct issue was oversubscribed. And we have the pleasure to welcome on board both 2 strategic investors, Cargill, the American company, very strong in Nutrition, both in Animal and Health and Human and Equity Public Value Funds. Yesterday evening, after the board, we announced as well that the company has decided to revise the dividend policy to pay a shareholder dividend equal to 50% of profit after tax in the parent company compared to a previous 40%. Next page, please. Looking at the different launches and despite the difficult situation not being able to launch during big events due to the COVID situation, we'll be anyway able to launch a couple of new products in new countries. I'm not going to go through the whole list. I just would like to emphasize the launch of Biogalia ProDenti Smell, and you can see the packaging done in Japan. So in Japan, as you know, our biggest seeing you is Prodentis, so oral health. And so we decided to extend the range available for patients. And this diarrhea present this month is, as it says, for pregnant women who happens to have much more problem with their gums, more bleeding gums due to the hormone changing in their body. And these new products have been extremely well received by the dentists and the patients in Japan. I would like as well to emphasize, saying in the oral health, the launch of doing GIAP for dentists in the U. S. Here as well, very promising first I mean, first order and discussion with the dentists in the U. S. So we start with ProDentist for adults, really focusing on it. And there will be more to come in the future still in the oral and in the U. S. Next page, please. Been decreasing by 11%, which is mainly due to the decrease in sales of the protective tablets, whereas the drops remain flat. For the adult segment, that decreased by 5%. And here as well, it's mainly due to protective tablets. Having said that, I just would like to emphasize the fact that if we look at protective tablets with vitamin D or without, I mean, actually, the protective tablet plus vitamin D increased quite a lot, but the normal tablet decreased. And here as well, that's due to the COVID situation, consumer are very well aware that you need to boost your immune system and that vitamin D is appropriate for that. And therefore, we could see the increase of the protective tablets plus vitamin D. On the year basis, we end up up with a decrease of minus 3%, equally spread between pediatrics and adults. Next page, please. I mean regarding the gross margin per segment, well, it's pretty stable both at quarter 4 level and on the year basis. So I don't have so much more to add. So if we can go to the next page, please. Then we can look at the split per geographical market. So starting with quarter 4, you'll notice a strong decrease in EMEA. And this is still, I mean, as during Q3, we have a main issue in Italy, and that has affected again us a lot in the quarter 4. Okay, 'nineteen is not really a nice figure to look at. But it's I mean, it's in a market where we're doing pretty well like France and Germany, Belgium and Eastern Europe. So on the year basis, we have minus 7% for EMEA. Looking at APAC. Normally, we used to have very strong increasing APAC. During the quarter, we are minus 2%, and it's mainly due to Hong Kong. So Hong Kong has been doubled up by the COVID, but as well with all the political and demonstration issues they had on the contrary. So very, very much sharp and it's a pretty big market for us in Asia. But in China, we keep going very fast, both in the quarter and during the year. What is interesting to notice here is that we did a survey in China to see the brand awareness and the brand position of Biogare A Drop. And we are very happy to announce that now Biogare A Drop for pediatric the number 2 biggest brands for pediatric products. So we are very, very happy about that. Looking at Americas. So we have a good quarter and a good year. It's mainly driven by North America. LatAm during the quarter, 4 has been decreasing. On the year basis, LatAm is flat. But here as well, if we try to be to remain positive, we've done here as well, we checked the sale out. And on the year basis 2020 in LatAm, we were number 3 brand for a long time. And at the end, in November 2020, for the first time, we are number 2 probiotics brands in LatAm after Ontario Germana, which is a brand owned by Sanofi. So we are very happy because that's the first time it happens. We've taken market share in sellout. So the figures are not extraordinary, but in the context, we've taken market share. Next page please. Alex, if you can help us with the financial? Okay. Yes. So we move to Slide number 9, OpEx. So if we look at our OpEx Operating expenses, we see that our operating expenses increased with 10%. This can mainly be explained by negative currency effects. You can see that on the line called Other under OpEx Core. We have A cost of SEK8.2 million versus basically 0 in the same period last year. And the other reason for the OpEx increase is that our noncore OpEx increased from SEK 7,000,000 to SEK 8,300,000,000 And the noncore OpEx is basically the cost For Metabogen and Biogaya Pharma, where we're expanding our activities. So if you add those 2 together that is those are the main explanations why the costs were increasing compared to the same quarter last year. If we now look at our OpEx score, the different cost lines. You will see that our sales costs were 11% lower than last year you for the quarter and for the full year, 7% lower than last year. Our admin costs are 5% higher for the quarter and 6% higher for the year. If you look at our R and D costs, those are 29% higher, Which then, of course, it looks like a lot. And one of the reasons is that during the quarter, we started several projects that we or clinical studies and projects But we could not really start in the Q3 due to the COVID-nineteen situation. So therefore, we had some costs in the Q4, which we should have had, so to speak in the Q3. And if you look at the full year for the R and D cost, it is still lower, 7% lower than in the previous year. But in the quarter, you see a higher cost. And then again, to summarize then all in all, this means that our OpEx were 10% higher compared to last year. We were also in the quarter, we had cost of about SEK 3,000,000 for business development activities. Those are mainly activities then relating to evaluating Potential acquisitions for the company. So we are active in that field, and we have The quarter has been negatively affected by those costs of SEK 3,000,000. But as you know, we have not Pursued anything yet. Move on to the next slide, Slide number 10, the profit and loss statement. To summarize then, you can see that our sales was down 10% and our gross profit down 9%. Our operating expenses for the quarter up 10% as we just discussed. That leads to an EBIT of SEK 45,000,000 versus 68% in the previous year, so 34% down. And a margin of 24% versus 33% in The last year. And then if we just then also look at the full year, since we have the full year behind us, you You can see that our sales spend declined 3%. Our gross profit also declined 3%. Our OpEx declined 1% and our EBIT declined 6 And obviously, we are not happy with that. But considering the circumstances, we are trying to make the best of the situation. We move on to Slide number 11, cash flow. So if we look at the cash flow from operating activities before changes in working capital, it was about SEK 30,000,000 versus SEK 50,000,000 in the same period last year. And we have the changes in working capital, which were SEK 25,000,000, which is what we should have. I mean, as we have a declining sales, we Should have positive effects on the working capital. So that effect was down in the quarter SEK 25,000,000. And then the cash flow from operating activities after changes So working capital was about SEK 55,000,000 compared to SEK 17,000,000 in the last year. And then, of course, we have this very large item of cash flow from financing activities, which is the cash flow from the direct addition that we made, leading to an overall cash flow for the period of about 2 SEK 1,000,000,000. And the cash at the end of the period is about SEK 1,500,000,000. So with that, I hand over to Isabelle for some concluding remarks. Thank you. And my first point is regarding sharing the situation in Italy and Spain because that's basically where most of the loss they'll come from. And as we already explained, it's mainly due to the lockdown situation during the COVID-nineteen. And because consumer could not go to the pharmacy to buy the product, they could not go to the doctor to be recommended to buy the product. And on top of that, one of our key indication with probiotics is when we take it together with antibiotics. But as people stayed home, I mean, people have not been sick, so there has been no prescription, which is good in a sense, but there has been no prescription of antibiotics and therefore no prescription of recommendation of probiotics. So that's one of the main reasons. Hopefully, in the country where we've initiated the omnichannel strategy, the situation is really different. I mean, it's a really, really good year for us in the U. S, which is really our biggest omnichannel to private market. So that is extremely encouraging for the future. Here in the U. S, I mean, we've both extend the portfolio in term of product, in term of channel. So that's something that will help I mean, that's really our benchmark for what we want to you in the future. In the meantime, I mean, we've been really trying to monitor our costs closely. We knew that Q3 and Q4 were going to be a bit difficult in terms of sales, and I think that's what we have been able to demonstrate. So even though I mean, obviously, I would more be happy to present a seeing double digit increase for 2020. It is not the case, but we remain confident that our long term ambition are achievable bond. This omnichannel strategy implemented works, so we just have to leveraged in a broader number of countries. But now so we are ready for questions. So please, operator? The first question comes from Christopher Luebbers from Carnegie. Please go ahead. Your line is now open. Yes. Hi. I have four questions, but let's take 3 now, and then I'll get back to the queue. So first, Ilya, how quickly do you think sales growth will return? So what are you hearing from your sales partners, distributors? So what do they tell you about the demand situation? And maybe even more important, their inventories and Inventories among their customers. My second question relates to operating costs. I understand what you say about Higher R and D costs in the quarter, and since there have been some temporary effects. But when it comes to selling costs, What's the reason they're only down €6,000,000 year over year when there are no traveling exhibitions, Is it so that you have done any larger consumer marketing campaigns affecting cost in the quarter? And then the Q3, the new dividend policy, it looks a little bit strange Since you have raised money and talking about being more active doing M and A, so why also increase the dividend policy At the same time. Thanks. Thank you, Christopher. So starting with your question number 8, the one about how sales will return. Talking to our partner, basically, they say that the 2 first quarter are going to be, I mean, pretty stable, but that they see the vaccine effects starting for Q3 and Q4. So that's basically how they see the year. Regarding inventories, we've not seen any I mean, we had a bit of an issue in the Q3, as we said discussed last time. But we don't think that there is a big inventory buildup at the partner level. They've been I mean, they learned from Q2 to Q3, so they've been pretty cautious. And looking at the order book we have in front of us for Q1, we don't see any strange happening in terms of inventory. So that's for your first question. Begin Sorry, follow-up on that. So the sales decline of 4% organic in Q4, do you think that represents More where the underlying market was in or the end user demand in the 4th quarter. That's a good question. I do believe that demand is stronger than that. Availability has been still an issue. And all the small sickness that normally you should have during winter have not happened. But the prevention trend is very big. I mean, we got so much question about the immune system, how probiotic works that I think that part of the business will be able to sustain a bigger demand than minus 4 for the quarter to come. Okay. And when you say feedback from sales partner that sales will be stable in the 1st 2 quarter, Yes, that's I think that will be stable plus and but rebound in Q3, Q4. Okay. So a little bit of growth In 1st and second quarter, best guess. Okay. If we go to operating costs regarding the L and D, so as Alex explained, indeed some delayed. We've not been able to do the clinical study, the recruitment. I mean, to be honest, we cannot recruit patients to hospital. And that's what that has impacted from Q3 to Q4. But I was more interested in I understand that, but the marketing costs are up, I think EUR 17,000,000 versus the Q3. Yes. But if you allow me to continue on L and D, just wanted to say as well some things that we've initiated a study in Ouroboru. That was not in the budget, and we started that in December. We've been contracted by Ouroboru Hospital to formed a study to with their nurses to see how if you take probiotics, I mean, Protected in that case, roitery, with vitamin D, how it's going to have an impact on your immune system. So and that was not planned in the budget, but we found it so interesting to check that we say, okay, let's start that. The intervention period is about 6 months. So we have today recruited 130 GPO out of I mean, we have to recruit 300 as far as I recall. We will have endpoint in June, and we do expect to be able to communicate on the results in October. And normally, we don't communicate on the study we start, but it has been published on the website of the Aurobo Hospital. So we can be very open with it. So but that's an explanation as well why the R and D increased by 29%. Now to your question about sales. So basically, yes, indeed, we've not been traveling, but you know our P and L better than us. And you know the traveling cost is not exactly the main part of our budget. We've basically increased some consumer campaign and is mainly in the U. S. Because here, we can monitor that when we invest more, we sell more. And therefore, we've been decided to increase our marketing investment mainly in the U. S. Market and mainly to sustain traffic on the 4 main e commerce platforms. Okay. Interesting. So and will you was this something special for Q4? Or is this something We plan to continue. I mean, we want to focus on the most interesting market, and U. S. Is one of these. So this overall investment is going to continue in 2021. So yes, there is more to come on that side. But there is more product to be launched as well. So I mean, U. S. Will be a very key focus market for us in 2021. Thank you. And then just on the dividend. Yes. So the dividend policy, I mean, the positioned come from the Board yesterday. And basically, the decision has been taken to increase from 40 to 50 we meant to be voted, of course, at the General Assembly in May. And that's basically I mean, we've always said 40%. Normally, we've been distributing much more and was more close to 100% than 40%. But in that case now, we didn't deliver any distribute any extra dividend. So that's why and the situation of the company is pretty good. So that's why we've decided to propose this increased from 50% to 50%. Okay. That it makes sense, of course, with extra dividend. Thank you very much. Bring Thank you. The next question comes from Daniel Albin from Danske Bank. Please go ahead. Your line is now open. Yes. Thank you and good morning. So I have three questions and maybe we can take them 1 by 1. The first question coming back to your medical marketing model. Wondering if you could elaborate a bit more on What type of doctor visits the main which is the main sales channel, if you could relate to which types of area Would be interesting. And also on a follow-up on that question, maybe more long term now and doctor visits are becoming virtual. How do you see your sort of medical marketing model being long lasting in, say, more virtual doctor visits? So that's the first question. Yes. Thank you, Daniel, for that. Basically, as 80% of our sales are pediatric product, normally our partner are mainly visiting pediatricians. So that and that remains the case. But we want to focus more on the adult portfolio. And within this agile portfolio, I think the type of doctor and physician or partner are focusing on are mainly gastroenterolog. So if we look at France, we launched Gastroenterology in the Q3 2020. And but we prepared the launch by really talking to the gastroenterology Association, finding some key role in the gastroenterology space. And that's exactly what Abbot is doing as well in Latin America. So a lot of I mean, a lot of visits to work on Entrance and Olog. For the U. S, we've been already visiting the pediatrician and the gastroenterologist, but the new type of physicians. They started to visit in Genealog because we want really to focus on the pregnant women. We want really to own that space, this 1,000 and third day of life. When you enter into your last quarter of pregnancy, then the genealog in U. S. Would recommend that you start to take protective because it's good for the mother and it's good for the baby. And then we start as well to when they are visiting their genealog to say, well, don't forget when you deliver your baby in order not to maybe to our colleagues, things about the drop. So and we've been even sponsoring getting these boxes that mothers receive when they get birth at the hospital. They get boxes with a lot of samples. And now the EOGA drug is in there. And then we start to talk to the mother as well when they are toddlers, while visiting their genealog. So all this genealogic space is new to us for the U. S. And it's for the moment, mainly U. S, a bit Germany. And that's and the late I mean, the last group is more dentists, but that will be mainly in Japan and now in the U. S. And here as well, it's very new. So we are contacting the Dental American station both for adult and soon in pediatrics as well. Does it answer your question? Yes. Thank you. And our meetings becoming more virtual also? Yes. I mean, that's a very interesting question because we are figuring out now we work very much on social media to reach the consumer digitally. So that's something we are really focusing on. We have as well developed a lot of online platform, education platform towards healthcare professionals. So we have the Biogalia Academy for Pediatricians that we've run the 2nd edition this year. Now we have developed a new one called it's our partner pediatric education platform. So here as well, they have modules about different type of trained not only our, by the way, but more in general for biotics, how it works. So we had a lot of web seminar that on our part of launch that our partner can use. So for the partner and the consumer, we developed a lot of things. For the moment, I cannot today we've find exactly the way how we should work all these crew and all these doctor online, but that's something which is interesting to follow. Okay. Thank you. And my second question On future outlook and profitability, are you still comfortable with the 34% EBIT margin level As a long term target and going into next or going into 2021, 2022? Yes, I mean, that's the target we've been focusing on. You know my position, I think, obviously, that is a bit high. But that's the target we've been given and that's the target we're going to follow. Okay. Thank you. And thirdly, On Americas, you mentioned campaigns earlier, are there any phasings effects to considering Q4 all larger orders being booked. And also, is it possible to get a breakout between How U. S. Has developed in Q4 versus, say, Brazil and Mexico, are there any larger deviations to account for? Now I'm in U. S. Every month is a record month compared to the month from last year. So we really don't see any inventory building there. And the I mean, both sell in and sell out are very strong. In LatAm, as I mentioned, the sell out for us. It has been very good. The market was not that interesting, but we took market share. So while we are selling and decreasing, our sellouts have been increasing a lot. So here, I don't see any big inventory because I see that outselling like flat and debt sale now increasing. So there is no inventory on the contrary. Okay. So pretty sound, I mean, situation to start 2021. Okay. Thank you. You're welcome. Thank you. The next question is a follow-up question from Christopher Leiber from Carnegie. Please go ahead. Your line is you. Yes. Thank you again. You talked about the successful Online strategy you have in the U. S. And China, do you have any examples of changing to or starting to implement some strategy in European countries as well. And if you want to do this change, does it also means that you need another type of distributors and sales partners more used to working with an online strategy rather than selling to traditional pharmacies, etcetera. Thank you. Yes. No, that's obviously what we are looking we want to do. And obviously, it's easier to convince perhaps a bit traditional distributor to change when you can present good business cases, and U. S. Is a fantastic business case. The COVID-nineteen as well be a great help in that sense that our partner understood that, well, if he cannot attend physically, then digital online sales is actually a good channel to go. And we started I mean, I hope you noticed now that we, Birgayer, we sell directly in Sweden. We've been very chief with apothea.se. We are very active with meds. I hope you saw some print advertising in the Sweden so on and so forth. So it's happening in Sweden now already. And France is working starting to work as well on digital marketing and, I mean, e commerce sales, but perhaps more still the e commerce via the pharmacy, not the automatic e commerce directly to consumer, but that will be next step. Okay. And you're doing this in Sweden? You're doing this With the distributor. We do it by ourselves. We are the distributor, and we terminated the contract in December to start to work on our own for the adult portfolio. And so now we've been launching protected was available via our X distributor. And so we took over and we launched Prodentis, we launched OT40 and we launched GATTROISE. So now you have the full adult portfolio that we represent in Sweden ourselves. Regarding the pediatrics portfolio, here, there is we have an exclusivity contract with Tempur. So Tempur under their own brand, Magdre Par, Tempur are I mean keeping the exclusivity for the pediatric product. But for the adult portfolio. We've taken over. But is this should we see this as a Change of strategy in a broader scale, not only the homes home market in Sweden that you do more yourself? No, that's not a major change in our strategy. We are still too small to be able to run the whole global business worldwide with our own distribution companies. But we've decided to be a bit more, I mean, opportunistic. So when we're in countries, we don't have a satisfactory solution with external partner, then we are looking at doing it by ourselves. But we don't intend to change our business model globally. Okay. And you're not planning to change a lot of distributors? Not allowed. But I mean, when we are happy, then we will do it. But here as well. We have long term partner. We are pretty happy with most of them. There are still some parts of the world where we could do better. So there will be changes because we have to be, I mean, happy with the capacity of our distributor to take Biogare to the next step. But on a, I mean, global perspective, there will be a few changes coming, but not the majority. Do you have a figure for the percentage of sales from online channel today and if there's an ambition, let's say, In 5 years from now? We are checking on the QPIs, but we are not disclosing it as we speak. Okay. Fair. Thank you very much. You're welcome. Thank you. The next question comes from Matthias Watsen from SEB. Please go ahead. Your line is open. Yes. Good morning. I mean, many of my questions have already been answered. But just one on the regulatory side. I think I read just a few months ago that the term probiotics can be used on food and food supplement labels sold in Spain. This has always been a general health claim before, as I understand it at least. I mean, is this wrong? And if not, have you seen And using regulatory environment in other parts of Europe? Or how is your view on this? Yes, I mean, you're right. So Spain took the decision against the European Community the regulatory way of looking at probiotics to allow to have probiotics put on the label of a product which is actually a probiotics. Italy have done that before. So now we have 2 major markets allowing probiotics. And there are I mean, we are working very actively on that topic because we don't understand why we can't put probiotics when it is probiotics. And that will allow on the I mean, for the consumer to have a better understanding of what is a probiotic, which is a living bacteria and what is not a probiotic. So by not allowing people to put probabilities, we are misleading the consumer. So we are really working together with IPA, the International Progiotic to increase awareness towards consumer to say, well, this is not acceptable in order to add probiotics on the label. And there is a big meeting coming in Denmark. So I think there is a light at the end of the tunnel because it should be clear for consumer. And we should be able to put much more things on the label that we are allowed today because we are misleading the consumer by not being able to say that we are clinically proven. We are not able to claim anything even if we have clinical data to prove it. So but regulatory instances are perhaps not the more agile that you can find in the world. But I mean, Spain plus Italy, that's really the light at the end of the tunnel for the rest of the country we do also. Thank you for that. And just one on OstORTIS, I mean, launched now in the U. S. And now also in Sweden. What to you is the next step for the product? You will soon get press released that we are working on. So let's say in 2 weeks' time, you will have a new country on that press release. But we so now today, we launched in the U. S, Sweden and Spain. So that is official. But there is a 4th big country coming, but you will get it in 2 weeks' time, I guess. Okay. Thank you very much. Have a great day. You're welcome. Reach the 2. Thank you. The next question is a follow-up question from Daniel from Danske Bank. Please go ahead. Your line is open. Yes, thank you. As a follow-up. So a bit curious regarding the EUR 3,000,000 spent in the quarter for cost related Two acquisition candidates, as you are looking now, could you perhaps share some more light on exactly what It includes, in more concrete terms, other candidates, you're reviewing other production sites, commercial products or R and D related company Any color there? I mean, obviously, we're not going to disclose the object we looked at. I would understand. We are very active in that areas because our ambition is really to be able to focus on growth, and we see M and A as an interesting way to go back to double digit growth. And in terms of what type of company we are looking at, I mean, there are, as we mentioned, we look at perhaps some fermentation capacity. And as we've been already discussed because we don't own that today, we can look at more direct to consumer type of company that would help us to fact track our digitalization. We could look at some trained, well documented, but at the early stage, with company not having their on distribution or even not their own brands that we could take on and leverage under Biogaya's portfolio brand towards our distribution. So we have a couple of axes, and we are looking actually in all of these. Okay. And just Maybe size wise then, are these companies same size as you? Or are there smaller sort of bolt ons you think? I mean, size is not exactly our main focus. We look more at the synergy, and then we will make it happen. So it could be smaller, same size or bigger. Okay. Yes, thank you. That was all for me. Thank you, Daniel. Thank you. There appear to be no further questions. I'll return the conference back to you. Okay. But thank you for your attention, for all these good questions as usual, and have a nice day. Bye bye.