Vistin Pharma ASA

OSE:VISTN

Earnings Call Transcript 2023-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Vistin Pharma Quarterly Report Q2 2023 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kjell-Erik Nordby, Chief Executive Officer. Please go ahead.

[Kjell-Erik Nordby, executive]

Thank you very much, and welcome to the second quarter presentation of Vistin Pharma. As usual, we will start with the highlights of the quarter. I'm pleased to inform you that Vistin is continuing doing well in 2023. The revenue in the second quarter ended at NOK 107 million compared to NOK 69 million in the second quarter last year. The reason for this significant increase in revenue is mainly driven from the increased volume from the new production line that we invested in and opened in 2022 compared to the same quarter last year, which was in the beginning of the operation of the new line. So year-to-date, the revenue is -- was NOK 208 million compared to NOK 102 million year-to-date last year, which is more than 100% increase.

EBITDA ended at NOK 20 million compared to NOK 5 million in the last quarter. The significant increase in EBITDA is mainly affected by, first of all, the increased sales volume. We had much more volume available for sales. Scale economy benefits. In 2022, we hired all the employees that was necessary to run the new manufacturing line. So in 2023, we haven't had the need to add additional manpower, for example, which, of course, gives a a very positive effect when the manufacturing volume and sales volume increases.

We also enjoyed competitive electricity prices. Last year was a nightmare to reach demand, and all other manufacturers in Norway due to the extremely high energy prices. But in December last year, we entered into a 10-year supply agreement with Statkraft that gave us competitive prices on electricity, which we are all now enjoying.

And the Norwegian kroner has been very weak, as all of you know, in 2023. We mainly sell in Europe, and we produce in NOK, and that has given us a benefit. This is partly offset by a stronger U.S. dollar versus NOK because the raw materials are bought in dollar. So year-to-date, the EBITDA ended at NOK 34 million by Q2 compared to negative NOK 13 million the last -- the same quarter last year.

The net profit has -- is negatively affected with NOK 3 million in the quarter, and that is by fair value of future FX cash flow hedging contracts. However, that has no cash effect in the quarter. We are also happy with a significant improved cash flow at the end of 2022. We had a net debt of NOK 44 million that has been turned to a positive net cash flow of NOK 3 million by the end of June.

This enhanced focus, very much focused on local and global emissions. And we have several programs in place to consume responsibility. This is both because as a main manufacturer in the government policy, we are very responsible in taking care of the environment. But it's also, as we see it, a competitive advantage to focus on this, and it gives us a competitive edge or, for example, Asian manufacturers. We also know that our customers both appreciate and in more and more demand that they are a green company focusing on ESG issues.

So we have just listed some of the things that we are focusing on has been done. Our overall goal is to have 0 impact on surrounding environment. And we are now doubling the production volume with the aim of not increasing the impact on the environment, and we are on track on that. During the last 3 years, we have invested more than NOK 4 million in sustainable initiatives. For example, we have reduced the mission of solvent to air by 90%. And we are reusing more than 90% of all the solvents that we use in the manufacturing process. We are investing approximately EUR 1.5 million in a project to recycle cooling water. And that hopefully will be implemented by year-end and will reduce the consumption by 80%. This is both a benefit for the municipality, but it also will give us a significant cost benefits going forward.

We are in close cooperation with the waste treatment receivers to optimize waste and to turn the waste into raw material. This is a project that will be ongoing for the time to come. We have, since 2017, done biannual effluent surveillance of the Kragero fjords to analyze to see if there is any phase of Vistin material in the local fjords in Kragero. And in the report that we received last year, it concludes very clearly that there is no trace of any Vistin substances in the local fjords, which is, of course, very, very positive for us and for the people living in Kragero. Our target is to reach the United Nations sustainability vision of 0 emission when planning for the future. So all our initiatives going forward has that in mind.

Yes, then we go over to the operational review. Vistin, we are probably the only company in the world that actually live and breathe with metformin. We are a pure-play metformin company with advantages that, that gives us because we can concentrate and focus 100% of our metformin business. Diabetes is one of the largest health emergencies in the 21st century. And metformin is still the gold standard treatment of type 2 diabetes. So we are in a growing market. The market is expected to grow by 5% to 6% annually. And we aim to have a global share of that market with approximately 15% when the new capacity is fully utilized.

Metformin is the first long treatment for type 2 diabetes. 90% of people suffering from diabetes have type 2. The advantage and the benefit with metformin is that it's a very cost-efficient treatment. So the health society can afford to treat patients with metformin. It has been around since the '60s and has limited side effects compared to all the positive effects that metformin have. Today, more than 0.5 billion adults in the world are living with diabetes, and that represents more than 10% of the world's population. And we are quite proud to say that Vistin, today, deliver metformin to diabetes type 2 patients to more than 50 million of the type 2 diabetes patients every day. So we are a significant contributor to treating diabetes 2 in the world.

The total number of diabetes patients, I said that the market is expected to grow by 5%, 6% annually. And the -- that is based on -- the total number of diabetes patients is expected to rise by more than 200 million people by 2045, which is a 46% increase. This is numbers taken from WHO's reports.

Today, we produce about 10% of the world's demand of metformin. We have a worldwide sales coverage. This sales map just illustrate where our customers are located. However, most of our customers are operating in the global market, so that we since metformin API is probably included in metformin medications spread around the whole globe, the whole world.

So I think that finish the highlights and the operational review. I know I'll give it to -- give the word to Alexander to go through the financials for the quarter.

[Alexander Karlsen, executive]

Thank you, Kjell-Erik. So we'll start to have a look on this historical graph. As you can see, we have a long and successful growth track record. And with the investment, we are on a path to continue this growth.

Going to the quarterly figures. Having a look at the production and the sales volume, both continued to increase in the second quarter and is also expected to continue increase throughout 2023. It's, however, important to mention that for the production volume, there will be quarterly variations depending on planned maintenance stop and potential downtime as we still are in a ramp-up phase.

As you can see in the production and sales figures, we have produced more than we have sold for the last quarters. So we have built some finished good inventory, and that is mainly to secure customer service level that are their expectations and also to prepare for increased sales volume in the second half of 2023.

Having a look at the revenue, which was NOK 170 million -- NOK 107 million in the quarter. And as Kjell-Erik mentioned, mainly driven by more volumes available sale. The revenue is also post affected by a stronger euro versus NOK. If we adjust for the FX, the currency in neutral revenue increased by approximately 30% compared to the same quarter last year. And the sales prices is reflecting the current raw material and freight costs. I would add that we have seen a general decrease in raw material prices in Q2 and also some going forward with the purchase we're doing now. So it's likely that there will be some reduction in sales prices. However, our goal is that the reduction will be less than the raw material prices. So this may affect the top line going forward, but should be positive for the margin development.

Having a look at the gross margin, which came in at 58% in the second quarter. Adjusted for currency and mix, the gross margin is approximately 2% better in the second quarter compared to Q1 2023. For the gross margin in Q2 last year, it's important to mention that, that was heavily affected that we had very limited volumes. So only very high-priced premium volume was sold.

And as mentioned, the raw materials is continuing to increase and much raw material we have in hand for the third quarter and orders we do for Q4 is at reduced prices, which should be positive for the gross margin development going forward. And our ambition for the gross margin is above 60% long term.

Looking at the EBITDA, came in close to NOK 20 million in the quarter compared to around NOK 5 million in second quarter 2022. Again, post affected by more sales volume, the euro versus NOK, partly offset by the strong USD as we purchased raw materials in dollars. The Q2 last year was, as Kjell-Erik mentioned, heavily affected by limited sales volume and start-up costs for the new line in addition to the very high electricity prices.

It's very pleasant to see that we deliver margin improvements, which is driven by the economies of scale as the MEP volume ramps up. For example, having a quick look at the operational expenses and salary costs in Q2 2023 is almost at the same level as the same quarter last year, giving us the expectations of good economies of scale.

Having a look at the key figures income statement, we have been through some of the numbers, but having looked at the earnings before taxes which came in around NOK 9.1 million. We can, for example, see that depreciation has significantly increased compared to the same quarter last year, which has driven that we have completed the MEP investment and started to depreciate that investment.

We also have a net finance income -- sorry, finance expense of around NOK 6.2 million, which is mainly NOK 3 million in realized loss on the FX hedging contracts and NOK 3 million in unrealized cost and also FX hedging contracts. That gives a profit for the period after tax of NOK 7.1 million. However, our tax is not payable as we have a deferred tax asset.

Going over to the balance sheet. Not any significantly change, I would say, compared to previous. Total noncurrent assets at around NOK 246 million. Looking at the current assets, I would -- some comments on the inventory. Previously, we have had more raw materials than finished goods. This has switched a bit in the second quarter, where we have bled out a significant part of the raw material and have sold less than the upper duty. So the mix is now more finished goods and less raw material. However, we expect that to change again in the Q3 and Q4 as we have purchased some additional raw material due to favorable crisis. We got some additional volume rebate if we purchase more raw materials. So we decided to do that as we see the prices as favorable. That gives total assets of around NOK 383 million as of end June.

Having a look at the equity and liabilities. Equity at around NOK 277.6 million, and a strong balance sheet, 72% equity ratio. We have a very strong cash flow in the first half of 2023. So we have done a full down payment of the credit facility. And as of end June, we have a net cash position.

If you look at the balance in other current liabilities, that's mainly raw material in transit. So it's sent from the supply but not yet received locally. But as mentioned, as we have purchased additional raw materials, which we will deliver and paid in Q3, this will mean that we will have more work and higher working capital requirement in the third quarter that will affect the cash flow in Q3.

I think that was all I want to say with the financials, Kjell-Erik, so I'll give the word back to you.

[Kjell-Erik Nordby, executive]

Okay. Then it's time for me to kind of sum up the second quarter. Starting with the slide who we are and Vistin is operating in the market. We -- today, we produce 2 different metformin products. We produce the bulk API and we produce also the DC, direct compressible granular, which is a pre-tablet form. Approximately 80% of our volume are the HCl and 20% DC. When we go forward, and we are going to fill the capacity completely, we are focusing on both these products. So we want to grow both the HCl and the DC business.

There, in April 2020, as mentioned in previous calls, the Board decided to invest NOK 100 million to increase the annual capacity up to 7,000 metric tons. That investment is completed. We have used less than the budgeted -- the price for the expansion has been less than NOK 100 million. So we are well in line with budget. The installed capacity where at the end of 2022 was 5,500, running at 6 shifts, 24/7. We're still running 6 shifts 24/7 and producing as much as we can. And we expect that capacity to increase to close to 7,000 tonnes by end of 2023 or early 2024.

We position ourselves as a premium producer in a competitive market. So the customer should demand more from us than from low-cost manufacturers. We sell to reputable international pharmaceutical companies or strong regional companies. We have a state-of-the-art, fully automated manufacturing plant in Kragero. We are approximately 70 employees in Kragero produced -- that are able to produce approximately 7,000 metric tons of material. That means that also that salary levels are not the most critical factor in Vistin Pharma since we have been so focused on automation. We are certified by all significant international regulatory bodies. And our competitiveness is that we -- what we think differentiates us from other metformin manufacturers is that we are located in Europe. So we have a delivery time less than 24 hours to most of our customers in Europe. That gives us a competitive edge over non-European producers. In addition to that is what I mentioned earlier, our focus on ESG and environment, which is something that I think we will see becomes more and more important going forward.

So we are in a growing market, which is very nice to be in a growing market. And diabetes is, unfortunately, going to continue to be a very important and serious disease in the 21st century. Metformin is expected to be the gold standard treatment going forward because it's so cost efficient. It will probably come other medications, but they will be second or third-line treatments and will not be the blockbuster as metformin is.

We see the attractive growth potential to be realized when the capacity is fully available. We are already progressing nicely with the capacity expansion. And as mentioned, we are strategically well positioned as many European clients and most of our European customers -- most of our customers are in Europe, they prefer high-quality supplies, reliable supplies, near-shore production and not -- and also placed an attractive ESG profile, which we believe that we are and will continue to strengthen.

The expansion project is progressing according to plan. The ramp-up plan is going nicely. And that is something that we will benefit from going forward. The long-term renewable energy supply agreement with Statkraft, that has improved our competitive position. And hopefully, going forward, we are not that exposed to fluctuation in energy prices.

And as Alexander also mentioned that we see a downward trend in both freight and raw material prices. So for the remaining part of 2023, they are expected to decrease. Sales prices and volumes for most of the remaining '23 are secured already. And I will finish off by also stating the ambition that the Board has communicated earlier, to pay out 50% of net annual profit and dividend. The size of the dividend will be dependent on the company's financial capability and, of course, the capital requirements for future growth.

So thank you very much. That ends the second quarter presentation of Vistin. So now we'll leave it up for questions.

[Operator]

[Operator Instructions]

[Alexander Karlsen, executive]

Okay. There is -- Kjell-Erik, we received some questions, so we'll start on the top. There's a question if there will be a dividend. The Board of Directors did receive a proxy to pay out up to NOK 0.75, NOK 0.75 per share dividend. The power of attorney is valid until the general meeting next year. So we will come back to that and send out a press release if they decided to send or to pay a dividend.

[Kjell-Erik Nordby, executive]

There was -- it's a question. It was an article. I was in [ Fenosa ] some time ago and was an article about Vistin, and it says that we target NOK 400 million in revenue for this year. It's a very approximate figure. I mean I was asked to do that. So we are not giving any guiding about what we expect to be the end revenue target for this year. But as Alexander mentioned that we have a strong focus on selling whatever we produce. And of course, to sell 6,000, 7,000 tonnes in the future, it will be also a higher percentage of generic volume that will be sold at somewhat lower prices. So the average selling price, going forward, is expected to be somewhat lower than, of course, that we have in the second quarter last year where we only sold premium volume.

[Alexander Karlsen, executive]

There is also a question here about the gross margin and our long-term goal of 60%. I think this discussion about what needs to be premium and how much [indiscernible], et cetera. I think it's -- there are a lot of variables that decides the gross margin is, of course, the sales volume and the mix, meaning premium versus generic, but it's also the FX, the dollar and euro. And also the general sales prices in the market is, again, as I mentioned, is depending on the raw material prices. So to be concrete on the question, it's not a defined percentage of the sales that need to be premium volume to reach the 60%. I think we will do what we can on the sales prices and on the volume to make sure that we reach the 60%. But -- and I think we are on a track to that as of today -- as of now. But again, a lot of variables that affects that, but we will do whatever we can to reach the 60% target going forward.

[Kjell-Erik Nordby, executive]

We got a question. So many FTEs that we have by end Q2 2023, we had 70.

[Alexander Karlsen, executive]

Around 80, I think.

[Kjell-Erik Nordby, executive]

77, 78 employees, which is the same number as we had in the second quarter last year.

[Alexander Karlsen, executive]

Yes. And we don't expect to add any FTEs short term. I think you have to see in 2024, but for short term, we will have a similar number of FTEs as we have or had in Q2.

[Kjell-Erik Nordby, executive]

A question about the progress in acquiring new customers, new generic customers. We can't say anything about that, except that we want to, and we expect that we will fill the additional capacity by also entering into a new supply agreement with new customers. So this is an ongoing activity. If we -- if and when we sign a contract which is substantial, this will be something that we will inform about. So I can't say anything about that because that's either 100% or 0. And of course, we are working with a different project at the moment. Some will hopefully materialize. Some will not. That's life.

[Alexander Karlsen, executive]

Yes. And then also a question here about the [indiscernible] expect decreasing freight prices. I think to be precise there is that there has been a very steep decline in the freight prices, but there are some lag from the spot prices until that kind of materialize in our P&L. We generally place orders and shipments 3, 4 months before we receive the raw material from the [ Asian ] and we don't then pay the freight before it's shipped and received in Norway. So it's not necessarily mean that we see that the spot price will decrease. But as we see, we start to receive material raw materials were also placed in late Q1 and Q2, the cost we actually pay when we receive raw material is decreasing.

[Kjell-Erik Nordby, executive]

So I think that is the question that we received. We try to answer them as best I can. Some questions cannot be answered in full because it's confidential, and we do not want to inform about the things that maybe happen in the future. But otherwise, I think that completes the second quarter presentation, and thank you for listening in.

[Alexander Karlsen, executive]

Yes. Thank you.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.