Vistin Pharma ASA

OSE:VISTN

Earnings Call Transcript 2021-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the Vistin Pharma quarterly report Q3 2021. [Operator Instructions] Please be advised today's conference is being recorded.I would now like to hand the conference over to your speaker today, Kjell-Erik Nordby. Please go ahead.

[Kjell-Erik Nordby]

Thank you very much, and welcome to Vistin Pharma third quarter reporting. The presentation will be held by myself, Kjell-Erik Nordby, the CEO of the company; and Alexander Karlsen, the CFO.So first, we start with the highlights for the quarter. We continue to deliver strong revenues also in the third quarter. The revenue for the quarter ended at NOK 63 million compared to NOK 55 million the last -- the third quarter last year, which is a 14% increase in revenue. And the increase was driven by, first of all, higher sales volume and also higher sales prices, which was partly offset by a significant stronger Norwegian kroner versus euro in the quarter. And year-to-date, we have achieved more than NOK 200 million in revenue, which is a 6% growth compared to last year despite a very strong Norwegian currency throughout the year. Sales volume was also up 6% year-to-date compared to last year.The EBITDA ended at NOK 4.6 million in the quarter versus NOK 9.5 million in the Q3 last year, which is a 52% decrease. And the EBITDA was unfavorably affected by the strong Norwegian kroner throughout the quarter, also increased raw material costs following the COVID-19 pandemic and record high international freight costs. I guess, you all also have realized or also heard in news, et cetera, about this very congestion in international freight, especially from Asia to Europe. And the world freight index has been more than 600% higher than the same -- compared to last year. The electricity prices has also been very high in the third quarter and also compared to last year. The EBITDA year-to-date ended at NOK 36.5 million versus NOK 44.3 million last year.We are on track for an all-time high production volume in 2021, which is, of course, very, very important for us since we have a very strong demand still for our products. The Fikkjebakke plant has been running at full capacity. However, we had a 10 days stop due to lack of raw materials in July. We have recovered and also achieved a higher production volume in the quarter compared to last year despite this stop. The stop has -- is caused by low predictability and significant interruption in freight lead times from Asia to Europe. However, we have been proactively building security stocks of key raw materials and believe we have control over the situation. And it has -- the stop will not impact the total volume for the year, which will be a record high if the fourth quarter is running according to plan.The metformin capacity expansion progress -- project is progressing according to time and cost. We still believe that the first commercial batch from the second production line will happen in Q2 2022. We have now paid more than 50%, 55% of the investment of the new production line as of end September. And we have, after also this payment, a cash balance of NOK 52 million at the end of the quarter and still no interest-bearing debt in the company.So we continue to deliver strong revenues. The revenue has increased by 17% from Q3 2019 to Q3 2021, and it's a solid underlying growth in the market. EBITDA has also increased by 50%, even though that third quarter this year was lower than the third quarter 2020.On the operational side, as you probably all know that Vistin Pharma is the only dedicated metformin producer in the world. We live and breathe with metformin 24/7. This is our key and only product. Diabetes is one of the largest health emergency in the 21st century, and metformin is the gold standard treatment of type 2 diabetes. So that actually amounts to that the growth in the metformin market is expected to be 5% to 6% annually in the coming 10-year period according to WHO. So we see a bright outlook for Vistin Pharma as being one of the leading producer of metformin in this growing market.Metformin actually went off patent in the '60s. However, it's -- as we said, it's still the gold standard treatment for diabetes 2. And one of the reasons is that it actually is very efficient to reduce the liver's production of glucose and delays and reduces absorption of glucose from the intestine. And it is a very cost-efficient treatment. It has been used for treating diabetes 2 for decades, and it has limited side effects and long-term safety profile. So it's a very cost-efficient and safe treatment.It comes normally in tablet form and also lately in combination with other glucose-reducing medicines. It's a big generic market. However, it is also a patented market with novel, innovative, new formulations, which is second or third line treatments. And this means metformin is inside both the novel products and also in many of the generic formulation that is -- are marketed worldwide.Diabetes is regarded and defined by the international health authorities as a global emergency. And it -- the number of diabetes 2 patients worldwide will increase by more than 50% during the coming 20 to 30 years. And it's a growth in diabetes in all regions over the world.This next slide shows the coverage of our sales. The red bubbles are -- indicates where actually our main customers are located. However, since most of our customers are either multinational, global or strong regional players, metformin from Vistin is in tablets sold to consumers in more or less all countries in the world.As I mentioned in the highlights, we have a record high sales volume year-to-date compared to last year. It's a 6% increase, which is, of course, extremely important for us. The sales volume for this quarter, the third quarter, was 861 metric tons, which is 12% higher than the same quarter last year, which showed the demand also and how successful we are in the market with our products. Year-to-date, it is, as we said, a 6% increase.We had a 3% increase in production volume in the quarter compared to the same quarter last year, even with the 10 days production stop due to lack of one of our key ingredients. So the plant is running really nice, and we had no interruption in the production whatsoever in year-to-date, except from this unplanned stop. And we are, as we speak, and have been taking actions to secure future supply and also improve delivery performance of raw materials from Asia. As you may be aware of, there has been or there are still port congestion. There's a lot of ships waiting on the harbors in, for example, Antwerp and Rotterdam, and we are taking measures to secure that our material is being loaded to trucks from key locations in Europe.And finally, before I give the word to our CFO, the corona pandemic status, the pandemic is not over yet, even though that the countries are opened up. And we are still taking actions to secure that we do not get corona-infected employees in Vistin Pharma, and we have had no incidences of corona in our plants so far. The demand in the market is high. It has not been affected by the epidemic. And the forecast going forward, if you look at the demand for metformin, has not been altered or changed due to the corona pandemic.I have mentioned the lack of containers in Asia that has increased the freight costs, which, of course, is an effect following the corona crisis, not for only -- not for Vistin solely, but for the whole world or the whole manufacturing industry. However, in this landscape, we believe that we are strategically well positioned to benefit from the expected increase in local supply/demand going forward. We can reach any -- more or less any destination in Europe within 24 hours with a truck from our manufacturing plant in Kragerø, which give us a competitive edge over -- especially Asian manufacturer.So then we are to the financial review, and I'll give the word to Alexander.

[Alexander Karlsen, Chief Financial Officer]

Thank you, Kjell-Erik.We'll have a more look at the financials, starting with the revenues, NOK 8 million or 14% increase year-over-year, mainly driven by increased sales volume and increased ASP or average selling price, however, as Kjell-Erik mentioned, partly offset by a stronger NOK versus euro. If we FX adjusted numbers in Q3 this year compared to same quarter last year, the revenue increase would be around or close to 18%, so a very nice increase there.Unfortunately, we see the gross margin going down versus -- or compared to previous quarters, and that is mainly driven by the extremely high transportation costs to transport containers with raw materials from Asia, especially China, to Europe. And also, we're starting to see more pressure from our raw material suppliers on increased price. We are working closely with our customers to see how we can get compensated for the significant increase in cost of goods. And this is something, of course, we will work closely with the customers also going forward next quarters as we see the continuous pressure from increased raw material prices.Looking at the result for the Pharmaceuticals, EBITDA came in at NOK 4.6 million versus NOK 9.5 million in the similar quarter last year, a decrease of close to or a bit more than 50%. If we adjust the numbers for FX here, the decrease will be around half or 27%, 28%.Again, we see pressure on freight on raw material. And in additional, we have in the third quarter had really high electricity prices. I think it's 3, 4x the prices per kilowatt hour versus same period last year. And as I think we have mentioned before, electricity is one of the main cost drivers at our plant in Fikkjebakke to produce the metformin. We also, in addition to this, had a cost increase on water. That's another important cost. In the plant, we use water to cool down the production area.Looking at the earnings before taxes, it came in at NOK 2 million for the quarter, down from around NOK 6 million in similar quarter last year. And depreciation for the quarter were NOK 2.4 million compared to NOK 2.3 million in the same quarter last year.I think we've been through most or highlighted the most important figures in the previous slide, so we will continue to the balance sheet. It's not -- there are a lot of changes since the comparable period last year, but there are some small -- or there are some increase in fixed assets which is driven by the net project or which is the investment in new parallel production line at the Fikkjebakke plant.And the deferred tax assets is in relation to the realized loss for Energy Trading and slightly decreasing as we have our profit quarter-by-quarter. And then the next main item is that there is actually a decrease in cash balance compared to similar quarter last year, driven by dividend payout in June and the investment in the MEP project. So total assets as of end September, around NOK 317 million, which is quite the same level as similar quarter last year.Proceeding to the equity and liabilities, share premium has decreased there driven by the dividend payout. And as we mentioned in the highlights, no interest-bearing debt in the company as of now. We have some lease contracts that are recognized in the balance sheet accordingly to IFRS close to NOK 2 million. Equity, around NOK 268 million equals an equity ratio of 85%, so a very, very strong balance sheet. Liabilities, I would say, similar as last year, NOK 48.5 million. And again, total equity and liabilities close to NOK 317 million.I think that was all for me, and the word back to you, Kjell-Erik.

[Kjell-Erik Nordby]

Thank you. To sum up, we are bullish about the future of Vistin. The metformin market is growing. Diabetes will continue to be a very important and challenging disease in the future. And metformin is a very, very safe and cost-effective treatment and will continue then to be the gold standard for the treatment of diabetes 2.So -- and our sales are progressing nicely. We have -- I think we have established a very good relationship with customers, also working with new customers, and we see a very attractive growth potential to be realized when we have additional manufacturing capacity and additional volume to sell.The COVID-19 situation, all-in-all, it's a very bumpy road at the moment with high freight costs and you name it. From a market perspective and strategic perspective, the industry are looking for companies that can lower the risk in the supply chain, offer short-travel medicines and also focus on factors like environmental, social, governance standards, et cetera, where we believe we have done quite a lot of work during the last 5 years and also had some very interesting projects in pipeline, which we maybe will talk more about in the coming quarterly presentation.And the project to increase the capacity to benefit from the demand -- from the increased demand and growing markets, the capacity to increase the volume to approximately 7,000 metric tons is on track. And hopefully, we will have the first commercial batch from the second production line released to the market by Q2 2022.So that sums up the third quarter presentation of Vistin Pharma. So we now leave the rest of the call to any questions that you may have.

[Operator]

[Operator Instructions]

[Alexander Karlsen, Chief Financial Officer]

We have, as of now, received one question, and that is, can you give an update on the sales of the new MEP capacity available both from Q2 2022? And I leave that to you, Kjell-Erik, to answer.

[Kjell-Erik Nordby]

Yes. Thank you. We do not give any guidance to the future. As we said in the summary, we are optimistic that the demand in the market from existing customers and new customers will give us additional sales when the new line is open. However, we are not willing or not prepared to give you any words on how much of the additional capacity that will be sold. However, we are positive that the new line will be -- we will fill the new line with volumes as they go along.

[Operator]

[Operator Instructions] There are no questions coming through, sir. Please continue.

[Alexander Karlsen, Chief Financial Officer]

I think another question that came up is, can you say something about the prices that we charge our customers? And I'll leave that to you also, Kjell-Erik.

[Kjell-Erik Nordby]

What we can say here is that, of course, when the market is developing as it does with higher freight costs currently, which is probably not a very sustainable long term, but at the moment, of course, that is something that hits all manufacturers, whether it's pharmaceuticals or else. But we are in discussions with customers to increase prices to compensate for the increased cost of goods sold.

[Alexander Karlsen, Chief Financial Officer]

I think there are several questions coming in kind of asking the similar things about prices and compensate the cost increase, and I'll add some additional points there. I think kind of -- I think in Q3, we've seen kind of a perfect storm where we see the, as I mentioned, the raw materials increase. We see the transportation increase. In addition, we have the, I would say, extremely high electricity prices for -- specific for Norway and also the water increase from the Kragerø municipality.So there are a lot of things, kind of costs are going wrong direction. But as we mentioned in the report, we have a continuous dialogue with customers to see how we can get that compensated, and we will continue with that going forward to see how we can mitigate that.

[Kjell-Erik Nordby]

I think the answer, to call it complete, and the short feedback is, yes, we will -- it is possible, and we will increase sales prices due to the increased cost of goods sold. But we -- I can't and we won't say anything about how much or what kind of effect that will have.

[Operator]

[Operator Instructions]

[Kjell-Erik Nordby]

I think we've finished the call now. It doesn't seem that we don't get any more questions. So we'll thank you for listening in, and we finish the third quarter presentation now.

[Operator]

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