Vistin Pharma ASA

OSE:VISTN

Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to Vistin Pharma Quarterly Report Q3 2022. [Operator Instructions]. I would now like to turn the conference over to the CEO, Kjell-Erik Nordby. Please go ahead.

[Kjell-Erik Nordby, executive]

Thank you very much. Welcome to Q3 conference call in Vistin Pharma. The call -- the presentation will be given by myself, Kjell-Erik Nordby, the CEO of the company; and Alexander Karlsen, the CFO.

To start with, we are happy to present to you the new company logo and the new company design, which was launched this month. You're also invited to our new website. And we believe that the new website and new design reflects a more modern version of Vistin Pharma and who we are at the moment.

So then continue to the highlights for the quarter. We had an all-time revenue in the quarter. The quarter ended at NOK 92 million versus NOK 63 million in the same quarter last year. This is up 46% in -- increase in revenue. This is a combination of both price increases and also volume growth. However, the new line, we are ramping up the activities, but we are still have some limitations on volumes available for the quarter. Total this year, the revenue is NOK 194 million versus NOK 201 million last year. And remember, we had almost no manufacturing in the first month of this year due to the installation of the new line in the first quarter.

The EBITDA for the quarter ended at negative NOK 2.9 million versus NOK 3.8 million positive in the same quarter last year. The world is currently in a turmoil with a lot of volatility due to the war in Ukraine and European energy prices. So for example, in this quarter, our electricity prices is more than 500% higher than in the same quarter last year. And it's also the inflation rate in the world is high, which caused also an increase in raw material. And we also had an unfavorable U.S. dollar currency for the quarter. In addition, we had a onetime negative cost effect of NOK 5 million in the quarter. And that was due to nonsellable validation batches from the new line which was expected and an inventory adjustment. So year-to-date, EBITDA is negative of NOK 16.3 million versus a positive NOK 32.5 million last year.

The volume output from the new line is ramping up, and we are currently producing from both manufacturing lines, which also resulted in 1,100 metric tons production in the quarter, which is an all-time high manufacturing volume. At the moment, we have an installed capacity of approximately 5,000 metric tons, and we expect that capacity to gradually improve as we implement the -- process optimization tasks are completed. And by year end, the capacity should be around 5,500 metric tons. By the end of next year, we should be close to 7,000 metric tons in total manufacturing volume. We are somewhat delayed in the ramp up, unfortunately, and that is not normal when you install a new production line. But the momentum is gradually picking up. But we have -- we, of course, the marginal -- the economies of scale effect is lower than we will have when the line is fully utilized because we have already hired employees which are able to handle a larger volume than we currently produce.

So all in all, the Q3 financials has been significantly impacted by unfavorable market conditions. I think that not only Vistin Pharma, but most industries in Norway and probably in Europe have experienced a perfect storm during the last quarter. However, we expect that the financial result in the next quarter is going to improve.

We're seen still a pure play metformin company. And the market demand -- fortunately, the market demand for metformin is expected to continue to grow by 5% to 6% annually. That hasn't changed during the pandemic and hasn't changed due to the market conditions that we see today.

So with the installed capacity -- the new installed capacity of another 3,500 metric tons, Vistin's global market share will be approximately 15% when that capacity is fully utilized. And with a 15% market share, we will be one of the 3 largest metformin companies in the world.

Metformin is a first-line treatment of diabetes 2. It's used to lower glucose levels in the blood. The nice thing about metformin is that it's a very cost-efficient treatment. Metformin has been used since the late '60s, has very limited side effects and a long-term safety profile. So therefore, it is also the first line treatment and the drug of choice when treating diabetes 2. Metformin comes normally in tablet forms and also recent developments and innovations in the diabetes market -- in the treatment of diabetes. And also the use of metformin are metformin in combination with other drugs. So metformin is always inside the new innovative products that are being launched.

Diabetes is still a global pandemic or epidemic defined by WHO. The number of diabetes patients will grow by almost 50% the coming 20 years. And is still no sign that this unfortunate situation will change or flatten out. Vistin, we are strategically well positioned in Norway. Most of our customers are -- large customers are in Europe, a very close distance to Vistin Pharma. We can reach almost any destination in Europe via truck from our manufacturing plant outside Oslo. However, even though that most of our customers are in Europe, we have customers in Japan, in Latin America and other places. And even though our customers are located maybe in Europe, our products are sold worldwide to almost every country in the world.

Then I hand over to Alexander, who will speak more about the financial results.

[Alexander Karlsen, executive]

Thank you, Kjell-Erik. And as you mentioned, we continue to see a positive trend in the sales volume, and we also expect that trend to continue into the next quarter. There are, however, some limitations in sales volume as we continue to ramp up the manufacturing.

Looking at the revenue, 46% increase, both the 19% sales volume increase, but also significant increased sales prices. The Ukraine situation has further increased volatility on especially raw materials and energy prices. However, we see some positive signs arise in Vistin that there will be some decreased freight and raw material costs in 2023.

As reflected in the revenues, the current sales prices has been significantly increased to reflect the increased raw material and the freight cost this year. This is mainly for the premium volume. When we -- going forward, there will be more generic volume and there's more challenging, and they are more price sensitive than the current premium volume.

Due to the volatile world and the volatile cost base, we have quarterly dialogue with our main customers to negotiate quarter prices. And the commercial team is currently in discussion with customers to secure sales volume for 2023 and prices, and that is expected to be finalized in late November, early December.

Having outlook at the EBITDA, which was negative with NOK 3 million in the quarter. And as Kjell-Erik mentioned, that's mainly related to electricity costs and some higher raw material costs, both higher prices but also a very unfavorable USD versus NOK repurchase, our main raw materials from Asia in U.S. dollars. There are also some concrete initiatives ongoing in the plant to reduce the power consumption. And this is very high up on our agenda now to see how we can either reduce consumption or maybe look at more long-term agreement to secure better prices on the electricity we consume.

As mentioned, the onetime negative cost effect of NOK 5 million relating to nonsellable validation batches and the inventory adjustment. The inventory adjustment is mainly related to yield loss on line 2 as we optimize the production process as part of the ramp-up plan.

We start now to see some economies of scale as we ramp up the volume. However, we expect that to continue and further get more scale economics as the output from Line 2 increases. As of now, we are the employees needed to fulfill the -- or to produce and sell the volume in Q4, so there are no expected change in manning in the near future.

I think we've been through most of the numbers in the income statement. Just a couple of things I would like to mention. There's an increase in depreciation versus the same quarter last year. And we started late in Q3 to depreciate the net investments. So that is -- depreciation is expected to increase going forward. Profit or loss for the period ended at negative NOK 6.7 million.

Having a look at the balance sheet, we see that the non-current assets continue to increase, mainly driven by capitalization of the MEP investment. For the current assets, we especially see an increase in inventory, which is around 50% driven by higher volumes on hand, but also if we spent that 1 kilo of DDA or DNA which is our main ingredient in production has significantly increased compared to last year.

Trade receivables also going up as sales was increased as we ramp up volume, and that's also part of the kind of high working capital we had in the quarter. Total assets of close to NOK 363 million.

Looking at the equity and liabilities, equity at NOK 254 million or close to 70% equity ratio. And when it comes to non-current liabilities, pretty stable. Basically some pension liabilities while current liabilities is driven by more trade payables as we ramp up volume and purchase more raw materials. And also the short-term debt, which is a credit facility, which we established to handle their working capital effects and the final payments of the MEP investments. So that's bringing the total equity and liabilities to close to NOK 363 million.

So I'll leave the word now. Back to you again, Kjell-Erik.

[Kjell-Erik Nordby, executive]

I'll give you some highlights about the expansion project, which is, of course, one of the main focus point for us to get the manufacturing capacity up to 7,000. So it's nice to notice that the ramp-up activities has improved the manufacturing capacity in the quarter resulting in approximately 1,100 metric tons production in the quarter, which is a new record by almost 15% increase. As mentioned earlier, we will continue the ramp-up activities for the remaining part of 2022 and also 2023 which should result in -- that we will have an installed capacity around 5,500 metric tons by year-end and around 7,000 metric tons by next -- end of next year 2023.

We have the current organization in place to handle the expanded volume, and we don't -- we don't foresee any new hires in the foreseeable future.

With respect to financials, this then we position ourselves as a premium supplier in the market. One of our most important KPIs is keeping a high service level. That means delivered on time in full. And during the COVID-19 pandemic and also due to the very volatile situation in the world the last year, we have decided that we want to -- and we have decided to expand the raw material storage volume, so that we will be able to supply all the customer volume orders and needs. That has, of course, resulted in higher working capital requirements in 2022 and also in the third quarter, driven by this raw material stock level. And also the time from production start of Line 2 to payments from customers.

This operational cash flow is expected to improve from Q4. We see that the freight and delivery time from Asia is now improving. So we will gradually decrease the raw material security stock to more what we could call a normal level. However, we will still have a significant safety stock that will be kept locally to support the ramp-up plan and the increased manufacturing volume. Approximately 85% of the expansion project and all other planned CapEx initiatives in 2022 has been paid at end of September.

So to sum up, there hasn't been any change in the metformin market and the demand for metformin. That is expected to continue to grow by 5% to 6% annually. We still see a good demand -- a high demand for our products among our current customers and also new customers that are interested in qualifying metformin, qualifying Vistin as a new supplier of metformin. The COVID-19 and Ukraine situation has both been an eye opener to authorities to look at more nearshoring opportunities. But also, it has been, as you said earlier, kind of perfect storm. And uncertainties in the market has never been higher, and that is not very kind of especially related to the Vistin business, but in general.

The expansion project is progressing. We are getting momentum on the ramp-up activities. The first commercial batch from the second production line was shipped already in Q2 2022 as planned, and we hope that we by -- as we said earlier, that we by year-end and also by the end of next year, have fully implemented the net volume in our plant.

So I think that summary concludes the Q3 presentation from Vistin Pharma. So we open for questions.

[Alexander Karlsen, executive]

Okay. I think we received a couple of questions. There is a question about where we book the electricity costs that's under other operating expenses. And there was some question about how much electricity we use. I think we were pretty open to that in previous presentations. And on average, we use around 1 million-kilowatt hours per month. Obviously, you saw more when it's called in the winter month and the summer, but on average, but then between 12 million kilowatts and 13 million kilowatts and that will increase going forward as we ramp up production.

[Kjell-Erik Nordby, executive]

Here's a question about...

[Alexander Karlsen, executive]

There's a question here on the gross margin. And that's mainly the -- there is a question related to the decrease in gross margin, which I would say was normally low in the quarter. And that's related to 3 things. One is continued increase in raw material costs, but also acquired a big dollar effect. I think the dollars was around 10% stronger versus the NOK, which obviously affect the raw material costs since we purchased those in dollars. But there's also the NOK 5 million onetime effect which is booked to raw material as it was the scrap of the validation batches and the inventory adjustment in relation to yield loss on Line 2. We expect that 5 million to be a onetimer and not to continue in -- or happen again in Q4.

I think when it comes to gross margin going forward, it should be more similar to what you had in Q2. But again, depending on the -- what's happened in the world when it comes to inflation, but also the dollar development versus the NOK.

Then there is a question about CapEx going forward. In 2022, we have obviously the big one and the huge one, that's met. We also have 2 other CapEx, which are quite large, around 10 million each. That is the construction of a new finished goods storage, which was completed in August. And we are also now progressing well on the product where we're going to reuse or recycle the water. Today, we use tap water from the Kragero municipality to cool down the reactors in the production. We are in a project where we're going to recycle 80% of that water consumption. And that project is expected to be completed by between Easter and summer 2023. And that will give us a very, very nice savings annually from the summer 2023.

When it comes to CapEx in '23, it will be completion of the recycling project, which is a NOK 10 million project. And some -- we haven't finally decided the CapEx plan for 2023 yet, but I would expect that going CapEx will be in the range of NOK 10 million to NOK 15 million. If you exclude some onetime big product like recycling or warehouse, et cetera. It will be NOK 10 million to NOK 15 million per year.

There are, again, some questions to the COGS and again, related to raw materials and electricity. And I think as mentioned, the decrease in gross margin is mainly onetime, that's 5 million, but also the impact of the increased raw material costs and the dollar NOK -- strengthen of dollar versus NOK. In the operating expenses line, all the increase or 95% of the increase compared to last year is the electricity costs which are up by about 500% compared to last year -- same quarter last year.

There are also a question about the effect in absolute numbers. It's a bit depending what you kind of -- what's your baseline, want to compare it to. But on raw materials the FX effect alone versus -- or compared to the same quarter last year is probably around NOK 10 million. It's huge.

And also some questions about average sales prices. As I mentioned, when it comes to the premium volume we have the quarterly dialogue with our customers to kind of reflect the current raw material and freight costs. As we continue to increase the rolled output, we will see more generic volume, and they are much more price sensitive and it's more challenging kind of to reflect all of the increased raw material and freight costs in that selling price.

[Kjell-Erik Nordby, executive]

Just to add to that, the question is that since you need to increase the prices substantially given by factors out of your control. We see it comfortable by continue to be competitive in the market. We say that we have all the factors that we control. We feel that we are quite competitive, and we will increase our competitiveness by the economy of scale. As Alexander says that it's fortunate that Europe fee is the same pattern as we do here in Norway and in Vistin Pharma.

So we have been able to increase the prices to other premium customers to reflect the increased raw material prices. However, there -- with ridiculous energy prices that we experienced in Norway and Europe today is very linked to -- is a Norwegian or European phenomena. So it's -- that is probably the most challenging for us going forward, since our competitors in India and China do not have the same problem as we have in Norway. So therefore, it's very important for us and not at least the government to help supporting the Norwegian industry to be more competitive, energy-wise.

Energy should be a primary competitive advantage for Norwegian manufacturers. Today, it's a disadvantage, We are optimistic when we say that we believe that in the future, at least in 2023, the situation will improve significantly. We do our utmost to see what we can do ourselves. And we hope and we believe that we will get -- that support will be given from the government to support Norwegian industry.

[Alexander Karlsen, executive]

I think also especially frustrating is that the high electricity prices is kind of a Norway/European issue. But also within Europe, there are countries, for example, Spain, where one of our competitors are, get reimbursed some of their electricity costs. So as of now, we see for us, it's more like a Norwegian issue than a European actually.

There's also some questions regarding volume in Q4. I think I'll just emphasize what I said previously, I think there's a nice development and trend both in production volume, sales volume and revenue from we started our production in and we expect that trend to continue into Q4.

[Kjell-Erik Nordby, executive]

Question about you have initiatives ongoing to reduce electricity consumption. I think that myself and the management team have probably used more time on looking at energy, reducing activities the last half year than we have done in our life before. So we can't mention very specific what we are doing, but we are looking at everything from reducing the energy consumption in the plant to investing in solar energy to long-term agreement to give predictability on future electricity prices, et cetera. So we hopefully that in Q4 can present some concrete activities or results from our initiatives. But we can't actually give you any results today. But we are optimistic that the situation will improve, not only in Vistin Pharma, but in Norway and hopefully in Europe generally.

[Alexander Karlsen, executive]

And also some questions about how much cost associated with the water cycle has been taken to this point. It's a CapEx. So it's not on the P&L, but Around 30% of the 10 million CapEx is paid as of today for the recycling projects.

There's also, again, some questions on the historical gross margin of 65%. I think our target is to have a gross margin of 60% plus. But kind of with the world we are now with war, unpredictable Russia next steps in Ukraine situation, it's very difficult to be very precise on exactly that will be from quarter-to-quarter. It's also important to mention that the gross margin also linked to the mix. If we have a lot of generic volume in one quarter, that will go down, and this ever if a lot of premium volume.

So you probably have more volatility in the gross margin from quarter-to-quarter going forward, not only linked to the, call it, situation in the world, but also to mix. But definitely, we think margin will -- gross margin will increase in 2023 as we see positive signs on decreased freight costs and raw materials. But again, it's difficult to be 100% sure because of the volatility in the world.

I think that was all the questions. So I think we are now okay to close the call.

[Kjell-Erik Nordby, executive]

Yes, so thank you for listening in. And we look forward to seeing you again when we have the Q4 presentation next year.

[Operator]

That concludes the conference for today. Thank you for participating.