Vistin Pharma ASA

OSE:VISTN

Earnings Call Transcript 2021-Q4

[Operator]

Good day, and thank you for standing by. Welcome to Vistin Pharma Fourth Quarter 2021 Quarterly Report Conference Call. [Operator Instructions] After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] And now I'd like to hand the conference over to your speaker host today, Mr. Alexander Karlsen, CFO of Vistin Pharma. Thank you. Please go ahead, sir.

[Alexander Karlsen, Chief Financial Officer]

Hello, everyone, and good morning. Welcome to the fourth quarter presentation. And today's presentation will be held by myself, Alexander Karlsen, the CFO. And I also have with me Magnus Tolleshaug, which is the CCO and the Interim CEO. I'm now handing the word over to you, Magnus.

[Magnus Tolleshaug, Commercial Director]

Thank you for that, Alexander. I will go through the highlights of the fourth quarter and the preliminary 2021 results. So the Q4 2021 ended at NOK 78 million versus NOK 64 million in Q4 2020, a 21% increase. The revenue increase was driven by higher sales volume and sales prices partly offset by a significant stronger Norwegian krone versus euro. The full year revenue ended at NOK 279 million versus NOK 254 million last year, a 10% growth despite the stronger Norwegian krone throughout the year. If you look at it currency-neutral, the revenue growth year-over-year is approximately 15%. The EBITDA of Q4 ended at NOK 12.2 million versus NOK 13.9 million in Q4 2020, which is a 13% decrease. The EBITDA was unfavorably affected by the FX rate, increased raw material costs following the COVID-19 pandemic, record-high international freight costs and significantly higher electricity prices in the quarter compared to last year. The EBITDA in the fourth quarter was unfavorably affected by a bonus accrual of NOK 4 million versus NOK 2.5 million in the Q4 2020. We have successfully negotiated higher sales prices with customers in Q4 to reflect the increased cost base. The full year EBITDA ended at NOK 49 million in 2021 versus NOK 58 million in 2020. And the net unfavorable FX effect on 2021 versus 2020 is approximately NOK 7 million. We had an all-time high sales volume in 2021, an increase of 12%. The Q4 sales volume was 1,031 metric tons versus 802 metric tons fourth quarter 2020. And the 2021 sales volume was 3,748 metric tons versus 3,360 metric tons for the past year. The freight lead times from Asia to Europe has slightly improved its predictability. However, additional safety stocks of key raw materials will be kept in the first half of 2022 to ensure supply security to our customers. The metformin capacity Expansion project, which we call MEP, is progressing according to time and costs. So the existing line was closed down as planned in January and then successfully resumed production in the second week of February as planned. The first commercial batch from the second production line, the new line that we're building, is expected in Q2 2022. Approximately 55% of investments is paid as of year-end. Some other financials. The cash balance of 31st December 2021 was NOK 36 million and no interest-bearing debt. The Board proposes to get a power of attorney from the Annual General Meeting in May to pay up to NOK 0.75 per share in dividend for 2021 by the end of 2022. If you look at the top line revenues in the period 2019 to 2021, we had NOK 228 million in 2019; and in 2021, NOK 279 million, an increase of 22%. And if you look at the EBITDA in the same period, we continued to deliver a good and healthy EBITDA. So Vistin Pharma is a dedicated manufacturer of metformin with a bright outlook, as we like to say. Diabetes is still one of the largest health emergencies in the 21st century. About 5 million people die of diabetes every year. And if you look at the total, approximately 90% of the diabetes patients diagnosed are type 2 diabetes and approximately 10% type 1 diabetes, and metformin is used to treat type 2 diabetes. Metformin is the gold standard treatment of type 2 diabetes and will continue to be so. It's been on the market for many, many years. It has a good safety profile, very limited side effects and it's in an affordable price compared to other drugs. So we like to see -- say that we have a bright outlook for Vistin Pharma. We are doubling our manufacturing capacity to grow with existing and new customers. We are producing a molecule, which has an annual growth rate of 4% to 6%, and we are, as we like to say, a leading global producer of high-quality premium metformin based in Europe. Metformin will continue to be the first-line treatment of type 2 diabetes in the, at least, foreseeable future. Metformin is used to lower the glucose -- blood sugar levels or to balance it out. And it's a cost-efficient treatment; limited side effects, as mentioned; and a long-term safety profile. Typically, metformin is then used in plain tablets or combination tablets by our customers and then given to patients all around the world, either as pure metformin or as combinations with the DDP4-inhibitors or SGLT2-inhibitors or combinations thereof. If we look at some data in this case from the International Diabetes Federation. Up to the right, you can see the expected growth of diabetes patients in the world. In 2019, it was measured to 463 million and is expected to grow up to almost 700 million people in 2045. This is an increase of 240 million patients and an increase of 51%. And again, about 90% of these patients are expected to have type 2 diabetes and around 10% type 1. Vistin is really a global player. We have direct sales to our customers all the way from Japan and Asia in the East to U.S., Canada and Latin America in the West and a lot of customers in Europe. Typically, our customers are buying our API and using it in their final drug product, which they sell then globally in their markets. So Vistin Pharma API is at least given to patients, treating patients in more than 100 countries today. So with that, I'd like to hand over back to our CFO, Alexander Karlsen, to go more into the figures.

[Alexander Karlsen, Chief Financial Officer]

Thank you, Magnus. And let's have a look at the operational figures. The plant continues to deliver excellent operational performance and the sales volume in the fourth quarter '21 was 1,031 metric tons, an increase of 29% compared to similar quarter last year. For 2021, the whole year, we also had an all-time high sales volume of 3,748 tons, an increase of 12%. The annual production volumes increased by 5% year-on-year even with the 10 days unplanned production stop due to lack of raw materials in Q3. And as Magnus mentioned, we have built additional safety stock to secure the volume ramp-up in 2022. Having a look at the revenue. All-time high quarterly sales in Q4, NOK 78 million, an increase of NOK 14 million or 21% compared to Q4 last year and driven by more increased sales volume and higher average selling price, however, partly offset by a significantly stronger NOK versus euro. As mentioned before, most of our sales are in euros. The gross margin was affected by continuous record-high transportation costs, increasing raw material prices and net negative FX effect. And I think as Magnus mentioned, the sales and marketing team has worked really hard during the Q4 to negotiate new prices with our customers to compensate for the significantly higher cost base we're seeing now. Having a look at the results. The EBITDA came in at NOK 12.2 million compared to NOK 13.9 million in Q4 2020 at a decrease of 12%. However, some reasons for that, a bonus accrual of NOK 4 million higher than quarter -- same quarter last year, which was NOK 2.5 million. And as a lot of other industries in Norway, we're seeing significant increase in energy prices. Our electricity costs was around NOK 3 million higher in Q4 2021 compared to Q4 '21 (sic) [ '20 ]. If we kind of do a currency-neutral EBITDA, the Q4 '21 EBITDA would be around 15% higher than the Q4 '20. Profit before tax ended at NOK 12 million (sic) [ NOK 10 million ] compared to around NOK 12 million in -- for Q4 '20. Having a look at the consolidated income statement, I believe we have been through most of the numbers. But just briefly on the net profit for the period ended at almost NOK 7.2 million compared to NOK 8.7 million in Q4 2020. Moving on to the balance sheet and starting with the assets. The fixed assets continues to increase driven by the net investment. Total noncurrent assets as of year-end '21, around NOK 195 million compared to around NOK 180 million at year-end 2020. For current assets, around NOK 10 million-plus increase in inventory, this is purely driven by a raw material safety stock. The finished goods inventory at year-end '21 is significantly lower than year-end 2020. So we have a lot of raw materials now currently sitting in our warehouse to support the volume ramp-up. This brings total current assets to close to NOK 138 million compared to close to NOK 142 million at year-end 2020. Total assets close -- around NOK 333 million compared to close to NOK 322 million at year-end. Moving on to the, sorry, the equity and liabilities. Total equity at close to NOK 276 million at year-end '21 gives an equity ratio of 83% and I believe we have a strong balance sheet. Total liabilities at around NOK 57 million compared to close to NOK 50 million at year-end 2020. And the total equity and liabilities around NOK 333 million compared to close to NOK 322 million as of year-end 2020. Moving into MEP and the summary slides. I think we are a bit more concrete now than normal due to the MEP ramp-up that also creates some -- a bit more volatility for the company in the short term. Having a look at operational part first. We closed on production first week of January, as planned. Line #2 successfully resumed production last week, an important milestone for us, and we're happy with that. We still expect the first commercial batch from Line 2 to be shipped out of plant in the second quarter. And we have set ourselves an ambitious production target in 2022 for 5,000 metric tons. So the financial impact. We expect a significantly increased working capital requirements in the first half driven by raw materials, 2 reasons. Additional safety stock plus we will speed up the volumes produced, which then will require more tons of stock to keep the same number of weeks at safety. And there are also a quite long lead time from we start Line 2 until we will start to receive payments from customers. In addition, we have an ambitious CapEx plan in 2022, in addition to the MEP project. We have 2 really good projects. We will build a new warehouse to support the volume ramp-up and they give us operational excellence. And we also have really good productivity projects where we recirculate cooling water, which will give us some really good savings from 2023. And those 2 together will require around NOK 25 million in net CapEx also taking into consideration that we have secured around NOK 4 million in government grants for the latter project. So to support the expansion and the increased working capital, we have secured our credit facility with Nordea. As mentioned, we have almost been closed half of the quarter due to the production stop for the implementation. So we have less volumes available for sale in the first quarter '22, and based on that, we expect a traditionally weak result in the period. However, the financial result is expected to improve from Q2 and accelerate further in the second half 2022 when we have more volume available for sale and we achieve the expected leverage from the new capacity. Going into the last slide, summary. The metformin market is expected to continue to grow by 5% to 6% annually. And as Magnus mentioned, diabetes is one of the largest health crisis of the 21st century. There's no reason why metformin is not going to stay the gold standard treatment in the foreseeable future. And we believe that there is an attractive growth potential to be realized when the additional manufacturing capacity is available, and that's not too far out. The COVID-19 situation has been an eye-opener to both authorities and the industry-leading pharma players that they're looking to decrease their risk on their supply chain and looking for short-traveled medicine. And Vistin, as one of 2 European metformin producers and suppliers, we are very well positioned for that shift or transition. I believe that was all we would like to present now, and we are now ready for the Q&A session.

[Operator]

[Operator Instructions]

[Alexander Karlsen, Chief Financial Officer]

Yes. We have received a couple of questions, so we will start with that. The first question is, after new production line is fully up and running in 2023, can you elaborate a little on what kind of new projects Vistin has in pipeline to ensure further growth? I can say that even if we have the full capacity in 2023, we still have a job in front of us to toll that or convert that to sales volume. And we see also now it significantly increased volumes. We also have a lot of exciting productivity projects we can do the next couple of years to further improve the operational excellence of the plants. But I would say we're ambitious, and it will be an exciting year. The next question was, did we see full effect of price increases in the quarter? Or will it have full effect from Q1 and onwards? Do you want to comment on that, Magnus?

[Magnus Tolleshaug, Commercial Director]

Well, we negotiated prices with our customers in Q4 for 2022, which we believe is the correct prices to reflect the cost base that we'll see going forward.

[Alexander Karlsen, Chief Financial Officer]

The third question was, do you see improved freight and raw material prices now compared in Q4? I think we see similar levels at least now in Q1 that we had in Q4 last year. What's happening from the second half and onwards, especially around freight, which is, I would say, extremely high, it's difficult to say. But I think we're -- in our assumption and price negotiations with customers, we can do adjustments during the year if we see further spikes in the cost base. And I have a question about expected sales volume in 2022 and '23. I think kind of what we will say is that we have the ambitious production target of 5,000 tons. And I think it was also mentioned that we had very little finished goods at inventory at year-end 2021, so it's probably natural that some of that will be inventory at year-end 2022. But of course, we want to convert as much as possible to sales volume, but so will likely be inventory at year-end. And I will also emphasize that 5,000 tons is an ambitious target. We have started Line 1 again after the stop. But there's still a lot of work to do before we can start Line 2 and then we have to get that up and running and get it paid. So a lot of work in front of us still. We have a question about do we still have any plans for adding or producing new products. I think that as of now, we have a full focus on getting Line 2 up and running. And then in '23, then we have around 7,000 tons volume available and we want to then convert as much as possible of that to sales from 2023 and going forward. That's our #1 priority as of now. And then we have a question about gross margin, which has been varied a bit through the years. Is the margin -- gross margin expected to be close to 60% or 70% as you had in 2020. It's always difficult to predict the future, but I can say 2 things. I would say that 2020 was a year where basically everything went our way. We had a very weak NOK, and since we sell almost all of our goods in NOK, that really helped both the top line and the bottom line, and hence, the gross margin. We also had, I would say, a bit lower material and freight costs than trending before. So that's helped 2020. For 2021, I would say that really switched completely around. We've seen record high transportation costs, raw material costs. And it takes some time to convert that into increased sales prices to customers and the market. So it's difficult to be very concrete, but I think maybe something in -- between '20 and '21 is something that we expect from '22 and going forward. But again, it's a lot of depending on the international freight costs and what's happened with the raw material costs when the world is in a more stable state. And there's a comment on -- or sorry, it's a question on can you comment anything on the CEO going on sick leave. We expect Kjell-Erik back in the short to medium term. That's what I can say. I think we now have been through all of the questions that we have received. So if there are no further questions, we would like to thank you for today's call, and the call can now be closed. Thank you.

[Operator]

Thank you. Well, that does conclude our conference for today. Thank you for participating. You may all disconnect.