Biogaia AB

STO:BIOG B

Earnings Call Transcript 2020-Q1

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

Yes, good morning, everybody, and welcome to BioGaia Interim Management Statement Q1 2020. I hope all of you are doing fine and keeping safe in these difficult circumstances. So today, I'm going to go through our business executive summary, and then Alexander, our BioGaia's CFO, is going to take you through our financials. And as mentioned before, we will take your question at the end of this presentation. Next page, please. So how did our Q1 look like in a nutshell? So first of all, our sales increased by 7%, which is mainly driven by the sales of our Paediatrics product and mainly thanks to our Protectis drop for babies. Regarding the Adult segment, we have an increase as well. But in that case, it is mainly driven by Protectis tablet and to a certain extent by Gastrics (sic) [ Gastrus ] tablets. Regarding the sales per region, we have a very strong sales growth in EMEA, plus 14%; a decrease of sales in APAC, minus 6%; and a slight decrease in Americas with minus 3%, due to periodization of order and some supply issue regarding Japan, and I will come back to that on Page 6. Next page, please. So as for many other company, Q1 has been the key event, unfortunately we are not invited and that is this COVID-19 pandemic. And even if we cannot say that we've been directly impacted by the COVID-19 in our figures or in our production facilities, it has changed our ways of working. And that way, we've been impacted as everybody else by the COVID-19. We are continuing to build our global coverage. We have one black spot in Latin America, a big one that was Argentina. And we were looking for a distributor for a long time. I know we finally managed to sign a new agreement with ETHICAL NUTRITION to cover Argentina as from 2020. In term of research, we are continuing to win our research. We have to admit that to run clinical study these days is not exactly the best period, and we don't want to push our physician too much. They have really something else to do at the hospital. But anyway, we had a very interesting study published regarding a group of young and healthy sailor working for the German Navy. We did a clinical study with them with Prodentis, and we have very good results showing that when they take Prodentis, they have a much better hygiene -- oral hygiene and better gum. So we are very happy to have this study published. This publish has been done by Professor Schlagenhauf.After the quarter, we've announced -- we've already published that we are not going to distribute the extra dividend. So we have the general assembly this afternoon. And depending on the evolution of this situation, we might organize an extra general assembly later on to decide either or not we're going to distribute the extra dividend. Next page, please. Looking at the sales per segment. As I mentioned in the executive summary, both Paediatrics and adult have increased at 7%. But obviously, the Paediatrics volume is bigger and therefore, more significant in terms of increase. But the Paediatrics increase was driven by the sales of our drop. And the sales -- the increase of the adult product were driven by Protectis tablets and for Gastrus. And it is worth mentioning that on the sellout from our partner that you can't see on that slide, we've a lot of discussion regarding the increase of the sales of Protectis with D vitamin and this is probably due to the fact that there have been a lot of article and the consumer are pretty well aware that probiotics together with vitamin D is very good for your immune system. Next page please. Nothing really specific regarding gross margins, very stable for the quarter and slightly lower 2019 versus 2018 for the Paediatrics, which is mainly due to the fact that the loss of the royalties. Next page, please. Now looking at the sales per region. And here, I really would like to emphasize again the fact that I would like us to look more at the 12-month period rather than only by quarter because we deliver in 90 days and sometimes one order might end up on the next quarter whereas it was planned to be shipped at the end of the quarter. And looking at the Americas figures, with a minus 3% for the quarter 1, that doesn't reflect the reality. We know for sure that the sellout in U.S. especially are extremely strong, especially -- I mean, March has been our best-ever month ever. But it doesn't reflect in the figures because one of the orders that should have been on Q1 will be on Q2. And I don't want then to disclose anything about Q2, but you can draw the conclusion. So if we look at the rolling 12 figures, Americas is a plus -- strong plus 12%, APAC plus strong 20% and EMEA is at minus 6%, but we know that last year had been impacted by the royalties. Now looking at Q1. So Americas, I've already commented. Regarding APAC, it's -- I mean, it's a minus 6% and mainly driven by Japan, not because of COVID-19 that might come but under Q2 because the lockdown of Tokyo and of the main city was decided really late in the quarter, but it's mainly due to still a small backlog coming from Sanico for our Prodentis lozenges. And anticipating your question regarding Sanico, we said during Q4 that we had a small backlog remaining for Q1, which is the case. And it's limited. We are a bit concerned by the fact that Belgium has been affected a lot by the COVID-19. Hopefully, all our partners are GMP certified, and therefore, are not following the lockdown rules. So Sanico has been able to produce. Having said that, they have contacted us recently to say that some of their staff has been sick. So they have a big problem of sick leave rather than a problem of sterilization.So we might have something like 3 weeks delay for next quarter.Next page, please. And then I'm going over to Alex, who are going to show us the financials.

[Alexander Kotsinas, Executive VP & CFO]

Thank you, Isabelle. So then we will move on to Slide #9, the P&L. So if we look at the P&L, we see that, as mentioned previously, we have a gross profit growth of 7%, which is in line with the sales growth. Our operating expenses are minus 1%. This is mainly, if you look -- if you break down -- you can see it in our report, if you break down the operating expenses you can see that we have increasing expenses for marketing and sales for R&D mainly. However, this is compensated by lower other operating expenses, which is mainly due to the fact that we have positive currency effects on our trade receivables that is compensating some of the cost increases. And the cost increases we have in marketing and sales and R&D are mainly related to staff that we are investing for the future and expanding our sales organization and our R&D. So this leads then to an EBIT of SEK 56 million, which is 20% higher than the same quarter last year. And the margin then is 30% versus 27% 1 year ago. So if we move on to Slide #10, look at the cash flow. We see that we have a healthy cash flow for the period of SEK 67 million versus SEK 29 million in the same quarter last year. If we look at the breakdown of why this is, you can see that we have a positive effect from the cash flow from operating activities compared to 1 year ago. It is SEK 17.6 million better, and this is mainly -- it is an effect of the better results then, obviously. And then we have a positive effect also from changes in working capital of about SEK 20 million. And the main reason for this is that we have collected more of our trade receivables. So we have a positive effect from that. Plus we have higher -- we owe more to our suppliers, so to speak. We have the -- and yes, so that is the main reason for this. And this then leads to cash flow for the period of SEK 67 million and the cash at the end of the period of SEK 284 million. So if we move on to Slide #11, Isabelle will continue.

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

Okay. So it's a summary of what has been said, with an increase of the net sales by 7%, strong EBIT of 56% (sic) [ SEK 56 million ], which is 20% more than last year, and EBIT margin of 30%, in line with our indication that we had on our target. If we move to the conclusion, I have only 2 messages. The first one is we have a healthy growth in sales for the Q1 and a very strong increase of the EBIT, we are very happy for. We have so far seen limited impact on COVID-19, and basically, I would say that we have some positive impact in terms of consumer demand. We have had some pressure on costs, mainly logistics and transport, to continue to be able to ship our products. But if you took everything together, the COVID-19 impact is slightly positive for BioGaia. And I just would like to take the opportunity to remind you that we have our general assembly today at 4 p.m. and in order to respect the [ judicial ] authority recommendation limiting the number of participants at 50%, I will not attend myself the general assembly, but I have the pleasure to, I mean, register a film so you could see me. And the same film will be available on our website as from 4:00 p.m. this afternoon as well. So now -- and you will have as well the possibility, of course, to send me question after the general assembly and there has been created an address, an e-mail address specific for that, which is [e-mail], which is specified in the website as well. Thank you so much. And now Alex and myself are waiting, and we'll be delighted to take your question.

[Operator]

[Operator Instructions] We have a question from the line of Kristofer Liljeberg from Carnegie.

[Kristofer Liljeberg-Svensson]

My question relates to the sales growth, of course, positive to see the improvements versus the last 2 quarters, but I would have expected maybe to be a bit higher, especially considering your comments after Q4, where you indicated it might -- there could maybe be some stocking effects. And you also say now at the call that there were some positive effects from COVID-19. But on the other hand, there were a phasing effect -- negative phasing effects in the U.S. So is U.S. the only reason why sales is not growing more than 4% organically?

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

So it's a lot of prioritization. If you look at France, we had a very big order that was planned for Q1 that was in Q4. The contrary for Brazil, so we had one very strong order for Q4 that ended in Q1. So the -- it’s mainly -- it's really mainly the prioritization issue. Sellout is strong, and we don't communicate, and we don't have all the sales figures. But on our main market, we do have the sellouts in our biggest market like the U.S. So when I said that the COVID-19 has a positive impact, it has mainly been in the country where we are very strong online because then consumer didn't need to go to the pharmacy. So when I look at all the countries that have performed very well this quarter, so U.S. -- in terms of sellout, so U.S., China, Vietnam, they are all in common that they are invested heavily in e-commerce platform. And I had a business call with India last week. And I can tell you, India was not really in advance in terms of e-commerce before, I was there in February. And suddenly, as agile as Indian could be, now they started to sell online. So which might be one of the biggest learning of this crisis for us is that all our focus that we've had on e-commerce are paying back and that we have to accelerate in other parts of the world that were a bit more like reluctant to sell online, like Europe, to look at the possibility because now consumer have understood that well, basically, they can order online probiotics. They don't have to go per automatic to the pharmacy.

[Kristofer Liljeberg-Svensson]

Do you still see your business growing 10% under normal circumstances?

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

On the -- I mean on a rolling 12, absolutely.

[Operator]

And the next question comes from the line of Mattias Vadsten from SEB.

[Mattias Vadsten, Analyst]

Just to follow-up there, is it possible to quantify the order that will occur in -- as sales in Q2 instead in the U.S.?

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

I mean I don't want to disclose the figure. Obviously, we know and that's why I'm not worried. I don't want to say how much it is in percentage, but I can really see Q4, Q1 and the order books for Q2. I know I'm not worried. And I mean, I had here as well Everidis on the phone. And I mean Americans are being crazy. They've been buying like toilet paper and coffee, Coca-Cola and probiotics. So there's been very strong demand from the consumer. And I have to mention regarding U.S. as well that the minus 3% that were coming from a slight delay for our delivery together, which has nothing to do with COVID-19 or anything, it's just that we've been obliged to run an extra round of analysis at the lab, and therefore, we've been delayed by 3 weeks. And one of the Gerber order will be delivered under Q2 as well. But just timing because of extra analysis that Nestlé ask us to perform.

[Mattias Vadsten, Analyst]

Okay. But so in general, the demand that presumably was strong when we had the call, you are still confident on the demand across all regions basically in this extreme business environment?

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

Yes. I mean U.S., no doubt. Europe, the question will be -- I think there will be a big trend that consumers realize that health is the figure #1. And when they will have a budget of 100, I think they might allocate more percentage of that budget to health and prevention. But at the same time, people are losing job, and people will have a financial struggle to pay back loans so they might have difficulty to buy a nonreimbursed product. So I don't know which of these trends are going to be in our favor or not, but I can definitively see that consumer are investing more in out-of-pocket product. And you will see in my presentation, general assembly has a slide, it's a very long-term trend that consumer understood that you can't ask to all the time be reimbursed. So even in country like France, very strong, where normally, the government reimburse your medicine, people understand that it's better that I am healthy not to be sick than wait to be sick to take medicine. And it's a very strong trend.

[Mattias Vadsten, Analyst]

My last question is regarding some of the studies that are currently being conducted that is being delayed now due to COVID-19. Should we expect somewhat lower R&D spending, not in general, then I'm talking for this year?

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

No. It's exactly the same number. The problem about the study is that it's difficult to recruit patients. We can't ask doctors to spend time to recruit patient, but the program are going on, and the only -- the recruitment period is going to be longer. So when we plan to recruit 100 patients in 1 month, it might take 2 months instead or 3 months that we don't know. But the level of spending are going to be the same.

[Operator]

And the next question comes from the line of Daniel Albin from Danske Bank.

[Daniel Albin, Research Analyst]

I have 3 questions today. So the first one, if I may, just maybe some clarification regarding the long-term implications of you not being able to participate on international fairs, face-to-face meeting with new distributors. How will that impact you in maybe the quarters to come? That's my first question. The second question is regarding the rollout and geographic expansion of BioGaia Osfortis, would like to know some status there.And thirdly, perhaps if you could give us some level of understanding on the activities in Asia Pacific in here April and beginning of May.

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

Okay. So thank you, Daniel. To answer to your first question regarding congresses, so obviously, the -- we had -- the biggest worldwide congress on probiotics were supposed to be in Copenhagen in June, WCPGHAN, has been canceled. So on the positive side, we don't have any spending to attend these congresses. On the negative side, it's true that we like to meet our key opinion leader, and there are a lot of symposium and so on and so forth. But we've been extremely agile, and I think we are running web seminar, I mean, at least 10 every week with our KOLs answering to physicians via -- I mean our partners are organizing web seminar, and here as well, it's a learning. We don't need to be everywhere all the time and to fly our scientific people around the planet every week. It's not necessary all the time. And so now we are -- I mean we are registering some web seminar. We have the BioGaia Academy, which is as well a digital platform where we can use the material. So we are developing a lot of materials that distributors can use by themselves. So yes, it's not ideal. But I think we've learned that we might only need to attend 2 or 3 instead of 50, and the rest, we can do online. And even physicians. I mean now we had a web seminar in Peru. We had 1,000 physicians online, same thing in Australia, same thing in Mexico, so it works. Regarding new distributor, we are already present in 107 countries. So extending our coverage is not exactly the main priority. We have some black spots. We have Argentina. That now is settled. We have Venezuela. But honestly, we don't -- COVID-19 or not we don't want to go there. And we have U.K. and I would say, Netherlands. So we are working on it. We have business meeting with different partners, especially in U.K. because that's a market we want to cover. And we have initiated some contracts that we met. And now we continue online. And we hope to be able to sign a deal in physics soon. So that's for your first question. The second question regarding Osfortis. So the good news is that, at some stage, our main problem with Osfortis was to scale up the culture. If you remember, the concentration in strain in Osfortis is extremely high, and we didn't have enough culture to be able to roll out in more than one market. And now this culture is -- I mean this problem doesn't exist anymore. We have the quantity we want. So now we are studying the rollout in one or 2 markets this year. And I hope that we’ll be able to give you some more specific news in the coming quarter. And lastly, for APAC, from activities, well, they are very active, but more online. They cannot visit doctors as we speak, but they are here as well, building web seminar and they do as good as they can. So here as well, I'm not specifically worried.

[Operator]

And we have a follow-up question from the line of Kristofer Liljeberg from Carnegie.

[Kristofer Liljeberg-Svensson]

When it comes to the cost and COVID-19, the fact that you haven't been able to travel and there's a lot of conferences, et cetera, that you haven't participated in, is it possible to quantify how much that helped, so to say, the operating costs in the quarter versus a normal year?

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

I think the most of the saving will be on next quarter because we stopped to travel in March, so it's only 1 month, whereas we will not be able to travel during all Q2. So I think most of the saving in term of traveling are going to be in Q2 and for -- same answer for the congresses. We have still some congresses planned for Q3 and Q4 that are still going, I mean, today. We don't know. I mean, it might change, but for the moment, they are still going on, but not under Q2. So then you will have a 3-month saving visible, but that you can't see in Q1 because Q1 is only 1 month.

[Kristofer Liljeberg-Svensson]

Okay, but -- okay, so if this is the true underlying cost, the operating cost continues to grow in now mid- to high single digits versus I remember when you started as a CEO, you made some comments that there were a need to invest more in the organization, et cetera. So is this the new normal to grow maybe cost by high single digits instead of mid-teens?

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

I mean we have invested a lot in staff and now it's been -- I mean, it's really visible in our figure. So if you look at the personnel, the staff, the payroll, we've been increasing the marketing team with 2 people, the sales team with 3 people. So obviously, these are -- these costs are going to remain. Having said that, we had a long list of recruitment. We filled some that we see depending on the situation and our capacity to grow the top line if we want to pursue with that recruitment. So we are cautious. We look at the top line, and we try to be on line with the sales on something not -- I mean, not more than the increase of the sale.

[Kristofer Liljeberg-Svensson]

Well, is it important for you to get back to the 34% EBIT margin in the near term? And by that, holding back a bit on cost expansion?

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

I think if we maintain 30% EBIT margin in 20 -- I mean for the year to come, we should be very happy. It's a very high percentage. I don't see any need to increase that percentage more. I would more be, I mean, interesting to look at perhaps M&A to focus on growing the top line by doing clever acquisition. That's more -- I mean, the -- BioGaia is here to grow, and that's the objective. So my objective is to grow the sales by being clever and perhaps looking at acquisition and continue to grow organically. I'm not that much focused on cost, but I want to maintain the cost at the right level.

[Operator]

And as there are no further questions, I will hand it back to you again, Isabelle.

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

Okay. But I mean, I thank you for all the good questions, and I wish you a nice day and keep safe. Thank you.