Biogaia AB

STO:BIOG B

Earnings Call Transcript 2024-Q1

[Operator]

Welcome to BioGaia Q1 report for 2024. [Operator Instructions] Now I will hand the conference over to CEO, Theresa Agnew; and CFO, Alexander Kotsinas.

[Theresa Agnew, executive]

This is Theresa Agnew. We're here for our Q1 results. In Q1, our sales were SEK 370 million, which is an increase of 1%, primarily driven by growth in Asia Pacific and Europe, Middle East, Africa. This is despite record high sales in Q1 of 2023. So we were lapping of the strongest quarter we've ever had at BioGaia Sales in EMEA increased by 13% and in Asia Pacific increased by 6%, while the Americas region decreased by 14%. Our EBIT of SEK 143 million decreased by 3%, and our EBIT margin for Q1 is at 39%. We had a number of key events and launches in the quarter. In France, we launched BioGaia Prodentis.

In BioGaia Canada, we launched a new skin health product called BioGaia Aldermis. We had previously launched Aldermis in the U.S. in 2023. And due to the success of that launch, we decided then to launch in Canada in March of 2024. The U.S. business also launched a new product range called BioGaia Nurture & Grow, which focuses on gut health, immune health and oral health. Our sales by segment for the pediatrics business, our sales decreased by 4%. This is primarily due to the Americas, mainly in the U.S. where last year, we had sales of the Gerber product, where Gerber has discontinued the BioGaia products. So now we are lapping that discontinuation in 2023 as well as Brazil, we had a phasing of large orders in Q4 of 2023. So lower orders in Q1 in Brazil.

Our adult sales increased by 32%, and this is mainly due to our sub-brand Gastrus in the U.S. and Spain as well as Prodentis in the U.S. and Germany. In terms of the regions, as I said before, Europe, Middle East, Africa increased by 13%. This was mainly in Spain, South Africa, the UAE, in Asia Pacific increased by 6%, primarily in Indonesia, Japan and Thailand. And as I said previously, Americas has decreased by 14%, mainly Brazil, Mexico and the U.S.

And now Alex will take you through the specifics on the financials.

[Alexander Kotsinas, executive]

Thank you, Theresa. So to summarize, like we heard, we had total revenues of SEK 370 million, which is 1% growth compared to the same quarter in the previous year. And we have an operating profit of SEK 143 million, which is a 3% decline compared to the same quarter in the last year. The margin was 39% and the earnings per share at SEK 1.21 per share. Operating cash flow at SEK 52 million versus SEK 98 million last year. If we look at the organic growth, we had an organic growth of 2%, and we had a negative currency effect of 1%. So the currency effect in the quarter was quite small.

Moving on to the gross margin. Our overall margin was stable at 72%. Within pediatrics, margin increased from 73% to 75% and within adult health, it declined from 63% to 57%. The main reason for the variations in the margin, especially in adult health is changes in the product mix. So for example, we had, as we mentioned previously, we had a quite large increase in sales, for example, Prodentis and Gastrus. And those products have slightly lower gross margin than, for example, the Protectis tablets. So that explains that mix change in the quarter explains why the margin is somewhat lower for the adult segment.

Moving on to the operating expenses. Our operating expenses increased with 7%. If we look at the different lines, we see that our sales and marketing costs grew 9%, mainly due to a higher activity level within different markets. As for the R&D costs, this cost grew 34%. However, we have to remember they grew from a lower base due to that, we had quite low cost last year and the year before due to COVID restrictions on clinical studies, and we are more normalizing the cost now. That is why costs are increasing within R&D.

If you look at the administration, the cost grew with 42%. The cost here include expenses for the litigation in Italy, and we have a total of extraordinary costs of about SEK 5 million, which has hit mainly this line of admin costs. Then we have a line called other OpEx, which was a positive of SEK 12 million versus SEK 2 million last year, and this is due to increase in exchange gains. So we have, so to speak, a negative cost here. So total OpEx then, SEK 122 million. And then if you exclude adjustments of SEK 5 million, we have an OpEx of SEK 118 million versus SEK 112 million. So it grew 5%, if you would deduct the one-off items. Look at the P&L to summarize then, sales grew 1%, OpEx, 7% and an EBIT minus 3%. We have a margin of 40% -- 39% and excluding the one-offs, a margin of 40% versus 41% last year.

Looking at the cash flow. Cash flow from operating activities decreased by 47% to SEK 52 million versus SEK 98 million, and this is mainly due to higher costs in working capital due to increased receivables. We don't -- there is nothing special. It's more normal fluctuations within the quarter between the quarters that make this. So we will see in the coming quarter that the cash flow from those receivables will come in. And then cash flow for the period then SEK 41 million and cash at the end of the period of SEK 1.6 billion. And as we announced before, we will pay out dividends that will be decided by our Annual General Meeting today. There will be some dividends payment of SEK 0.69 per share and a total of approximately SEK 700 million out of that cash position of SEK 1.6 billion.

And with that, I hand over to Theresa for some concluding remarks.

[Theresa Agnew, executive]

So in summary, despite record high sales in our same period Q1 2023, our Q1 sales grew 1%. Our region of Europe, Middle East, Africa is back to growth with an increase of 13% due to some of the markets we discussed, such as U.K., Spain and United Arab Emirates. Asia Pacific continues on its solid growth trajectory with a 6% growth in markets such as Japan, Thailand and Indonesia. And we also saw continuing growth in China, as we also saw in 2023. America sales decreased by 14% as discussed, mainly due to Brazil, Mexico and U.S. As we said, the U.S. sales were negatively affected by the discontinuation of the Gerber products and Brazil sales were negatively affected by the inventory buildup in Q4 of 2023 due to the launch of our Protectis drops, Easy Dropper which is a novel innovation and the Brazilian market is very excited about that launch for this year. Our operating expenses grew by 7% as Alex detailed and our EBIT margin holds at 39%.

So we will take any questions that you have.

[Operator]

[Operator Instructions] The next question comes from Kristofer Liljeberg from Carnegie.

[Kristofer Liljeberg-Svensson, analyst]

I have 3 questions. First, I wonder if it's possible to quantify the negative effect from Gerber in the U.S.? And for how long do you expect this negative year-over-year impact to continue? For example, did you have any sales to the back in the third and fourth quarter last year? Then I wonder if you could comment on the situation with distributors in Italy and whether you will continue to have legal costs here coming quarters? And finally, I'm sorry, I just missed what you said about receivables. If you could give some explanation there on why they were tied up so much in the quarter?

[Theresa Agnew, executive]

Okay. So first question, in terms of the negative effect on Gerber. So we do anticipate that this will continue this year because there were orders last year in Q2 as well as throughout the year. I would say the Q1 orders were larger than the other quarters, but we will still be lapping those orders from 2023. In terms of Italy, our legal costs will be continuing because our arbitration is proceeding as scheduled. So those legal costs we anticipate to continue. I'm not sure of the exact quarter, but it will be through most of the remainder of the year. And then I'll let Alex answer the question about receivables.

[Alexander Kotsinas, executive]

Yes. So the receivables. Now what I meant was basically that we have a normal fluctuation in certain quarters. We have some orders coming a bit closer to the end of the quarter, beginning of the quarter, so it's more of a normal variation. It's nothing strange with the receivables.

[Kristofer Liljeberg-Svensson, analyst]

Could I ask a follow-up here? So Gerber, is it possible to say how much negative impact that had on year-over-year growth in the quarter?

[Alexander Kotsinas, executive]

No, we won't quantify it, but I mean it had a substantial effect enough, it was a large enough effect for us to have to mention it, so to speak. So it did have an effect on Americas total sales, Kristofer.

[Kristofer Liljeberg-Svensson, analyst]

Okay. And I think you have previously said that the target is to accelerate sales growth. So my question is, even with this effect for the full year, do you expect you could grow reported organic sales double digit?

[Theresa Agnew, executive]

So we don't give guidance around the upcoming quarters. But as we look at our growth trajectory, there will be certain markets that we will be doing some targeted investments in. Some of those kinds of investments will be in marketing, will be in sales in terms of sales force. So they do take some time to then see that growth corresponding. So we will be starting some of those investments in the future. But we don't particularly quantify what the quarters will look like.

[Operator]

The next question comes from Mattias Vadsten from SEB.

[Mattias Vadsten, analyst]

I think it was very strong delivery in adult sales. So maybe a bit more flavor on the development there because it seems like a shift in terms of year-over-year momentum. Then perhaps also a more long-term question for you as well. I mean do you see this part of BioGaia growing faster maybe than the pediatric segment? Or how should we sort of view the growth trajectory for the different segments? That's the first one.

[Theresa Agnew, executive]

Okay. Yes. Good question. So as we were saying, our Adult segment grew disproportionately higher, mainly off of Gastrus and Prodentis and some of the details around that, Prodentis continues to grow very well in our market in Japan as it has for a number of years. But what is new is the focus in the U.S. on Prodentis. So that has been a driving force for the adult sales growth. They are calling on dentists through congresses, hygienists, so doing our typical medical marketing focus to build recommendations for Prodentis. So that's going very well, and now we are looking to replicate that in other markets. So in Canada, we just relaunched Prodentis in Q1. So that's also contributing slightly, but not to the significant level of the U.S. So we anticipate that Prodentis will continue to grow because of our additional effort there. And longer term, we want our adult segment to disproportionately grow. We want to continue our pediatrics growth, but because we're operating on a much smaller base with our adult business, we want to see disproportionate growth, especially with Gastrus and Prodentis.

[Mattias Vadsten, analyst]

I think that's a very clear answer. Then maybe a follow-up to the previous question here on costs. You talked about sales, sales force, marketing investment, et cetera, and maybe just to clarify a little bit, when will we see those investments in OpEx for you? And how much have we seen so far? Maybe some [ clarity ]...

[Theresa Agnew, executive]

Yes. So in terms of some of those OpEx costs, we haven't seen too much of it yet. If you look at our OpEx increases for Q1, they were primarily around clinical costs because, as Alex said, now we're getting back into our clinicals, recruiting a lot of patients because in COVID, it was much more difficult to recruit patients. So our clinical costs increased during Q1. We anticipate though that the marketing and sales investments will begin to increase in the latter quarters of this year. And again, as we know, as we make those kinds of investments, it will take some time then to see the growth there. But we will be making targeted investments for sure, in certain markets where we feel we have a strong opportunity to grow.

[Mattias Vadsten, analyst]

Perfect. Sounds more like maybe the second half then to me, at least. Then the last one, maybe to tweak a little bit on the previous question as well. I appreciate you don't comment on growth going forward. But would you agree that comps are more normalized for Q2 through Q4? And then on another note, I mean, Q1 looks once again very strong. Are there some kind of seasonality that we should continue to expect Q1 to be the strongest delivery for BioGaia in a typical year? Or is it just sort of, let's say, a timing effect here in the recent 3 years? Or how should we view that? That's my last one.

[Theresa Agnew, executive]

Yes. Yes, good question. So it is mainly a timing effect. It is orders. When we had Q1 2023, it was phasing of orders from China and the Americas that caused the big increase in Q1 of 2023. And we had some similar effects in Q1 of 2024. So I wouldn't say there is seasonality to our business. Some of the things, though, that we have seen in Q1 that are very positive, such as in the U.S. our Amazon sales grew considerably. So 38% in our Amazon sales. So very strong in those -- in that particular channel. But again, there really isn't, I would say, seasonality. It's more phasing of orders because some of our distributors will place orders in certain quarters depending on product launches and so forth.

[Alexander Kotsinas, executive]

I can also add that, I mean, when we go more and more direct with our own subsidiaries like we do, that type of spending in those subsidiaries, it's more seasonal and so that you have more campaigns in the fourth quarter, for example, compared to the first quarter. So you will have a higher activity level and a higher cost level in your fourth quarter compared to the first quarter. So that is why you see, for example, now in the first quarter is part of the explanation why we have quite a strong margin now compared to the rather relatively weaker margin, which we had in the fourth quarter. That is an effect of going direct to a larger extent.

[Operator]

The next question comes from Mattias Häggblom from Handelsbanken.

[Mattias Häggblom, analyst]

Two questions, please. Firstly, coming back to the buildup of receivables in the quarter which hampered cash flow. So were there large orders late in the quarter? Anything you'd like to call out or were they within the normal variation? And then secondly, further on the Americas decline sales on the Amazon platform being up 38%. Could you remind me what portion of U.S. sales is derived from the Amazon platform just to put that 38% growth figure into perspective? I kind of recall we've been sharing some kind of detailed data point around the online channel and its proportion of the U.S. sales historically, but I can't recall it right now. So any commentary around how to think about that magnitude would be helpful.

[Alexander Kotsinas, executive]

Thank you. I will try to answer the first question. No, there were no large orders of any particular kind that, so to speak, influence this. So again, I think this -- the lower -- I mean this receivable situation, it's more of a normal fluctuation, so to speak, as it happened to be like this. So it's not really any large order or anything particularly coming in late or something like that, it's more of a -- it just happened to vary to this extent, I would say.

[Theresa Agnew, executive]

Yes. And then on Amazon, we don't give the specific percentages of our channels, but I would say it's over 1/3 of our sales for the U.S. for Amazon. It's a very important channel for us in certain markets because that's where consumers shop. So we -- because of our omnichannel approach, we need to be where the consumers are with the right message at the right time with the right product. So we focus very heavily on that channel because that's where consumers are in the U.S.

[Mattias Häggblom, analyst]

Good. And that's very clear. And just a quick follow-up. Can you talk about the volatility of that growth figure historically for Amazon, although not sharing, of course, quarter-by-quarter, but is it typically more volatile than the rest of your sales through the -- into the U.S. market or should we think about it perhaps being superior to the rest of the groups performing in the U.S. for the more durable future?

[Alexander Kotsinas, executive]

I can try to answer that question also. I mean our sales -- our Amazon sales in the U.S. is quite stable, so to speak, from quarter-to-quarter and actually increasing sequentially. And basically, we are having a new record sales almost every quarter, so to speak. So it's quite stable in a way, our Amazon sales from a quarter to another quarter sequentially. But then, of course, we have other business, other channels in the U.S., which can be volatile up and down to some extent. But the Amazon channel actually is quite stable, I would say, and growing.

[Operator]

The next question comes from Kristofer Liljeberg from Carnegie.

[Kristofer Liljeberg-Svensson, analyst]

Yes. Two follow-up questions. Given what you said about legal costs in Italy to continue, although you probably won't give an exact figure here, how big they were in the quarter, but was that absolute majority of the one-off item cost here in Q1?

[Alexander Kotsinas, executive]

That is correct. Yes, it was the large part. And like Theresa said, I mean, it will continue to some extent, but it will probably decline going forward, those costs.

[Kristofer Liljeberg-Svensson, analyst]

Okay. Good. And then coming back to the previous question here about seasonality or quarterly fluctuations, is it true to assume then given that you have a larger sale or larger direct sales now than historically that Q1 is going to be the biggest quarter and not as it was historically which it was rather Q4 being the largest quarter for BioGaia?

[Alexander Kotsinas, executive]

Yes and no. So I mean, for our direct business, it's actually, I would say, it's probably quarter 4 which is stronger than quarter 1, so to speak, because of flu season and et cetera. I mean, you have a bit higher sales in the fourth quarter most probably. But still, I mean, a large part of our sales is not the direct sales of course, the majority is still to different distributors. And there, I think it's the same as it has been previously, the same quarterly variations, I would say.

[Theresa Agnew, executive]

Yes, and that part of our business, which Alex is talking about when he talks about the flu season, that's our immune health part of our business and that is highly fluctuating. So sometimes you can have an early flu season for Q4 and sometimes it's a later flu season for Q1. So that's not something we can predict. It actually happens based off of flu strains and what is happening in the environment. Some of the predictors, because I've worked actually in flu category for a long time, is you look at certain markets around the world, such as Australia, and it's a prediction of what Western Europe and North America will see in terms of flu because it's going to be a similar type of flu season. So that's the only prediction we can have around flu season for Western Europe and North America.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Theresa Agnew, executive]

So thank you. Thank you for your questions, very good questions, and we look forward to speaking with you next quarter. Thank you.