Biogaia AB

STO:BIOG B

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, and welcome to the BioGaia Conference Call. [Operator Instructions] Please note this event is being recorded.

I'd now like to turn the conference over to Isabelle Ducellier, CEO. Thank you, and over to you, ma'am.

[Isabelle Valerie Ducellier, executive]

Thank you, and good morning, everybody. So following a very strong quarter -- first quarter, I'm actually very pleased to present yet another very strong quarter with sales up with 42%, mainly driven by strong growth in Europe and with plus 26% organic growth. I mean we are pretty proud to say that we outperformed the probiotics market during this quarter. In terms of EBIT, thanks to close cost monitoring, we can here as well present strong figures with an increase of 46%. And to end up this executive summary, it's worth mentioning a strong operating cash flow at SEK 87 million.

Next page, please. Looking at key events, I just would like to have your attention on the press release we found on 17th of May, informing you that we will operate directly in Canada as from January 23, and that will give us a full coverage of North America. So we will fund the U.S. under the Canadian country with 2 people based in Canada that will work as sales organization, and we will leverage our marketing organization from the U.S. to cover the Canadian market.

During the quarter, we had 9 launches. And here as well, I'd like mainly to attract your attention on the launch of BioGaia Pharax in China.

Why do I think it's interesting is that, first of all, Pharax is our first probiotics in an upper respiratory infection. And on top of that, Pharax is dedicated to children. So as we have a leading position within pediatrics, we have a lot of hope behind this new launch, and we are going to launch -- I mean we have basically launched now and that has been published in July, Pharax in the U.S. and you can think about a more global rollout in the coming months.

And secondly, I'd like to attract your attention on South Korea, where we are launching Prodentis KIDS. And here as well for the same reason, we are very strong in pediatrics. And we've launched Prodentis KIDS in the U.S. last year with great success. So we are very optimistic about this new launch in South Korea.

Next page, please. Looking at our sales per segment, both Pediatrics and Adults are growing pretty fast, 44% for Pediatrics and 33% for Adults, and that's mainly thanks to the sales of Protectis drops in EMEA and Americas for the Pediatrics and of Protectis tablets in EMEA and Americas for Adults. So that generate year-to-date increased by 41% for Pediatrics and 44% for Adults.

Next page, please. For our geographic market, as I stated in my introduction, we can clearly see the comeback of Europe. EMEA is up by 86% for Q2 and year-to-date 71%. And as, I mean, EMEA has always been, I mean, our historical background for BioGaia. We've been pretty badly hurt last year because of COVID restriction in Italy, in Spain. And we were convinced that when the COVID restriction will be released, we should go back to normal and that it is what is happening.

So both in Q1 and in Q2, and we secured that there is no stock effect is really driven by demand and I mean, Italy, which has always been one of our key markets, here we enjoy 3, I mean, figures increase. So we are very happy to be back on track. But it's not only Italy. As I mentioned, Spain is strong. France is very strong. I mean, Turkey, even I mean, very complicated economical situation there, we do very strongly. So we are very satisfied with the results in Europe.

If we look at APAC, here as well, very steady all the time double-digit in growth, so 16% for the quarter, 13% year-to-date. We were a bit worried with China with all the city closing down because of COVID restriction. And as we speak, there is still 31 cities closed down in China that represents about 17% of the Chinese population. But our distributor has really been very clever to handle logistics. And we've been able, I mean, to sell not as much perhaps as we would have loved to, but at least better than last year. So we have putting good figures in China.

But the clear -- I mean, the clear winner in Asia are, I mean, all the omnichannel champions, so mainly Indonesia, Vietnam, I mean these markets are really booming and is very satisfactory. In Japan though, here, COVID restrictions are still pretty strict and that has an impact on our sales via the dental clinics. Having said that, we've really focused on our -- I mean, our own e-commerce solution, and there, we see a lot of increase and we even opened a hotline, I'd say, for elderly linked with our website.

So the -- this older consumer can give a call if they don't feel at ease by ordering online to get information about the product and that we've seen as well a very positive success. So at the end of the day, we've been able to compensate partly the loss of the sales in the dental clinic.

Moving then to Americas. So here, a 21% increase for the quarter, 26% increase year-to-date. And that's -- the biggest part of the increase is driven by the U.S. and Canada. Regarding Latin America, we've been very happy with the launch of our product in Argentina. We were not expecting so -- such a success. So there was a very positive reaction from the market, and I think we have found a very good distributor.

Brazil could have been better during the quarter, but that's mainly order phasing. And then a lot of positive results in Colombia, in Peru, in Chile. So as a whole, Americas is increasing fast. If we focus a bit more on our latest acquisition, Everidis, very strong figures as such, but a slight decrease if we would like on local currency in the domestic market, and that's mainly due to only one client there that has been performing not as good as last year. But apart from that, I mean, Amazon is flying with a lot of launching. Walmart is doing very well.

So we are very impressed by the quality of the work that our new acquired subsidiary is doing on the field, being both at all congresses and meeting health care professionals and being super good on digital marketing campaigns with new effort on TikTok, which is new for us. So a lot of TikTok comments during this quarter.

Next page, please. Gross margin per segment with still about 70%, both for -- I mean, for the quarter and for the year-to-date. A slightly decrease of adult health gross margin for the quarter, mainly due to product mix. We've been really launching in a lot of countries Gastrus, which has a slightly less margin than our star Protectis.

But having said that, Gastrus is one of our best 2-strain product. We are really a strong believer in that product. So we invest for the future. And if you look at year-to-date, we maintain the margin for the adult health.

Next page, please. And I will pass over to Alexander, who is going to take you through our financials. Thank you, Alex.

[Alexander Kotsinas, executive]

Thank you, Isabelle. So we can move on to the slide called Q2 financials. So just to summarize, like Isabelle said, we had revenues of SEK 288 million, which was an increase of 42%. EBIT at SEK 101 million, which is a growth of 46% and a margin of 35%. Earnings per share were SEK 0.78 versus SEK 0.54 1 year ago and cash flow at -- operating cash flow at SEK 87 million versus SEK 56 million 1 year ago.

Move on to the next slide called Q2 sales bridge. We can see then that our sales then increased from SEK 203 million to SEK 288 million, of which 26%, as mentioned by Isabelle, was organic growth, 7% was acquisition related from the acquisition of the U.S. distributor and 90% were currency effects, leading to a total growth then of 42%, which is basically the same for year-to-date also in terms of growth and currency effects.

We move on to the next slide called group OpEx. I will just briefly go through the operating expenses. So our total operating expenses increased with 28%. And the main explanation for the increase in OpEx is the acquisition of Everidis, or Nutraceutics. So if you exclude that acquisition, OpEx was only growing in 1%. So basically flat, excluding the acquisition.

If we look at then the cost, different costs, starting with the sales costs. As mentioned, the acquisition of Everidis is the main explanation of the increase in sales costs. And of course, with a strong U.S. dollar versus the Swedish krona, I mean the cost is even higher for Everidis, so to speak. And if you exclude that, it's quite a marginal increase in cost and that increase in cost is mainly then you could increase activity levels as we have increased our sales in mainly Europe, et cetera.

If you look at our admin costs, they are flat during the quarter. Nothing worth mentioning, just some minor effects there, but basically flat. R&D costs, excluding MetaboGen and BioGaia Pharma increased slightly due to some phasing of clinical studies. And we have a negative cost of minus SEK 14 million in other costs, which is then due to positive currency effects.

We move on to the next slide called group profit and loss. This is again maybe repetition, but just to summarize then, sales increased with 42%, OpEx 28% and EBIT increased with 46%. And we have a margin of 35%, both on an unadjusted basis and on adjusted basis.

Move on to the next slide called cash flow. We had a very strong cash flow from operating activities before changes in working capital of SEK 74 million versus SEK 57 million in the same period last year. And we had positive changes in working capital of SEK 13 million versus minus SEK 2 million last year, all in all, leading to a cash flow from operating activities of SEK 87 million versus SEK 56 million 1 year ago, which is then an increase in cash flow of 57%.

And cash flow -- total cash flow then for the period was minus SEK 225 million versus minus SEK 16 million 1 year ago. And the main reason for that is the large dividends that we paid in the previous quarter of SEK 301 million. And cash at the end of the period is healthy at SEK 1.356 billion.

We move on to next slide, the balance sheet. I will not go into detail. It's just for reference. But basically, you can see we have a total asset of a bit north of SEK 2 billion.

So with that, I hand over to Isabelle for concluding remarks.

[Isabelle Valerie Ducellier, executive]

Thanks, Alex. So as a conclusion, I would like to repeat the fact that I think we have a very strong quarter with 42% growth, which is mainly driven by the lifting of COVID restriction. So SEK 288 million in turnover is the strongest quarter ever in BioGaia's history. It was always nice to break our own records. And we do believe that the reason behind this success is the implementation of our omnichannel retailing strategy and the building of our global premium brand BioGaia always supported by science.

EMEA is recovering with a strong 86% that we can see in Italy, France, Spain, Eastern Europe, you name it. Americas is performing well. We are very happy with the acquisition of Everidis. The integration went very smoothly. And the only thing, as I mentioned, is Brazil due to phasing of orders, but the -- all continent Americas is performing very strongly. APAC is continuing its growth. We have a new distributor in South Korea doing very well, [ Super Digital ]. China, despite still some COVID restriction did pretty well.

So as a final conclusion, I would say that we remain very confident for the future of BioGaia. Obviously, we cannot ignore what is happening around us. I mean, between the war and still some COVID restrictions here and there and perhaps a new wave of COVID, you never know. So we have to remain cautious that an inflation might have an impact as well on purchase power from consumer. But having said that, every time you do a survey to ask consumer what is your main focus today is -- I mean, health is always coming first. And therefore, we do think that they will start -- they will continue to focus on I mean investing on their own health to support the demand of our products.

So with a strong brand such as BioGaia supported by fantastic science and a distribution network, internal or external, we do believe we are well-geared to seize opportunity coming for the future.

Thank you so much for your attention. And now we are happy to take questions.

[Operator]

[Operator Instructions] We have our first question from the line of Mattias Haggblom, Handelsbanken.

[Mattias Häggblom, analyst]

I have a few. I'll take them one by one. So with regards to the gross margin, it's now been below at least my expectation now for 2 consecutive quarters, mainly driven by Adult Health and you state in the report campaigns and product mix, including the Gastrus launch as the reason for this. So prior to the pandemic, Adult Health operated at 70% gross margin. It's now been at 63%, I think. So should we expect this to improve going forward as volumes of Gastrus improves? Or is this now a more permanent change for Adult Health?

[Isabelle Valerie Ducellier, executive]

Mattias, I will take your comments already. So I was [indiscernible] question. First of all, in Adult, we don't have the same volume as for the Pediatrics products. So for our gross margin is not at the same level of the Pediatrics because volumes are lower. So that's a fact. And we are working on it. So Adult is increasing, but we are not at the same level as Pediatrics. So that explains the differences between the 2.

Then in some case, when we launch a product, we accept to have a lower margin because the idea is we need to recruit new consumer. And that sometimes we have some price positioning we have to take into consideration. So -- but that's worth the investment. So here as well, that [indiscernible] the price to innovate, you have to launch at perhaps a slightly lower margin. Then in the -- during this quarter, indeed, we are at 63% versus last year, which was at 70%.

But that was an exception kind of last year at this -- the quarter 2 last year was 70%. But if you look at MAT, we are pretty stable. And if we look at year-to-date, we are pretty stable. So I'm not too worried. And we -- but there will be slightly different for a while between Pediatrics and Adults. And for -- if you look at Osfortis here as well, it's a very expensive product to produce. We have a very big quantity of bacteria as such, so that affected the cost of goods.

So we are here as well all the time working on improving the -- I mean the product by perhaps reducing the quantity of bacteria. But to do so we have to do new clinical trials. You see that with a lower number of bacteria, we will reach written results. So everything takes a bit of time. Protectis is our star, but we know that bacteria forever. So we've been really optimizing a lot for the other product, they are a bit younger. So there is still some possibility of improvement. So that's something we keep in mind. That's something we are taking into consideration. But I will not be too worried.

[Mattias Häggblom, analyst]

Good. And then secondly, both Christian Hansen and Probi have spoken recently about the weakening U.S. retail probiotic market based both on retail data stats plus customer input ahead of the second half of this year. So how do you think about the second half in the U.S. based on what you hear and what the data tells you?

[Isabelle Valerie Ducellier, executive]

Yes. I read both Christian Hansen and Probi's reports. Having said that, I've called with the U.S., I was in the U.S. in June when I met both Nestle and Everidis to really see if they see a problem coming from the domestic market. And to be honest, I'm not worried either. If we look at both Everidis and Gerber, the domestic demand is strong, both online and offline. We have a slight decrease, as I mentioned during the call for the Q2.

But it's actually mainly due to one client that we sell to from the U.S., but this customer is as well selling overseas from the U.S. And basically, there was that part of that business that was decreasing, but not the American part. So it's difficult. I mean I don't want to get into, like, what the U.S. market is going to be in the 6 coming months. But we don't see on our product a main decrease of demand coming from consumer.

[Mattias Häggblom, analyst]

That's clear. And then last question for me, mainly for transparency. You state the comparison for the [ quad use ] distributor Everidis was tough in Q2 on the back of strong campaigns in Q2 a year ago. This was down 6% in the quarter in local currency. But could you help us understand what was the growth for the comparable quarter a year ago? And how does comparisons look for Everidis in the second half of the year?

[Isabelle Valerie Ducellier, executive]

I mean, we had -- I mean, we had a lot of campaign on Amazon last year. And so if you compare really strictly quarter-to-quarter, we have a slight decrease of 6%. But on the long-term, I mean, for Q3 and Q4, we have a lot of campaign ongoing. We have the launch of Pharax coming. We have a couple of other launchings -- launches that I cannot disclose, as we speak, coming. So I mean, I'm very confident in the professionalism of our distributing company in the U.S. And with the current listing we have plus the new coming, I think we will be strong -- very strong at the end of the year in the U.S.

[Operator]

We have a next question from the line of [ Paul Lettieri ] with [ ARC Advisors ].

[Unknown Analyst]

Congratulations on a good set of results. I've just got 3 very brief questions. Could you just talk briefly about your future M&A pipeline, what that might look like? The second part is really inflation-related. Are you seeing any increase in, say, the cost of clinical trials? You mentioned you're going to carry out more clinical trials and in terms of cost inflation in other areas of your business, could you please just give a little more detail on that?

[Isabelle Valerie Ducellier, executive]

Yes. Thank you, Paul. So to answer your first question on M&A pipelines, obviously I cannot say we are doing totally. But what I can say is that we're so happy with the integration of Everidis and that we might look at doing that in other parts of the world. So we have a clear blueprint about which market could be suitable for BioGaia. There are a certain number of KPIs, which are very important to secure the integration of a new market in the BioGaia network. So that's -- if you see something that's probably within forward integration, so to answer your first question.

To answer your second question about inflation, one, on clinical trials, I mean here, we don't see a lot of increase. We mainly do our clinical trials with investigator and this stands for the cost. We rarely run the clinical trial by ourselves. And here, the inflation impact is not really significant. What is more significant though is the increase on raw material. So we've been really super careful very early to buy the amount of oil we need to do the drops because that's where the main impact could be, and we feel pretty secure for 2022. But we have to really -- that's where basically we have to put our attention on and in order to address the increase of raw material with cost increase to our distributor globally for implementing -- ongoing implementation so that we don't have any margin problem coming.

[Operator]

Ladies and gentlemen, this concludes our question-and-answer session. And that brings to the end of our conference as well. Thank you for attending today's presentation. You may now disconnect your lines.

[Isabelle Valerie Ducellier, executive]

Thank you.