Biogaia AB

STO:BIOG B

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Welcome to the BioGaia Q2 Report for 2024. [Operator Instructions] Now I will hand the conference over to CEO, Theresa Agnew; and CFO, Alexander Kotsinas. Please go ahead.

[Theresa Agnew, executive]

Hi. This is Theresa Agnew, CEO of BioGaia and Alex and I are here to share our Q2 results. For Q2, our sales were SEK 384 million, which is growth of 22%. That was mainly driven by growth in Asia Pacific as well as our Americas region. Sales in Europe, Middle East, Africa increased by 7%, Asia Pacific by 49% and Americas by 22%. And we did have some orders due to quarterly variations in some of those areas, specifically in China and Brazil.

Our EBIT was SEK 134 million, (sic) [ SEK 135 million ] which is growth of 42%, and our EBIT margin is 35%. Earlier in the month of June, we actually announced that we are taking our business direct in Australia and New Zealand. This is really exciting for us. It is one of our future investments. Australia is actually the 12th largest probiotics market in the world, and we have a really big opportunity to grow in both Australia and New Zealand. Those are both markets where consumers understand probiotics.

And coming in with our products, our probiotics drops in the beginning, and then we will be expanding our other probiotics products in the future in the pharmacy channel as well as the grocery channel in Australia and New Zealand. So it's a big opportunity for us in terms of taking our business direct.

And as you know, we have been successful in our other direct businesses. We are -- prior to this, we were direct in six markets. So now that makes it eight markets. And our direct business is typically are around 30% of our sales. So we anticipate this will continue to grow as we take in Australia and New Zealand direct now.

Also on the news front, in early July, we won our arbitration with our former Italian distributor, Noos. And we have recently, just last week, signed a long-term contract with our sub distributor, Recordati, which is a pharmaceutical company in Italy, Spain, Portugal and a number of other markets. So they will now be our exclusive distributor of probiotics in Italy as well as in Spain and Portugal.

As you know, over the past couple of quarters, we have been talking about future investments in our business to continue our growth. So we are ramping up our investments in the second half of this year. We are projecting SEK 75 million to SEK 85 million in the second half of cost on top of our normal operating costs. Some of those investments will be in marketing and sales activities. Specifically, we will focus on the U.S. with a sales force that will be marketing and selling our probiotics products.

As we said, we are launching our direct business in Australia and New Zealand. So that is another opportunity for investment for us. We will also be launching our first global advertising campaign and preparing for that launch that will be coming up in the nearer term. We are also investing on new products in R&D, on clinical studies for the future. So these are just some of the investments that we will be doing to drive our continued growth.

Some of the launch events and other events in the quarter, so we had through our Pharmabest distributor in Italy, our BioGaia Protectis Drops with Vitamin D.; and in the U.K., which is one of our direct businesses, we have launched our BioGaia Prodentis lozenges.

So as we've talked about before, Prodentis is one of the brands that we are continuing to invest in. We've done extremely well in Japan, the U.S., Canada, and now we are driving even more emphasis on Prodentis in the U.K.

As I said, in the overall introduction, we announced our own distribution in Australia and New Zealand and also announced our long-term agreement with Recordati in the Italian market.

So our sales, as I said, increased by 22%. Our pediatric sales increased by 32%, mainly due to increased sales of our Protectis Drops. And sales increased in all regions and also specifically in markets such as China, Brazil and Canada.

For the quarter, our Adult sales decreased by 6% due to decreased sales of our Protectis Tablets, mainly South Africa, Belgium and Japan. But this is due to quarterly variations for individual orders.

And as you see for year-to-date, our overall Pediatrics growth is at 11%, and our overall Adult Health is at 10%. So our Pediatrics business remains at around 79% of our total business.

In terms of the regions, as I said, EMEA sales increased by 7%. This was mainly in Germany, Spain and Turkey. In Asia Pacific, our sales increased by 49%, and this was mainly in China, South Korea and Vietnam. And again, our sales were positively impacted by quarterly variations for orders in China.

And in Americas, our sales increased by 22%, mainly in the U.S., Canada and Brazil. And again, our sales for the quarter were positively impacted by quarterly variations, specifically in Brazil. But as you can see, also our year-to-date growth in EMEA is 10%, in Asia Pacific is 25%, and in the Americas is 3%, for a total year-to-date growth of 11%.

So now I'll turn it over to Alex to go through the financials in more detail.

[Alexander Kotsinas, executive]

Thank you, Theresa. So if we just to summarize the quarter, we had revenues of SEK 384 million, which was a growth of 2%. Our operating profit was SEK 135 million, which was a growth of 42%. And the margin was 35% compared to 30%, 1 year ago. Earnings per share at SEK 1.10 and operating cash flow at SEK 119 million.

If you look at the sales bridge, we see that in the quarter and also year-to-date, there is basically no currency effect. It's very small. And the whole growth actually then comes from organic growth.

We move on to the gross margin. We have a total gross margin in the quarter of 74% versus 72% in the same quarter last year. For Pediatrics, the margin improved from 74% to 77%. And in Adult Health, it decreased from 67% to 61%.

Now the main reason for the decreasing Adult Health margin is a mix effect. We have been selling more relatively our Prodentis, which is a product where we have a slightly lower margin compared to our Protectis Tablets. So when we have a higher Prodentis sales in Adult, the margin is getting lower here. And that is the main explanation for the lower margins, both in the quarter and year-to-date.

We move on to the operating expenses. Our total expenses increased with 13%. Sales and marketing costs increased with 23%, mainly due to the increased cost in the subsidiaries that we have and the investments we are making in those subsidiaries. In terms of R&D, the cost decreased actually from 38.8% to 26%, a decrease with 31%. This is mainly due to some timing and some prioritization effects of clinical studies. The cost did increase actually compared to the quarter previous to this one.

In terms of administrative costs, they declined with 49%. This is due to a reversal of an accrual that we had for the litigation fees in connection with the termination of the distribution agreement in Italy. And that had then a positive effect on the cost. There was a negative cost, so to speak, in the quarter, and therefore, we have such low costs here.

And then, we have the last line in OpEx is the, Other OpEx, that was minus SEK 5.8 million versus plus SEK 8.5 million, and that is due to that we have had in the quarter this year, we have had exchange losses. And in the same quarter last year, we had exchange rate gains in the quarter. So all-in-all, then a total OpEx of SEK 149 million versus SEK 131 million, 1 year ago.

If we then summarize and look at the profit and loss, we see that we have a sales of SEK 384 million, a margin of 74% -- gross margin of 74% and an operating expense level of SEK 149 million, leading to an EBIT of SEK 135 million. And then the EBIT or operating profit then increased with 42% in this quarter compared to 1 year ago.

If we look at the margin in percent, we have a margin of 35% versus 30% a year ago. And year-to-date, we have a margin of 37% versus 36% in the same period last year.

Moving over to the cash flow. Cash flow from operating activities increased by 14% to SEK 119 million. The increase is mainly due to higher operating profit despite the negative change in working capital. Cash flow from financing activities went from SEK 296 million to SEK 699 million. This is due to the increase -- due to the higher dividends paid this year. So in total, we paid dividends of SEK 697 million versus SEK 293 million in the same period last year.

And all-in-all, that leads to a cash flow for the period of SEK 582 million versus SEK 216 million -- negative SEK 216 million to negative SEK 582 million. And therefore, we have the cash at the end of the period of SEK 1.08 billion.

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

[Theresa Agnew, executive]

So as we said, BioGaia won the arbitration with our former Italian distributor, Noos. And we have now started our new contract with Recordati for the Italian market. As we said, our total sales increased by 22%. In EMEA, specifically increased by 7% in sales in both the Pediatrics and the Adult Health segments. Sales increasing mainly in Germany, Spain, and Turkey. Asia Pacific continued its solid growth with 49% and was due to higher sales in the Pediatrics segment. And again, sales increased mainly in China, South Korea and Vietnam. And sales for the quarter in Asia Pacific were possibly impacted by quarterly variations for orders, specifically in China.

Americas sales increased by 22%, mainly in increased sales in both Pediatrics and Adult Health products and our sales mainly increased in U.S., Canada and Brazil. And again, sales for the quarter were positively impacted by variations, specifically in Brazil.

As Alex said, our operating expenses increased by 13%. Our EBIT margin is 35%. And as I described, we have been talking about the last couple of quarters that we would be ramping up investments and making some targeted investments. So we will be doing that, and we will be driving continued growth. We are projecting our cost of SEK 75 million to SEK 85 million in the second half on top of our normal operating costs.

And I did talk a little bit about where some of that focus will be, such as in the U.S. and Canada, in Australia and New Zealand. In global advertising campaign that we will be starting at some point as well as investments in our new direct businesses, Australia and New Zealand. And of course, continuing investments in our current direct businesses to continue to drive growth.

So that is the overall summary for Q2 as well as year-to-date. And we can now open it up for questions.

[Operator]

[Operator Instructions] The next question comes from Mattias Häggblom from Handelsbanken.

[Mattias Häggblom, analyst]

A couple of questions, please. So firstly, on the OpEx expansion of SEK 75 million to SEK 85 million. So what portion of that will be internal versus external cost? I'm trying to get a sense for how easy it will be for you to navigate these cost items, assuming the initiative does not translate into higher growth than you anticipate, you spoke about the sales force in the U.S. or perhaps a bit more on the nature of these costs?

And then secondly, is there a way for you to help us think about what magnitude of extra sales would be required for you to see that this investment is a wise one? Organic sales growth has totally already been high for this company, often in excess of 15% for various time periods. So anything on that would be also appreciated.

[Theresa Agnew, executive]

Sure. So just a little bit more on the nature of the cost. So as I said, we will be investing in the U.S. in a sales force, which calls on healthcare professionals. So that is something that we are starting. Obviously, when you launch a sales force, it takes time to then see the overall growth from the sales organization, but we will also be starting some additional marketing and over in the coming months, not immediately, but we will be launching some additional marketing also in the U.S. as well as Canada and some of the other direct businesses.

And so those efforts, we will be spending -- those are external costs, because it's in media. So it will be external facing to consumers as well as healthcare professionals in terms of marketing costs. We will also be investing, as I said, in the Australian and New Zealand business.

Some of those costs will be internal, because it is setting up the business, looking at things like infrastructure, ERP systems, third-party logistics, just as we would do with any direct business that we would start up. But there's also external costs there. Because we're very happy to say that we have started shipping product to customers.

So customers in Australia will be in the pharmacy channel and also in the grocery store channel. And so the cost that we have there, there will be some customer marketing retail. There will be some consumer marketing. It will be healthcare professional marketing. So just as we would with any direct business, there will be a percentage of internal costs to set up the business, but then there will also be external facing costs once we have the products distributed. So we are in that process of now of just starting to ship the products to retailers.

So it will take time. It usually takes, or I would say, 4 to 8 weeks depending on the retailer to get products distributed. So it will take some time to actually start to see some sales in the market. But that is going to be some cost for us, of course, both internal and external.

And then there will be some other internal costs in terms of clinical studies that we're doing for new products. There will be some internal costs around product development for our future products. We will be able to announce some new products coming up over the course of the next year. So I won't give specific timing on that, but we will be launching some new products over the course of the next year.

So hopefully, that gives you a little description of the types of costs. We won't share the exact amounts, of course, but that gives you the nature of the costs as your question was.

And then in terms of sales growth expected, we do not give guidance around sales growth, but we will be making strategic investments, and we will be monitoring growth associated with our investment expectations. So we will be monitoring this on an ongoing basis. We have KPIs around this. So we are doing this to drive penetration of our brand. We are doing this to drive awareness, sales into the future of our brand in select targeted markets where we are making these strategic investments. So we won't share specific guidance around sales, but we do anticipate continued growth for the products that we will be marketing.

[Mattias Häggblom, analyst]

Two follow-ups, please, and then I will get back into queue. So firstly, maybe can you help us understand the timeframe for how long you think it's reasonable to expect before this monitoring of the investment to see if that translates into what you would like to see. Is that a quarter? Is that a year, maybe something on that?

And then secondly, around your confidence in how this would translate into higher growth. Have you already experienced on your brief time here at, big you some similar nature of investments, all the smaller magnitude that have translated into higher growth? Or what gives you confidence that this will be a successful investment?

[Theresa Agnew, executive]

Yes. Yes, good question. The timeframe for monitoring will be on a quarterly basis as well as longer term. Some investments are more longer term, such as in R&D and in sales forces, other investments are shorter term, such as marketing, customer marketing efforts. So we will be monitoring short term as well as longer term.

In terms of confidence in growth, we do have strong confidence in the investments that we're making. When we have been increasing our advertising and marketing in our direct markets, we have seen increased sales. So for example, in the U.S., we have had record months in Amazon the past few months, and we have been increasing some of our marketing costs in specific areas there. So what we like to do is, we like to test things and then scale them more. So we have been testing some of the increased investments and now we'll be looking at scaling some of these things.

So -- and in terms of sales force, a lot of our partners that we work with around the world, they have sales forces. So they have commercial organizations that call on pediatricians and healthcare professionals, pharmacists and so forth. So there's a lot of really good evidence for the things that we're doing and what we're investing in even through -- that we've seen through our partners as well. So hopefully, that answers your question.

[Operator]

The next question comes from Mattias Vadsten from SEB.

[Mattias Vadsten, analyst]

I have a follow-up there on the extra costs that you have announced. So you said it's SEK 75 million to SEK 85 million extra OpEx in H2. So maybe is that compared to last year? Or what is normal OpEx to you in that regard?

And then I was also wondering a little bit more on the extent to which these extra costs will stick in coming year and years? So an approximate split between short-term and long-term investments would be very helpful. That's the first one.

[Theresa Agnew, executive]

Okay. So just in terms of the SEK 75 million to SEK 85 million, so we're looking at that -- we're talking about that for the second half of this year. We won't share what additional investments will be beyond that at this point. We will obviously be evaluating investments, looking at results and so forth. So we'll share more as that progresses.

We won't share specifics around our normal operating costs, just know that this is on top of our normal operating costs that we have, because our operating costs are quite extensive from what we're talking about in terms of internal costs as well as external costs. So hopefully, that gives you a little bit more guidance.

[Mattias Vadsten, analyst]

Okay. And I was wondering about the -- so APAC, very strong again for BioGaia and you flagged some extra inventory build in China and then I wonder about the magnitude of this. And also, I have the corresponding question then regarding Brazil. That's the second one.

[Theresa Agnew, executive]

Okay. So in terms of China, they've had to build inventory for some events that are coming up. So they have some significant events for the third quarter, which is why they wanted to build up more inventory for the events, the congresses, online, e-commerce events as well as they're launching our new packaging design. So this is something that it's a quarterly fluctuation in terms of preparing for these events.

In Brazil, similarly in terms of preparing for events but different types of events. So they have been launching our Easy Dropper, that seems to be going well as the feedback that we've gotten from them. That's our Protectis Easy Dropper. So they are continuing to prepare for their own events in Q3.

[Mattias Vadsten, analyst]

Sounds good. Then the last one, I mean, you have started the year now with 11% constant exchange rate growth, which is strong. So maybe a little bit on what you expect here for the full year. Do you expect this rate to continue? Or is that a very cautious way of looking at things given these extra investments that could convert to sales towards the end of the year? Or just some thoughts around how we should think about it. That's the last one.

[Theresa Agnew, executive]

Yes. In terms of some of the additional costs, we're looking at continuing our growth, but some of those will not have an immediate effect. So some of these are going to be investments that will see returns on them over the course of the year, of the next year from this point, right? So we don't give particular guidance. We think right now, it's strong at 11%. We hope to continue our growth where we have been and also hoping that these future investments will continue to drive growth moving forward above market. So that's always our goal is to grow above market.

But we don't know the exact timeframe, and we don't give guidance. We know that some of these investments will be -- we'll start to see a return over the course of the next year.

[Operator]

The next question comes from Kristofer Liljeberg from Carnegie Investment Bank.

[Kristofer Liljeberg-Svensson, analyst]

Also a question related to the extra cost. So based on what you say, it seems you will have higher costs also going forward. But should we expect now operating costs will be lower in 2025 versus 2024? Or will they continue to increase or be flat if you could help on that?

[Theresa Agnew, executive]

Yes, we're going to be looking at the investments that we're making, as I was saying, on a quarterly, half year, yearly basis. So we're not signaling right now of what the cost will be moving forward. We want to see some of the results over the course of the next year. So we'll be able to share more on that in the future as we evaluate and look at the investment potential and other things that we're going to be investing in. But these are very targeted strategic investments in very particular markets where we see opportunities for growth. So we aren't able to signal what the cost will be ongoing. But now that, as our investments are successful, we will -- we want to continue to invest to grow the business.

[Kristofer Liljeberg-Svensson, analyst]

Okay. That's helpful. But at the same time, you stressed in the report or said in the report that you're committed to the longer-term 34% margin -- EBIT margin target. So as you're monitoring this, I want to see higher sales from the investments, are you aiming to get back at 34% EBIT margin in 2025? Or would you accept that to take maybe a year longer?

[Theresa Agnew, executive]

So we don't know yet in terms of the length of time, because we'll continue to look at the investments over time. But we are committed to our long-term target. It is a long-term target for us, but we want to continue to invest in the business to make sure that we have a very healthy business. And the things that we are investing in, such as brand building awareness, penetration of our products, R&D, innovation, taking businesses direct, these are things that we feel confident and that we will grow our business for the future.

[Kristofer Liljeberg-Svensson, analyst]

Okay. And my final question, when it comes to the timing of individual orders seems to have been both positive and negative effects. Is it fair to assume that is on the overall group has been a positive effect in the quarter?

[Theresa Agnew, executive]

Yes. In terms of this quarter for Q2, the growth of 22% has been positively affected by these order variations. So that is something like in China and Brazil and some other markets, they have been preparing for events coming up in Q3. So these are quarterly variations due to orders.

[Kristofer Liljeberg-Svensson, analyst]

Actually, I have, just one final question. You mentioned the new packaging design in China. Is that some to specific thing for China or something that you will aim to do on a global scale as well?

[Theresa Agnew, executive]

So we are aiming to change our packaging globally, but each market will roll out at a different time. So we have already changed our packaging in Sweden. The BioGaia packaging has been changed in Sweden. And now we are starting to roll this out in other markets. So each market, depending on regulatory timing, because you have to do all your registrations and so forth, every market will be a little bit different. So it will take us really over the next couple of years to really roll out the packaging design change across the world.

[Operator]

The next question comes from Mattias Häggblom from Handelsbanken.

[Mattias Häggblom, analyst]

Yes, two follow-ups, please. So on the new strain, BG-L47, it's clear from being in the recent publication that hypothesis is that the strain will boost the growth and activity of reuteri. So can you help me understand how you think this could translate into clinical benefit in human trials, faster impact on reduction of crying time or rather an even higher response rate, if I use Colic as one example. So maybe help me understand how this could manifest?

And then secondly, coming back to this OpEx expansion, but maybe from a different angle, do you think BioGaia could have continued healthy growth without these investments? Or is it rather good alternative that without this investment, BioGaia was, to some extent, running out of the cadence of the current growth?

[Theresa Agnew, executive]

Yes. So first question on BG-L47. So this is a new patented strain for us. It's a Bifido bacteria, so different than our reuteri bacteria. So what we are looking at is the synergistic effect. If we were to launch a product that would contain both of these strains, so then it would be a patented product for the future being that the BG-L47 is a new strain.

It's a little bit different in that Bifido bacteria is not necessarily as effective for Colic. So there are different things that each strain is indicated for. So this is something that we're looking at for overall gut health, kind of, think of it as a healthy start for a child in terms of their overall gut and gut balance. And combining our two strains, we're looking to see these positive benefits for the future. So it's still being studied.

So obviously, when there's science involved, you can't promise anything. It's just something that's really interesting that we're looking at. And then, in terms of the overall growth question, I'm confident that BioGaia will continue to grow even without these additional investments. These additional investments are being made, because we want to continue that growth trajectory over time, and we want to drive even more penetration and awareness of our brand, both with healthcare professionals as well as consumers. So doing things like a global advertising campaign, it can be a real benefit to a brand in terms of building brand awareness, benefits of the brand and positioning of our overall BioGaia brand.

[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 I want to thank everyone for listening in, and thank you for the very good questions. And we look forward to speaking with you next quarter. Thank you.