Biogaia AB

STO:BIOG B

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, welcome to the BioGaia Q3 Report 2020. Today, I'm pleased to present Isabelle Ducellier, CEO; and Alexander Kotsinas, CFO. [Operator Instructions] Speakers, please begin.

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

Thank you, and good morning, everybody. Welcome to BioGaia quarter 3 presentation. As you have already heard about our disappointing results on October 12, when we issued our profit warning, but Alex and I are going to explain you today what is behind the figures.So to start with, we are facing a total sales decrease by 21%, which is minus 17% if you exclude the currency impact, and this is mainly due to COVID-19. The main reason is that our distributor in the world, their sales forces are mainly medical sales force visiting doctors, have not to the same extent been able to visit the doctor, the health care professional or the pharmacy. So -- and that's where in most of our markets, that's where we operate. If you look at this per region, I mean, basically, we are facing a decrease in all regions but not at the same pace. And you will notice that Americas is facing a lower decrease thanks to the omnichannel strategy we initiated in end of 2018.In terms of products, here as well we could notice a decrease of BioGaia Protectis drops, BioGaia Prodentis, BioGaia Gastrus. If I just comment on Prodentis here already, the main problem is Japan. Our omnichannel [ almost ] in Japan for Prodentis is the dental clinic, and they are being heavily locked down, so they've been closed. So no one could go to the dentist, and therefore, no one could be recommended on the spot by the dentist to buy Prodentis and nobody can buy it. So the part of the business in OTC has been halved but not that much. But for Prodentis lozenges only sold in dental clinic in Japan, that has been a major issue, obviously.Next page, please. Here as well, we communicated at 10th of September that we will not have any Extraordinary General Meeting. And we have in mind perhaps to one month to decide either or not we should distribute the extra dividend. And we -- the Board decided not to distribute any extra dividend this year due to the context.Good news is -- we have some good news -- is that we have a new clinical study published in functional abdominal pain for children, which is very close to our focus area, pediatrics product, with very good results showing that we've protected to our mainstream DSM 17 we could -- I mean, we were the only probiotic showing reduced pain intensity, so which we were very happy about. Then on 12th of October, you all know, we published our profit warning.Next page, please. Despite COVID-19 and heavily lockdowns, perhaps everywhere in the world, we've been able to secure digitally 8 new launches. And I'm not going to comment all of them, but I would like to underline 2.The first one is the launch of Gastrus in France, and -- which is -- has been a long discussion with our distributor, Pediact. France is doing very well. Pediact is extremely talented to promote our product for children within midwife. But we decided in 2019 to launch Gastrus, and that's another type of doctor they have to visit. So they really focused on the gastroenterologue and really the gastroenterological association recommended to use Gastrus. And based on that, they have been able to launch in pharmacies and the first retail are really, really promising, so that we are very happy about.The second one I would like to emphasize is in U.S. via Everidis. Everidis respresented Prodentis before our oral health [ performing ] portfolio, but just Prodentis added. And I was a bit kind of stripping SKU because they were focusing mainly on the drug and on Protectis and the launch of Osfortis. But the American Pediatric Association has recently decided that it is up to the pediatrician to look at the children's overall health, which is very new.So now when you -- when the American goes to the pediatrician for the control of their children, it's up to the pediatrician to look at their mouth as well. And obviously, if they see something, they assign it to the dentist. As this is a type of doctor Everidis has set for visiting, for us, it has been very easy to launch Protectis -- Prodentis Kids. So while they are promoting the drops already, then at the end, they say, okay, by the way, you remember, you are in charge as well of the oral health of the children, and we have Prodentis to keep for you.So now we've been -- I mean, launching the oral portfolio to both for adults and for children. And it as well one specific target group for children, like children with problem like autism. These children, they cannot brush their teeth, they cannot -- I mean, articulate and they cannot -- I mean, brush their teeth even, which is always a fight with their parent. So we propose the Prodentis tablet for these children. So it's a nice taste with apple flavor. They taste good. It doesn't hurt them. So they just have to take it, and it works as a protection again caries. So the first result from the market, both the pediatrician and the dentist, has been really strong.Next page, please. If we look at our sales per segment, so both Paediatric and Adult Health are decreasing. The Paediatric are decreasing slightly lower. If you look at the year-to-date, we are stable. So we can see slightly resilience coming from our Paediatrics product, but anyway, decreasing heavily in the quarter 3.Next page, please. In terms of gross margin, here, you have probably noticed the higher decrease behind the Paediatrics product. So it's -- the first reason is a product mix, where the drops were decreasing a lot compared to the tablet, and that's why we have a higher margin. And secondly, it's a one-off unfortunate event where we received a batch from Danisco that, in term of culture, had respected the specification. But during manufacturing, when we checked before launching, we noticed that we didn't have the right number of living bacteria in the product and therefore, destroyed the batch. And that explains 1% of the decrease in margin. Year-to-date is stable for the whole portfolio at 73%.Next page, please. In terms of geographic markets, if we look at the quarter, all the region are decreasing, but as you can see, at different pace. So if I start with EMEA, it's mainly 25%, and it's mainly due to some of our biggest markets, namely Italy and Spain. And here, the first reason is the COVID-19. These 2 markets has been in a really strong lockdown, where consumer has not been able to go as usual to their pharmacy. Our distributors have been very reluctant to start our online strategy, even if it was our recommendation. Their old model is based on medical marketing, so their sales force could not visit the doctor, as I mentioned in the introduction.So if you add up all these, this -- I mean, it has a very bad impact on our sales. But I have to admit that in Italy, it has been a problem to be a top distributor. We have a distributor, which is extremely conservative, that we are trying to push to open new way of promoting probiotics to consumer. And it takes a bit of time.If we look at APAC, it's a bit disappointing compared to the super nice figures we always disclose for APAC. But I have to say that it's mainly because of the phasing of order regarding China. So one order that will have end up in Q3 end up in Q4, which is the reason of the decline in China.South Korea, here, we -- I think I already mentioned, we are changing distributor. So every time we change distributor, there is a bit of slowdown. And Vietnam is, I mean, mainly a phasing issue as well, to be honest.If we look at Americas, so we decreased only by 6%. We have a year-to-date at plus 5%. And here is different if you look at South America and if you look at North America. And actually here as well for U.S., it's mainly a [ prioritization ] of order effect. Our sales are doing very -- the sell-out in U.S. are extremely good and continue -- will continue to be good. So I really would like you not to look at the minus 6% as something which is a problem, because it's not. And I can even disclose that we received the biggest ever order from Amazon for the drops, which we'll get an order of 40,000 units of drops. It has never happened before. So on the sell-out side, the U.S. is doing very well. Same for Canada. Regarding Mexico though, here, there are, I mean, really, really badly impacted by the COVID-19, and we know that because we have a lot of researcher working for us in Mexico. And they say that it's really, really bad. And here, it's not only the oldest people dying it's as well the youngest. All people having obesity, suffering for metabolic disease, and they are young. They are 35. So it's -- I mean it's almost impossible for us to have able to focus on the sales of probiotics when the whole country is, I mean, impacted so badly by the COVID-19.Next page, please.

[Alexander Kotsinas, Executive VP & CFO]

Yes. So if we go to Slide #9, we look at our costs, the OpEx. We have seen that we had a cost -- the OpEx in the quarter was about SEK 62 million versus SEK 72 million in the same quarter last year, which is a decline of the cost with 14%. As you can see, our cost in the core, the core is our costs, excluding our subsidiaries, MetaboGen and BioGaia Pharma. In these areas, we see cost decreasing versus last year in basically all areas. And this is -- then again, it's mainly relating to COVID-19.So in sales, for example, we have a lower activity level in terms of the number of congresses, customer visits, et cetera, that we do, and that is one of the reasons why the sales and marketing costs are lower this quarter compared to a year ago. The same goes for R&D. We have a lower level of activity in terms of our clinical studies due to delays relating to COVID-19. So all in all, we have a decline in our OpEx of 14%.Then regarding the noncore OpEx, the MetaboGen and the BioGaia Pharma, we have an increase of 8%, and they are fairly unaffected by COVID-19.So move on to Slide #10. And to conclude, you can see in our P&L, we have a sales decline of 21%. Our OpEx declining, as mentioned, with 14%, which leads to an EBIT of -- EBIT decline of 45%, which is, of course, we are not satisfied with this. So our total EBIT was SEK 27 million versus SEK 49 million in the same period last year. And this leads to an EBIT margin of 20% versus 30% last year. Year-to-date, we are at 33%, which is more in line with our long-term ambition. Looking at the EPS, it's SEK 1.18 per share versus SEK 2.19 in the same quarter last year.We then move on to Slide #11, the cash flow. We see that our cash flow from operating activities, before changes in working capital, was SEK 15 million versus SEK 41 million last year. And the main reason is obviously the lower results for the quarter.In terms of the working capital, we see that the change in working capital was SEK 41 million versus SEK 20 million in the same quarter last year. And the main explanation is, of course, a decline in sales and the fact that you then release working capital. So the cash flow from operating activities was SEK 55 million versus SEK 51 million last year. And all in all, the cash flow for the period was SEK 50 million versus SEK 51 million last year. And our cash at the end of the period is solid at SEK 292 million versus SEK 213 million in the same period last year. Thank you.

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

And moving to the conclusion. As I mentioned on several occasion of -- I mean, our biggest markets such as Italy and Spain have been facing very strict lockdown. It has been a problem both for our distributor sales force to visit the doctor, but as well for the consumer to reach the pharmacy. So where we had our traditional business model, purely medical marketing, will have been really impacted.But in countries such as the U.S. where we are initiating a new B2C strategy supported by omnichannel distribution possibility, namely having a possibility to run online, then we have not been suffering that much. And I think these markets on the year perspective are not going to be impacted at all.So this comfort us that we will be able to go from this health-economic crisis, and that gives me as well a kind of strong argument to be able to go back to our traditional market to say, well, I think you've been noticing that if you would have opened yourself to -- via Amazon or your local marketplace platform, we might not have been in that situation. And here as well trying to see all this doctor online network, how we can collaborate. So really try to reinvent ourself and use the COVID-19 as an opportunity to fast track our digitalization.In the meantime, I mean we are as well been trying to monitor our costs as much as we could. On a year-to-date basis, you may have noticed as well as our core OpEx costs are decreasing by 7%, but our sales are flat. So we really try to monitor the costs in order to face this difficult time and not being impacted too much.So even though the lower sales is very unfortunate, we believe that this is mainly related to the COVID-19, and we are confident that our long-term ambitions are achievable.So now operator, we are ready for question.

[Operator]

[Operator Instructions] Our first question comes from Kristofer Liljeberg from Carnegie.

[Kristofer Liljeberg-Svensson]

Four question, somewhat related.The first one is, would it be possible to quantify how much of your sales is coming from e-commerce and how that was doing in the quarter versus physical stores and pharmacies? And then you mentioned this large order in U.S.A. Was that received in -- now in Q4?And also related to Q4, it seems the weakness will continue. I don't know if you could give some more color whether do we -- whether you expect gross sales to be declining in the fourth quarter as well?And then the final question relates to cost. And given how much you already have reduced cost year-to-date due to the COVID and in general, with less traveling, et cetera. What more could you do on the operating cost for the remainder of the year to compensate for lower-than-expected sales?

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

Thank you, Kristofer for your 4 questions. To quantify Internet, that's something that I really tried to consolidate with Alex. We don't have all the sellout figure divided by channel we would like to get from our partner. Some we have total transparency. We know exactly what it is. Some we don't. So we have not been able to quantify for our 109 countries that is on or offline. What I can say is that where we have decided to focus on, namely China and U.S., where there were our 2 pilot markets, and the sales of -- in fact, omnichannel in China is more than 70%. And in U.S., I think now it's more than 80%. Vietnam is transforming itself into 100% online market. If we look at South Korea, we are changing partners, because they could not have any sales online, and they were not willing to, a pure pharma thinking. And now we change from distributor, and they are mainly selling online.So I mean we are changing our -- I mean, our distribution strategy, but I cannot consolidate figures. It remains at the level of the whole company, not -- I mean, not the -- I mean the majority, because we have still Italy and Spain and Brazil, all these heavy markets where they are not ready. And not this tough to be willing, but they are not ready with that. So that's to answer to your first question.Regarding your second question...

[Kristofer Liljeberg-Svensson]

Sorry. Sorry. So -- but still, China, you said China now 70% Internet sales, U.S. 80% of sales from e-commerce channels.

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

Yes.

[Kristofer Liljeberg-Svensson]

But still, both those countries were still down for you in the quarter? But that then is only due to timing of shipments to distributors, right?

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

Exactly. It's just a prioritization issue, which is -- to answer your second question, the Amazon order we received for the U.S. is indeed a Q4 order.So in terms of lending, I don't think I am allowed to disclose the lending for the whole year. It's -- I mean that will be difficult to go back to a strong increase with the quarter, which is at minus 21%. So I think our effort is really to try to do as good as we can. We had 2 good first quarter, Q1 and Q2, and at both my -- at least plus 10%. And now we are at quarter end minus 21%. So I mean you can have [ themes ] what it's going to be for the lending.Regarding your cost -- the question about cost. I'm sorry, but Alex asked me at the same time, so I didn't hear the question. Could you please repeat it?

[Kristofer Liljeberg-Svensson]

Yes. Yes. I think you had mentioned both in the press release last week and then the report that you are trying to adjust the cost base for the lower-than-expected sales. But what I wonder is, as costs are already down so much this year because of less traveling, less trade exhibitions, et cetera, what more could you do on the cost, really, in the short term?

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

In the short term, not that much, to be honest. But we had the 2 strategy days yesterday with the Board and have 2 strategy days with the management committee in September. So we are looking at it on a broader perspective, how to be more efficient in our way of working, perhaps how to integrate better MetaboGen, Pharma and BioGaia more on the operation side. So we are looking at it on the broader perspective to be able to be more efficient to support the whole organization.But it's not -- it will not be like a magical effect on Q4. No.

[Operator]

Our next question comes from Mattias Vadsten from SEB.

[Mattias Vadsten, Analyst]

Thanks for taking my questions, many of them were already answered, but I have 2. So firstly, can you just repeat the number of units in the large orders to Amazon to come in Q4?

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

Yes, it's 40,000.

[Mattias Vadsten, Analyst]

40,000?

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

Yes, which is for 1 order of drops. I mean, the historical one. So this one, we will frame it. We hope we get a lot of them in the future.

[Mattias Vadsten, Analyst]

Yes. My next question relates to Protectis drops, which has been also weak if you look on a year-to-date figure. Can you just talk us through the dynamics in terms of sales and marketing of this product versus sales of the other products that you have in general? Is this product likely to see the main shortfall also into Q4 here or how should we think about it?

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

Yes. I mean, the drops, on my opinion, are almost, I would say, secure SKUs. If you have a baby who has colic, COVID or no COVID, you're going to buy your drops. So you have -- and I mean, parents are really ready to do anything possible for their babies.So you have a resilience towards any type of crisis. But our job is really to make them available. So the problem is not the demand, the problem is the availability. So I'm not at all worried about the sales of the drops. I have to say as well that when the COVID started, the focus has been for us and for our partner to get their products on their market.We were all afraid that we will not be -- neither be able to manufacture because of closing down of the factory or whatever or not being able to ship the product, because all the country were closing borders and it was difficult to find transport. So we ask our BioGaia production to work in 2 shifts instead of working in 1 shift to be able to secure that all the products, at least, will reach the market. And that has worked very well, and that explain the Q1 and Q2.But unfortunately, in terms of visibility, then it has not been available to the consumer. So you have this slowdown due to nonavailability of the trial to the consumer. But now that the markets are open again, I mean, we don't know how long, but for the moment, it has been open during at least all the month. So these sellout effects will be absorbed slightly, and then we don't know. I mean now Ireland closed again 6 week and France is in a big curfew.So it's what -- that I cannot control. I don't have the idea, but the impact. But availability has been the key problem.

[Mattias Vadsten, Analyst]

Okay. Can you just elaborate a little bit more? I mean what is the main concern when you ship the product and then for it to reach the end consumer? Can you just elaborate a little bit more on that?

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

Normally, the first -- the usual way of a parent to hear about that, oh, your baby has colic and we recommend you to buy this probiotics magic BioGaia drops to stop the colic and stop the crying. The parents, they were not going to the doctor. I mean if you -- the people weren't going to the doctor at all. So they didn't meet the pediatrician as they used to and didn't get -- heard about the drops and about our product in general. And another impact for the drop, and here actually -- mainly in Italy and Spain, is that they recommended drops together with antibiotics.So if your children is sick, they will have antibiotics. And then they say, oh, by the way, don't forget antibiotics will kill all the bacteria, the good and the bad. So don't forget to take your probiotics to nurture your good bacteria and stimulate your immune system. And that has not happened as well, because people have been less sick. They have been at home. They were not going to school. They have not have all these small disease that you normal get requiring antibiotics. And therefore, you didn't buy your drug either.So yes, there has been a lot of impacts that together explain the decrease for the Q3.

[Operator]

[Operator Instructions] Okay. There appears to be no further questions. I'll turn the conference back to you, speaker.

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

Yes. Thank you so much for listening to us. Thank you so much for your interesting question, and we hear you for Q4. Thank you so much. Have a nice day, everybody.

[Operator]

Thank you. This does conclude today's conference call. Thank you all for attending. You may now disconnect your lines.