Biogaia AB

STO:BIOG B

Earnings Call Transcript 2022-Q3

[Operator]

Welcome to the BioGaia Audiocast with Teleconference Q3 2022. [Operator Instructions] Today, I am pleased to present CEO, Isabelle Ducellier; and CFO, Alexander Kotsinas. Speakers, please begin.

[Isabelle Valerie Ducellier, executive]

Thank you, and welcome, everybody, to BioGaia's Q3 interim management statement. And indeed, we are -- I'm kind of happy with the Q3 sales and figures in general. That's the fifth quarter in a row with double-digit growth, and Q3 shows a strong -- net sales increased by 48% and the year-to-date at 33% for [indiscernible] SEK 30 million. The operating profit is increasing by 40% at SEK 94 million, and our operating margin is at 36%. And Alex will comment the cash flow later on.

Next page, please. If you go through the key events. So outside of the 2 reverse profit warning, we did one for Q1 and one for Q2 -- sorry, one for Q2 and one for Q3. We have been announcing that we just opened a pilot plant at Eslöv, so [indiscernible] production, where we will start to, first, fermentation on our strain, but as well on MetaboGen strain, so it's anaerobic strain. So that's the pilot plant that we will very much about to ferment new types of bacteria.

On the 2nd of September, we as well announced together with Skinome that Skinome is launching the first skin care probiotic product in collaboration with us. So we did the research, they run the clinical and now they launched the product that you can find in Sweden.

Regarding launches, a very active quarter as usual with 10 different launches. So out of the list that you can see in the presentation, I would like to underline a couple. In terms of products, the Pharax drops. So that we launched in Sweden, but -- and that we've already launched in the U.S. and in China. Now we are launching Sweden. We are launching in Hungary. And there, we are very; very enthusiastic about this product, which is a new area again for children who has, I mean, upper respiratory infection. And that's for sure that you come into the winter time, the children will have a cold and our product could be very useful for that. So we have a kind of great expectation behind Pharax.

In terms of country, I just would like to emphasize the fact that we are launching now to Nigeria. And I mean, Nigeria has about 206 million inhabitants and 8 million newborn. So as we are launching now the drops, we have as well -- I mean, we have to keep an eye on Nigeria.

In terms of other countries, I would like to emphasize Indonesia. Here, we work with Interbat already for our trust, but now we are extending the range to -- with Prodentis KIDS. And here as well, Indonesia last year, it's 4.75 million newborn. So that's a pretty interesting market for us as well.

Next page, please. Looking at the sales segment, pediatrics showed extremely strong quarter with plus 57%, and that's mainly thanks to our drops in Americas and EMEA.

Looking at the adult, we are increasing by 20%, so that remains very strong. If you look at the year-to-date, we are now at 36% increase for the adult. But from a smaller base and the adult sales increase is mainly driven through Gastrus in America. So we've run an extensive road trip in Latin America with our Chief Scientific Officer, Gianfranco, to launch Gastrus in a couple of countries together with our distributor, Abbott, and that seems to be here as well, quite promising.

Next page, please. Looking at our sales per geographical market. During this quarter, EMEA increased by 19%, a very strong year-to-date by 53%, mainly thanks to the fact that we are back to normal. No more COVID restrictions. And actually, we are doing even better than prior to the pandemic. EMEA were to mention during the quarter, France and Eastern Europe doing extremely well. Looking at the year-to-date, we should have as well Italy with a triple-digit increase, which is a relief with the kind of difficult year we went through Italy in 2021.

Looking at France, I mean, France will probably take the lead of the whole European market. So not because I'm French, but kind of nationality pride about France. And I wanted as well to mention South Africa, which has both a very strong Q3 and a strong year-to-date, and the fact that Ascendis, our distributor, has been acquired by Austell Pharmaceuticals, a very well-established pharma company in Africa that will help us to have a wider coverage of Africa because they are implanted in a lot of different countries.

Now moving to APAC. APAC has a strong increase for the quarter by 20%, a strong increase in year-to-date by 15%, and that is mainly driven by China, South Korea and Taiwan. Regarding China, I think we could have done better if there would not have been so much COVID restrictions. But despite that, we've been managed to go any way versus last year, and that is our budget.

South Korea. Here, I just want to emphasize, again, the fact that we changed from distributor for our drops to Grace International, and they are doing a fantastic job by implementing our omnichannel strategy. We have as well another partner dynamics in oral health doing extremely well.

Then if I move to Americas, that's basically, I mean, the continent where we've done best under the Q3 with an increase of 137%, and that's driven by the U.S. market and by Brazil. So Brazil, they always had very strict -- I mean, strong big orders. So sometimes Q2 was a bit low. Now Q3 is very strong. So you have to see it on a yearly basis because depending on when they place the order, it has an impact on the quarter. But Brazil is doing very strong, I mean, year-to-date basis.

So first time -- first quarter -- where if you look at the split of our total sales, America with 30%, it counts as much as Europe. And I think that's the first time I see that. On the year-to-date basis, it's more normal. We are at like 37% for [indiscernible] and 34% for America. And for the third quarter, we can really see the impact of the acquisition of Everidis into the BioGaia Group.

Next page, please. In terms of gross margin per segment, so we are pretty stable for the pediatrics at 74%. We've lacked some points in the added segment. And here, basically, the gross margin has been started to be negatively affected by the increasing of purchase prices, mainly on packaging items like the glass bottle or the tube, which was the easy dropper. But we have started to roll out a price increase to our distributor. So we have been able to manage part of the increase, and we are going to continue to roll out this price increase in 2023.

Having said that, we always have the question regarding the impact on retail savings to the consumer and the impact on our sales spend. And for the moment, what we see is that the price elasticity on the dropper are pretty low. I mean, a father or mother who has a baby who has colic who was crying all the time, honestly, it's not really the -- I mean if it needs to cry quite a lot to have this baby teething. So we don't see any impact for the moment of the consumer price on purchase.

But on the more kind of wellness adult products where you buy your probiotics, it's nice to have, but it's not the most. Then perhaps here, we might see some decrease in the coming quarter.

And then I will hand over to Alex for the financials.

[Alexander Kotsinas, executive]

Thank you, Isabelle. So if we move on to Slide #8, Q3 financials. So to summarize, the revenues were SEK 258 million, which was a growth of 48%, as Isabelle just explained. Our operating profit was SEK 94 million, which was a growth of 40%, and our operating margin was 36% versus 39% a year ago. And earnings per share was SEK 0.79 and operating cash flow was SEK 47 million. And I will comment on these figures a bit more in detail in the coming slides.

So if we move on to Slide #9, Q3 sales bridge. Our sales -- total sales was, for the quarter, SEK 258 million. This was a growth compared to a year ago when the sales was SEK 174 million. And the growth was 48%, of which we had an organic growth of 21%. If we look at the currency effect, the currency effect was 15% and the acquisition effect, that is the acquisition of the U.S. distributor, Everidis, that effect was 12%. And we're looking at it year-to-date, the growth was 43%. So in the quarter, we had a bit lower organic growth, but it was sort of compensate by a bit higher currency effect.

Move on to the next slide called group OpEx. I will briefly just discuss the costs. So our total OpEx increased with 52%. However, the main explanation for this cost increase is, again, the acquisition of our U.S. distributor, Everidis. And if you exclude that effect, our OpEx increased with 12%.

Sales costs increased, mainly due to the Everidis acquisition, but also due to increased activity levels. We have, for example, participated in more exhibitions, congresses and on more marketing activities for various kinds. And therefore, there is a natural increase of the costs on sales. But mainly, it was the Everidis acquisition that affected the sales cost.

Looking at the R&D costs. If we exclude MetaboGen and BioGaia Pharma, we see a somewhat higher costs, and this is mainly due to increased clinical study costs during the period. Also, we have other costs, which were negative SEK 15 million, i.e., it was a positive effect on our profit of SEK 15 million, and this is due to positive currency effect.

And then just to finally comment, our so-called OpEx non-core at this MetaboGen and BioGaia Pharma costs were SEK 3.6 million versus SEK 4.3 million a year ago. So it was slightly lower than a year ago.

Move on to Slide #11, group profit and loss. To summarize them. We had a sales growth of 48%, an OpEx increase of 52%, and thereby an operating profit that increased with 40% and a margin of 36%. Our adjusted margin increased with 39% and was also at 36%.

Move on to the next slide called cash flow. We can see here that our cash flow from operating activities before changes in net working capital was SEK 81 million versus SEK 52 million in the same period last year. And the main explanation for that is, of course, higher profit in this quarter compared to a year ago. However, we had changes in working capital of minus SEK 34 million this quarter versus plus SEK 16 million in the same quarter last year. The main explanation for the negative effect, so to speak, of the change in working capital is mainly that we have increased our trade receivables as a result of the higher sales. So there's nothing strange really behind this other than our sales has grown a lot, and that has led to that we had a bit higher receivables that we will eventually get paid.

And also, we have had lower trade payables in the quarter. It's a factor that it can vary between the months. And for some reason, it was -- it had this effect in this quarter. And that's, all in all, led to cash flow from operating activities of SEK 47 million versus SEK 68 million in the same quarter last year. And in total, the total cash flow of SEK 37 million versus SEK 56 million 1 year ago and total cash at the end of the period of SEK 1.4 billion.

Moving on to the next slide for the balance sheet. I will not go into details. This is more for reference.

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

[Isabelle Valerie Ducellier, executive]

Thank you, Alex. And I mean, as I say in my intro, another strong quarter, plus 48% growth, mainly driven by the lifting of COVID restrictions in EMEA and the wider implementation of our so-called omnichannel retailing strategy and the leverage of our global premium brand, BioGaia.

Just my figures we just received regarding this omnichannel retailing strategy, we can now estimate that we do 28% of our total sales online, which I mean we had an internal objective of 25% and we [indiscernible], and we are very, very satisfied with this evolution.

The region, as I mentioned, EMEA is continuing its recovery. Americas is performing very strongly, thanks to the U.S. and Brazil. APAC is, as usual, a sound double-digit around 20%, so which make us -- I mean, we have been very confident for the future of BioGaia. We know we are in the perfect storm in terms of macroeconomics and geopolitics, but we do believe that we are well geared on to go through the storm. We started to pass on this price increase to protect us from COGS increase. And therefore, based on our, I mean, improvement strategy now on brand building and scientifically proven probiotic, we are able to maintain our long-term financial target, namely EBITDA of 30%.

Thank you so much, and I will be happy to take your questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Mattias Vadsten of SEB.

[Mattias Vadsten, analyst]

I have four. Firstly, if you could speak a little bit more about Americas. I mean being strong also while looking at Q2 and Q3 together to adjust for the big order. What are the key initiatives you are taking there now when you have full control towards the end customers? And do you expect this market to also grow faster than the other geographies for years to come here? Or how should we view Americas for you?

[Isabelle Valerie Ducellier, executive]

Okay. So if we start by speaking about North America, I think we are doing very well because we are at every consumer touch phone, and that has been the success story. I mean, every month, it's about -- if we break record at Amazon, so we have a very good relationship with them. We are their most favored brands in terms of pediatrics, probiotics. And so I mean, on Amazon, we are already flying.

We are doing very well as well on Target online. We are doing well on Walmart online as well. Target has listed us now in their shops. So we are both on and off-line. So the whole ecosystem regarding on and off-line sales are complementing each other very, very well. And what is -- this is a factor for the U.S. is that we are continuing with our medical marketing. So our teams are all around the U.S. all the time to attend all possible congresses and visit health care professionals, sampling massively to health care professional. So we are -- I mean, the drops are the most recommended product by pediatrician in the U.S.

Based on that, we've been able to enter a new category, which is I mean the oral health. And we didn't know really what to expect. We thought, well, as we are so well distributed with the drops towards pediatrician, why not trying to launch quality kit, though. And here, we've got a very good answer from the pediatrician, but we got as well a lot of attention from the dentist.

And that's a new area for us. So now we've been participating to a couple of 2 big first in the oral health businesses, talking to hygienist, talking to dentists. And I think there is more to come from that front. So it's both a channel reason. It's a product reason, and the fact that we have a very good team in place.

[Mattias Vadsten, analyst]

Perfect. Then Finland, historically, it's been an important market for you. It's all going according to plan there. I would just like some flavor about the penetration among pharmacies now with your new product versus the prior distributor, that would be interesting.

[Isabelle Valerie Ducellier, executive]

Yes. Thank you for that question. Finland, as you remember, probably was a tough decision to take because we work with Verman. That was a private label business. We are like 33% market share. And as we didn't find any possibilities to distribute our own BioGaia brands via them, we've been obliged to examine the contract and start from scratch, which is sometimes a bit painful, but that was a strategic good decision.

And now I can tell you, we don't regret. Once again, we are not back at the 33% market share. Obviously, we launched our product in September. So it's very early. But we are -- today, I mean I talked to the MDs last week. We are in 570 pharmacies in Finland out of 800. The pharmacies in Finland, they are very ethical. They sell based on clinical data. And now they look at RELA, so all the private label brands, who is, I mean, selling on others, trying -- without any clinical data. And the pharmacies, they don't recommend it anymore. They say, "No, no, no, we want the rotary with all the clinical data. We can't promote RELA because they don't have any clinical data." So we are taking, I mean, much more market share and much more rapidly than we thought, but we are not still back to the 33% market share we have on RELA.

[Mattias Vadsten, analyst]

Very good flavor, I think. One more for me for now. On price increases, have you seen any impact of that yet here in Q3?

And then, I mean, maybe a difficult question, but at what share of sales approximately can you increase price at the turn of the year? Because I presume you're stuck in sort of longer contracts with some distributors. I mean if we could just get a sense here, that would be very helpful.

[Isabelle Valerie Ducellier, executive]

So in terms of price increase, we are just at the beginning of the process as to you're just saying. We have contracts in place with our distributors. Sometimes we can change the price on the year basis. Sometimes we can change the price if we have good reason to like cost increase. So it depends a bit. So we have not rolled out the price increase everywhere in the world, and we will see the full impact of that as from January next year.

Now we have a part of it, but not the full part of the price increase, which is perhaps a good way to transition towards the price -- the retail selling price increase to consumer, where we will have a good view as well when we will start selling -- price increasing. But as I mentioned during the presentation, I think pretty confident that we have a good resiliency for the prices of the drops because, here, you really answer a consumer unmet need. There is no drugs out there that works against colic. The only thing that works is basically our drops. So if you have colicky baby, you just buy the drops. And here, I don't think we will see a major impact on our sales even if we increase the price and even if we have over the premium price compared to competitor because we have a superior benefit.

For, I would say, the more well-being type of probiotics, I think, here, it's going to be a bit more difficult. We have much more competitor, it's much more reduction, and that might be slightly more difficult to support a price increase even if, thanks to the good reputation of BioGaia and science we have, we will probably be able to have a higher price point anyway compared to competitor.

[Operator]

And our next question comes from the line of Kristofer Liljeberg of Carnegie.

[Kristofer Liljeberg-Svensson, analyst]

Three questions. First, if you could maybe say a little bit more about the strategy of the small fermentation plant you are setting up.

Also, I wonder if you could quantify the big quarter and what you think the total stock effect might have been in the quarter ahead of price increases.

And finally, you gave this figure for online sales. Is it possible to compare that maybe, let's say, 1 year and 3 years ago?

[Isabelle Valerie Ducellier, executive]

Okay. So to start with your first question on the pilot plan for fermentation. So we -- the strategy is the following. One, for MetaboGen, we are dealing with anaerobic strain. Today, no one is able to ferment an anaerobic strain because they are too sensitive to oxygen, too sensitive to humidity. Nobody has succeeded by fermenting at -- I mean, at a good scale level. And that's what we want to prove that we can. I mean I'm not saying we are going to succeed. It's still at R&D level. But we know how to do that in a lab. We've been increasing the quantity of bacteria we can ferment more and more, and now we want to go to the next step. So the pilot plant is a 100-liter capacity fermentation plan. Just by succeeding -- by fermenting in scratch that will be revolutionary, I would say. So that's the number one.

The number two is for our own strain and the smallest one where sometimes we need to do clinical study. To do clinical study, you have to have a product. And when we call the big guys out there to say, well, we need to have a very, very small batch of clinical numbers, could you do that? Normally, they are not super happy and not to be quick. So now we will be able to do our own clinical sample products so we can run a clinical factor.

And then we wanted when to learn about our bacteria. Today, we are outsourcing 100% of the fermentation to different players like Christian Hansen or [ IFF ]. We want to know more, and we are working on new strain. So that will be our -- I mean we can experiment much more on old capacity than doing that outside. So that I hope answer your first question.

Your second question about stocking effects. Just to say that there is no stocking effect will not be really reasonable to say. But here as well, we sell product with a limited life expectation, I would say. On strain, we can guarantee that they will survive 2 years. Pharmacy in the world wants to have a product with a very long-life shelf life line. So there is in nobody's interest to stock for a long time our product. But some might have taken a bit more order this year to be able to, I mean, adapt. I don't think it's massive, but there was a slight stocking effect, I would say, in the figure.

And for your last question, the online sales, I think we -- I mean, basically, we were not selling online at all. Then suddenly, we acquired Everidis. So our online sales has been increasing. I think, last year, we ended the year at 19% and we are today at 28%. So that's a very strong increase.

[Operator]

Our next question comes from the line of Mattias Häggblom of Handelsbanken.

[Mattias Häggblom, analyst]

I have a few. I'll take them one at a time. So first, probably for Alexander, can you maybe help me understand the net financials of SEK 5 million plus. I guess it's driven by the strength for the dollar, but we've seen such strength before. So curious to understand that a bit better, whether it's nonrecurring or if it will occur again. That's the first one.

[Alexander Kotsinas, executive]

Okay. Mattias, Yes, it's mainly currency in short.

[Mattias Häggblom, analyst]

Why haven't we seen it before? I mean, can you expand on that? Because the dollar has been strong before. So why does it show up now?

[Alexander Kotsinas, executive]

I mean, it depends. I mean, it will -- I mean, it's difficult to say. I mean there varies a bit between the quarters, but I mean -- we are a bit more dollar dependent now with the U.S. acquisition, for example. So that is probably one reason why it's more visible, I would say.

[Mattias Häggblom, analyst]

Okay. And then probably the second one probably also for Alexander. Working capital was up SEK 34 million in the quarter. You had strong sales. You talked about receivables being up, but still you've had strong sales before. So is there anything new to the dynamic here? Or should we just expect that to reverse in the fourth quarter?

[Alexander Kotsinas, executive]

There is nothing new, no. You should expect it to reverse, I would say. So we don't see -- I mean, we don't have any longer receivable times, so to speak, or anything like that. It's just, I would say, a natural variation. It just happened to be like that. I mean, for example, if the sales during our quarter was -- a lot of it was, so to speak, in the second half of it, I mean, then we would have had higher receivables. So this is just a natural variation. It could be also the other way around, to be honest. So it's sort of a natural variability. So it will reverse.

[Mattias Häggblom, analyst]

That's clear. And then lastly, probably for Isabelle. On Adult Health, 7% growth in local currency. I know the comparison from Q3 last year was tough, but still, you made comments earlier that adjusting is a must-have, whereas Adult Health is more nice to have. So how should we think about our forecast for Adult Health going into 2023 with that in mind?

[Isabelle Valerie Ducellier, executive]

I mean we -- as you know, we don't comment on 2023. I think it's more -- the problem on Adult is to maintain the premium price because you are much more competitive and you are -- I mean you compete with a lot of different products. I think on Prodentis, here, we are a leading science and we are pretty unique. You don't have a lot of oral probiotic out there as we speak. So the pressure on Prodentis will not be that high where I see -- where it will be a bit more bloody is probably on Protectis on the immune health because there are so many probiotic out there claiming on immune health that, that might be a bit more complicated to maintain the premium prices. And perhaps on Gastrus, unless we come up with -- perhaps you never know, new clinical data that will reinforce our priority.

[Operator]

And we have a follow-up from Mattias Vadsten of SEB.

[Mattias Vadsten, analyst]

Yes, two additional ones for me. I guess on Pharax. What are the focused markets to launch the product for the quarters ahead?

[Isabelle Valerie Ducellier, executive]

Yes. So I'm sorry, it's a pediatric product. So we were on the product where we have good pediatric [ distributor ]. And then even if we sell in 112 countries, I think it's back top 113 yesterday, actually, we want to focus much more on our 12 biggest markets. So you could see a very big focus on China, U.S., Scandinavia, our direct market. I think all our direct markets in the long run has to have all the portfolio.

So today, Pharax is not sold in the U.K. We just opened the company, and it's doing extremely well, much more than what we thought. Even the MDs have been focusing on the drops. We won a lot of awards, get a lot of recognition among health care professional. So now it's time to extend the portfolio. But at the beginning, we always start with the drops. But U.K. is a big market, super interesting in terms of probiotics and our entrance to that market has been very successful. So you could see probably Pharax there soon.

[Mattias Vadsten, analyst]

Perfect. And then the last one, when do you expect to launch in Canada under own management? And will we see the same dynamics as we saw in Finland, even though that's, of course, a smaller market? Just interested to hear a little bit about that.

[Isabelle Valerie Ducellier, executive]

I mean, I am a super strong believer in Canada. So as you know, we were working with Ferring before. And Ferring wants to refocus on that core business. So they say, "Well, sorry, but I think it's better if we focus and we start distributing BioGaia." And that was the perfect timing because we had acquired Everidis. So we have a lot of synergy in terms of logistics, in terms of marketing that we can drive from the U.S. And we managed to get 2 -- the 2 best employees from Ferring.

So [ Darryl ] will take on as [ MD ] and has been working on BioGaia for 8 years. And that same Director is following as well, so he will join us in January. So that will ensure the perfect transition from today to tomorrow. So tomorrow, one of their biggest customer is Costco in Canada. Everything is already in place. So we press on the button January, here we go.

And as for the U.S. case, instead of having the distributor margin going to Ferring, the distributing margin meeting within BioGaia. So the dynamic there is going to be very interesting to follow.

[Operator]

[Operator Instructions] There seems to be no further questions from the phones at this time. So I'll hand back to our speakers for the closing comments.

[Isabelle Valerie Ducellier, executive]

Yes. No new comments. Thank you for your attention. And yes, thank you for following BioGaia. See you. Have a nice day.