Biogaia AB

STO:BIOG B

Earnings Call Transcript 2021-Q4

[Operator]

Ladies and gentlemen, welcome to the BioGaia Audiocast with Teleconference Q4 2021. Today, I am pleased to present CEO, Isabelle Ducellier and CFO, Alexander Kotsinas. [Operator Instructions]Speakers, please begin.

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

Thank you, and good morning, everybody. Thank you for attending BioGaia's Interim Statement Q4 2021.And next page, please. So if we start with our executive summary, I mean we had a strong Q1, a weak Q2, a very strong Q3, and we are very happy to present a very good Q4 as well. So therefore, we have a pretty good year. If we consider excluding the currency effect, our sales increased by 12%, and the key thing that we have for objective to go back to double-digit growth, it's done. And I'm really, really happy for that. We've been through, I mean, 2 years of pandemic with a lot of uncertainties. So I'm simply very happy to present this Q4.if we look per region, we have some discrepancy as usual, but the good news is that in the last quarter, we could see at least the light at the end of the tunnel in EMEA, and I will come back to that a bit more in detail afterwards. It's still going super strongly in APAC. Americas decreased, but that's mainly because of Brazil. And the North America is doing super well. So thanks to that, we have a strong increase of our EBIT for the quarter at plus 17%, and we've been able to generate a very strong EBIT on the yearly basis for 2021 with an increase with 11%.Next page, please. What has happened during this Q4? I mean, mainly big news is that we've been acquiring our distributor in the U.S., Everidis. That officially today changed name to BioGaia USA, and I will come back to that on the next slide. And then you've probably noticed as well that the Board of Directors proposed ordinary dividend of SEK 3.63 and an extra dividend of SEK 11.29, and this SEK 11.29 is basically an extra dividend for this year put as well because we took this -- I mean, we are -- I mean the Board is insisting to compensate for the year 2019 and 2020. If you remember well, we were very cautious. So we dot know what's going to happen with the COVID. And therefore, we did not distribute any extra dividend. But as now, we have a strong year, we have the capacity to do it. So we -- the Board decided at the general assembly in May 6, but at least that's a very nice proposal from the Board of Directors.Next page, please. So of course, I mean, Everidis, our U.S. distributor, that's the information of the Q4. We acquired 80% already from the company, Nutraceutics, which is the mother company of our distributor, Everidis. We've been working with Everidis since 2007. So it's all partnership, so we know exactly what we are doing. We know the team, which is a very strong team. They've been able to implement the omnichannel strategy. We want to implement in every market very successfully. So we are very strong on marketplaces, such as Amazon and Target. Now we start to increase as well off-line.The team has a good market team, both in terms of medical and consumer. So that's basically now the new benchmark for BioGaia Group, and I'm really, really happy to welcome the 23 employees into the BioGaia constellation.Next page, please. Q4, we had a couple of launches as usual despite the fact that most of them has been still digital. And you will probably notice that we have 5 launches, which is related to the Immune Boost. So it has been very strong in Q3 as well. Consumer wants to present them to be sick, and we have a lot of campaigns, back to school, back to work, and they understood that. Okay, 80% of my immune system is driven by my guts. I want to stimulate my immune system. And therefore, our offer with BioGaia Protectis, and we have Protectis with D has been really successful during this quarter.If we go to the next page and look at the sales per segment. Both Pediatrics and Adults are growing, both at quarter level and year-to-date level. But here, again, I'm very happy to see that both for the quarter and for the year, the other segment is growing faster because it's exactly in line with our strategy. We want to be able to address all unmet consumer -- some consumer needs through life. So we are very strong in pediatric. We have a unique position in there, but we want to penetrate the adult portfolio, the adult population. And now we do see really a strong tenancy quarter-after-quarter that this is happening.Next page, please. Now looking by region. Yes, at least increased in Italy and Spain in the quarter. We wait -- we've waiting for that sixth quarter in a row. We've been spoken a lot with our distributors. And now we have a new strategy in place. They call it hybrid. I call it omnichannel, whatever. They were very strong in pharmacy, but now we are as well online. So you can find our products on Amazon in Italy and a lot of online pharmacies. We have been very, very active with social media campaign to work consumer to promote the back to school, especially for the children, say, okay, now the society is opening up. Your children are going back to school. They are going to be, of course, in contact with other small little disease perhaps -- so please work on your prevention for you and for your kids, and it is starting to pay back. So we are very happy. Obviously, it didn't compensate all year for Italy, but we have a very strong quarter for Italy and Spain in the quarter.Regarding APAC, I mean now you'll get used still very strong increase and -- but plus up 35% for the quarter. That's a kind of a recall for APAC. And there are a lot of good explanation for that. I mean, in China, going super strong online still. But what we did is that we had the BioGaia Academy in Chinese, and that's the first time we do it. BioGaia Academy is a program for health care professional in different areas. So we have one for pediatrics, we have one for all else. But this time, because sometimes when we have this, I mean, training program in English, it might be a bit complicated for our Chinese friends. So we've done that for China, mainly in Chinese and with key opinion leader -- Chinese key opinion leader because we want to be stronger as well in the medical sphere in China to work on BioGaia brand awareness and credibility. So that's worth mentioning.For Indonesia -- so it's both demographic impact. I mean, it's still a very big population with a pretty young population. And our distributor has been really, really working hard online. And here as well, we see a lot of increase in sales.In Japan, here, I mean they have been struggling because if they are still under a strict lockdown despite the ratio case of COVID, but that's another discussion. The fact is that it's -- and still people are working from home. The society is, I mean, mainly paralyze. Having said that, our BioGaia Japan own distribution company has been able to activate their sales of all probiotics on their own income solutions and as well towards dental clinic.In Hong Kong, it's back to growth, but we have to admit after a very, very too difficult year here as well, a very strict condition in terms of COVID and then as well some political issue. So Hong Kong is starting again, but that will take time to compensate on the year basis.The last region, Americas. So Brazil has been a bit weak. It's mainly to the order timing phasing. So I guess we will have a better Q1 2022.For the U.S., Everidis has done a fantastic job. So we have fantastic figures. And for the first time in our history, we have one market doing more than SEK 100 million in turnover, and that's the U.S.A. So you understand why we were so eager to get closer to the relationship we have today with Everidis back acquiring them. So at the end of the quarter, plus 10% for the total region, plus 5%, but plus 12% if you exclude the currency impact.If we go to the next page on the gross margin. I mean nothing significant to notice, except that we've increased once again our margin, mainly thanks to increased productivity at BioGaia production here in Sweden.If we go to the next page, I will ask Alexander, our CFO, to present the financials.

[Alexander Kotsinas, Executive VP & CFO]

Yes. Hello. Thank you, Isabelle. So if we move on to the slide called OpEx. So if we look at our costs, we had OpEx increase of 12%. Total OpEx of about SEK 106 million in the quarter versus SEK 95 million 1 year ago. However, that increase in cost is mainly driven by some restructuring costs and the cost for acquisitions that we have mentioned here previously. Those costs were about SEK 13 million. So if you exclude those costs, we have an OpEx of about SEK 94 million versus SEK 95 million a year ago. So it actually decreased 1% total cost.If we then look at the composition of the OpEx, the different lines, we see that regarding sales, we have costs of SEK 67 million versus SEK 50 million 1 year ago. The increase there is mainly driven by partly the restructuring cost of SEK 6.5 million and an increased activity level, which then drives increasing cost in sales.If you look at our admin, we have admin costs of SEK 12 million versus SEK 7 million 1 year ago. And here, the increase is due to the acquisition of Everidis. So it's about SEK 6.7 million, and that's basically the whole increase in admin costs.If you look at R&D, R&D is increasing from SEK 21 million to SEK 24 million, an increase of 13%. And if you exclude MetaboGen and BioGaia Pharma, you will see that we have an even higher increase, and that increase is due to increased cost for basically clinical studies and other projects within R&D as we move back to a more normalized situation after COVID-19.So -- and then lastly, we have another cost line called other costs, which is positive currency effects of SEK 3.3 million versus a negative effect of minus SEK 8 million last year. So all in all, our OpEx then increased 12%.Next slide, please. If you look at the P&L, on total sales then, as Isabelle explained, increased with 11%. Our OpEx increased by 12%, and then it leads to an operating profit of 17% increase and a margin of 26%. However, as I previously mentioned, we had these one-off costs. And if you adjust for those, we have an EBIT of SEK 65 million versus SEK 45 million 1 year ago, an increase of 45%. And we have an adjusted EBIT margin of 32% versus 24% 1 year ago.And just to summarize for the full year then, we have a sales increase of 5%, we have an EBIT increase of 11% and we have an adjusted EBIT increase of 21%. And the adjusted EBIT margin is 35% for the full year, which is then obviously above our financial target slightly.So if we move on to next slide, cash flow. So our cash flow from operating activities increased with 3% to SEK 56 million versus SEK 55 million 1 year ago. Cash flow from investing activities was minus SEK 90 million versus minus SEK 2 million 1 year ago. And the main explanation is then the acquisition of Everidis or Nutraceutics, which was about SEK 87 million of those SEK 90 million. We have a cash flow from financing activities of minus SEK 10 million versus plus SEK 1.125 billion last year. That was the equity increase we did. And that leads then all in all to the total cash flow for the period of minus SEK 43 million versus SEK 1.17 billion in the same period last year. And that leaves us with a cash at the end of the period of SEK 1.48 billion. And as Isabelle explained, it is proposed that we pay out the dividend of SEK 14.90 per share, which then equals about SEK 300 million that we would then pay out in dividends.So with that, I hand over to Isabelle for the concluding remarks.

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

Thank you, Alex. And as a conclusion, I can just repeat that we have a healthy Q4. We are happy to see that the EMEA is recovering. We are extremely satisfied with our results in APAC and in U.S. We've been accelerating our B2C journey with the launch of BioGaia U.K. in November. So if you look at the year, we took over BioGaia brand in Sweden from the idle portfolio in January, then we opened BioGaia Finland in March. Now we've launched BioGaia U.K. in November where you can already find our part -- I mean the whole portfolio both on Amazon and on our own website, and now we are looking at wholesaler for pharmacy and the acquisition of Everidis.So I mean, of course, we have to remain, I mean, cautious. We don't know what's the next Omicron variant coming for next year. But based on our new organization, based on the same consumer demand and our BioGaia brand getting stronger and more and more global, I mean, I remain very confident about the future. And I have to say that I'm particularly pleased with this year. As you remember, I started as CEO of the BioGaia in November 2018 and that, very quickly, I saw that the future of BioGaia was really depending on, one, building a global brand; two, be at every consumer touch point or in other ones at the omnichannel strategy, and we started to implement it in the U.S. And based on the success of that, we started to implement a bit everywhere. And now we're back to double-digit growth. So we have always remained cautious, but at least I can enjoy my day by coming with this report, and I will be happy to answer to your questions.

[Operator]

[Operator Instructions] And we have our first question from Kristofer Liljeberg from Carnegie.

[Kristofer Liljeberg-Svensson]

I have a few questions, if that's okay. First, could you maybe explain a little bit more what's going on in Brazil? If I remember correctly, Americas were a bit weak in the third quarter as well. And I think back then, you also said U.S. was strong. So if you could confirm this is only related to phasing effects? Or does it reflect the weakness in the Brazilian market?Then I wonder a little bit about the strategy of selling directly in the U.S. Is that a strategy you think would make sense in more markets than where you do it today so that we should expect you to take over from more distributors or collaborate closely with distributors? And based on this strategy, I guess it also is more attractive for you to look at product acquisition. And is that something you have set up activities around now than having acquired U.S.? Those are my questions.

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

Thank you, Kristofer. To answer to your first question, I mean, basically, the Lat Am region was, I mean, pretty well if you consider their situation and the way they address the pandemic. On one hand, we are working with Abbott in at least 10 countries now. I believe with them in December, very committed team, very strong results in Mexico, very strong results in Colombia, in Ecuador, in Panama. So I mean I'm not worried. And we have been pursuing our investment in Lat Am, where we actually saw some of our competitors in Latin America expand in Sanofi with their brand, Enterogermina. I mean they stop investing. I mean the situation was so bad that they say, okay, let's not invest anything. We've continued, and we've taken market share. So I'm not worried.Regarding Brazil more specifically, it's always a problem with having orders. So on the long run, I don't see super strong double-digit increases in Brazil, no. But I see a sound one thing, it did grow continuing in Brazil. We have not announced it, but we are going to launch a new product with them, a minipack. They are working on the launch. I was supposed to go there to support the launch in 2 weeks' time, but there are so many cases of COVID that they send everybody back home. So I'm canceling my trip. But we have some launch plan for the minipack that we really believe in. So that's for your first question.

[Kristofer Liljeberg-Svensson]

Could I ask a follow up on Brazil? What's the reason you don't think that market will grow double-digit anymore?

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

I mean not in 2022. I think they are really to recover from the pandemic, but then it's a huge market. And today, I mean the name of the game will be for us to launch adding portfolio because demographics perhaps not as dynamic as it was before, but we have to be able to propose products for adult in Brazil. Today, we are only dependent on the pediatric range. So that will be -- so then, when we find the solution, I mean, then -- and we started to have a lot of contact with the gastroenterology for adult community. As you know, our CFO is from Uruguay. So we had a lot of connection in Latin America. So that would be the way to move forward in Brazil.So your next question about selling direct to the U.S. and if you're supposed to wait for new or forward integration the same way. I mean, we are very pragmatic. We don't want like to take over the world when it's not necessary. So I was thinking about Abbott in Latin America. I mean, we will -- I mean we are far away from being able to do a job that they are providing on the field. So when we have strong distributors that know their market with big sales force capacity to visit health care professional as of being online, there is absolutely no reason why we should change it.But in the case of markets where perhaps we are not satisfied with our current distributor or when we don't have any distributor or where the distributor say, "you know what, if we would be to get done really, we will be stronger, let's get married" then that may happen. So yes, that might happen. And obviously, it would be for a strategic reason on important market where we see a strong potential for probiotics in the future.And then your last question regarding product acquisition. I can tell you it's still on. We are looking at -- I mean, so many different companies contacting us with lots of good ideas. And normally, we are all the time very excited until we sign an NDA and then we act on the clinical results. And there, we have all the time to be disappointed or perhaps we -- our standards are a bit too high, I don't know. But for the moment, we have not find it. But we don't give up, and there are a lot of very interesting research program ongoing. So we are not giving up, but it's difficult -- very tricky to find the right suitable product at the same clinical standard level that we want for BioGaia brand.

[Kristofer Liljeberg-Svensson]

So you're not ready to buy a strong consumer brand if it's not backed up by strong scientific evidence.

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

I think there will -- I mean, if it's called -- if it has to be called BioGaia, never, because that will totally damage the brand. The 32 years of efforts we've been doing to create our brand reputation will be spoiled in 1 day. It takes a lot of time to build the brand. It's extremely easy to destroy it. So we'll be very careful.

[Kristofer Liljeberg-Svensson]

Yes, makes sense. All right. Could I just add one more question for it? How should we think about operating costs in 2022 now when activity is picking up?

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

I mean this -- as you noticed, Kristofer, we really try to monitor our costs. So when the time was complicated, we really try to, I mean, save. Now under Q4, we see that, okay, we have a lot of opportunity to have a new working campaign, and we've been increasing our operating costs. So that's basically my answer. We really try to be line with our turnover. When we see opportunity, when we invest 1 and you get 2, obviously, we do it, but we remain cautious.So some -- I mean when you, like in the U.K., it's a new activity for us. So you also invest in the beginning because the name of the day -- of the game is really to create traffic on Amazon. To generate traffic, you have to pay, I mean, to activate. We have a lot of campaign to attract consumers. And then when we have -- the good thing, what we've noticed, especially on our e-com solution is that we've generated traffic. They came to the side. They stay very long on the side, they come back, they repurchase and a lot of them are subscribing on a year basis, which is fantastic for us. So the idea was to say, okay, you don't have to order every month if you need your [indiscernible] every month. Just subscribe, you get it every month directly sent to you at home. You don't have to do anything. And we've seen a very, very high result for this subscribing campaign. But the up-front investment is a bit higher, and we do hope that the return on investment after 6 months will be more interesting. So that's my answer for the operating cost.

[Operator]

So we have another question from Mattias Vadsten from SEB.

[Mattias Vadsten, Analyst]

Some of them already asked here, but three from me, I guess. Firstly, it would be interesting for the development in Finland. I mean given you established own presence there early in 2021, I guess, starting Q3, you will have sort of an uptick in that country going forward. Can you share with us if you're satisfied with the initial progress? And when we can expect sort of Finland to again reach the sales level recognized there in the past? That's my first one.

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

Okay. So Finland, when we took the decision to stop working in Verman and start our own distribution company, the only reason why was that we wanted to have the BioGaia brand present in Finland, and Verman had other strategic choices that we respect expect. They wanted more to capitalize on their own brand. So that's why we decided to stop working with Verman. Having said that, it's a very bold decision. The RELA brand, they're more than 30% market share. And I don't see us being able to come up to that level in the near future. That will be totally naïve to believe that so well established brands, we can come up with a new totally unknown brand BioGaia in Finland and take -- I mean, take 30% market share in 6 months. Having said that, Finland is really a pharmacy-driven probiotic market. The Finnish consumer love probiotic. It's part of their day-to-day life. They have a box of probiotics on the breakfast table for the whole family. They are very knowledgeable. And they go to the pharmacy, they ask for recommendation. And the pharmacy are very knowledgable as well, and now they've seen that, a [indiscernible] in RELA, that's not the same strain anymore, what's that? And where are the clinical data behind that? And they start to say, okay, that's not what we want to recommend. We want to recommend the [indiscernible] strain that we know from before with the meta analysis behind. And we are listed everywhere. And I mean the BioGaia Finland is 2 people. So I can tell you, I mean, we only have 10 people around the world. It's only 2. But as soon as they open the door of the pharmacy, they say, well, that us. We have the [indiscernible] strain now product. They get listed. And then the pharmacies is really now starting to recommend BioGaia instead to say that's a real strain with clinical data. So please go on. Having said that, it will take time to go back to the same level we had with RELA.

[Mattias Vadsten, Analyst]

Makes sense. My second question relates to the gross margin, which were very strong. The improvement is alluded to product mix, which makes sense and the efficiency improvement at the production unit that you talked about. Can you give some flavor here to what extent these are structural improvements that we'll carry on going forward rather than timing effect?

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

I mean we are working on the productivity all the time. So we bought a new robot to automatize the line. So we are always trying to improve the productivity, which is already very high. So that will -- so that's a constant effort that the team is doing there. So I think it's really a structural effort that are going to remain. It's not a phasing or one specific aspect. That's something, which we work on very well. We might even look at perhaps manufacturing more by ourselves because we see that we are able to generate higher margin when we do that by our own, but we don't want to end up neither in a situation where we will have to invest massively in CapEx just to add it in-house. Sometimes it's much more clever to do that to outsource.So that's the question we ask ourselves. We have a new head of operation. I don't know if you noticed it. It started in -- obviously, unveiling. And yes, he's a very, very senior person in the probiotic world and in the pharma world. And he's Danish, he's gaining share of all industrial sites at the Christian Hansen. So he's been working for faring. He's a really, really senior guy in operations. So that gives us as well a new eyes on how we do operate and how we could be better.

[Mattias Vadsten, Analyst]

That's great. Also, in terms of your long-term EBIT margin target, that remains at 34% here. Give -- the incremental margin from the acquired sales in the recent acquisition is 26%, and I would guess that the requires some investments, going B2C in Finland, for example, now also U.K. How confident are you in that target over the long term or in the medium term at least to reach that?

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

I mean in the long term, I'm totally confident. In the short term, I don't think we should stick to it by the book because that will really -- I don't think that's a way to handle opportunities. I see a lot of growth possible if we are ready to invest when it's necessary, not being focused only on the 34%. So I would say that perhaps short term, we will not be sticking to the 34% by the book. But on the medium and long term, I don't see any problem at all.

[Operator]

So we have another question from Mattias Häggblom from Handelsbanken.

[Mattias Häggblom, Research Analyst]

In terms of the objective of getting back to double-digit growth, which is at now...

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

Mattias, I'm sorry, I have just one problem with my dog. I'm very sorry. Oh God, that's the problem of being home. Yes, sorry, I'm listening to you, Mattias.

[Mattias Häggblom, Research Analyst]

Yes. Good, in terms of the objective of getting back to double-digit growth, which you said is now achieved in your prepared remarks. At the same time, I'm thinking about some of your key markets, which have still been affected by the pandemic and lockdowns have yet to fully recover. So in terms of thinking ahead, is it fair to say that you've now turned a corner and outlook for double-digit growth is promising? Or were there elements in 2021 that were sort of extraordinary and, hence, could mean that the 2021 growth is misleading? And then I have a follow-up.

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

I mean opening of the society will help us a lot in all our traditional more conservative pharmacy-driven market. What's going to happen in the future? I think like now all the restrictions are gone in Europe, but not in Hong Kong and not in China. So that's a bit too early to say. But if the -- I mean, the countries are opening up. I don't see any reason why we should not stay with this double-digit growth. And I only see -- I mean, basically, we are in a lot of markets, mainly with 1 SKU. Now we've learned in a lot of different market launch the adult portfolio. So if the maths are correct, I don't see any reason why we should not continue to grow for the year to come.

[Mattias Häggblom, Research Analyst]

Good. My second question is related to the earn-out for the remaining 20% in Everidis, the USD 22 million you referred to in the release. I'm trying to work out what growth needs to happen in order for that earn-out to materialize. And you refer to a sales multiple in the report. And if I do the math, it seems as if Everidis on BioGaia U.S. need to grow 40% to 50% per year for the next 6, 7 years for that to materialize. I know you spoke about 100% growth in U.S. in Q1, and I think 70% in Q2. But is that kind of compounded annual growth rate for the period the right way to think about it? Or what am I missing?

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

I mean when we discuss with our friends from Everidis about the acquisition, obviously, we asked them to do a 5-year plan that we've challenged a lot. We have a very ambitious distributor there, but they are very confident about the evolution of the domestic market. And here as well, we have to keep in mind that it's still 80% driven by drops. But now we've launched the old Prodentis range. So both for adults, for kids and soon for babies. We've launched a totally new range, the Immune Boost, in the Q3 '21. So we added so many different SKUs that -- and we support heavily. So here, we are -- I can tell you with a heavy investment market, but it's paying back. So the return on investment, even if sometimes into big pricing, is okay. You're really sure you need to invest that amount of money on Amazon. And they say, yes. And you see that if you invest one, you could get much more hourly. And they are right. So it's a very bullish plan, but I believe them. I believe them. I think we are going to see just a lot of positive news happening from the U.S. I know that Amazon globally is looking at ourselves in the U.S. with very interesting highs. So yes, I'm very strong on U.S., I would say.

[Mattias Häggblom, Research Analyst]

Good. I had one final question, more of a clarification, maybe. So is it possible to help us understand where you are in terms of sales in Spain and Italy using pre-pandemic levels as Index 100? Is 60 or 70 the right way to think about it? Or where are we? How deep -- how steep are the drop? And where are we in terms of the recovery?

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

That's a tricky question. And when I look at Italy, mainly I look at the 2019 figures as a benchmark. So that's basically the target. It's not to -- I mean, to increase versus last year and the year before, yes. I mean, that's obvious. We cannot do worse. And the plan is really to go back to pre-pandemic time. And so that's the way we look at Italy and Spain.

[Mattias Häggblom, Research Analyst]

But you're not willing to quantify using 2019 versus maybe Index 100. How deep down are we?

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

No. We don't disclose it for market normally. It's just a matter of [indiscernible]. But if I tell you that we are looking at 2019 as the benchmark for this market, then we can understand.

[Operator]

So we have no further questions.

[Isabelle Valerie Ghislaine Ducellier, CEO & President]

Okay. But then thank you, everybody, for attending this call and looking forward to meet you after Q1 '22 then. Thank you. Bye-bye.

[Operator]

This now concludes our presentation. Thank you all for attending. You may now disconnect.