Biogaia AB

STO:BIOG B

Earnings Call Transcript 2022-Q4

[Operator]

Welcome to BioGaia Q4 Report 2022. [Operator Instructions] Now I will hand the conference over to the speaker CEO, Isabelle Ducellier. Please go ahead.

[Isabelle Valerie Ducellier, executive]

Good morning, and welcome to our interim management statement quarter 4 2022. I will as well comment on the whole year '22 prior to the annual report release planned on March 27. So in a nutshell, I will say that we have a strong Q4 with 33% growth in sales and one of the best year of BioGaia at plus 41% sales increase, which allow us for the first time in our 32-year history to pass the SEK 1 billion mark in turnover. And despite the global cost increase, we've been able to maintain our EBIT at 33% even if the Q4 being a bit lower in EBIT margin as it was last year and that's mainly due to the fact that it's a very intense activity in terms of marketing and sales campaign. So the OpEx increase somehow weighs a bit more in Q4 than the rest of the year.

Looking at key events, I just would like to focus on the launches. We have 16 launches during the last quarter of 2022. Worth mentioning the opening of 1 new country Botswana and that is via our South African distributor, Ascendis. Ascendis has been bought by a big pharma group called Austell and we can already see their willingness to expand our reach to Africa. So we start with Botswana, but we do believe there will be new opening in Africa coming with our new distributor. And then if you look at the product launch, you could see 5 launch of Prodentis and that is totally in line with our focus. We focus on both Moderna trial and oral health and we see a lot of our distributors now going into the oral health. Sales per segment: well, we always say we want to increase the adult and have kind of 30%:70%. But as the pediatrics keep increasing faster, we're still at 80%:20%.

Having said that, it's pretty great news. We know the uncertainty out there and we are kind of happy to have brought this here and be dependent on -- I mean 80% of our turnover on the paediatrics because that's a must have product for parents who have colicky basis, crisis inflation or whatever; I mean I don't think that will be very important. They will go anyway to their pharmacy or to Amazon to buy their drugs. So that's kind of protect us when it's a bit more complicated out there. Having said that, the Adult Health on the year basis increased still by 30% and that's mainly thanks to Gastrus. So here our distributor has been trying hard to launch Gastrus and thinking about France more specifically and now it starts to pay back. But the paediatrics represent 44% increase. If we go to the region starting with Q4. EMEA I would say 1 word, it's really recovery after all the trouble we have had during the pandemic time.

We are at plus 52% for the year, plus 51% for the quarter and that's mainly thanks to Southern and partly to Eastern Europe. So Italy in the South and that's where we suffered the most during the pandemic is back big time and so is France and Spain. So recovery for EMEA. Regarding APAC, I think that's the first time I see a quarter with minus. Doesn't mean that we don't believe in APAC at all because we do believe in APAC, but this year our 2 main markets are China and Japan and these 2 markets has been really suffering from COVID restrictions. So on one hand if we take Japan, the consumer could not go to the dental clinic and that's our main sales are oral product. On the other hand, China people were on lockdown at home so they could not order and we've been suffering as well. But now with the new relief of the restriction, we don't see any reason why '23 will not be great again.

We have been used with double digit all the time in APAC so that's just a one-off. And I have to flag here as well a slight delay from Sanico, our Belgium supplier, for the blister for Prodentis in Japan, which didn't help but now they are in the order book for next year. And then fantastic Americas, plus 57% for the year, plus 79% for the quarter.

And even if you look at the domestic U.S. P&L Q4 was, and you cannot see it there but I can disclose it, at 11% increase and for the year at plus 5%. So fantastic Americas and it's mainly due to the U.S. thanks to the integration of Everidis, our distributor and as well Chile, which has always been a big country for us with the consumer really using probiotics. It's a very major probiotics market in Latin America. Gross margin per segment, here as well slightly decreased with minus 1% for the adult and minus 1% for the total. Very high if you compare -- we are at 76% for the quarter and 73% for the year.

And now I'm passing over to Alex, who is going to go through the financials.

[Alexander Kotsinas, executive]

Thank you, Isabelle. So just to summarize then. Our revenues were SEK 274 million, which were a growth of 33% as mentioned by Isabelle. Our organic growth was 5% and EBIT was SEK 71 million versus SEK 53 million 1 year ago, growth of 34% in line with the growth for the sales. Regarding the margin, we had an EBIT margin of 26% versus 26% the same period last year. And earnings per share were SEK 1.38 versus SEK 0.38 1 year ago. And strong cash flow at SEK 94 million versus SEK 56 million 1 year ago.

Move over to the sales bridge. As mentioned before, we had a total growth of 33% which composes of currency related growth of 14%, acquisition 15% and organic growth 5%. And as Isabelle pointed out, our organic growth of 5% is lower than in previous quarters and that is partly due to the negative effects we have seen in Asia of the COVID restrictions that were actually later lifted. So the situation will improve definitely in Japan and China.

And also we had negative effects of some orders, which were moved to the first quarter compared to the fourth quarter so some periodization effect. So underlying, we are not worried about the growth or Asia specifically. Moving on to our costs. Our costs were growing with 29%. The whole growth is basically explained by the acquisition of Everidis so if you exclude Everidis, our costs only grew 1%. And if you look at the sales cost, you can see that basically all the cost growth is within sales and that is then Everidis.

R&D costs are actually declining if you exclude the subsidiary MetaboGen and BioGaia Pharma and that is due to some effects of clinical studies where you have certain variations between the quarters. Move to the group P&L. Like we said previously, we had a sales growth of 33%, OpEx growing 29% and thereby EBIT 34% growth and a margin of 26%. We also have some smaller one-offs in the quarter of approximately SEK 2 million so the adjusted EBIT margin was 27% versus the reported 26%.

And move on to the cash flow. Like I said before, we had a strong cash flow in the quarter. Cash flow from operating activities increased with 67% to SEK 94 million basically due to then the improved operating profit and also positive changes in working capital of SEK 6.6 million and that leads to a cash flow for the period of SEK 89 million versus minus SEK 43 million last year. During last year in the fourth quarter, we acquired Everidis. That is why you see the cash flow from investing activities in the last period minus SEK 90 million. And that leads to cash at the end of the period at SEK 1.488 billion. And included the balance sheet just for reference.

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

[Isabelle Valerie Ducellier, executive]

Thank you, Alex. And so I will repeat what I said almost in my introduction. A strong Q4, fantastic year '22, we are passing the SEK 1 billion turnover for the first time. It's a very nice milestone for the company that we're going to celebrate and I think that's basically the result of 4 years of implementing our 4 pillar strategy. I look at all my presentation I did when I started and I mean basically the 4 pillars; omnichannel, brand building, uncompromising science and efficient product supply; that we've been implementing then from '19 and now we are seeing the results. So we are very satisfied and we will continue with these 4 pillars. So there is more to come, but always on these 4 strategic directions. The region EMEA recovery; APAC, has not been the APAC year, but it's going to be APAC next year so I'm not worried at all; and Americas has been impressive, 79% for the quarter and that's really -- I think we can see that we could really leverage on the synergy to acquire our distributor.

So I'm very happy to have now Everidis part of BioGaia Group. That will help us as well now with the opening, which is on since January 1 in Canada where we can here as well leverage some synergies from this to Canada. So here as well very promising for next year. So despite [Technical Difficulty] work for '23 where our risk organization and at the same time economic situation which is kind of unusual economic situation. We are very confident because our main product is a must have product for consumer. So we do think that we see a lot of resiliency and therefore we will be protected, 75% of our P&L will be protected for next year. So even if the FX then will be even worse than plan, we have a good control of our cost, we have demand which is there and strong. So we can maintain our long-term financial objective of 34% margin.

Thank you. And now we'll be happy to take your question.

[Operator]

[Operator Instructions] The next question comes from Mattias Vadsten from SEB.

[Mattias Vadsten, analyst]

Mattias Vadsten from SEB. I think I will start with 3 questions. I mean sales very strong despite uncertain times as you mentioned as well as COVID disturbances in China and Japan. Looking at 2023, obviously I think paediatrics, as you say, will remain resilient. But can you comment more on the Adult Health segment and what you have seen so far there and what you expect here going into 2023? Some more flavor would be good.

[Isabelle Valerie Ducellier, executive]

So indeed resilience on paediatrics, I've already commented that. For the adult, I think Prodentis will not suffer that much because it has to address a need. When you have bleeding gums, there is not that many solutions out there. Having said that, it's more nice to have than a must have and you might consider then well, you don't need to buy product and you bleed a bit and that's nothing serious. So strong consumer that might have some difficulty to pay for the bill might postpone the purchase of nice to have product to focus on the must have product. So that's why for '23 we don't see superb increase on the adult portfolio.

If we take the gut health portfolio with Gastrus, here we've launched massively and we had extensive scientific tool in Latin America and we can already see the first result of this relaunch. We have 2 study ongoing for Gastrus that we do hope will be published in the beginning of 2023. And we know here as well that when we got a good result on clinical trial and we always hope to have it, you never know but we have great hope for that, then it might as well influence very positively the sales. But having said that, that will be easier on paediatrics to generate higher sales than on adult.

[Mattias Vadsten, analyst]

I think that's good flavor. The next one, I mean contribution from M&A was up quite substantially in Q4 versus earlier in the year and it looks like a clear step-up for Everidis. Are there any seasonality here or should we expect this part to continue to be strong going forward here or can you give some flavor there on how you see it?

[Isabelle Valerie Ducellier, executive]

I mean basically the U.S. market domestically is not as buoyant as it was, but we take market share. So that's very good news of the U.S. market because we weren't expecting the global probiotics market to increase faster than it is and that it will probably in '23. But our market shares are increasing faster than competitors and that's very significant especially if you look at Amazon, if you look at the walmart.com or Target; our market shares are increasing. So even if it's slightly more expensive to do business in the U.S. than to do business in Europe, I see U.S. being a big contributor to our growth next year.

[Mattias Vadsten, analyst]

Perfect. That's good. And then I don't know if you can comment on this, but I will ask anyway. On the price impact, what that was in Q4 and what do you expect from that in 2023? Because I assume it was a limited price impact here in the fourth quarter given that you raised off the turn of the year. But if you could give any comment on that?

[Isabelle Valerie Ducellier, executive]

Yes. I mean we are monitoring our cost a lot and we have a lot of focus on cost for '23 so we look at everything as part of our COGS so that we could decide whether we should have a price increase to consumer or not. We've been passing pretty big price increases in '22 that will be fully implemented in January '23. For the [Technical Difficulty] again, thanks to the fact that we have a strong resiliency on the pediatric. We have the possibility to increase again our prices to our distributor meaning to the consumer in '23. We have not taken that decision yet because there is no need because we have control of our cost. But if it would be necessary, then we will do it in '23 again.

[Operator]

The next question comes from Kristofer Liljeberg from Carnegie.

[Kristofer Liljeberg-Svensson, analyst]

I wonder if you could comment about what you see when it comes to demand from distributors here in early first quarter? As you know, we have been a bit concerned about the potential risk of distributors having stocked up ahead of the price increases. Have you seen any signs of that?

[Isabelle Valerie Ducellier, executive]

When we decided to pass the price increase, that's the first thing we say okay, now we are ready to check on the order book and we don't want any distributors to stock instead to be able to buy at the old price obviously. And we know exactly who has the tendency to do that and I can assure you that there is no such situation massively. I mean a bit in Eastern Europe where we might have approximately SEK 10 million out of the whole year on stock up that they should have bought perhaps in '23 and they bought it in '22, but it's not massive and there is in nobody's interest to stock up probiotics product because you want to have 18 months on-shelf with living bacteria if not the pharmacy will not buy you. So our distributor, they can't have big stock of living bacteria. So I don't think we can -- I'm almost sure that we don't have any artificial stock-up out there.

[Kristofer Liljeberg-Svensson, analyst]

Okay. And so do you expect -- of course you have the price increase here in Q1, but at the same time it's a pretty difficult year-over-year comparison. But do you think is it realistic to assume that you will grow volumes in Q1?

[Isabelle Valerie Ducellier, executive]

Yes, we will grow volume in Q1 and we will grow volume in '23. So I don't think it will have an impact. Now that they know the prices, it's almost implemented everywhere so we are running as well price elasticity to be careful to see how the consumer is reacting. So we monitor the ASP and we have a constant discussion with our partner regarding as well the margin because they have to live and we have to live. But I don't think it will have -- we would have seen the impact of the price increase already if it would have been massive for Q1. So I see still Q1 growing.

[Kristofer Liljeberg-Svensson, analyst]

Okay. That sounds very good. When it comes to new products, you mentioned Prodentis in the U.S., but I didn't hear you talk at all about Pharax and Prodentis KIDS. Could you say how those products are going?

[Isabelle Valerie Ducellier, executive]

Yes. So that's a very nice question. Pharax we launched in I think 5 markets under '22. We had a workshop here at the office actually last week with 15 European markets. So we intend to have a full roll-out of Pharax in Q1 and we have as well decided to run a new study so to build on our data. So we are very optimistic for Pharax. I would have thought we could have launched more in '22 of Pharax in more country than we've done, but it's coming now. Regarding Prodentis KIDS, here it's launched in the U.S. and according to the CEO of BioGaia USA, that's one of the stronger launch ever that they saw. For the first time we are attending dental congresses, they are sampling massively and the dentist and especially the hygienists, they are extremely interested. For them it's totally new. The consumer and they are not really informed about how can bacteria probiotics have an impact on your oral health.

But it's always like that. It was the same before with gut health. We started to talk to the physicians, then we convinced the physician and then they convinced the consumer. With oral health, we are at the same stage but like 10 years after where we have to convince the physician here in that case, the dentist, that bacteria in your gut could help you in your mouth and then they have to pass on the message to the consumer when they go to the dentist. So we are in early time of overall health with probiotics. But this area is going to be very big in the year to come because every time, and that we see all the time, a consumer is trying Prodentis, then it works so well that you secure the consumer for life. But that's coming.

[Kristofer Liljeberg-Svensson, analyst]

So when you mentioned or talked about in the slides about Prodentis in the U.S., that included the kids version?

[Isabelle Valerie Ducellier, executive]

In the U.S., we have 3 products. We have for the normal adult, then we have as well for the pregnant women and we have for kids. And we are looking at as well having perhaps Prodentis for babies as well.

[Kristofer Liljeberg-Svensson, analyst]

Okay. Given it seems you're very optimistic now about new products, but I guess you're still dependent on the colic drops. How long do you -- how many years do you think it will take till within paediatrics that the drops are less than half of sales?

[Isabelle Valerie Ducellier, executive]

That I don't know because basically the whole market, we've just scratched the surface. Even if it's 80% of our sales, there are plenty of baby out there that don't know that there are colic products for them. The consumer worldwide is not super aware about probiotics still. We have a massive job to do in terms of education. So I don't see the drops product decreasing at all. So it's difficult to say percentage-wise in 5 years where are we going to be because I think it's going to continue to grow massively.

[Kristofer Liljeberg-Svensson, analyst]

Okay. And then maybe 3 very short questions. First Japan, were there still COVID restrictions with dentist in Q4 and I wonder if you could give a figure for online sales proportion of total as you have given before? And finally, what do you expect with operating cost in 2023? That's all for me.

[Isabelle Valerie Ducellier, executive]

Okay. So Japan, I mean they are starting to release now the COVID restriction and I see the order book for Japan is really back on track. So for Japan for us, the name of the game next year will be to succeed in our omnichannel strategy. Today Japan is mainly still the dental clinic. And we started a project with Amazon and the Japanese consumer is looking on Amazon to buy BioGaia and they buy it from other countries. So now we are building a strong Amazon case for Japan and our plan is to be able to grow online in Japan on Amazon and on e-comm. So we have opened a new e-com, which is doing much better than what we thought. So that has to be checked and the increases are going to come online rather than offline. Coming to the online total on net sales, we've reached 25% of our total sales are online as we speak. So it was 28% last quarter, it's 24.5% this quarter.

So on the whole year perspective, 25% of our total sales are online. And then regarding our operating cost so we keep a constant eye on cost and we have reinforced our procurement department to be stronger in our negotiation so that we can have a full visibility of the cost evolution for next year. And therefore, I think we have a pretty good visibility about the operating cost. In terms of sales and marketing, we said that we have to be cautious so we will take it quarter after quarter. We freeze -- nobody is allowed to spend the money of Q2 in Q1. We will see quarter after quarter if situation is good, okay, you can continue to invest. Situation is bad, perhaps we should review and maybe do a bit more on spending. So we are going to be pretty cautious and freezing release quarter-over-quarter so that we can be on line with the outside environment.

[Operator]

The next question comes from Mattias Häggblom from Handelsbanken.

[Mattias Häggblom, analyst]

So with strong performance in the U.S. during Q4, can you help me understand the new U.S. salesforce [ cast ] to 2027 versus the previous one? It seems that prior to FX adjustment, the financial liability has been reduced roughly 80%. Should we assume the new growth rate for the U.S. is now 80% lower than the previous assumption or how does these elements link together?

[Alexander Kotsinas, executive]

No, we will not comment on the exact forecast we have for the U.S. I mean what we have done is basically reviewed our long-term forecast for the U.S. mainly due to the fact that we have seen a slowdown in the U.S. economy, et cetera, due to the current crisis. So we have had to review our forecast that forms the basis for the estimate of that additional purchase amount that we owe. So we cannot unfortunately comment in detail on the exact forecast, but we are still considering the changed environment in the U.S.

[Mattias Häggblom, analyst]

But is there anything else to add compared to just the base forecast for revenues? Could there also be an impact from higher interest rates or discount rates of the future liability that has influenced that exact amount?

[Alexander Kotsinas, executive]

Yes, it has definitely. You're right about that. And actually we have made in previous quarters some adjustment also due to the increased interest rates. So the increased interest rates have of course brought down that liability also. Yes, that's correct.

[Mattias Häggblom, analyst]

Can you talk about the magnitude between interest rates and underlying sales forecast? Which of them have the largest impact?

[Alexander Kotsinas, executive]

The larger impact is from the sales estimate so to speak across the basis of that calculation, but it's not insignificant the interest amount effect.

[Mattias Häggblom, analyst]

Good. So then on the input costs for glass and packaging, I'm sure direct and indirect effects from energy cost and inflationary environment has impacted this. But how should we -- what's your view on how this component will develop and have an impact on your COGS for 2023? Do you have a clear view? Have we seen the worst? Is there yet more to come or what do you hear or what do you see from your suppliers?

[Alexander Kotsinas, executive]

That's also a good question. No, we don't have a clear view and we don't know exactly what will happen of course. But what we can say is that we will continue to see cost increases for our goods, for example the glass bottles or et cetera. But I think it's too early to tell. But we do believe that the cost increases will start to decline so to speak. So going forward, there will continue to be some cost increases, but I think the effect will slow down. And then how much and when it will hopefully end, that is difficult to know. But we do see for example for the first half where we have some visibility for the first half of this year, we do see of course cost increases. But like we have done so far, our ambition is to compensate for this by increasing the price that we sell our products for to protect our margin. That is the ambition. But it's very difficult to know exactly when things will normalize so to speak.

[Mattias Häggblom, analyst]

Good. And last question for me still related to COGS. Could you remind me what portion of your COGS is fixed cost versus flexible cost?

[Alexander Kotsinas, executive]

Yes. The absolute larger part is the variable cost. But then there are of course fixed components also. But I would say the absolute larger part is the variable part.

[Operator]

The next question comes from Mattias Vadsten from SEB.

[Mattias Vadsten, analyst]

Many questions asked now, but I have one follow-up. You talked about prioritization of some sales from Q4 that slip into Q1. Previously you've been able to quantify those. Could you do this, this time around?

[Isabelle Valerie Ducellier, executive]

We can, but we don't. We know exactly. But I don't think we've disclosed it and I don't think it's really necessary. So it's not written in the report so I don't think we can disclose it now.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Isabelle Valerie Ducellier, executive]

I would like to thank you all the for the attendance, for the attention and nice question and looking forward to talk to you soon for the Q2. Bye-bye. Have a nice day.