Biogaia AB

STO:BIOG B

Earnings Call Analysis

BioGaia's Q4: Sales and EBIT Rise Despite EMEA Slump

BioGaia's fourth quarter showed a solid performance with sales increasing by 9% to SEK 298 million. This contributed to an annual revenue of SEK 1.29 billion, marking a 17% increase for the year. The Asia-Pacific and Americas regions led the growth, with remarkable achievements in the U.S., Canada, China, the Philippines, and South Korea. Despite the success, sales in the Europe, Middle East, Africa (EMEA) region fell by approximately 29% due largely to underperformance in France, Italy, and Central Eastern Europe. The company's EBIT for the quarter rose 13% to SEK 81 million, resulting in a 23% growth overall for the year, with the EBIT margin for the quarter at 27% and 34% for the full year. BioGaia managed to maintain healthy margins by offsetting global cost inflation with price increases throughout the year.

Strong Growth Amidst Regional Variances

BioGaia concluded the year with robust sales of SEK 298 million in Q4, marking a 9% increase and contributing to the annual sales of SEK 1.29 billion, a hearty growth of 17%. This prosperity resonates with the notable achievements in the Asia-Pacific and Americas regions. Key performers such as the United States, Canada, China, the Philippines, and South Korea drove this success. However, the company faced a stumbling block in the Europe, Middle East, Africa (EMEA) region, where sales dipped by approximately 29%, particularly impacted by France, Italy, and Central Eastern Europe.

Enhanced Profitability and Margins

EBIT for the quarter escalated to SEK 81 million—a 13% increment from the previous year—while the annual EBIT surged by 23% to reach SEK 443 million. This growth translated to a healthy EBIT margin of 27% for the quarter and an impressive 34% for the year.

Dividends on the Rise

Reflecting confidence in their performance, BioGaia's board proposed a bounty for shareholders: an ordinary dividend of SEK 1.9 per share supplemented by an extra dividend of SEK 5 per share, summing up to SEK 6.90 per share.

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Earnings Call Transcript 2023-Q4

[Operator]

Welcome to BioGaia Q4 Report for 2023. [Operator Instructions]

Now I will hand the conference over to CEO, Theresa Agnew; and CFO, Alexander Kotsinas. Please go ahead.

[Theresa Agnew, executive]

Hello. This is Theresa Agnew, CEO of BioGaia. We are pleased to be here to present our Q4 results. We will start with our executive summary with sales of SEK 298 million, so up 9% for the quarter, with overall for the year, SEK 1.29 billion, which is a growth of 17%. And these sales were strongly driven by our Asia-Pacific and Americas regions with distinct strong performance in the U.S., Canada, as well as China, the Philippines and South Korea. Sales in our Europe, Middle East, Africa region decreased by around 29%, and that was mainly due to the performance in France, Italy, and Central Eastern Europe.

Our EBIT went to SEK 81 million for the quarter, so growth of 13%. Overall for the year at SEK 443 million, which is growth of 23%, and our EBIT margin for the quarter is 27%, now for the year at 34%. So strong overall performance, both in sales as well as EBIT.

We do want to communicate that we have terminated our distribution agreement with our Italian distributor, Nóos, for non-performance, and we are initiating arbitration proceedings. So the performance of Italy has also been a drag on our Europe, Middle East, Africa sales. We are now securing availability of our products in Italy through a previous sub-distributor.

The Board also has proposed an ordinary dividend of SEK 1.9 per share, plus an extra dividend of SEK 5 per share for a total of SEK 6.90 per share. So an increase in our overall dividend. So overall, our Pediatrics business grew 17% and our Adult business grew 20% for the year.

A little bit more on the dividend. So we decided to increase the dividend to return a larger share to our investors. And we are -- we feel we have a strong cash position remaining for potential acquisitions for the future. But a number of years ago, we did raise some significant capital as we were looking at investments and acquisitions. But we didn't find something that was a really strong strategic fit or have the scientific evidence that we would want. But we will continue to look for smaller, more tactical acquisitions.

And we are signaling that in the future, we do intend to give extra dividends of 50% to 100%. And that obviously will be dependent on our cash position at the time.

So a couple of the key events and launches. We always like to talk about this. One of our key events was that we on October 16, said that our third quarter exceeded the market expectations. So we signaled that. We had a number of launches in the quarter. Exciting areas around Gastrus. So BioGaia Gastrus is one of our adult-focused products. Pharax, which is an immune health-focused product. And as you can see here on the list, across Asia Pacific, parts of U.K., as well as Central and Eastern Europe.

To talk a little bit about the sales per segment. So as I said, Pediatrics is growing strongly. If you look at the overall performance for the year at 17%, for the quarter at 6% growth, mainly driven by BioGaia U.S., Canada and Turkey for the quarter. Our adult sales grew for quarter by 18% and overall for the year at 20%.

So we've seen increased sales of Protectis tablets. We've also seen growth of Prodentis. Prodentis is our oral health focused product, specifically in Japan and the U.S., and we're actually in the midst of relaunching Prodentis in Canada. So we expect a strong performance there as well. Pediatrics still represents the bulk of our sales at 78% for the year.

When you look at the regional performance, as I said, Europe, Middle East, Africa sales did decline by 29%, mainly driven in Eastern Europe, France, and Italy. In Asia Pacific, we had very strong growth of 60% for the quarter and overall for the year of 36%, as I said, mainly driven in China, south Korea, and the Philippines.

And in the Americas for the quarter, we had 28% growth, for the year at 35%. Again, strong growth in the U.S., Canada as well as Brazil for the quarter.

So now I will turn it over to Alex to handle more of the financials.

[Alexander Kotsinas, executive]

Thank you, Theresa. So to summarize our financials. As we heard, our revenues were approximately almost SEK 300 million, a growth of 9%. Operating profit of SEK 81 million versus SEK 71 million last year, a growth of 13% and a margin of 27% versus 26% in the same period last year. Earnings per share at SEK 0.67, and operating cash flow of SEK 122 million, and I will go through a bit more details here.

If we look at the sales, again, we had a growth of 9% in the quarter, of which 7.4% were organic and 1.2% were currency. And as the years back in total, we can also look at the total. We had a total growth of 17%, of which 11.3% organic and 6% currency related.

We look at our gross margins, they were fairly stable at 76% this quarter compared to 76% in the same quarter last year. We did see an improvement in the Pediatrics gross margin and a decrease in the Adult Health. The decrease in Adult Health gross margin is mainly related to mix effects. And as you can see on the full year, we have a stable gross margin for the Adult Health segment and a slight improvement in the Pediatrics.

And just to comment then again, since the year is concluded, we can say that, basically, we have managed to compensate for the cost increases we have had, the global cost inflation, we have managed to compensate by doing the price increases, which we did in 2023 and also prior to that in 2022. So in a way, we are quite confident that we should be able to maintain a healthy margin as the cost inflation is decreasing as we see it now.

Move on to the expenses, the operating expenses. They grew with 6% in the quarter and 15% year-on-year. We have sales cost increase, which are in line with -- basically in line with sales and the sales cost increased due to increased activities, for example, in Americas, in the U.S. and other markets where we have growth. R&D and admin costs were stable and other OpEx was SEK 8.6 million versus SEK 3.5 million last year, an increase due to increased exchange losses.

Continue to the P&L. Again, like we said, a growth of sales of 9%, OpEx grew 6%, and EBIT thereby grew 13%, leading to a margin of 27% compared to 26% 1 year ago.

Then to conclude, just to look on the cash flow, we see that our operating cash flow increased with 29% to SEK 122 million versus SEK 94 million last year. And this is, of course, mainly due to the increased operating profit that we have. And cash flow for the period was SEK 100 million versus SEK 89 million last year. And cash at the end of the period was SEK 1.544 billion.

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

[Theresa Agnew, executive]

Yes. So overall, as we said, our Q4 sales have grown 9%, which is solid. Overall year-to-date sales at growth of 17%. EMEA is our area that needs improvement with our Q4 at minus 29% and overall year-to-date at minus 4%, whereas we talked about Italy, which has been impacting our overall EMEA sales.

Asia Pacific continues on a very strong growth trajectory at a 60% growth in the quarter and then 36% growth year-to-date. And as I said, driven by some of our larger markets like China and South Korea, where we have very strong online sales and an omnichannel presence. Americas has demonstrated strong performance as well with growth of 28% in the quarter and then 35% year-to-date.

And just to make a note, during this time frame, Gerber decided to stop selling our co-branded Gerber BioGaia drops, yet we were still able to perform well in the U.S. despite this. Our costs are increasing in line with our sales. Our gross margin is stable, as Alex talked about, 73% for the overall year.

Our EBIT margin for the quarter was 27% and overall for the year at 34%, which is in line with our financial target. So very solid performance for our business for the quarter and for the year. So we would open it up to any questions that you may have.

[Operator]

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

[Mattias Vadsten, analyst]

I have three. First one is, APAC looks like a super strong quarter, not only compared to a weaker Q4 2022, but also comparing to basically any other quarter in the history of the company. So could you describe maybe a little bit more in detail what's happening? And any particular large orders that we should be aware of in the quarter or anything like that? That's the first one.

[Theresa Agnew, executive]

Yes. So we can take that question first. So Asia Pacific, strong performance, as I said, in China, South Korea, the Philippines, and this is underlying performance of the business. So we continue to see those strong sales, specifically in our online sales. We have very important partners in those markets, that are doing an exceptional job with growing our BioGaia brands. So we do many things on whether it be TikTok, Tmall in China. Our partner in South Korea is Grace, and they are very strong at consumer products as well as healthcare products. We've recently met with them. They're doing an exceptional job.

So we feel that this performance is very strong in Asia Pacific. And in talking with our partners there, we feel the market is going to continue to grow and our business will continue to grow.

[Mattias Vadsten, analyst]

That's very encouraging to hear. Then on Italy, if you could explain what's happening there maybe a bit more in detail? Are you planning to establish your own subsidiary there to settle yourself? Maybe just, yes, how we should think about Italy in also coming quarters perhaps? And what Italy perhaps of group sales would be interesting as well?

[Theresa Agnew, executive]

Yes. So Italy is a very important market for us. It's 1 of our top 10 markets and 1 of the largest probiotics markets globally. So it's extremely important. And we have stopped distributing to our partner Nóos due to lack of performance. We will now be pursuing a relationship with a previous sub-distributor. So we will continue to have a partnership rather than taking that business direct. So it is a very important market for us. We want to have a strong relationship with whatever partner we put into place. And we have a lot of efforts there to build the brand, the local brand through medical marketing, mainly marketing to healthcare professionals.

[Mattias Vadsten, analyst]

Okay. But if we -- if you just maybe take a strategic question. You have done a very successful job in going yourself direct to in a few markets here, recent years. And I -- as I see it, maybe Spain, Italy, perhaps Germany as well, are you having enough volumes and so on to go yourself in any of these markets? Or should we just expect BioGaia to continue to have distributors in those markets? Or -- yes. Just some -- maybe some thoughts on how to think about it.

[Theresa Agnew, executive]

Yes. So we don't share our future plans in terms of any businesses that we would want to take direct. So let me say that first. How we look at taking our businesses direct, as we look at the size of the market, we look at the growth of the market, we look at the potential, and the current performance that we have with partners. So that's very important as we look for the future. But we don't have any current plans. So we can't really share that. But with Italy, we do, as I said, have a previous sub-distributor that we can do a potential partnership with. For Italy specifically.

[Mattias Vadsten, analyst]

Okay. Good. And my last one, yes, you're right in this area, lesser for significant investments in marketing and sales to increase the growth rate. That seems reasonable. But how should we read this? What kind of growth in sales and marketing expenses do you see for '24? Then, if I may, also on R&D, it was flat full year '23 over '22. So just if we should expect this now again to increase with the prep sales going forward? Or if this level is sufficient based on your plans in clinical trials and so on? So this was my last one.

[Theresa Agnew, executive]

Yes. So good question. So in terms of marketing expenses, we will be doing targeted increases in certain markets where we feel there is potential. We will only invest in strong ROI-driven marketing efforts. So we tend to focus in the digital marketing areas because it's a really strong way to reach the consumer. We will also be focusing on increasing our reach of our medical marketing. So we have extensive scientific evidence, as you know. And we want to drive the reach of that information and that education to healthcare professionals as much as possible. So we are looking at new digital platforms to be able to do that more effectively.

So I would say it's an increase in the focus on consumer marketing in certain strategic markets as well as the reach of our medical marketing and education on our probiotics and our client healthcare professionals.

And then in terms of your question on R&D, we anticipate that we will continue to have R&D percent to net sales at around 10%. So as our sales increase, then our R&D expenses will increase commensurate with that. So we will continue to focus on the most important areas to drive clinical studies, but also not just ourselves, we partner with a vast network of universities that are doing clinical studies as well.

[Operator]

The next question comes from Kristofer Liljeberg from Carnegie.

[Kristofer Liljeberg-Svensson, analyst]

I have 2 -- 4 questions actually. First, if I could follow up on the previous one on Italy. If you could maybe talk a little bit more about the financial impacts we have seen here in the quarter, maybe for 2023 and how we -- how do you think this will impact 2024 now when you have terminated the existing agreement?

[Theresa Agnew, executive]

Yes. So on that first question, since we have terminated the agreement and we are looking for a previous sub distributor relationship. So we plan on continuing to ship into Italy and keep that market going for our business. So even though it has negatively impacted for 2023, we do anticipate to be able to achieve sales in Italy for 2024.

[Kristofer Liljeberg-Svensson, analyst]

Okay. But is it possible to say how much lower sales you had in Italy? For example, were you selling anything through the previous distributor in -- or the distributor that you have terminated with now? You were not selling anything to them in Q4, I guess.

[Alexander Kotsinas, executive]

Alex here. No, I mean we have been selling during the year and also during the fourth quarter, but to a much larger extent than what we would -- we were hoping to, so to speak. We have not been satisfied with the relationship and how it has developed. So it has been quite weak sales for the year and during the quarter. And that leads then in total that our Italian sale has been quite weak. And then like we said, we had -- we have a sub-distributor also that is distributing products. So -- but the main distributor, which we now terminated or are in arbitration with have been part of that sale and that has been weak, so to speak. And that means that for next year, we do hope that our sales will improve, so to speak, but it remains to be seen, but we hope things will be better.

[Kristofer Liljeberg-Svensson, analyst]

Okay. So you expect higher -- okay. Sorry, so do you expect higher sales in Italy in 2024 versus 2023?

[Alexander Kotsinas, executive]

Well, since sales was quite weak with this distributor during the year, to some extent, we will not have any sales to that distributor, which we are in arbitration. We on the other hand, we have the other distributors. So we don't really give a projection, but we do hope that this will improve the situation in Italy, definitely.

[Kristofer Liljeberg-Svensson, analyst]

Okay. And the same with Gerber in the U.S., I thought that they had maybe 20% of your U.S. sales previously. So what was the impact there? And how should we view that potential impact in 2024?

[Theresa Agnew, executive]

Yes. So good question. No, it's a much lower percentage of the U.S. sales than 20%. And actually, when they terminated because they wanted to stop selling our co-branded products. The good news is our U.S. business has been able to recover and is growing very well. So as we look to 2024, we hope to continue the strong momentum in the U.S. to be able to cover for the sales that we lost from the Gerber partnership.

[Kristofer Liljeberg-Svensson, analyst]

Okay. So expect -- when you say hope to recover, is that in absolute terms? Or do you expect to keep the same type of growth rate?

[Theresa Agnew, executive]

We expect to keep the same type of growth rate.

[Kristofer Liljeberg-Svensson, analyst]

Okay. And then just -- I don't know if you want to say anything about the stocking effects in Brazil. And then my final question is, if you could just say something -- how much interest rates you receive on your cash currently?

[Theresa Agnew, executive]

Okay. On the stocking effects in Brazil, so we actually have a new product launch, which is Protectis Easy Dropper. It's 1 of our consumer preferred format for Protectis drops. So our stocking effect has to do mostly with that preorder before the sales begin. So we -- that's why we wanted to signal that we did have some stocking effects in Q4. And then in terms of the interest rates, I'll let you answer that.

[Alexander Kotsinas, executive]

Yes. So regarding the interest rates, we have an approximate around 3% during the quarter -- return around 3%. But of course, this will vary in going forward, and it would actually decrease as interest rates are declining.

[Kristofer Liljeberg-Svensson, analyst]

And talking about interest -- or the financial net there, do you want to say anything about new assumptions for the future earn-outs from the previous U.S. distributor?

[Theresa Agnew, executive]

Do you mean -- are you talking about Gerber previous?

[Kristofer Liljeberg-Svensson, analyst]

No, I mean, there were a negative effect in the financial net related to changed assumptions for future earn-outs in Nutraceutics.

[Theresa Agnew, executive]

Okay.

[Alexander Kotsinas, executive]

No, I mean, that is an effect of the fact that we are performing very well in the U.S. Our own subsidiary is performing very well. The company we acquired, Nutraceutics. And therefore, we reevaluated the future earn-out, so to speak. And that is why you have that effect.

[Operator]

The next question comes from Mattias Häggblom from Handelsbanken.

[Mattias Häggblom, analyst]

Yes. I have a few. So excluding Italy, was EMEA up, down or flat in the quarter?

[Theresa Agnew, executive]

No, no. In terms of -- specifically for this quarter, no. I'd say Italy was the market where we saw that the most.

[Mattias Häggblom, analyst]

So excluding Italy, it was flat or even growing?

[Theresa Agnew, executive]

No. No, it's still down. Still down. Are you talking Europe, Middle East, Africa, specifically?

[Mattias Häggblom, analyst]

Yes. Yes, just EMEA, excluding Italy, it was a sizable decline. But we assume that most of that was linked to Italy. So I'm just thinking, trying to isolate sort of say, the situation, so excluding Italy for your still large region, EMEA. Just trying to understand how that would have performed, excluding the effect from Italy.

[Theresa Agnew, executive]

Okay. Yes. So excluding Italy, we did have some weaker performance in France, and that's because we are lapping very strong growth from 2022. But we foresee -- in talking with our partner there, we foresee some growth for 2024. So I would say it was mainly Italy and then France and then some small declines in some of the Central Eastern European markets.

[Mattias Häggblom, analyst]

That's clear. And then I'm curious to hear your thoughts around the ability to accelerate growth as you stated in CEO statement, while at the same time, dividend policy suggests that you will hand out more cash to the shareholders. So should we interpret that, that the vast majority of this acceleration is going to come from organic initiatives and perhaps also help us understand what acceleration means from a fairly high number of 11% in 2023?

[Theresa Agnew, executive]

Yes. So what we're going to be doing is we're going to look at targeted marketing investments in certain markets where we feel we can accelerate growth further. So there are some particular markets that are doing extremely well such as U.S. and Canada, where we feel we can continue to invest. And it's really about building our brand. So we want to make these strategic investments that have a strong ROI to continue to build our BioGaia brand. So that when we talk about accelerating growth, there will be particular markets that we're focused on in terms of our top 10 markets.

[Mattias Häggblom, analyst]

That's clear. And then my last question is around the next generation stream. When should we expect to hear some outcome of the ongoing clinical trials for that?

[Theresa Agnew, executive]

So we don't share that information. We do have an ongoing study. We are recruiting patients. We're getting updates on this weekly, monthly. It's a multicenter clinical study across multiple countries. We're looking for new sites as well. So we'll be going to other countries actually next week to look at additional sites. So we don't share the exact timing. But as we get closer, we will share more of that.

[Operator]

[Operator Instructions] The next question comes from Kristofer Liljeberg from Carnegie. Please go ahead.

[Kristofer Liljeberg-Svensson, analyst]

One additional question. Could you say what the price impact was on sales for full year 2023, and what we could expect for 2024?

[Alexander Kotsinas, executive]

Yes. So we made a price increase during 2023. It was larger in -- it was -- sorry, it was smaller in percentage than it was in the previous year, but it was a price increase, which was like in the mid-teens. And since we didn't -- some of the prices are increased yearly, some are increased during the year. Some contracts, you do not increase because it's predetermined, et cetera. So the net pricing for a bit -- was a bit lower than the general increase, just to give some background.

So there was a price increase for the year, but we cannot really comment exactly on how large it was. But it was smaller than in the previous year. And then for the coming year, we don't foresee any major price increase at the moment since cost inflation is coming down. So we'd rather actually -- since we believe we can maintain our margins, we believe it is better to give our distributors et cetera, some headroom to invest in marketing and sales. So going forward, we don't anticipate any large price increase other than maybe in selected markets and selected products. It could be some minor things. I hope that answers the question.

[Kristofer Liljeberg-Svensson, analyst]

But even with that in mind, you talked about accelerating growth or then maybe you refer to volumes.

[Theresa Agnew, executive]

Yes. I mean, we do refer to volumes in terms of as we spend more from a marketing and sales point, a point that we will be able to drive our units even more.

[Operator]

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

[Theresa Agnew, executive]

So we want to thank you for joining us for this call, and we look forward to future discussions and any further questions that you have in the future. Thank you so much.