Probi AB

STO:PROB

Earnings Call Transcript 2019-Q1

[Operator]

Hello, and welcome to the Probi AB Q1 Report 2019. Today, I'm pleased to present CEO, Tom Rönnlund; and CFO, Henrik Lundkvist. [Operator Instructions] I will now hand you over to Tom Rönnlund. Please begin.

[Tom Rönnlund, Chief Executive Officer]

Thank you. Welcome, and good morning to everybody dialing in for this call today where we will be presenting the first quarter results for -- in 2019 for Probi AB. Together with me here in Lund, I have our CFO, Henrik Lundkvist, in the call as well. Let's turn to Page #2 in the presentation, which outlines a safe harbor statement. Please familiarize yourself with the wording on this page. Turning to -- oh sorry, turning to Page #3 is today's agenda. We will initiate with an overview and perspective on our first quarter performance. I will then hand over the word to our CFO, Henrik, who will walk us through the financial review. I will also finish off the call with some comments on -- and perspectives on our outlook as a company. We will, after this, also open up for a Q&A session, where we encourage you to either submit via e-mail or in the call provide your questions once we have completed the presentation. If we then turn to the highlights of our first quarter performance. We start the year in Probi with revenue growth as well as a strong cash flow in the first quarter. It is very satisfying for our organization to see a sales revenue growth of 16% compared to previous year, which is exceeding the market growth as such, which is one of Probi's objectives to be beating the market growth. We landed on sales of slightly above SEK 138 million, which then, as mentioned, represents a 16% growth. This was coupled with, as expected, an EBITDA -- sorry, EBITDA improvement as well, where it was quite significant. It's expressed in percentage terms, but in monetary terms, it was up SEK 11 million compared to previous year. These are strong numbers for our organization. However, it's important also to note that we are comparing ourselves to a fairly weak first quarter in 2018. So even though we are beating market growth, we are, as an organization, aiming for even stronger numbers in the future. We have maintained our strong financial position as well in this quarter, which has then also allowed us to make a partial repayment of a bank loan. Our innovative product concept in prevention of bone loss in postmenopausal women is an important item for the quarter. This product concept was presented in last year, in 2018. And our teams across the world have worked very intensively in order to present this to customers, as well as ensuring that we get products ready for market introduction. In a fairly short period of time since the presentation of the data from this exciting study in this innovative product area, we have already launched a few products with customers and we are also looking at an interesting pipeline of scheduled launches throughout this year as well as the years to come. So it is truly sort of an evidence of Probi's ability to produce world-class research and turn that into successful concepts in the commercial market space. If we turn to Slide #5 -- or sorry, picture #5, we have a slightly closer look at the performance in our respective business areas, which is Consumer Healthcare and Functional Food. As you can see here, we had a very strong performance in our largest segment, Consumer Healthcare, with a 17% revenue growth year-on-year compared to first quarter 2018, sorry, particularly driven both by the EMEA region as well as the U.S. markets as well. And we'd be getting back to that in a few seconds. Our Functional Food segment, which is our smaller business area also contributed with stable performance in the quarter, was up 4% compared to previous year. And even though it doesn't represent more than approximately 6%, 7% of our total turnover, we are, of course, happy to see that we have positive development in the APAC region as well as sales growth in the Americas for our Functional Food segment. If we turn to Page #6 and have a look at our geographical performance across our company, we can see that we continue to have a successful trend in the U.S. market or in the Americas in Probi's portfolio, despite that we are seeing a somewhat lower growth in the overall market of probiotics in the Americas. So Probi is definitely, in this quarter, growing faster than the market. We have been helped by a normalization of one of our major customers ordering patterns who in the past have adversely affected our performance. We are now, in 2019, seeing a stabilization and normalization of the ordering patterns of this customer, which, together with our healthy pipeline of commercial opportunities in the market, fills us with confidence that the U.S. market will continue to be an important growth driver for our company. If we turn to our EMEA region, we can see that we had a very strong quarter compared to first quarter of 2018, up more than 60% in sales revenue. This is the result from a focused effort by our teams in Europe in ensuring that we have a stronger presence and covering more customer accounts and a larger customer base than what we historically have done. The company has invested in this for the past year, 1.5 years, and actually we are now seeing the results of this. We, in the quarter, for example, we attended the so-called Probiota conference, which was held in Copenhagen, where we had more than 300 industry executives participating and where Probi was a prominent speaker presenting our Osteo product concept for postmenopausal osteoporosis, and we garnered a lot of exciting leads and business opportunities out of this activity. If we turn to our APAC region, which includes the Asian countries as well as Australia, we had a weaker start to the year compared to last year, which offset some of the strong performance that we saw in the U.S. and EMEA. This was mainly due to a number or several delays in planned customer launches for various reasons. There was not one denominating factor. However, we remain very confident about Probi's prospect for growth in this particular region. And as late last year, we had expanded our team based on the fact that we are looking at a very promising pipeline of sales opportunities moving into the future, so we expect our APAC region to be one of the growth drivers of our company moving into the future. But the implementation and the commercial results of this are not visible during the first quarter, but we expect this to change as we move into the future. If we turn to Page #7, we have summarized some of the highlights in our first quarter. As earlier mentioned, it's a solid quarter for Probi. We're growing faster than the market. We have added new customers and launches as well occurring on a regular basis for our organization. We have exciting launches happening in the Chinese market as well as in Australia moving through this year, which we are expecting to help us with driving the performance in the region. During the quarter or actually post quarter, we have also communicated that a collaboration agreement with a global fast-moving consumer goods company was discontinued. This collaboration agreement was signed back in late 2017, and we have worked closely with the customer on helping them upgrading one of their product line. Unfortunately, based on a strategic review of the product line by the customer, we have discontinued the collaboration agreement. We have a very good relationship with this customer/partner and are in dialogue in terms of other potential business applications, while this particular project have now been discontinued. This led to -- will lead to a short-term revision of our growth expectations within our Functional Food business area, which is the smaller of our business areas, accounting for approximately 6% of the total sales in 2018, while we are redirecting resources to other projects and opportunities that we have in the field as well. However unfortunate that the collaboration agreement was discontinued, we still feel confident for a continued solid performance in our Functional Food business area. We are also proud in this quarter to announce that we have completed a clinical trial of more than 300 pregnant women in evaluating the efficacy of Probi FerroSorb on iron status in these women. We're now looking forward to the actual results of the study. The study has been completed. The data collection has been completed. And we are right now in the analysis phase of the results of this trial that will be presented later in the year and is an opportunity for Probi to continue to strengthen our position in scientific leadership as well as our FerroSorb iron absorption product concept as well. Also interesting happening during this spring is that one of our collaboration projects with Symrise AG, a global leader in flavor and fragrances, came to fruition by the presentation of a new product concept in using probiotics in skincare. The product as such, was presented and launched at the industry fair in-cosmetics Global in Paris earlier this spring, as well as it was also, post-quarter, a few days into the month of April, was awarded a BSB Innovation Award in Best Active Ingredient at this fair. We have seen quite significant customer interest also in this joint product together with Symrise AG and are looking forward to see this probiotic concept enter into product available for consumers throughout this and the years to come. With that, I will hand over the word to our CFO, Henrik Lundkvist, for some comments on our financial review.

[Henrik Lundkvist, Chief Financial Officer]

Okay. We are now turning to Page #9. In the sales bridge, we can see that total sales went from SEK 119 million to SEK 138 million, which means an increase of SEK 90 million or up 16%. The organic growth was SEK 12 million or up 10% due to stronger performance in Americas and EMEA. We also had a favorable exchange rate effect from a stronger U.S. dollar versus Swedish kronor, which contributed to the top line by SEK 7 million. In the condensed P&L, it's visible that EBITDA was SEK 11 million higher compared to last year as an effect of the revenue growth. We had a positive impact in the quarter on EBITDA by SEK 3.6 million as a result from the implementation of IFRS 16 related to financial leasing. The EBITDA margin improved 6 percentage points to 20.4 percentages. Adjusted for the IFRS 16 effect, the EBITDA margin would have been 17.8 percentage. The EBITDA margin in the first quarter was lower than the full year figure 2018 due to unfavorable product mix and customer order phasing that reduced the gross margin in the quarter. We expect, however, to come back to historical gross margin levels going forward. EBIT was SEK 7 million higher compared to Q1 last year, which is an increase of 157%. The impact from IFRS 16 was very limited on EBIT since the reduced operating expenses in principal are converted to depreciation. In total, the IFRS 16 implementation increased EBIT by SEK 0.2 million. Net income increased by 159%. And since the number of shares is unchanged, this also means that earnings per share improved with the same percentage rate as the net income. Now turning to Page 10. Net income Q1 last year was SEK 3 million and Q1 this year ended SEK 6 million higher at SEK 9 million. EBIT was SEK 7 million higher as a result of higher sales. The financial result was negatively affected by the implementation of IFRS 16 by SEK 0.2 million, but this was offset by lower interest expenses due to reduced borrowings compared to previous year. The income tax was slightly higher as a result of higher operational result.Now turning to Page 11. The cash flow continues to be strong, and during the quarter we made a redemption of borrowings of SEK 60 million. The net cash flow was minus SEK 30 million for the quarter. But excluding this redemption, the net cash flow would have been plus SEK 30 million. The gross operating cash flow of SEK 29 million, together with a favorable working capital of SEK 10 million, provides a good base for the cash generation. Now turning to Page 12. Our balance sheet continues to be strong with an equity of more than SEK 1 billion and an equity ratio of 85%. The increased goodwill and intangible assets are a translation effect from the stronger U.S. dollar versus Swedish kronor. Property, plant and equipment increased due to implementation of IFRS 16, where the opening balances for the year increased by SEK 72 million. At the same time, the liabilities increased by SEK 71 million. As earlier mentioned, we have significantly reduced the level of borrowings. The rest of the balance sheet items have limited movements compared to the end of last year. Now turning to Page 13 and handing over to Tom again.

[Tom Rönnlund, Chief Executive Officer]

Thank you, Henrik. So if we then turn into Page 14 in the presentation, just summarizing and also providing some perspective on mine and Henrik's first few months within Probi. We both joined the organization back in early January this year. Both of us have spent a lot of time in various sites across the world, both our own sites as well as meeting with customers and partners and our teams, of course, in all the 3 continents basically or on all of the continents where Probi is active. These travels and these meetings and these interactions have filled me as well as the entire management team with great confidence that Probi continues to be very well positioned for future growth. We're active in a growing marketplace in virtually all regions of the world despite that some regions might be slowing down somewhat compared to historical growth numbers, but it's still a very attractive marketplace to be at, to be present in. Probiotics, as such, is one of the fastest -- if it's not the fastest, it would be the second fastest growing at least, growing supplement category on a global level. As an organization, we have a strong portfolio of evidence-based products where we also see a clear trend from our customers asking for a scientifically validated and documented products both in terms of efficacies, stability and quality, all factors that are playing into Probi's core strength as an organization and as a researching leader in this market field. We, as an organization, we have a "stronger than ever before" commercial presence in both the U.S. market, and we're also expanding in the APAC region as earlier mentioned. This build-out of our resources in APAC is an ongoing effort and we remain very confident about the opportunities that represents for Probi AB moving into the future. We will continue to drive our performance for growth above the market rate by ensuring a very strong commercial presence as well as execution across all the geographies that we are working in. We're also making sure that we are increasing our investments in R&D, in research and development, to both maintain as well as accelerate our scientific leadership position as a company within the probiotic market space. This has been proven time to time in the past in terms of launches of innovative concepts which have turned into commercial opportunities for our company. And this is, of course, one very important core capability as an organization that we will continue to capitalize on. We're also launching an investment program in our production capabilities at our sites in order to incrementally increase efficacy -- sorry, efficiency and quality coming out of our production sites to make sure that we remain very well positioned to capitalize on the growth opportunities that we see in the market. We will also -- in order to provide ourselves opportunity for an accelerated growth in various areas, also have a strict focus on strategic partnerships and investments in order to broaden our geographical presence and strengthen our market position in various probiotic market segments. Based on these as well as a normalization of the strength in our base business, we remain very, very confident that Probi has all the tools, capabilities and ambitions to deliver on the promise of above-the-market rate growth moving into the future with a maintained strong profitability as such. Thank you for your attention so far and we will be turning to questions. Do we have any questions from the dial-in participants?

[Operator]

[Operator Instructions] And our first question comes from the line of Christopher Uhde from ABG.

[Christopher Winston Uhde, Biotechnology Analyst]

I just have a question on APAC performance. So can you -- the minus 40%, I mean how much of that is attributed to, say, Australia and how much to China and how much to other regions? I mean can you give a little bit more clarity on that?

[Tom Rönnlund, Chief Executive Officer]

We said the majority of it is attributable to the Asian region or, broadly speaking, Asia. So not Australia. And a large part of it is a nonrenewal, in this particular quarter, of a governmental tenders product. And that is a tender that occurs regularly, and we are working on ensuring that we participate and win that moving forward. So that was the biggest single explanation and that was in an Asian country and not in Australia, and not in China either.

[Christopher Winston Uhde, Biotechnology Analyst]

Okay. Do you have -- I mean do you have any information or sense you can give us about whether there's a good likelihood? I mean is there some strong competition for the tender? Or...

[Tom Rönnlund, Chief Executive Officer]

Well, can't really -- without exposing too much information on that, it's difficult for us to provide much more information on that. However, we believe that we will be in a good position to be able to repeat that tender in the future.

[Christopher Winston Uhde, Biotechnology Analyst]

Okay. I guess what I'm really wondering is should we be assuming a lower-trend growth like this if that tender is not renewed? Yes.

[Tom Rönnlund, Chief Executive Officer]

Well, it depends on your perspective in terms of time you put on it, I would say. As I said, we believe that Probi has a very strong growth outlook for the APAC region as a whole based on the activities and sales leads that we are seeing coming through. So from a longer-term perspective, it does not affect our growth ambitions for the region.

[Operator]

[Operator Instructions] As there seem to be no further questions at this point, I will hand the word back to Tom and Henrik.

[Tom Rönnlund, Chief Executive Officer]

Okay. Thank you very much for dialing in today. And if we turn to page number, that would be then 15, I imagine, we hope to see many of you both at our Annual General Shareholders Meeting, which occurs next week on the 7th of May; or otherwise, if not, hope to have -- be speaking to you again at our next quarterly presentation, which will be on the 19th of July. Thank you very much for your attention. Have a lovely day.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.