Probi AB

STO:PROB

Earnings Call Transcript 2022-Q1

[Operator]

Welcome to the Probi Audiocast with Teleconference First Quarter 2022. [Operator Instructions] Today, I am pleased to present CEO, Tom Ronnlund; and CFO, Henrik Lundkvist. Gentlemen, please go ahead.

[Tom Rönnlund, executive]

Thank you, and a warm welcome to everybody dialing in today for our presentation of our Q1 results for 2022. And as usual, together with me here, I have Henrik Lundkvist, our CFO.

Please turn to the next page, please, #2. And please familiarize yourselves with our safe harbor statement. Next slide, please, #3, where we have today's agenda, where we're going to present an overview of our results, our financials, as well as some comments on our outlook moving forward.

Please turn to the next page, please, #4. So as presented, we have a start to the year which we are not satisfied with, where we have weak development, particularly in the region Americas, mainly related to certain customer ordering pattern, that resulted in a sales decrease of approximately or about -- of 10% in reported revenues, which is minus 16% if we adjust for the currency.

If you look at the -- sorry for that, not revolving, but rolling 12 months, we're down 2.5%. Our EBITDA margin came in lower than previous year, and this is mainly related to the lower volumes that we saw in the quarter. Our challenges were mostly in the U.S., as mentioned, where we saw ordering patterns from customers who did not repeat their orders in Q1, and which meant that we had lower sales in the region Americas than what we were hoping for in this quarter, and that explains the most of the decline in our sales development.

When we look at the U.S. for the rest of the year, we expect the U.S. to be mainly -- or basically in line with the previous year. At the same time, we have positive developments in EMEA, even though that we're, in reported terms, have a decline in this quarter, we see a good underlying demand in the market. And if we account for one-time milestone-related payments last year or revenues last year, we had a decent quarter in EMEA.

In our APAC region we were basically on par with previous years, and our partner there in Sinopharm, in the Chinese market, are on track with the launches. So we expect to see a stronger development later in this year in the region and are confident about our growth objectives there.

With regards to the terrible war that is ravaging Ukraine right now, from a business perspective, we have at Probi not seen any immediate effects, and we are not either directly exposed with major customers in Ukraine or Russia. But the developments in the region, of course, can result in delays of product launches that were planned in those countries.

We have also in the quarter achieved an important milestone in the technology transfer of the Blis portfolio, and I'll get back to that a bit later on. And we have been clear that we at Probi have a growth agenda for our company. And as we have reported through the last few quarters, we have had headwinds, particularly in the U.S.

Last year we had 2 major accounts that hampered our growth, and also then in this year, we do see signs of a bit slower ordering patterns in the U.S. So whilst we have customers developing very, very well in the region, we also see some existing customers being a bit soft in their ordering right now. And that is why we are a bit defensive this early in the year with regards to the growth prospects for the full year in the U.S.

Please move to the next picture, please, which is #5. So if we look at our development here, we saw that our revenues were SEK 155 million, down from SEK 171 million in the same quarter last year. And if we look at a comparison between our rolling 12 months and the full year '21, we're down by approximately 2% in currency-adjusted performance.

Our EBITDA margin, as mentioned before, mainly affected by the volumes in the U.S. We had good profitability in both EMEA and APAC, but the volumes affected us in the U.S., and we came in at a number of 25% EBITDA margin in the first quarter.

And let's move to the next picture, please, #6, where we have a look at our regional development. As already mentioned there, the U.S. were affected by ordering patterns from a few larger customers and which gave us a quarter which is quite low in compare particularly to last year, where we had a quite strong Q1. But we do see the region stabilizing moving forward, and we're expecting to be in line for the coming quarters with last year, more or less.

We also had our gross margins declining in the U.S. market. And as we have explained before, this is mainly due to the fact that we need certain volumes to ensure that we have a strong gross margin in the region with volume related.

EMEA, as mentioned, came in at SEK 30 million. The decline from last year -- from the same quarter last year attributable to milestone-related payments which we had in last year. So the underlying performance in the EMEA market is good.

In our APAC region, basically flat vis-à-vis last year. And as I mentioned before, we are seeing very good development with our Chinese customer Sinopharm. They have launched the Defendum product line into the market as well as are on track to launch Osteo and FerroSorb, our ClinBac-based offerings there.

And we do expect for both EMEA and APAC moving forward to be more in line with our overall communicated financial targets and growth objectives. If we move to the next slide, please, which is #7. In the quarter as well and also shortly after the quarter, we have communicated good development with some of our key partners.

As mentioned, the technology transfer from Blis of their strains to our production has resulted in -- during the quarter, a first run of commercial-size batch of a dairy-free BLIS K12. This is a good achievement by the team. We're slightly delayed due to the fact that we had to wait for some parts which were held up in supply chain that we needed to add to our production line, but we are now there, adding these strains of -- well, these clinically documented strains to our portfolio to allow our commercial teams to really begin the sales process of these.

And we are expecting to see revenues out of these activities towards the end of this year, in the U.S. mainly. Another important partnership project was with Symrise AG, where we, together with them, have developed a skincare ingredient which is based actually on fermentation broth from our production line.

So this is basically a byproduct from Probi's production process which contains still bacteria and micronutrients that can be used for other applications. So for Probi, it is a recycling of a waste product from our production process, which we then together with Symrise have developed into an ingredient that is applicable within skincare.

And Symrise's team of scientists have conducted 2 studies on the product showing an improvement moisturizing effect, and this product -- or this ingredient was launched here recently at a cosmetics fair in Europe, and they have started to sell it. And from Probi's perspective, we've already delivered the first order on this exciting collaboration project.

And the -- another beneficial side effect from here is that we can recycle water that we use in our production process. So it also has a sustainability perspective in terms of Probi being able to reduce our waste from our facility by manufacturing this product.

Please turn to the next page, please, and where I will hand over to Henrik for the financial review.

[Henrik Lundkvist, executive]

Thank you, Tom, and good morning, everyone. I will now walk you through the financial section. Now turning to Page 9. As earlier mentioned, we reported net sales of SEK 155 million, which, adjusted for currency, was a decrease of 16% compared to last year.

The decreased sale was explained by large orders in Americas that was shipped in Q4 2021 instead of Q1 this year. The last year, we also had milestone-related revenues of approximately SEK 5 million in EMEA that we did not have this year.

Our EBITDA landed at SEK 38 million in Q1, which was a decrease of 19% compared to last year. The decreased profitability was mainly explained by lower sales volumes, but also higher operational expenses. This gave us an EBITDA margin of 25% in the quarter compared to 28% last year. EBIT was 39% lower than last year and net income and earnings per share was 38% lower than last year.

Now turning to Page 10. Net income for the first quarter landed at SEK 14 million, which was SEK 9 million lower than last year. Compared to last year, we had a negative sales volume effect of SEK 7 million in the quarter, and a negative gross margin effect of SEK 1 million, as the higher gross margins in APAC and EMEA did not fully compensate for the lower margin in Americas.

Our operating expenses increased in Q1 compared to last year by SEK 3 million, which was a result of more customer and business development activities. The financial expenses and tax expenses were SEK 3 million lower in the quarter compared to last year.

And now turning to Page 11. The gross operating cash flow amounted to SEK 39 million for the first quarter, which once again demonstrates a robust business model. We had a positive cash flow effect from lower working capital by SEK 6 million, mainly due to lower accounts receivables. Paid taxes amounted to SEK 7 million in the quarter. Our CapEx amounted to SEK 16 million in the first quarter, and the largest part was related to the upgrade program of our manufacturing site in U.S., but also rebuilding an upgrade of our laboratory in Lund.

The cash flow from financing activities was related to payments and interest on lease obligations and amounted to SEK 4 million. And we had a positive exchange rate effect in the quarter of SEK 2 million. To summarize, our cash generation continues to be strong, and we generated additional SEK 20 million in cash in the first quarter.

Now turning to Page 12. We continue to have a very strong balance sheet and no external loans. Our equity amounts to SEK 1.3 billion, with an equity ratio of 90%. This means that we are in a good position to further evaluate interesting business development projects to grow our business. Blis Technologies has been one good example, but we are actively working on planning more opportunities.

Now turning to Page 13 and handing over to Tom.

[Tom Rönnlund, executive]

Thank you, Henrik. Please turn to Page 14. So in Probi, our strategic focus areas remain the same as in last year as well. It is important for us as a company to get back to growth. We have been through turbulent times with both the pandemic and the start of the war in Europe. And we have experienced headwinds in the U.S. market, mainly, while both EMEA and APAC have continued to perform well.

And looking at that, of course, from those regions, as they are relatively smaller compared to the U.S., that is not sufficient to help us achieve our current growth targets in the start of the year. In the U.S., we are seeing a volatile market environment where there have been supply chain disturbances, not directly relating to Probi, but in the marketplace, it's been a quite dynamic period of time over the past 5, 6 months.

And also, as mentioned, we're also seeing some customers being a bit softer in their ordering based on that they had during the fall ordered a little bit extra in order to protect themselves from supply chain disturbances. We're working through this with our customers. We're continuing to drive our premium strains in the market.

We have a strong position there, but we see several opportunities to increase that share of our portfolio sales. We also have a very good development and good pipeline of global key accounts. As you know, we label the key account as a customer with a potential above $1 million individually. And we have a good pipeline in this field, but these development projects take time, and we expect to see effects of these negotiations probably towards the end of the year.

And that is why we are a bit more defensive on the U.S. It is a volatile situation -- or volatile environment in the U.S. right now, and that also makes us a bit more defensive on our outlook in the region and where we believe we will be in line with previous year, of course, working hard to improve that position for across -- throughout the year.

Partnerships and acquisitions remain a key priority for our company as well. We're working diligently in this field. We have several partnerships already activated. Of course, that we're working with, that will provide us and are providing us with additional growth opportunities, and we will continue to execute on that.

We will, of course, also continue to support the good development in both EMEA and APAC to support and aid our growth across our company. Within innovation and science, our pipeline is progressing well. We are working in the gut-brain field, where hopefully, we, in the future here, can introduce additional offerings into the market. We also have a good project within female health that we are investing in, ensuring that we can expand Probi's portfolio in these interesting fields.

We're also investing in our capabilities through -- in this quarter, we have inaugurated our new -- completely new laboratory in Lund, where this investment will allow us to strengthen our capabilities within preclinical and product -- preclinical research and product development as well.

We're also engaged in collaboration projects, looking into combination of our probiotics with interesting symbiotic ingredients as well. Within our ambitions and our objective to have a world-class manufacturing organization, we have made significant investments into our facility in the U.S. We continue to invest there for additionally increased capacity, which we will continue throughout this year and also ensure that we add additional capabilities to our organization to be able to drive continued growth.

From an outlook perspective, as I mentioned earlier, we expect the U.S. to be in line with previous year, while we in EMEA and APAC see a clear path to a growth more in line or better with our financial objectives. The consumer demand for our product is still strong. But we will need to follow diligently the development in the U.S.

We are seeing positive signs, and at the same time also, as I mentioned, some softening signals as well in the market. But all in all, we have great confidence in the future. We have very good development with many of our large customers as well as in our partnerships, allowing us additional sales opportunities and product portfolio opportunities, and we have made significant investments into our business that will allow us to return to growth as we move forward.

Next picture, please, or next page, please, which is for Q&A.

[Operator]

[Operator Instructions] We have a first question from Jakob Lembke from ABG Sundal Collier.

[Jakob Lembke, analyst]

I have a few questions. To start with the Americas, another quarter with this tougher environment and demand situation. So just wondering what makes you confident that you are able to stabilize the revenues here in the coming quarters?

[Tom Rönnlund, executive]

Thank you, Jakob, for the question. And if we look at our performance through the period of quarters in the U.S., Q1 2021 was relatively strong in the U.S. And what we're seeing there for the coming quarters is that we have a fairly robust order book and also additional projects being worked on with customers to drive the sales in the region.

So even if we sort of -- I think last year was -- as you might remember, it was from Q2 and onwards where we had a quite significant effect of a couple of customer accounts. But at the same time, we also had other customers grow in the same period. And even though we are seeing weaknesses in some of them, we are confident that we will be able to achieve that for the full year.

[Jakob Lembke, analyst]

Okay. Just a follow-up on the U.S. I mean you were also a bit more, I guess, cautious on the general market here today. Is there anything structural that has changed in the U.S. over, let's say, the past year that is contributing to the softness?

[Tom Rönnlund, executive]

I wouldn't say structurally. I think the conversations that we've had with customers over the past few weeks is more sort of about the macroeconomic factors, the inflation, the supply chain, et cetera, the consumer confidence and so on and so forth.

We've also seen that with the supplies chain shocks, which hasn't really affected Probi that much so far, but some of our customers, they've also been quite focused on managing that situation and at the same time perhaps not been as focused on new product development and new launches.

But I don't see it as a fundamental structural change. I think for the U.S. market, the expectations are that in the pandemic years 2020 and 2021 there was definitely at least a small surge, and that's perhaps normalizing now to a more modest market development.

Of course, looking forward, difficult to say what sort of the current macroeconomical conditions, how that will play out and affect throughout the entire year, but based on the customer dialogue that we have today, we feel that we should be in a good position to deliver at least in line with previous year.

[Jakob Lembke, analyst]

Okay. Understood. And my final question is on Oriflame, where, obviously, Ukraine and Russia are important markets. So is it reasonable to expect any meaningful contribution at all from the Oriflame partnership during this year?

[Tom Rönnlund, executive]

That's a good question. And I believe sort of the delayed launches is a clear sort of impact, of course, and fully understandable. At the same time, the Oriflame collaboration is also involving many other markets as well. So those are not the only regions where launch were planned for.

Of course, Russia is a big market for Oriflame, and I imagine also Ukraine. So that will have a dent there. And of course, that will sort of hamper it. We will have revenues, we already have, from Oriflame. But of course, the stronger growth that we were planning together with them is likely going to be delayed until, hopefully, the war situation settles down or is resolved one way or the other.

[Operator]

We have a following question from Mattias Vadsten from [indiscernible] SEB.

[Mattias Vadsten, analyst]

Some of them already asked, but I have some. And just firstly, on the sales, your comment on sales there, and that will correspond to previous year in Americas, I just want to make sure I get things right here. I mean, assuming the spot dollar FX rate to continue on this level, we should expect Probi to experience some SEK 10 million positive year-over-year impact from currency fluctuations in Q2 and Q3 at least.

So are you, despite this, expecting sales number to be in line with prior year, meaning some 10% or so negative organic development, just to make sure I get that correct?

[Henrik Lundkvist, executive]

We're looking at this from a currency adjusted. So organic. Then what happens with the currency, we would not like to speculate in, so it's the organic, Mattias, here.

[Mattias Vadsten, analyst]

Okay. Perfect. That's what I thought. I just wanted to confirm that.

[Henrik Lundkvist, executive]

Yes. Yes.

[Mattias Vadsten, analyst]

And then the next question is on the cooperation with Oriflame, where you were citing delays then in the product launch in Russia. But is it correct that Probi will eventually supply products to Oriflame to be supplied in Russia? Or how is your thinking around future sales of Probi products in that country now?

[Tom Rönnlund, executive]

So Probi -- we're following this situation very closely. And as I mentioned, we have very limited business interests in the region. And our products are classified as health care products. And for the moment, provided that there has not been any strong launches into the region, Probi has the stance that -- and as food companies and other health care companies have as well -- that restrictions should not be placed at this moment in time on Russia.

[Mattias Vadsten, analyst]

Perfect. And the last one, if you can give just some flavor to what extent sales in physical stores is back to normal now in Europe and other parts of your end markets? And what effects are you taking note of in China now where we see restrictions in some regions there? That would be interesting to hear.

[Tom Rönnlund, executive]

So for the European region, if we start there, I think the -- from a physical store perspective, perhaps not so much. But what we see is that our customers who are working with a medical marketing model, where they -- a part of the strategy is to actively promote products to pharmacists and health care practitioners, that that -- those businesses are doing better today compared to during the pandemic.

So I think that's mainly the difference there. For China and our products are sold via pharmacies and -- mainly by pharmacies, and particularly the Sinopharm launch is concentrated on the pharmacy sector. But of course, the very strict lockdowns in Shanghai and the concerns for Beijing might, of course, have some effect on Sinopharm's ability to push the products through, but we've had no such signals yet from Sinopharm.

We are of course in contact with them to understand how this affects. The Sinopharm, even though that it represents a large opportunity for Probi over time, here initially in the launch we are not talking about massive volumes today as well. So if there might be a delay of, say, a few months due to sort of COVID-related measures, that should not impact the long-term potential in our collaboration with Sinopharm.

[Operator]

We have no other questions over the phone for the moment.

[Tom Rönnlund, executive]

Okay. All right. Can we turn to the last page, please? And where we have our financial calendar, we have our Annual General Meeting coming up next week on May 5, where you're more than welcome to attend there. It will be possible, both in person here down in Lund as per the notice sent out earlier, but also a possibility, of course, to vote via mail.

And then after that, we will have our second quarter call on July 15 and hope you will be able to join us there. Thank you for your attention this morning. Have a great day.

[Operator]

Ladies and gentlemen, this concludes today's web conference. Thank you all for your participation. You may now disconnect.