Probi AB

STO:PROB

Earnings Call Transcript 2023-Q1

[Operator]

Welcome to Probi Q1 Report. [Operator Instructions]

Now I will hand the conference over to the speakers, CEO, Anita Johansen; and CFO, Henrik Lundkvist. Please go ahead.

[Anita Johansen, executive]

Good morning, everyone. Welcome to this quarterly 1 conference call for 2023. With me, I have Henrik Lundkvist, our CFO, in Probi; and myself, Anita Johansen, CEO.

Next slide, please, yes. So please take a minute -- a moment to familiarize yourself with this safe harbor statement. Here you see the agenda of our call today. First, I'll give an executive overview.

Our Q1 report came out earlier this morning. As you can see, we had a net sales in the first quarter of this year that increased by 11% and ended at SEK 172 million. This is compared to SEK 155 million in the first quarter last year.

We had good help of the currency effects in this quarter. And also we had a positive effect of the delayed order from the last quarter in 2022. That was delayed due to the huge snowstorms in North America. Our EBITDA margin ended at 28% in quarter 1.

When we look at the results and the underlying -- or the different regions, we have different dynamics in the different regions. In the Americas, we have an underlying market that shows signs of slowing down, and we see that from our customers' order patterns.

In EMEA, we expected and we saw a decline in our sales in the first quarter, and this is mainly due to the sellout of the stock that our former distributor in Sweden had. And this is a consequence of Probi taking over the distribution of our own brand in Sweden.

In APAC, we had an all-time high net sales in first quarter of this year, and this was with good help from the timing of orders. But also we saw nice growth in China, which is a driving force in this region. And also this is a country and a region that we see high growth potential.

In the first quarter of this year, we also succeeded with delivering news to the market. Firstly, we were able to deliver the first order of our Probi manufactured Blis strains into China. And also we were successful in producing the first batch of the new spore-forming probiotic that we can now offer to our customers.

In the executive leadership team of Probi, we had a few changes. Firstly, my interim CEO role was changed, and I became permanent CEO, which was announced on the 30th of March. Also I appointed a new VP of Operations. We had Von Carlson joining our organization in the U.S., and he joined us on the 27th of March.

In the first quarter of this year, we were also very busy in preparing to take home our Probi brand in Sweden. Probi is the brand and is Sweden's leading brand for probiotic products. We have more than 40% market share in Sweden. And today, the brand is sold in over 400 -- or in 1,400 pharmacies and up to 100 health food stores and also online. And starting April 1, we are now the -- our own distributor of this brand in Sweden.

We have built a new marketing and sales organization that is now in place, and they have a clear mission to grow this business in Sweden. We have ambition to grow in more channels, developing our marketing tools and also to launch new products in this brand.

We've invested in building the sales and marketing organization, but we do have high ambitions for the brand going forward. In 2023, we are expecting neutral effects on the earnings.

Now I will hand over to Henrik to go through the financial review.

[Henrik Lundkvist, executive]

Thank you, Anita, and good morning to all the listeners out there. I will now walk you the financial section of the report.

And as Anita mentioned, we reported net sales of SEK 172 million, which was a growth of 11%. Adjusted for currencies, this was a growth of 2%, but we should also mention that we had some help from the postponed orders in Americas that contributed to SEK 18 million in the first quarter here.

We reported a very strong EBITDA margin, 28%, compared to previous year, 25%, and this was driven by volumes, of course, but also a very healthy product mix with a lot of ClinBac sales in the quarter.

If we look at the different regions, to start with Americas, we reported a growth of 18% or 6% currency adjusted. What we see in this region is, general, a cautious market where customers are short -- are ensuring that they don't keep too high stock levels. And we also see the -- a bit lower order frequency from some of our customers.

In EMEA, we reported a decline of 33% mainly related to the old distributor in Sweden who sold out their stock, which meant that we had limited deliveries during the first quarter, which was according to our plan. This is, however, a business that we expect to pick up late in Q2 when the pharmacies will start to replenish their stocks. And we expect to see good development during the second half of the year.

In region APAC, we reported a very strong quarter with 55% growth, and the quarter was all-time high for us. The growth mainly came from China, which contributes -- or continues to be a fast-growing market. We should mention that some orders came in early this year, which means that we will not see the same sales levels in the second quarter.

In Q2, we expect to see more historical sales levels, and first half of the year is expected to be in level with previous year. We are, however, convinced that we will have a strong -- as we have a strong customer pipeline in this region, we are optimistic about the second half of the year.

And short comment on the gross margins. There is a strong correlation between volumes and gross margin. And in this quarter, you can see that the growth in Americas contributes to a higher margin, the decline in EMEA to a lower gross margin and the growth in APAC to a higher gross margin.

And then a brief overview of our net income. So net income ended at SEK 19 million or SEK 5 million up versus previous year. It's really -- there's a few explanation, and the volume is, of course, the largest one to that one, SEK 7 million up due to volume, SEK 2 million down due to operating -- higher operating expenses -- or reported operating expenses. They are actually more FX driven, so the nominal operating expenses are similar to previous year.

If we look at the cash flow, we generated -- our gross operating cash flow amounted to SEK 47 million in the quarter. We had negative impact from higher working capital by SEK 30 million in the quarter due to higher accounts receivables and inventories.

We have realized that we need to improve our processes and ways of working. And while we're doing this, we have temporarily increased our stock levels to ensure we are able to meet our customers' expectations.

Accounts receivables were higher, as large shipments were made late in the quarter.

Paid taxes amounted to SEK 4 million. CapEx, SEK 14 million, and the largest part was related to investment in our manufacturing sites in U.S.

Finance tariffs related to payments and interest for lease obligation amounted to SEK 4 million, and there were no FX effect on the cash at this time.

So overall, we have cash on hand of SEK 380 million at the end of Q1, which was SEK 6 million lower compared to the start of this year. So the temporary higher inventory levels made the cash to slightly below compared to the start of this year.

And the short -- or brief overview of the balance sheet. It continues to be very strong, and we do not have any external loans. Our equity amounts to SEK 1.4 billion, and the equity ratio is 90%. And it's, of course, good to have a strong balance sheet, especially under current macroeconomic uncertainties. And this also enabled us to further invest in new products and capabilities to continue to build our growth platform.

So to summarize the financial review. The reported numbers for Q1 were strong with good profitability. Our assessment is, however, that net sales for the first half of the year will be on par or slightly below last year, so this means that we are expecting a softer second quarter.

The profitability is expected to be negatively affected by the lower volumes in Q2. And we also see a less favorable product mix in the second quarter.

And we will continue to invest in marketing, especially around the new distribution model in Sweden, where we expect the sales and marketing expenses to increase. So this, all in all, means that our EBITDA margin for the first 6 months of this year is expected to be lower than previous year.

And with that, I will hand over to Anita again.

[Anita Johansen, executive]

Thank you, Henrik. So please, next slide. And I'll speak a little bit about the outlook and my agenda for 2023.

So for me, I strongly believe that the route to success is to have a strong leadership team in Probi, so this is my key priority in the short term. You already know that I just hired a new VP of Operations. With my own change in role now being the permanent CEO, I also have an open role as the VP of R&D, which was my previous role here.

But then the other key priorities for the rest of the year is obviously to execute on our strategy. We want to come back to growth and thereby increase our profitability. So currently, I'm reviewing how we can become more efficient internally and how better can meet the needs of our consumers, our customers and our external stakeholders.

In Sweden, obviously, the takeover of this own business to consumer brand, the Probi brand, will help us. It's a key must win, and it should provide us some benefits in our growth. It's also very important for us to timely succeed with the launching of the new innovations that can also contribute to growth.

We are already now offering the Blis strains that was mentioned earlier, now offered to our customers worldwide. Also this year, we started offering the spore-forming probiotic strain that we can now produce. Launching spores will enable us to offer a product to our customers that can now be applied in new formats that our normal probiotics cannot be applied in, for example, gummies or other experiential formats that are very popular, specifically in the U.S. and increasingly demanded by our customers.

Another new innovation that we are working on is our gut-brain health area. We finalized a pilot clinical study at the end of last year. And now we are preparing the results for publication later this year. In parallel with the publication being prepared, we have dialogues with our customers, and we see significant interest from our customers in the gut-brain health area.

As also mentioned earlier, we have continued our investment in our production capabilities and especially in our fermentation site in Redmond in Washington State. We will obviously continue to upgrade and maintain our equipment and our facilities and improve our production processes.

And now it's also really important to ensure we have the right resources in place and the right processes in place. So we continue to benefit from our investments in our manufacturing and gain the efficiencies that are required.

So this is my agenda for this year. Together with the executive leadership team, this is what we will focus on. With that, next slide, please.

With that, it's time to hand over to the operator for our question part. Thank you.

[Operator]

[Operator Instructions] The next question comes from Gonzalo Artiach from ABG Sundal Collier.

[Gonzalo Artiach Castañón, analyst]

The first one is on the U.S. market. I mean, how do you see this market for the upcoming quarter? I mean, you only say that you see a lower order frequency from customers. Why is that? And is it only seen in the LiveBac segment or -- as you mentioned in previous quarters or also in the ClinBac?

And as you previously announced in previous quarters, also potential new customers on the ClinBac segment for early 2023. I was wondering if you could give us some comment on that and how this is looking.

[Henrik Lundkvist, executive]

Okay. Gonzalo, and thanks for asking questions here. So let's start with the U.S. market, what we see there. The market reports that we have available, the data indicates flat to actually down, slightly down. So I think that is also what we see or our sales team experienced that it is a cautious market at the moment.

We have not lost any customers. However, the existing customers, they tend to place order less frequent compared to previous years, and sometimes also smaller orders. So I think it's a market thing there, really what we can see.

And especially around the second quarter, as you know, our visibility is -- let's say, it is around 3 months, depending on what we sell because, in some cases, it's like spot orders that we can get in an order 1 week and deliver next week.

But for many of our products, we have long lead time, and it takes us some time to actually produce them and to deliver them. And we do see a soft -- a softer Q2 here, and that is around the -- yes, the visibility we have.

And then your question related to the customers that's been -- yes, that's been discussed in previous reports. So that is ongoing launches. So there is really no news to them. They have all potential to become key accounts, key accounts meaning more than USD 1 million in sales for us on an annual basis.

However, they always start on very low levels. So I mean, the orders are small, and that is -- they are still small. So there's good potential in the customers. But also with the cautious market, they are not growing as rapidly as we would have liked, of course. But that is something that we are working on to fix with launching new initiatives and new products, spores and Blis, et cetera.

[Gonzalo Artiach Castañón, analyst]

Great, great. That was very clear. I have a second question in Europe. I was wondering if you could give us some color on the sales and prospects for Q2 and also for H2 in the European regions that are not Sweden. I mean, how is the market moving there?

[Henrik Lundkvist, executive]

So what we see in the European market is that it is really Probi's legacy market. We have long-term customers that's been with us for many, many years, and it's stable. So what we can see right now is this switch from the Swedish distributor to moving back that in-house. And that has hurt us in a couple of quarters in Sweden when the old distributors sold out their stock levels.

And in Q2, the pharmacies, they have stocked up with our products also for April, potentially also May. So we expect the orders to come in May, June, so to say. So we will not get a full quarter with sales. So that we expect to start seeing in the third quarter. So that is really when we expect the Swedish business to pick up again. Otherwise, I would say it's a stable development in Europe and on our legacy customers.

[Operator]

[Operator Instructions] There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

[Anita Johansen, executive]

Well, if there's no more questions, then let's go to the final slide, Henrik. Thank you. So please have a brief look at our financial calendar. The next event that we will participate in is the Annual General Meeting that is taking place next week on May 4. And the next interim report Q2 will be on July 18.

So with that, thank you very much for your attendance and the questions. Have a good day.

[Henrik Lundkvist, executive]

Thank you. Bye.