Probi AB

STO:PROB

Earnings Call Transcript 2018-Q2

[Operator]

Ladies and gentlemen, welcome to the Probi AB Q2 Report 2018. [Operator Instructions] Just to remind you, the call is being recorded. I'll now hand the floor to our first speaker, CFO, Jörn Andreas. Please begin.

[Jörn Andreas, Chief Financial Officer]

Thank you. Good morning, and welcome, everyone. Thanks for taking the time to sit in and go through our second quarter earnings results. My name is Jörn Andreas, I'm the CFO of Probi. As usual, Probi is making this call available to investors and media via webcast. The slides will be accessible through the link to our webcast on the Investor Relations section of Probi's website. Please move to the next slide. As usual, I would like to remind you to please take note of the forward-looking statement disclaimer contained on Slide 2. Also our recent annual report includes a detailed discussion of principal risks and uncertainties, which is why results may differ materially from our forward-looking statements. Next slide, please. I will start by sharing with you the key highlights of our performance during the year second quarter 2018, followed by a more detailed financial review. After this, I'm going to wrap up with a 2018 outlook, and we'll be happy to respond to your queries. Next page, please. Overall, and in line with our expectations, the second quarter marked a turning point for Probi. We have now recovered from the destocking program and picked up business momentum, which resulted in improved net sales performance and strong increase in EBITDA margin compared to the first quarter of 2018. Second quarter net sales amounted to SEK 153 million, up SEK 34 million or 29% compared to the previous quarter. And the EBITDA margin was 28%. As you know, Probi is running up against tough comparables from a year ago, when our major U.S. customer overstocked. This is why during the first 6 months of the year, Probi's net sales amounted to SEK 272 million, down 24%. EBITDA of the first half 2018 declined by 44% to SEK 60 million, which corresponds to EBITDA margin of 22%. The destocking negatively impacted comparison with the first half of 2017 by approximately SEK 78 million in net sales. The major U.S. customer that introduced the destocking program has now placed orders for a full quarter, confirming our expectation that recovery from the destocking program is now complete.The additional business momentum in the quarter was driven by solid execution of our APAC growth strategy and contributions from value-added innovation. Accelerating our innovation and translating them into commercial results will be key to sustain the momentum, and we are, therefore, particularly pleased to report about the market launch of Probi Osteo, the new premium concept in bone health and osteoporosis at Probi's 6th Annual Partner Conference, and the success of our R&D team that won the 2018 NutraIngredients Award at the Vitafoods trade show, one of the largest shows in our industry, for its groundbreaking research on the prevention of gluten intolerance in children. Although we are in the early days of capitalizing on all our commercial activities and initiatives, it is highly encouraging to see the team's effort to stay on course and execute against our growth strategy, which is reflected in our quarterly results.Please turn to Page 5. In terms of sales performance by segment, sales decline in Consumer Healthcare during the first half of 2018 was largely attributable to the destocking effect as well as the slow start to the year in North America that we reported in the first quarter. The North American market resumed solid growth in the second quarter of 2018, and we are currently catching up, which led to successive growth of order intake during the second quarter, in particular driven by the e-commerce segment. The business segment Functional Food grew organically by 8% year-on-year to SEK 90 million. In the second quarter. Probi also reached an important milestone in a major agreement with a global FMCG company that we reported end of last year. Application development, including [ vendor ] retesting, is nearly completed and CapEx has been approved by the customer. The project has now proceeded to small-scale production planning, and the market launch is still planned for the second half of 2019. In addition, our sales pipeline at Functional Food is progressing well towards new agreements. Next page, please. Moving on to our regional performance on Slide 6, you will first recognize that we reported this quarter under a new slightly simplified regional structure, the new segmentation into the geographical areas, Americas, Sweden, EMEA excluding Sweden and APAC, better reflects our internal organization and is also intended to improve your view on our regional sales performance. During the first 6 months of 2018, APAC accounted for Probi's stronger sales growth with a year-on-year increase of 71% or SEK 14 million, driven by both existing and new customers. Overall, sales in EMEA were largely flat versus prior year with the backdrop of strong results in our Swedish home market being offset by a soft quarter in the rest of Europe. Although sales in the rest of Europe decreased primarily as a result of a significant launch in pipeline for EMEA, we must and we will do better than this, and to this end, Probi is working actively to diversify the product portfolio in the region and also collaborating closely with our major customer in EMEA to improve market penetration and accelerate launch plans. We are confident this will pay off and then we will see the results in the coming quarters.Let me now share with you some of the key highlights of the second quarter and for this please turn to the next page, please.In the first quarter 2018, we have already reported that Probi is now entering the bone health area based on a major success with a positive clinical trial. The trial demonstrated that Probi's strain provided for a significant reduction in age-dependent bone loss compared to placebo, which is one of the first significant evidence shown by a probiotic supplement in this indication. We are now pleased to report the launch of Probi Osteo, our new premium concept, that was introduced to the market at Probi's Partner Conference. The product will be available in different formats such as capsules, tablets, sachets and as single-strain, multi-strain and combo product with vitamin D3. The combination product is specifically intended for the EU market to promote benefits from the probiotic product. We received very positive feedback, which reflects the key consumer needs around mobility and reduced physical activity level due to bone health, in particular. Our product concept will be a new and differentiated offer in the segment, and we are excited about the market opportunities.Please turn to the next page. Value-adding innovations such as Probi Osteo and disciplined targeted commercial execution were the key to the expansion of our organic sales pipeline. In the second quarter, we have made further progress on our growth projects that are particularly suited to drive long-term revenue growth.In June, we hosted our 6th Annual Partner Conference, which set new attendance record, with customers from all regions. During the conference, we signed and negotiated several new agreements in Europe and Asia and once again demonstrated Probi's leading position in science and innovation by celebrating the 2018 NutraIngredients Award in the Nutrition Research Project category. Expansion of business development in APAC is a strategic focus for us in 2018, which led to strong sales growth throughout the region during the first 2 quarters. One of the most important elements is our initiative to establish a footprint in China, one of the world's largest probiotic markets. I'm pleased to report about major progress being made in the second quarter, during which we signed several new agreements including cross-border e-commerce in China, expanded our sales resources and have taken steps to open a sales office in China.Let us now turn to Page 10 for a more detailed review of our financial figures. As we have previously communicated, last year's overstocking makes it difficult to draw year-on-year comparisons as we are running up against tough comparables from a year ago, which effectively reverses in the second half of 2018. Probi's net sales of the first 6 months was SEK 272 million, which is a decrease in reported currencies of 24%. Net sales was negatively impacted by approximately SEK 78 million due to the destocking effect. We expect this trend to reverse in the second half of 2018 to generate meaningful quarter-on-quarter organic growth. EBITDA of the first 6 months of 2018 amounted to SEK 60 million, representing an EBITDA margin of 22% consistent with our long-range target. Moving further down the P&L. Net income for the first 6 months amounted to SEK 24 million and EPS to SEK 2.13 per share. This is a significant decline compared to previous year on a year-to-date basis. However, quarter-on-quarter, in other words, isolated Q2 2018 compared to Q2 2017, net income and EPS increased to SEK 21 million and SEK 1.84 per share, respectively. This again demonstrates our solid quality of earnings delivered in the second quarter.Please move to Page 11 for the reconciliation of net income. In the first 6 months, net income amounted to SEK 24 million, down SEK 35 million compared to previous year. This is primarily a result of the destocking effect in addition to the personnel-related provisions of SEK 3 million, which were charged to EBIT. We had some tailwind from favorable FX in our financial results, which contributed SEK 3 million during the first half of 2018.Overall, we were pleased with the progress made during the quarter with the quality of Q2 earnings, which is up SEK 5 million compared to the second quarter of 2017. This gives us confidence for the second half of 2018 and that we are on track to deliver on our long-term financial objectives.Let us take a look at the cash flow on the next page, 12. In line with our regained business momentum, Probi again delivered strong operating cash flow results, which demonstrates our very cash-generative business model. Gross operating cash flow increased to SEK 69 million in the first 6 months, and group liquidity increased to SEK 195 million [ to ] up 25% compared to the beginning balance of the year, while the group continues to invest in R&D and in working capital in anticipation of stronger quarter-on-quarter growth. This again significantly strengthened our balance sheet, which is shown on the next slide, so please turn to Page 13.Thanks to the strong cash flow generation, Probi now returned to a net cash position for the group in the second quarter, excluding owned shares held in treasury. Net cash amount to SEK 2 million, which represents a negative leverage ratio of minus 0.2x EBITDA.Probi continues to have a very strong and healthy balance sheet with total equity amounting to SEK 972 million at the end of the second quarter, which represents an equity ratio of 79%. Let me now wrap up with the outlook for 2018, and for this, please turn to Page 15. The key messages, Probi remains on track to achieve our previously communicated objectives. We are very encouraged by the progress made in Q2, in particular regarding our quality of earnings and regarding the acceleration of commercial initiatives. And we want to build on our regained business momentum. We are, therefore, confident to deliver quarter-on-quarter organic growth for the second half of the year and to continue our healthy margin improvement. That concludes my presentation today. We will now open the call for your questions.

[Operator]

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

[Christopher Winston Uhde, Biotechnology Analyst]

Congrats on getting that customer again and a healthy quarter. I just wanted to ask if you have plans to increase headcount now other than potentially opening a Chinese office?

[Jörn Andreas, Chief Financial Officer]

Thank you for your question. So actually, all the while we have been now tracking the business over the last 3 quarters, with the destocking effect, we have also continued to invest in our business and in our people because we are really confident about our prospects and of the underlying market growth. So of course, this gives us now a more tailwind so that we have finally seen other -- our efforts pay off in our financial results. But we have a plan to also further invest in our people as well as in our assets, and we are executing this plan. So actually, we do not change now our plans quarter over quarter based on our core results, but we have like a long-term plan where do we want to put our people, where do we want to invest our resources and we highlighted some of this in our Q2 report that APAC is very important. It's actually #1 topic for us on the agenda. We have been a bit late, I would say, in APAC because we have focused so much on U.S. in the last 2 years, but we have now really speeded up and China is, of course, one of the most important topics where we have a now local people on the ground, which really makes a difference, and this is just one area where we want to also increase our resources and there's more to follow. So yes, but there is no real change in plans.

[Operator]

[Operator Instructions] Okay, there seem to be no further questions coming through, so I'll hand back to our speakers for their closing comments.

[Jörn Andreas, Chief Financial Officer]

Thank you. Okay. So thank you again for joining me on this call, everyone. This now concludes our earnings call for today. But of course, we are available, so my colleague, Niklas Brandt, and I over the course of today in case you have any outstanding questions after reading and reviewing our quarterly report. So thank you very much, and have a great start to the week.