Probi AB

STO:PROB

Earnings Call Transcript 2019-Q2

[Operator]

Hello, and welcome to the Probi AB Q2 Report for 2019. [Operator Instructions] Today, I am pleased to present CEO, Tom Rönnlund; and CFO, Henrik Lundkvist. Please go ahead with your meeting.

[Tom Rönnlund, Chief Executive Officer]

Thank you. Good morning, everyone. Tom Rönnlund here, together with Henrik Lundkvist, CEO and CFO, respectively, and welcome to this presentation of the second quarter results for Probi AB. Turning to next page, please. There's a safe harbor statement here. Please familiarize yourselves with that. And turning to Page 3. We have the agenda for today where we'll provide an overview of our first quarter, and of course, have also a financial review and provide a couple of comments with regards to our outlook moving forward, and after that, we will also open up for a Q&A session. So please, let's turn to Page #4 in the presentation. And as you'll see here, Probi had a very strong quarter in the second quarter of 2019. Our net sales grew by 18% this quarter compared to last year, 15% if we adjust for currency fluctuations in that. This also translated into a strong growth in our EBITDA, where our EBITDA grew from SEK 42.7 million, up to SEK 56.5 million, representing a margin of a bit over 31%. The quarter, otherwise, have also included some significant events in completion of a successful clinical trial in 326 healthy pregnant women, evaluating the intake -- or evaluating the effects of Probi FerroSorb to iron status in pregnant women. We've also introduced a new product concept based on Probi's proprietary materials and strain in the Nordic markets. I will be getting back to that a bit later. And we have also, based on our strong cash flow, had a partial early redemption of a bank loan of SEK 39 million. Turning to next page, please. If we look a little bit closer on our business from a sales perspective, we will see here that our Consumer Healthcare segment had an impressive growth in the first half of the year. We're now looking at the first half of the year total growth numbers where sales grew by 17%, mainly explained by strong performance in our EMEA region as a consequence -- as a result of focused efforts from the organization in broadening the customer base as well as making sure that existing customers also launch widened portfolios based on Probi's product. We've also been helped by the normalization of a major U.S.-based customer's order flows as well, which you are most likely familiar with. We are now seeing that stabilizing at a more normal ordering pattern, which is also supporting our growth. Our Functional Food business area shows here -- displays growth in the periods for the first half. But most of that is explained by a onetime item in relation to the earlier communicated discontinued collaboration with a major fast-moving consumer goods company that we were working with. Otherwise, the sales performance in the functional food space is flattish for the year. But good news that we are growing strongly in our Consumer Healthcare segment compared to previous year for the first half. Admittedly, the first half in 2018 was a weaker period. But we do see that Probi, as a company, is growing faster than the market today, which we are very proud of. Moving to Page #6 in the presentation, where we'll see a breakout of the net sales by region across the globe. Here, you can see, driven by the reassumed ordering from one of our larger customers in the U.S. helping us to drive a significant growth in 2019 compared to 2018, we're up 18%. Our local U.S. business, where -- as our U.S. business is divided a bit into sort of major accounts and then local smaller accounts, our local U.S. businesses, smaller accounts, is not doing as strongly. But we are working and addressing that by doing -- making changes and expanding our commercial team as well as investing in the quality upgrade program that we've earlier mentioned for our facilities in the region to strengthen our competitiveness for local customers there. But regardless of that, we feel that we're very strongly positioned for the U.S. market to continue to grow there moving forward. Of course, again, as mentioned, the first half of 2018 was a quite weak quarter. So the growth here is rather for us to actually be coming back to somewhat more normal levels in terms of performance. In the EMEA region, you can see very impressive growth with 44%. This is, of course, a smaller region for us, but we continue to see very strong opportunities for continued growth here. The results here reflect strong and focused efforts by the commercial teams in broadening the customer base as well as working very intensively with existing customers in launching Probi's new and innovative concepts to customers here. Some of the growth here is driven out of Turkey, for example, where Probi during late last year initiated collaboration with a major customer there. And that work is proceeding very, very well and has produced already quite significant results. Also in the EMEA region, the collaboration with Midsona on the Probi range of products, mostly sold in Sweden but also available in select Nordic markets, has also had a very strong first half of this year. We'll get back to that as well. But it's very encouraging to see that we are seeing strong growth numbers in these regions. Our APAC region, as you know and are aware as well, the region where Probi sees great growth potential for the future, for the first half of the year, we are down compared to last year. We had -- we were still -- if we look at the second quarter in particular, we are somewhat down compared to the second quarter in 2018. But we do see signs of rebound in this region. We have a new team in place there to a large extent. We added resources through the later part of 2018 and also moving into 2019. We are building up our organization there, and we have a longer list of potential business opportunities than what we've had in a very, very long time. And the team is working -- we're very intensely following up on these, and we hope to see that our APAC region will come back with stronger results moving forward. We have some customers who have done phenomenally well also in this period, but they are still [ full ] and under development. And we've also had, as earlier mentioned, a number of customer projects that have been delayed in the APAC region. That's also affecting the results here as well. Another element here has been the launch climate into the Chinese market due to the government having a period of time when they were scrutinizing certain businesses for -- quite strongly for a period of time, hampered the appetite for new launches and introduction of new products, which also affected some of our customers there in the region. But we remain committed to the region and a firm believer that we will be able to have a much larger presence in that region moving forward. If we turn to the next page, please, Page #7. As commented on earlier, Probi in collaboration with our partner, Midsona, in the Swedish market, in the Nordic market, we have a very strong position, a powerful market leadership position, especially in the Swedish market for probiotics, where we are the leader in this segment with a significant market share of over 50%, where -- actually, our Probi Mage 80 pack capsules is the largest single product in the entire dietary supplement category in the Swedish market. We are building on this -- sorry, we're building on this strength as we -- in collaboration with Midsona during Q2 and during the month of June, we're launching a new range of probiotic offerings, where -- which are being targeted for various needs for the consumer throughout their life -- different life stages. You can see them on the picture here. It is for babies and toddlers, children; for period of pregnancy; for the family for sort of overall use; as well as Probi Active 50+ targeted at the aging consumer. Probi Mage and Probi Frisk remains on the shelves in the Swedish pharmacies. It's being complemented by this range. And the initial launch indications, it's just been out there for a few weeks during the second quarter, are really encouraging. So we hope that this will help us to continue to solidify and even grow our market share in the Swedish market but also provide ourselves with a strong platform to enter into other Nordic markets as well with the Probi range of products. If we then turn to Slide #8, a couple of other highlights through the quarter. We are continuing to heavily invest in our commercialization of Probi Osteo, our unique and innovative concept for improved bone health in postmenopausal women. The combination of strains, that last year we had a successful study outcome, has been very well received by customers, and we have a long range of customer discussions today in terms of launches for products based on this concept. It is regarded as an innovative as well as highly desirable concept for the female segment of the probiotic market. That fits very well into that for women with an active lifestyle and a desire to maintain a good bone health throughout their life. So a number of launches have already occurred, and there's high customer interest of this. And we hope to see that, that will help us to grow into the future as well. More recently, as mentioned, in the quarter, we presented the clinical trial results on Probi FerroSorb, looking particularly at pregnant women and their need for iron supplementation during their pregnancy. Where in this placebo-controlled trial, we could clearly see that the beneficial effects of Probi FerroSorb also proven in other trials in this particular group of consumers or patients, that the Probi FerroSorb proved to be safe, well tolerated and more importantly, showed very significant results in reduced iron deficiency, but also lower incidence of anemia in this sensitive consumer group. Iron deficiencies in pregnant women is very common. It's normally treated by regular or normal iron supplementation. But iron supplementation has, in certain cases and quite often, undesirable side effects. And the Probi FerroSorb solution is actually containing a little bit lower amounts of iron, and the Probi FerroSorb solution with probiotics is helping that iron to be absorbed by the body in a better way, thus reducing the need for higher doses of iron and thus also avoiding certain side effects. So we're very happy to see that the strong clinical results are easily translated into consumer benefits, and we have initiated discussions with many of our partners in terms of launching this unique iron supplementation and iron uptake solution for pregnant women. And the first customer launch has actually happened already through the introduction of Probi pregnant or Probi Gravid in the Swedish markets, and we're looking forward to execute on this also in other regions moving forward. During the quarter, we also held our annual partner conference. We had 50 companies, both existing and potential customers, attending who, for 2 days, went through a -- both scientific as well as commercial update program for Probi. It was very well attended, and we have a number of commercial strong leads to follow up from that as well. So that concludes this first session of our call. And I'll hand over the word to my colleague Henrik Lundkvist, our CFO, to walk us through the financial review.

[Henrik Lundkvist, Chief Financial Officer]

Okay. Good morning. So now we're moving into the financial review. So now turning to Page 10. In the sales bridge, we can see that the total sales went from SEK 272 million to -- up to SEK 318 million if we compare the first half of 2019 with 2018. This means an increase of SEK 90 million (sic) [ SEK 46 million ] or up 17%. The organic growth was SEK 39 million or up 14% due to stronger performance in Americas and EMEA. We also had a favorable exchange rate effect from a stronger U.S. dollar versus the Swedish krona, which contributed to top line by SEK 7 million. In the condensed P&L, it's visible that EBITDA was SEK 25 million higher compared to last year for the first 6 months as an effect of the revenue growth. We had a positive impact on EBITDA by SEK 7.3 million as a result on the implementation of IFRS 16 related to leasing. EBITDA margin improved 4.6 percentage points to 26.6 percentage. Adjusted for the IFRS 16 effect, the EBITDA would have been SEK 77.4 million and an EBITDA margin of 24.3%. EBIT was SEK 18 million higher compared to the first 6 months last year, which is an increase of 55%. The impact from the IFRS 16 was very limited on EBIT level since the reduced operating expenses in principles are converted to depreciations. Net income increased by 58%. 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 11. Net income for the first 6 months was SEK 38 million, which is SEK 14 million higher than last year. EBIT was SEK 18 million higher as a result of the revenue growth. Our reduced interest expenses were offset by a favorable exchange result in the comparison period, which gives us an unchanged financial result. The income tax was SEK 3 million higher as a result of the higher operational results. Now turning to Page 12. The cash flow continues to be strong. And during the quarter, we made another redemption of borrowings of SEK 39 million. The total redemption of borrowings for the first 6 months amounts to SEK 99 million. At the same time, we have maintained a flexible financing, which can be utilized when needed. The net cash flow was minus SEK 54 million for the 6 -- first 6 months. But excluding the redemption, the net cash flow would have been plus SEK 45 million. The gross operating cash flow of SEK 85 million provides a solid base for the cash generation. At the end of the period, there was also an unfavorable working capital effect due to strong sales in June with increased trade receivables. We expect that, however, to come back to more historical levels going forward. Now turning to Page 13. Our balance sheet continues to be strong with an equity of more than SEK 1 billion and an equity ratio of 88%. A couple of comments on the line items here. The increased goodwill is a translation effect from a stronger U.S. dollar. Property plant and equipment increased due to the implementation of IFRS 16 with opening balances for the year increased by SEK 72 million, and at the same time, the liabilities increased by SEK 71 million. And earlier -- as earlier mentioned, we have significantly reduced the level of borrowings. And I also already mentioned the trade receivables were temporarily increased due to the strong sales in June. The rest of the balance sheet items have limited movements compared to the end of last year. Now turning to Page 14 and handing over to Tom again.

[Tom Rönnlund, Chief Executive Officer]

Thank you, Henrik. Okay. Let's turn to Page 15. So coming off a strong first half year as a company, we are happy to see that we have -- compared to previous year, we have posted significant growth. We are growing faster than the global probiotic market, which is one of our longer-term commitment. We are maintaining our profitability and have even strengthened it throughout this quarters, these first few quarters, and that's a good start to the year for us. If we look forward, we believe that we're very well positioned in this growing segment. Probiotics remains one of the fastest-growing supplement segments on the global market today. There are some regional variances here, we can see in the U.S. market, for example, that traditional retail sales and store sales is down but with online sales growing quickly as well at the same time, offsetting a part of that. So the historic U.S. growth rates are perhaps not in the market or perhaps not as strong as they've been in the past, but still a positive outlook also in that region. We're seeing other regions growing faster, like the Asian region, for example, Asia and China. And that is why we are increasing our efforts in those places in order to be competitive and continue to grow as a company there as well. We have a very well-positioned portfolio. We have new launches that are occurring, and it happened over a period of the last 12 to 18 months, which still are not exhausted in terms of opportunities. We also see strong opportunities with our existing portfolio and our hero product, you could say, in the digestive space. We have a number of ongoing interesting dialogues with large customers or opportunities moving into the future as well. So we feel confident that we have both the product portfolio as well as the team to execute on it, to continue to drive growth for our company. The first half of the year was -- compared to last first half of -- the first half of 2018 has been strong as mentioned, but at the same time, the compares are perhaps a little bit on the low side. And we're growing significantly above the market currently. And moving forward, this will probably normalize a bit, even though that we're, of course, set at driving our team and our business opportunities as hard as possible. We are -- as a company, in order to stay at the forefront of the scientific innovation, only in the past 12 months, we have launched the Probi Osteo concept as one of the first -- as the first company to make a solution in this area commercially available at all, plus the fact now with also the recently published and recently presented data on pregnant women with Probi FerroSorb, we continue to remain at the forefront of innovation in our industry. And that is well recognized by our customers and helps us in driving more business there. We continue to invest in our R&D program and have increased our investment in that in this year and will most likely do so also next year in order to continue to feed that innovation pipeline for our company for the future as well. We have also launched a quality upgrade program, which includes investments in upgraded machinery and some rebuilds in our production plants over in the U.S. as well to ensure that we give ourselves the best conditions, both for quality and efficiency improvements, to strengthen our competitiveness in those marketplaces as well. We're also discussing various types of strategic partnerships and opportunities to accelerate growth for this company as well and hope to be able to report back that -- on those initiatives as we move forward throughout the year. But all in all, good start -- good first half of 2018 -- sorry, 2019 and looking forward with bright eyes on the future as well. Okay. With that, we thank you for your attention and turn to Page 16 and open up for any questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Rickard Anderkrans from ABG Sundal Collier.

[Rickard Anderkrans, Lead Analyst]

So obviously, EMEA came in very strong for the quarter and for the first half. Could you add some flavor on the new customer base there in the EMEA region? Are we talking about smaller accounts or large orders? And how would you describe the sustainability of these growth figures as we move ahead?

[Tom Rönnlund, Chief Executive Officer]

Thank you. Very good question. I would prefer not to comment on specific customer names. But I think for the EMEA -- for EMEA region, it's a little bit of a mix. I would say 50-50 with larger accounts coming in with opportunity also to grow moving forward. So where we have initiated to work, start to work with those customers on their customer launch, on their -- sorry, on their in-market launches with good success so far and with these customers also looking at widening their portfolio and adding more solutions, additional solutions as well. If we look at the other element, there is also a mix of smaller customers placing small orders, evaluating and trying out different concepts in the market. So -- but those -- some of them can be successful, some of them might not. So there's a mix of those 2 there. So we're feeling quite confident based on the work that the organization is doing, that we, moving forward, should be able to continue to grow our EMEA business, perhaps not with quarter-over-quarter these kinds of numbers, but that does represent an opportunity for us. We're also very much anticipating to see how the new range being launched in the Swedish market as well as potential expansion into other Nordic markets could do for us as well, and that is another element that could help us drive the growth in this region. And Rickard, just saying a bit to you on the, sorry, sustainability on the growth numbers. As I mentioned, we are comparing ourselves to fairly weak first quarter. So our long-term ambition stays the same as before, i.e., we wish to grow faster than the market. But the market growth is not on these numbers, these levels today. The market growth is rather in the range of some -- well, between, I would say, 5% to 7% on a global level.

[Rickard Anderkrans, Lead Analyst]

Excellent. And shifting our view to APAC, it came in softer due to some delays, you mentioned, especially in China there. Could you add some color on how things are progressing in China or Asia? And what's the current market penetration strategy there? And perhaps if you can add some flavor on where -- when we can expect some regulatory climate improvements there.

[Tom Rönnlund, Chief Executive Officer]

Yes, the regulatory climate improvements, unfortunately, I would love to be able to say that we'll see shifts there quickly but not too confident on that -- not confident enough on that to say that today. But what we're doing about it is that we are strengthening our regulatory presence in that region, for starters, just to make sure that we take into account the local regulatory environment as well as we are introducing products there as well. And for us, the region is definitely under a buildup phase. We have some existing customers there, which historically has been managed more from our global sales teams based in other geographies. We have taken the decision to establish ourselves locally and having people in the markets, which we're clearly seeing today, is producing a high number of qualified business opportunities but with -- there are certain lead times in this area to actually get qualified as a supplier, making sure that you find the right product for the right target group and so on. So for us, it is -- we're definitely still in the buildup phase here, and we have not yet seen sort of the full potential of what that region could deliver. Probi as well as a business, we have traditionally entering into the Asian market or sort of the APAC region, I should say. We have relied on partly some cross-border trade to quite big extent, which is a big thing in the region, coming from Australia into China. We're well positioned there still. But we also see for a longer-term sustainable business model because you never know when the authorities will react to that and how they will react to that, making sure that we also have business with domestic companies. And we're seeing that happening right now. It is starting out. Probi is a relatively unknown player in that region. Those who have heard about us have great respect for our science and the quality of our products. And by having people placed in the region, we see an opportunity to widen that presence rather quickly. But it will take us some time to build that up into a sizable business, but we remain very optimistic about it.

[Rickard Anderkrans, Lead Analyst]

That's very helpful. And just on a final note, when can we expect sales from Probi Osteo to start showing in the numbers? And what's the estimated market and sales potential there in your view?

[Tom Rönnlund, Chief Executive Officer]

Yes. I don't want -- wish to comment on sort of the end potential for it. I think what we're seeing is that -- I mean the digestive segment in the market is the absolute biggest one for any player or any probiotic company, in general, I would say. And we have launched different types of concepts into the market in the past as well, targeting specific sort of health benefit. And difficult to assess the final total market potential for Osteo. But I would say based on the initial interest we're having from customers looking and seeking for innovation, for consumers, Osteo is definitely one that where we have had the greatest interest as a company. And we actually have sales already. They're small because it's just been introduced into the market. But more significant impact of Probi Osteo, yes, I will have to get back to that and a little bit further down the line.

[Rickard Anderkrans, Lead Analyst]

Excellent. And just a final question. You mentioned strategic partnerships as a sort of a growth vehicle going forward. What could such strategic partnerships look like for the markets? And could you get -- add some flavor on that? That will be interesting.

[Tom Rönnlund, Chief Executive Officer]

Not at this moment. I'll -- please. I will comment on that moving forward once we have come further in those dialogues and hopefully concluded them.

[Operator]

[Operator Instructions] And it looks like there are no more questions registered at this time. So I'll hand the call back to the speakers for your closing comments.

[Tom Rönnlund, Chief Executive Officer]

Okay. Thank you for your attention this morning and dialing in and looking forward to speak to you again when we present our third quarter results on the 25th of October this fall. Have a nice summer until then, and thanks for dialing in.

[Operator]

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