Probi AB

STO:PROB

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, and welcome to the Probi Q2 2022 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Tom Ronnlund. Please go ahead.

[Tom Rönnlund, executive]

Thank you so much, and welcome to all of you, and thank you for dialing in to Probi's presentation of our Q2 results in 2022. With me here in Lund, I have Henrik Lundkvist, our CFO. Please turn to the next page, please.

And here, please familiarize yourself with our safe harbor statements. Please turn to the next page, Page #3. This is today's agenda. We will have an overview of our results in the second quarter, our financials as well as some comments on our outlook for the remainder of the year. And then after that also open up for questions and answers as mentioned earlier.

Please turn to the next page, #4. We are happy that we offer several quarters of declining revenues can report a 10% growth in sales for the second quarter compared to last year. We landed the quarter at SEK 175 million. This growth was aided by a currency tailwind. And as earlier communicated, our current adjusted performance was in line with last year. Our EBITDA came in at SEK 46 million, which is 18% higher compared to last year in absolute numbers, which represents an EBITDA margin of just about 26%. Our EBITDA in the quarter was aided by healthy gross margin and also positive currency effect.

In our region Americas, we came in on a currency adjusted performance in par with last year. While we are seeing a healthy growth in new launches and accounts in the region, we also kind of had fluctuations in ordering patterns with some of our larger customers, which is holding back the growth in the region for. We're also getting some signals that the U.S. market could be impacted in the fall by a weakening demand based on consumer spending patterns in light of the current macroeconomic conditions.

EMEA, on the other side, is showing a modest growth in the quarter in reported numbers. But if we adjust for milestone-related revenues over the last year or last quarter in 2021, we are looking at a 10% in -- sorry, 10% growth in Q2 versus last year. We do see some post-pandemic demand increases in the quarter, and this will likely settle down a bit during the fall, and we also have a war in Ukraine, which has its impact on certain of our growth customers. We will be getting back to that later.

We do currently, though, not experience a significant direct impact of our business by the war in Ukraine, but as mentioned, it is dampening the opportunity for select few of our customers to launch into both Ukraine and Russia. In APAC, we were up marginally in the quarter versus last year. But still, it was our strongest quarter in the region since Q2 2020 actually, which was a quarter, that quarter then back then was boosted by pandemic-related stock build out by many of our customers. And we remain positive about the outlook for the region as we move through the year.

During the quarter, we also delivered the first commercial size batches of SymFerment, which is our collaboration project with Symrise AG, where we're using up-cycle byproducts from our manufacturing process that still contains micronutrients that have application areas in various skin care products. Our partner, Symrise, is commercializing as we speak. And we have actually quite positive initial feedback from customers, and we have already placed -- Symrise have already placed a follow-up order for additional products to be delivered during the full year. And a significant sales of this product would be expected in the period 2023, 2024. Of course, depending on how successful the launch will continue to be.

We have been clear as a company that our ambition is to drive growth. And even if this quarter is our strongest since Q2 -- sorry, Q1 2021, and we're happy about that, we have higher ambitions than delivering a currency adjusted sales performance, which is on par with the previous year. Our team is focused on delivering on our growth agenda, driving higher sales activity and accelerating product development and innovation agenda to drive new launches, both this and next year to support us in our ambition to return to stronger growth as we move forward.

Please turn to the next page, which will be #5. As mentioned, our Q2 net sales landed on SEK 175 million, which was 13% higher than our Q1 sales and 10% higher compared to the same quarter previous year. In currently adjusted terms, this was a performance basically in line with last year, though. Our net sales for the first 6 months came in at SEK 329 million, which is on par with previous year.

But if we adjust for currencies and due to our weak first quarter in 2022, we are at a currency adjusted decline of 9% for the first half of the year. We landed our EBITDA on -- at SEK 46 million in the quarter, which was compared to SEK 39 million last year, which represents an EBITDA margin of just above 26%. The number is stronger also compared to our Q1 number, both in absolute terms as well as from a margin perspective.

We've continued to invest in OpEx for product development, commercial resources, particularly in the U.S. and our business development activities. And these cost increases were offset partly in a positive way by a good gross margin in our U.S. business, which was driven both by a positive product mix, but also by our internal manufacturing of previously externally sourced bacterial strain. Also, currently played a role in this improvement as well. We are quite a bit from our long-term growth target of 7% organic growth. And for the past year as well as in this year, we have been fighting through market and customer dynamics in the U.S. market, which have been challenging.

We've had, at the same time, a positive development in EMEA and APAC. But these regions are still too small to offset the dynamics in the U.S., but we do expect that our efforts in the U.S. market or region Americas, to give stronger dividends in the region next year, provided that we do not see a sharp decline in consumer spending in the market due to the current macroeconomic conditions.

From an EBITDA margin perspective, we will continue to invest in our capabilities and product development activities to ensure that we have the conditions for stronger growth in the future. So we do not expect to reach our 29% long-term objective in EBITDA margin in this year. We, however, maintain that long-term objective to reach it further down the line as our growth efforts and gross margin improvements through our manufacturing upgrade kicks in.

Please turn to the next page, which will be #6. If we have a look at our regional performance and start with our region Americas, we had sales of SEK 123 million in the quarter, which represents a 14% increase on Q2 previous year on a reported basis. This was aided by the strong U.S. dollar currency. If we adjust for currencies, this was basically on par with previous year in the second quarter. If you look at the first 6 months of the year, we saw a small reported growth, while in currency adjusted terms, we had our weak first quarter pull us down, which resulted basically in a 10% decline on a currency adjusted basis for the first 6 months.

The gross margin in region Americas came in strong in the quarter and landed at 42%, which was supported, as mentioned by positive product mix as well as benefits from internal manufacturing and currency, which also helped the year-to-date margin numbers to improve from 36% to 39% for the first half.

In region America -- sorry, in region EMEA, we posted a 10% growth in Q2 compared to last year when we correct for the milestone-related revenues, which was approximately SEK 3 million in Q2 2021. This positive development was supported by increased post and then mix demand in several European markets as well as positive development with several new customers that we have acquired over the past 12 to 18 months period.

A couple of our larger new accounts have had weaker development though than what we had expected particularly Perrigo, who's launching a product based on probably clean back concept have had a slower-than-expected rollout so far into the year. Also Oriflame, who was planning for launches in a couple of very large markets, like Russia and Ukraine, have, due to the current situation, not been able to execute on those launches as planned. At the same time, their launch in other markets have received very positive feedback and good development, and they are now planning for additional markets to roll out the product into.

In APAC, we're seeing so far into the year a quite modest growth, but we do expect a stronger performance for the second half of the year based on our current pipeline. The launch by Sinopharm in the Chinese market is progressing well and as planned with 2 markets -- sorry, 2 products already on the market and with the third one planned for launch in the fall. This development, together with Sinopharm as well as other Chinese customers, grow a growth of 20% for the first half, specifically in China for us.

China is a small market probably so far, but we do see a strong traction there now and hope that our performance in that market will continue to drive a positive growth also for the wider APAC region. We're seeing a good development across APAC with several customers, and we will continue to invest both in our presence as well as activities in the region to capture these growth dynamics where the APAC region is one of the strongest growing regions currently for probiotic dietary supplements.

Also following the relative easing of COVID restrictions in many of the countries, that supports our activity level with customers and our team's ability to interact one-on-one with customers for new business opportunities and new launches. The gross margin for EMEA, APAC holds quite steady and fluctuate between quarters, normally based on product mix delivered in the specific quarter. Please turn to the next page. And here, I will hand over to Henrik for a financial review.

[Henrik Lundkvist, executive]

Thank you, Tom, and good morning, everyone. So I will now walk you through the financial section of the report. Please turn to Page #8. As earlier mentioned, we reported net sales SEK 175 million in the quarter, but we had a large positive FX effect of SEK 18 million, which means the net sales were down 1% compared to last year. Our EBITDA landed at SEK 46 million in Q2, which was an increase of 18% compared to last year. And the increase was mainly explained by exchange rate, but there were some underlying movements that I will come back to later in this presentation. The EBITDA margin amounted to 26.3% in the quarter compared to 24.7% last year. EBIT was 20% higher than last year, and net income and earnings per share was 26% higher than last year.

Please turn to Page #9. Net income for the first quarter landed at SEK 20 million, which was SEK 4 million higher than last year. Compared to last year, we had a slightly negative sales volume effect of SEK 1 million in the quarter, but a positive gross margin effect of SEK 7 million, as the gross margin in region Americas was much stronger than last year. The improvement came from a favorable product mix, but also through more internal production volumes. But we should also mention that the comparison period was rather weak.

Our operating expenses increased by SEK 7 million, part of this is related to strengthening our American sales team, but it's also coming from increased customer activities, including exhibitions and customer visits. We have also invested in our product pipeline, which has resulted in an increased spend in R&D in the quarter. And our administration costs have also increased due to higher cost in connection with business development activities. The FX component was largely this quarter, and we had a positive impact of SEK 4 million. The financial expenses and tax expenses were on par with last year.

Now turning to Page #10. The gross operating cash flow amounted to SEK 86 million for the first 6 months, which was approximately in level with last year. We had a negative cash flow effect from higher working capital by SEK 16 million, mainly due to lower accounts payable and higher inventory. Our paid taxes amounted to SEK 12 million for first 6 months of the year. Our CapEx amounted to SEK 31 million year-to-date, and the largest part was related to the upgrade program of our manufacturing site in the U.S., and also rebuilding and upgrading our facility or our laboratory in Lund.

In May, we paid dividends to our shareholders of an amount of SEK 15 million and the cash flow from financing activities is related to payments and interest for lease obligation and amounted to SEK 8 million. We also had a positive exchange rate effect of SEK 10 million. To summarize, our cash generation continues to be strong, and we generated additional SEK 14 million in cash in the first 6 months even if we made significant investments to our manufacturing site and pay dividend to our shareholders.

Now turning to Page 11. We have a balance sheet that is very strong, and we do not have any external bank loans. Our equity amounts to SEK 1.4 billion, which is a -- it's equal to an equity ratio of 90%. It is -- this is a good position to be in with the current macroeconomic uncertainties. And it's also -- it will also enable us to further evaluate interesting business development projects to continue to grow our business. By that, I will turn over to Page 12 and hand over to Tom again.

[Tom Rönnlund, executive]

Okay. I think it's Page 13 though. Okay. So thank you, Henrik. Please turn to -- no, sorry, that is correct. Please turn to Page 13. So while we're happy to report a quarter with 10% sales revenue growth compared to last year, we are not satisfied with our currency adjusted growth rate and we have our team focused on managing the challenging dynamics in the U.S. market, both from a market perspective as well as on an individual customer dynamics that we are experiencing, which is particularly with some of our bigger customers in the region. We have one and are in late-stage negotiations with several interesting potential growth accounts in the U.S. market.

And while we see a relatively strong performance, both in EMEA and APAC, our growth challenges lie in the U.S. market, and this has our fullest attention as an organization. We have added and transferred resources to the Americas team, and we're focused on product innovation, extraction of value from our upgraded manufacturing capabilities as well as accelerating the launch of BLIS in that region. These activities, together with a significant pipeline of strong opportunities give us a stronger sense of optimism of our ability to return to growth in the region as long as we do not see a sharp downturn in U.S. consumer demand based on the current macroeconomic conditions. We're also strengthening our research and development capabilities and activities to ensure that we stay at the forefront of scientific and product innovation within the probiotic space.

We have new leadership in place, and we're having a higher activity level compared to earlier, and we're planning for several new innovations over the next 12 to 18 months period. Our strategic pillar in manufacturing excellence is well on track. We're continuing to invest in our capabilities, and we have added several important upgrades in both our fermentation facilities as well as in our BLIS format manufacturing during the past 6 months as evident from the CapEx spending. Our gross margin improvement from these upgrades, although hampered by a relatively low volumes over the past year or so. This is why so important for us to return to a stronger growth pace, particularly in the U.S. to extract the full value of these investments.

We've set the stage for future growth with important strategic partnerships such as BLIS and the pipeline of product innovation as well as upgraded manufacturing capabilities. The U.S. market dynamics and individual large customer fluctuations have dampened our growth trajectory for quite a while, and it will take us some additional time to rebuild the momentum through our growth customers, the newly acquired customers and new product launches. But with the product portfolio and our pipeline and our team laser focused on our key priorities, we're confident that we will have all that it takes to return to growth in 2023.

And with that, I'll turn over to the last page and open up for questions and answers.

[Operator]

[Operator Instructions] Your first question comes from Mattias Vadsten from SEB.

[Mattias Vadsten, analyst]

I have three questions, I think. The first one, would you say that the environment in the U.S. has changed in recent weeks or months compared to what we saw in probably Q4, Q1 sort of run rate? That would be my first one.

[Tom Rönnlund, executive]

Okay. So the U.S. market, it's a bit difficult to interpret right now, I would say. But we are -- from a few customers, we are getting the signals that they fear that consumer demand could be affected in Q3, Q4 by the inflation rate and sort of the economical uncertainty. We haven't seen that, particularly in our order book at this stage. But we, of course, need to be reactive to that as we move forward. I think the confidence in the market has dampened a little bit compared to earlier quarters.

I was in the U.S. earlier this week actually meeting with customers. There is good activity in new -- sort of new product time and launches and so on and so forth, but there is a bit of concern in terms of, okay, how will the current economical situation play out in Q3, Q4. So I don't have any sharp signals on that or -- but we are hearing that with some of our estimates.

[Mattias Vadsten, analyst]

Perfect. Are you seeing those kind of factors playing in EMEA and APAC as well? Or are those factors sort of overshadowed or helped by the recovery that we're seeing from the pandemic with less lockdowns and so forth? Or how do you see the development in Europe and Asia?

[Tom Rönnlund, executive]

Yes. It seems to be not quite the same picture at this point, I would say. Quite often, the U.S. market is extremely quick to react in a sense. But we have seen through the first half of the year, a quite good rebound in certain customers following the lifting of many COVID restrictions. We're not currently hearing the same kind of messaging in terms of the impact of sort of inflationary pressure and so on and so forth in those regions, currently.

[Mattias Vadsten, analyst]

Very good. Next one would be, if we see sort of a downturn in the spend among consumers for the second half in the U.S., it's more likely that you experienced a downturn for sort of bulk less clinically evaluated product or sort of clean back products that I would assume are a little bit more expensive? Or what's your thinking and thoughts around these dynamics?

[Tom Rönnlund, executive]

I think it's -- I think it could play into both areas because, of course, if consumers start to really scrutinize where they put their money, which I think many consumers are right now. Of course, personal health is an important area quite often and one of the last things that we perhaps cut back on. I think our product portfolio is placed in such a way that we're working with customers both in the premium segment as well as in the less premium segment. That might protect us a bit there, of course, if customer turns to less premium solutions for supporting their health -- sort of health efforts from that perspective. But again, it is -- we haven't seen the U.S. demand slowdown just yet, this is just concerns that we are hearing from customers with regards to the fall really.

[Mattias Vadsten, analyst]

I'm aware of that, but some flavor was good there. And then have you seen any particular material inflection point in the partnering agreement, maybe just a refresher on BLIS and what the status is there now? And what we expect as inflection points in the near future from that one in the next quarters? That would be great.

[Tom Rönnlund, executive]

The first production batches quite recently, which had been put on stability, which is an important element in our sales efforts there, we are starting -- the commercial rollout has already begun, but there is a time lag in business development activity or in sales activities and actual sales. We are planning launches with the material with customers for Q4, Q1 next year -- or Q4, Q1 period. And -- but we will need to wait for our own stability data as well, which takes us about 6 months. So it will take us into Q4, I will say, before we can sort of see sales impact from that and then throughout next year, of course, as well.

[Mattias Vadsten, analyst]

I guess that more adds to the outlook for next year then.

[Operator]

[Operator Instructions] As we are showing no further questions, I will hand back to our presenters for closing remarks. Thank you.

[Tom Rönnlund, executive]

Thank you. Please move to the final picture in the presentation. And with that, thank you for your attention this morning. And hoping to see you all in -- as we present our Q3 results on October 21 this year. And with that, have a nice summer. And yes, speak to you soon again. Thank you.

[Operator]

Thank you. The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect.