Probi AB

STO:PROB

Earnings Call Transcript 2018-Q3

[Operator]

Hello, and welcome to the Probi AB Q3 2018 Report Call. [Operator Instructions] Today, I am pleased to present CFO, Jörn Andreas. Please go ahead with your meeting.

[Jörn Andreas, Chief Financial Officer]

Thank you. Good morning, and welcome to the Probi Third Quarter 2018 Audiocast. My name is Jörn Andreas, I am the CFO of Probi. As you know, we distribute our earnings release through our company website. A replay of this call, including the slides, will be made available later today and accessible through a link on the Investor Relations section of Probi's website. Now I will quickly cover the safe harbor statement. And please move for this to the next slide. Some of the statements we make today may be considered forward-looking statements. So I would like to remind you to please take note of the forward-looking statement disclaimer contained on Slide 2. For more information, please refer to the risk factors discussed in our latest annual report. Next slide, please. For today's call, I will begin by sharing with you the key highlights of our performance during the third quarter, followed by a more detailed financial review. After this, I am going to conclude the presentation and will be happy to respond to your questions.Next page, please. We are pleased to report that we delivered against our guidance from the beginning of the year and returned to quarter-on-quarter organic growth in the third quarter. In line with our expectations, Probi had a good third quarter with double-digit growth in several key metrics. Driven by both continued commercial momentum and recovery from the customer destocking, net sales and EBITDA margin improved significantly compared to the third quarter of 2017. Third quarter net sales amounted to SEK 169 million, up 26% on a currency neutral basis or SEK 35 million compared to the previous quarter and the EBITDA margin was 30%. As you know, Probi is running up this year against tough year-to-date comparables from year ago, when our major U.S. customer overstocked. And this is why during the first 9 months of the year, Probi's net sales amounted to SEK 441 million, down 10%. EBITDA of the 9 months of 2018 declined by 19% to SEK 111 million, which corresponds to an EBITDA margin of 25%, which is well above our long-term target. The destocking negatively impacted comparison with the first 9 months of 2017 by approximately SEK 49 million in net sales. In the third quarter, Probi achieved important milestones in transitioning the company into the next phase of growth by appointing Tom Rönnlund as our new CEO and by implementing a new customer-centric organization. In parallel, we started a process to review our medium-term R&D strategy and clinical trial program. Our goal is to update our R&D portfolio and corresponding investments following the completion of our ongoing multi-trial clinical study program beginning of next year. During the quarter, we also made an early partial redemption of our bank borrowings in an amount of SEK 57 million, demonstrating the company's strong balance sheet and free cash flow generation. We believe Probi is now operationally and financially well positioned for the future as we are transitioning the CEO position to Tom in the fourth quarter. Please turn to the next page. Page 5 provides you with the sales performance by segment. The year-to-date sales decline in Consumer Healthcare during the first 9 months of 2018 was largely attributable to the destocking effect as well as a soft demand in EMEA as we reported earlier this year. However, we made great strides in the third quarter in gradually reducing the sales gap. Sales in CHC increased 28% compared to the third quarter of 2017, driven by new launches in the U.S. and the recovery of -- the recovery from the destocking program. The business segment Functional Food grew organically by 8% year-on-year to SEK 28 million. We continue to progress according to plan in regards to the major agreement we signed with a global FMCG company. And additionally, we have also seen growing interest from customers to introduce probiotic beverages beyond fruit juice. And we are currently planning test launches in selected markets. Please turn to Page 6. During the first 9 months of 2018, APAC continued to be the growth engine and accounted for Probi's strongest sales growth with a year-on-year increase of 30%, driven by both existing and new customers. Taking advantage of APAC's growth potential remains a key priority. And we have added additional resources in sales and sales support in Singapore and China during the third quarter. We also introduced new product formats specifically designed for the Asian market and showcased our capabilities at the Vitafoods Asia, where we participated for the first time. Overall, sales in EMEA were slightly lower in the first 9 months of 2018 versus prior year with increased sales in Sweden being offset by a sales decline in the rest of Europe. We are working intensively to improve market penetration and launching plan in EMEA. And we are confident that EMEA will return to organic growth in the fourth quarter. Let me now share with you some more background on the new leadership organization that has been announced in the third quarter. Next page, please. In the third quarter, we announced a new leadership organization, which has been an important milestone for us in transitioning the company in the next phase of growth. We were delighted to announce Tom Rönnlund as new CEO of Probi, starting by the end of 2018. Tom is a highly experienced executive with a strong background in sales and marketing and in driving growth in the health care industry. In parallel, we implemented a new organizational structure that is a natural evolution of our more and more global business and geared even more strongly towards our customers. Under the leadership of an extended management team, Probi will be centered around 3 global groups: R&D, marketing and operations, that will be focused on developing, marketing and delivering our best-in-class products to the regional sales teams based on Probi's full suite of offerings. The new global operations and marketing groups will be managed from the U.S. while R&D and, of course, the headquarters continues to be located in Sweden. We are convinced this structure will create the conditions for improved commercial execution and reduce time-to-market for new product development. Let us now turn to Page 9 for a more detailed review of our financial figures. In line with our expectations, Probi returned to quarter-on-quarter organic growth in the third quarter and successively reduced the sales gap in comparables due to last year's overstocking. Probi's net sales for the first 9 months was SEK 441 million, which is a decrease in reported currencies of 10%. However, the single third quarter Probi generated currency neutral growth of 26% compared to the third quarter of 2017. Normalized for the recovery of the customer destocking, quarter-on-quarter growth was approximately 15%. EBITDA for the first 9 months of 2018 amounted to SEK 111 million, representing an EBITDA margin of 25%, well above our long-range targets. EBITDA margin also successively improved quarter-over-quarter in 2018 and amounted to 30% in the third quarter 2018. Net income for the 9-month period amounted to SEK 52 million and EPS of SEK 4.60 per share. This is a decline compared to previous year and year-to-date basis. However, again quarter-on-quarter, in other words, isolated Q3 2018 compared to Q3 2017, net income and EPS increased significantly to SEK 28 million and SEK 2.47 per share, respectively. This again demonstrates our very strong operating performance and quality of earnings delivered in the third quarter. Please move to Page 10 for the reconciliation of net income. In the first 9 months, net income amounted to SEK 52 million, down SEK 16 million compared to previous year. This is primarily a result of the lower sales activity and additionally personnel-related provisions of SEK 2 million that were charged to EBIT. We had some tailwinds from favorable FX in our financial results, which contributed SEK 8 million during the first 9 months of 2018 compared to the previous year. Overall, we are very happy with the continued quarter-over-quarter improvement of our earnings, which more than doubled in the third quarter compared to the first half of 2018. We are now back on track and which is also reflected in the cash flow generation. For this, let's take a closer look on the following Page 11. In line with our strong operating performance, Probi significantly increased gross operating cash flow to SEK 119 million, which demonstrates our very cash generative business model. We have, therefore, decided to proceed with a partial early redemption of our bank borrowings in the amount of SEK 57 million. Since the beginning of the year, Probi has reduced its net debt by SEK 72 million while we simultaneously supported strategic initiatives like, for example, the APAC expansion. And at the same time, we are retaining the capacity to invest in the future, which is also reflected in our balance sheet that is shown on the next slide. So please now turn to Page 12. Thanks to the strong cash flow generation, Probi has increased its net cash position for the group in the third quarter. Net cash, excluding own shares held in treasury, amounted to SEK 51 million, which represents a negative leverage ratio of 0.39x EBITDA. Probi has a very healthy balance sheet with total equity amounting to SEK 992 million at the end of the third quarter, which represents an equity ratio of 83%. Let me now wrap up with some closing remarks. And for this, please turn to Page 14. Our third quarter results demonstrate that Probi is back on track to carry on with its growth strategy. We have delivered on our previously communicated target and achieved organic net sales growth and margin improvement. And in parallel, we are building the foundation for the next level of innovation and growth by now implementing our new leadership organization, updating our medium-term R&D strategy and also by significantly deleveraging the company. We are very excited about the opportunities this creates and also to activate these levels in the coming quarters. That concludes my presentation today. And we will now open the call for your question.

[Operator]

[Operator Instructions] There are currently no questions registered at this time. So I will hand the call back to you, Jörn. Please go ahead.

[Jörn Andreas, Chief Financial Officer]

Thank you. We also do not have any additional questions that came to e-mail. So then I thank you again for joining me on this call. This concludes the audiocast for today. But of course, we are available over the course of today in case you have any specific outstanding questions. Thank you very much. And everyone, have a great day.

[Operator]

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