Probi AB

STO:PROB

Earnings Call Transcript 2021-Q3

[Operator]

Welcome to the Probi AB Q3 Report 2021. [Operator Instructions] Today, I am pleased to present CEO, Tom Ronnlund; and CFO, Henrik Lundkvist. Speakers, please begin.

[Tom Ronnlund, Chief Executive Officer]

Thank you. Thank you so much. Welcome to the Probi presentation of the Q3 results in 2021, and thank you for dialing in and listening to our presentation here. Together with me here in Lund, as usual, I have Henrik, our CFO, in the room as well. Please move to the next slide, Slide #2. And please have a look at your convenience at our safe harbor statement, which you see there. And then the next slide, please, Slide #3, where you'll see the agenda for today, where we'll provide you a bit of an overview of our results as well as activities in the quarter, our financials as well as some comments on our outlook as well. Please move to the next slide, please, Slide #4. And since the summer and during Q3, we are finally able again to meet in person with our new and existing customers across the globe. And this has been a really good development for us at -- in Probi. We're participating in seminars, trade shows, meeting personally with our customers, identifying new and exciting collaboration opportunities and product launches. This is very important for us in order to create and drive demand together with our customers. We've also kick-started the new strategic partnership with Blis Technologies in New Zealand. And we have continued through the quarter as well to enter into new customer partnerships for our business as well. From a revenue perspective, we had SEK 159 million in sales in Q3. It's a solid quarter, slightly above our Q2 this year but well below our record Q3 last year. The last year comparison did include a nonrecurring -- well, some nonrecurring revenues of approximately SEK 15 million and was also impacted to some degree of pandemic-related inventory buildup with certain customers, mainly in the U.S. For the first month -- sorry, for the first 9 months of the year, we're basically flat compared to last year in currency-adjusted performance terms. We've been clear as a company that our ambition is to drive growth for our products and our business. And while a flat year-to-date development is not to our satisfaction, we do see a market development which is slightly slower this year compared to 2020, particularly in the U.S., where the second half, in particular, saw some inventory buildup, to some degree, pandemic-related. Still, for us, with the underlying consumer demand and interest in probiotics remaining very high, higher activity level amongst our customers than under the pandemic -- sorry, than during the pandemic and with our strong product portfolio, coupled with these exciting partnerships that we've made -- entered into the -- over the past year or so makes us confident that we will return to our growth objectives as we move forward. Similar to our Q2, our EBITDA margin was affected by the lower volumes that we have had. And we came in at approximately 27%, a bit below our long-term financial targets. We have quite different dynamics in our geographical regions. Region Americas, our largest geography and where we've been affected this year by partly specific customer dynamics but also working through some inventory buildup with certain customers, we were not able to match the very strong quarter last year, which also included some nonrecurring revenues in connection with the product upgrade with one of our largest customers. Adjusting for these nonrecurring items and the currency in the beginning of the year, we were, on a year-to-date basis, approximately flat in the U.S., where we have had our greatest challenges this year of mitigating these specific customer dynamics that we mentioned in our Q2 report. While we see a slower market development and certain customer dynamics in the Americas, which has weighed on our performance, we are, at the same time, very happy to see our EMEA and APAC -- or sorry, EMEA and APAC regions performing well. Our strategy that with stronger commercial presence and focus on larger accounts is yielding a really good growth in EMEA this year. What is particularly good for EMEA as well is that the majority of the growth is driven by new launches with significant accounts that we have added to our portfolio through the last year. In region APAC in the quarter, we posted a slight growth. But based on the good business development that we have carried out through the past 12 months and also signed on significant accounts or accounts with significant opportunities, we feel confident that we will be able to drive growth in the region as we move into the future. Also in the quarter, in line with our strategy of creating growth through strategic partnerships, we've kick-started the collaboration with Blis, the New Zealand-based Blis Technologies, and we'll get back and comment on that a bit additionally later in the call. And our scientific teams continue to lead the way in clinical validation of our strain. And in the quarter, one of the first tolerance studies with both a Lactobacillus plantarum and Lactobacillus rhamnosus strain were studied or was published. The study was performed double-blind, randomized, placebo-controlled in 271 newborns. It is very important to establish the safety profile and tolerability in a vulnerable population such as infants and newborns. And the study also indicated positive effect on the immune system for the babies, which received the combination of the two strains. And this, we will evaluate further as we move forward. That's a brief summary of our third quarter. Please move to the next slide, which is Slide #5. As mentioned, our sales landed -- our net sales landed at SEK 159 million, which was slightly above our Q2, but where we have a really strong compare with last year of SEK 195 million. This represents a decline of 17% in currency-adjusted terms. And for the first 9 months, as mentioned, we were down approximately 1% versus the previous year in currency-adjusted terms. Our EBITDA came in at SEK 42 million compared to SEK 61 million in the same quarter last year, which represents an EBITDA margin of approximately 27%. That number is slightly higher than in Q2 and also -- but slightly below our long-term objective of the 29% target that we've set for EBITDA. Similarly, as in Q2, EBITDA was mainly negatively affected by the lower volumes that we experienced in the quarter compared to last year. While on OpEx, we were a bit lower based mainly on headcount-related items. The main reasons, I've already mentioned them, for the weaker quarter this year compared to last year are mostly related to the U.S. market and specific customer dynamic. And we also had some nonrecurring revenues in Q3 last year, which made Q3 compare this particular year very tough. Whilst at the same time, we've had other accounts that have performed really well and we see a healthy demand for our products, but it hasn't -- we have not been able to fully compensate for that in Q3 2021. Next slide, please, Slide #6. If we take a look at the regions here, as mentioned already, our main headwind this quarter was in region Americas, where we were down 22% compared to last year in currency-adjusted terms and approximately down with minus 4% if we look at the 9-month period for this year, adjusted for currency. And this is definitely not in line with our growth ambitions as a company. Still, the quarter in the U.S. was our best so far in this year. And like some of our peers, we do see the market being a bit softer this year following the strong development last fall. And on top of that, we've had some customer-specific dynamics that have affected us. And we have not been able to fully mitigate those to be on par with last year in the U.S. At the same time, we're also seeing other significant customers who have performed really well this year. And we also have indications that they continue to see good consumer demand. We maintain the outlook for the American market that is -- will like -- as a market that is the likely develop a bit slower through this year compared to last year as some COVID-related demand increases from last year will wear off. If we turn to EMEA, we continue with the strong development here in the quarter. We're up 20% to SEK 23 million compared to last year. And our year-to-date growth in the region is up 14%. We're really pleased with this. And it is driven by that we have entered into several important customer partnerships over the past year and where we're now seeing the initial benefits of these. We also see a stronger demand this fall or in Q3 with existing customers, i.e., not new launches, et cetera, but with the existing customers as they were affected to some degree by the pandemic last year. But most of our growth here is driven by new customer launches and new customer collaboration, which is a really good indicator for this region as we move forward as well. In EMEA in the quarter, we've also entered into an additional new exciting customer partnership with a large European food and health care company. And we continue to maintain a positive outlook on our ability to drive additional success in EMEA in the years to come, assuming that our partners are successful in their launches and demand creation, of course. If we turn to APAC, even if the individual quarter is small in sales terms and the growth is limited to 2%, and if we look at the full year -- or sorry, the year-to-date number was down approximately 4.7%. But we maintained a strong positive outlook on the region. And we're expecting a strong finish to the year based on the important customer partnerships and collaborations that we have entered into during this year. We're seeing these accounts performing well in the market and expect this to help us drive additional growth in the region as we move forward. As an example, our partner in China, Sinopharm Foreign Trade, are already quickly, following on a couple of product launches, already evaluating additional product launches with Probi. If you look at our gross margin, we continue to suffer, particularly in the U.S. from the lower volumes there. That is offsetting the positive impact we've seen of our facility upgrade program, which is nearing completion. As we build volumes in the U.S. back up, we expect to see our gross margin to improve over there as well. And in EMEA and APAC, the gross margin effects were mostly related to product mix items there. And if we move to the next slide, please. We are at Slide 7, I imagine. Just a brief update on a couple of our strategic partnerships. As you know, part of our growth agenda as a company is related to both mergers and acquisitions as well as strategic partnerships. During the third quarter, we entered into the strategic partnerships with Blis Technologies and where we have now initiated that collaboration across the two organizations. So we have started the technological transfer for manufacturing of BLIS K12 and BLIS M18 strains so that Probi can manufacture these in our facilities. We expect that to happen sometime around Q4, Q1 this year -- well, late this year. And where -- while we will be ready for manufacturing there, there are additional steps to be taken as that partnership develops as we also need to study the stability of the materials manufactured in our facilities. But over the course of 2022 and beyond, we expect to see the benefits of internal manufacturing of these strains. Our sales teams and our scientific communication teams, which are really important for driving customer demand in the market, have been trained on the Blis scientific dossier and the sales and marketing strategies as well. And they are deployed in the market. And we've had numerous customer interactions and dialogue opened already. We have had very positive customer responses on the addition of these additional health areas and strains to Probi's portfolio from individual customer meetings and trade shows as well. And we're currently maintaining or entertaining approximately 10 -- well, actually more than 10 active customer dialogues on future product launches, including these materials. One other strategic partnership that we entered into Q4 last year was Vital Nutrient Holdings. And in that, that's a company group, which consists of three brands: Vital Nutrients, Bariatric Fusion and Hyperbiotics, all mainly present in the U.S. market in online sales, e-commerce and the practitioners' channels. All three brands have products which are scientifically validated and have a strong positioning within their respective segments. The company group, Probi invested and owned a minority stake in shares there, and we're also working in partnership in terms of developing business opportunities for probiotics within the company group there. They've had a strong sales development in this year in Vital. Also, particularly for Hyperbiotics, which is mainly driven by online sales, the Amazon sales development has improved their since Vital Nutrients took over the work in selling online with Amazon themselves from an earlier third-party seller. We're seeing good development in subscribing sales customers and general sales there as well. It is still initial in its development as the internalization of the Amazon strategy happened during summer. But initial indications look really good. Vital is also revamping and investing more into marketing of the brand in that channel. And we expect that to develop nicely as we move forward. We're also launching -- they are also launching the Hyperbiotics brand into the practitioners' channel a little bit later this fall. And new product launches are being evaluated as we speak there as well. So that is an exciting additional partnership that we hope will help us drive growth as we move forward. Now moving over to the next slide, please, and where I will hand over to Henrik for a bit of a financial review.

[Henrik Lundkvist, Chief Financial Officer]

Thank you, Tom. Good morning, everyone. I will now walk you through the financial section of the report here. So now turning to Page 9, please. As earlier mentioned, we reported net sales of SEK 159 million, which was in level with previous quarter but a decrease of 18% compared to Q3 2020. The comparison quarter was the best in Probi's history and bolstered by a one-off revenue of SEK 15 million -- or approximately SEK 15 million and extra demand in U.S. related to the pandemic. Adjusted for the one-off revenue and the negative FX effect, the decrease was 11%. This is, as already communicated in our Q2 report, explained by a few larger U.S. customers where sales have not occurred during the delay -- due to delayed orders but also to changes in customers' product portfolios. Our EBITDA landed at SEK 42 million in Q3, which was a decrease by 31% compared to last year. The decrease is explained by reduced sales, which also has a negative effect on gross margin. This gave us an EBITDA margin of 27% compared to 32% last year. But we should keep in mind that profitability in Q3 last year was very strong and the full year EBITDA margin was actually 27%. EBIT was 46% lower than last year and net income and earnings per share was 44% lower than last year. Now turning to Page 10. Net income for the third quarter landed at SEK 18 million, which was SEK 15 million lower than last year. Compared to last year, we had a negative sales volume effect of SEK 16 million in the quarter and a gross margin effect of minus SEK 7 million in the quarter. The lower gross margin is also a result of lower volumes since we couldn't fully leverage from our fixed manufacturing costs. The operating expenses were slightly lower than previous year, mainly due to lower variable remuneration and personnel-related costs. The decreased result obviously resulted in decreased income taxes. Now turning to Page 11, please. The gross operating cash flow amounted to SEK 130 million during the first 9 months of the year, which demonstrates a healthy business model. The working capital increased by SEK 32 million, mainly due to strong September sales that increased the accounts receivables. Our CapEx amounted to SEK 27 million during the first 9 months of the year, where SEK 21 million of those was related to the upgrade program of our manufacturing site in the U.S. and the rest was related to investments in clinical trials and patents. In the quarter, we invested SEK 56 million or approximately 13% of the shares in Blis Technologies. The cash flow from financing activities was related to payments and interest for lease obligations. To summarize this slide, our cash generation continues to be very strong. And during the year, we have managed to finance the acquisition of Blis Technologies with more or less an unchanged cash balance. Now turning to Page 12. We continue to have a very strong balance sheet and we do not have any external loans. Our equity amounts to SEK 1.2 billion with an equity ratio of 90%. This means that we are in a good position to further evaluate interesting business development projects to grow our business. Blis Technologies and Vital Nutrients are two good examples, but we are actively working on finding more opportunities. Now turning to Page 13 and handing over to Tom again.

[Tom Ronnlund, Chief Executive Officer]

Thank you, Henrik. Thank you. Please turn to Page 14. And as a company, we have the clear ambition of growing ourselves and growing our presence in the probiotic space as a business-to-business provider of probiotic solutions for improved health and well-being for consumers all over the world. While we're not satisfied with being flat so far into this -- sorry, being flat so far into this year, we are dealing with a softer market and some specific customer dynamics. We're performing well in APAC and EMEA. Admittedly, they're smaller regions for us. But our strategy is working. The new customer collaborations and partnerships that we have struck over the year with potential significant future customers have all been directed in the -- or has all been around our ClinBac line in our portfolio, where we have our strongest unique selling point. The situation in the U.S., where we are dealing with softer market development and a few customer-specific issues, we are seeing good signs as we speak in terms of our ability to turn that development around and again create U.S. to be 1 of the 3 growth engines in our company. We see good signs in the dialogue with existing customers but also have interesting pipeline customers as well -- or customers in the pipeline. Next week, it is the largest trade show happening in the U.S., where we normally get a great opportunity to interact with many, both new as well as existing customers for advancing business discussions and help us create and generate additional demand. Another element of our growth strategy is M&A and strategic partnerships. And while we have entered into a few strategic partnerships over the past year or so, we also remain very active in finding strategically interesting candidates for acquisitions or provide additional growth opportunities for our company. We are working on this continuously and hope to be able to conclude discussions as we move into next year there. And in innovation, research and product development, we continue to invest. We have a high activity level. And we have very interesting and promising candidates for launches, both in short and medium term, as well as in the longer term as well. We have spoken about our manufacturing upgrade program. We're nearing completion and -- on that in this quarter. And we are seeing positive results on our effectiveness in that facility. At the same time, we have also encountered volume losses, which have not allowed us to translate that into improved gross margins so far. But as we build volumes in the U.S., we expect to see our gross margins to improve as an effect of these activities. As a company and as a team, we're fully focused on achieving our long-term financial targets. Even this year is a tough one from that perspective for us. We have a great team, a strong product portfolio, great partnerships and very solid finances, all really good foundational factors for us to be able to continue to drive growth for Probi. We are working in a very exciting, ever-evolving area in human health and with continued consumer focus as well in this field, own personal health and well-being, we expect the global markets to get back to more normal post-COVID state hopefully with stable growth across the geographical region, which, in combination with our internal capabilities, create a really strong foundation for our future success as a company. Thank you for your attention so far. And I think we open up the floor to questions and answers. And you can also flip to the last page in the presentation, which, I imagine, is #15, with the dates for a couple of upcoming events.

[Operator]

[Operator Instructions] Our first question comes from the line of Jakob Lembke of ABG Sundal Collier.

[Jakob Lembke, Analyst]

Tom and Henrik, I have a few questions. I think I'll take them one-by-one. And if we start with the ongoing sort of market dynamics and looking at the sort of abnormally high comparison quarters, how should we think about Q4, where I presume it's also a bit sort of abnormal demand in North America if I look from last year? Would you say that maybe Q3 sales is a more reasonable level for the run rate where the market is currently?

[Tom Ronnlund, Chief Executive Officer]

Yes, I would say so, approximately. We are -- we're seeing -- we have lately seen a bit of additional demand pickup. But we are up against also a very high Q4, I would say, or relatively high Q4, particularly in the U.S., I would say. So I think that's a reasonable assumption, even though that we are seeing an increased customer activity level to some extent. But for us as well, it's also about our ability to be able to deliver within this year our -- yes, so it's a bit of a timing question there as well if we get orders now, if we're able to get it out through the door before year-end. But I think that's a reasonable assumption, Jakob.

[Jakob Lembke, Analyst]

Okay. And then on Asia Pacific, I was a bit surprised on the sales level in the quarter, where I anticipated some additional contribution from Sinopharm and also the customer agreements you mentioned in Korea last quarter. Can you give some more color maybe on that?

[Tom Ronnlund, Chief Executive Officer]

That -- our outlook that we've maintained through the year here is positive for APAC. And we're still small there, but that also gives us an opportunity to grow at the same time. And in this case, we are executing in accordance with plan, but sometimes it also depends a bit on, okay, on which side of the quarter that the business fall. And that is why we're also confident that we will have a stronger finish to the year in APAC.

[Jakob Lembke, Analyst]

Okay. That sounds great. And then on Blis Technologies, where you're sort of integrating them now and you mentioned that you expect sort of production readiness in late this year. But how should we think about the potential sales ramp-up when you're able to launch?

[Tom Ronnlund, Chief Executive Officer]

Yes, very good question. Thank you. And I would say that we have -- we started it in the summer in July, August. The teams are working very actively together here, along with a number of different work streams while our sales cycles are quite long with customers. So it takes some time to build the offering that the customer wants, making sure that we get it registered in the relevant markets and so on and so forth. So I would say towards the second half of next year, that is where we should start to see sales. There could be some before that as well, but it will be quite small. And of course, this is also a buildup over time here. It will also take us some time to, once the technology transfer is complete and we manufacture the materials in our own facility, also to put these solutions on stability testing and so on, which is, unfortunately, we have not found a way of accelerating time. So it's time-bound in that effect. But that doesn't prevent us from starting to work with that material in combination with the material that we already have. But I would say from -- in terms of the sales ramp-up and sales update, it would be from second half of next year in any material term.

[Jakob Lembke, Analyst]

Okay. And then my final question is just on the Oriflame account. How has that developed? And what sort of feedback have you gotten?

[Tom Ronnlund, Chief Executive Officer]

Thank you. And good question there. I actually met with them earlier this week. And they're very happy with what they've seen so far. It's not been rolled out yet in all the markets. They're -- they also have been hampered a bit in their sales channels with lingering pandemic effects. And as you know, it's [indiscernible] in different geographies right now. But in general, very, very pleased with the business area in health -- or wellness and health. And their launch expectations are right now on track basically, I would say. So that is an exciting partnership that we will develop into the future.

[Operator]

Our next question comes from the line of Thomas Nilsson at Analysguiden.

[Thomas Nilsson]

Tom and Henrik, I was wondering if you could talk a bit about future acquisitions. If you could elaborate a bit about what geographies you're looking to make acquisitions in, what indication and also what kind of sizes of companies we can expect you to acquire in the coming years.

[Tom Ronnlund, Chief Executive Officer]

Thank you for the question. And we maintain the focus that we've had communicated earlier, where we're looking along two assets mainly. One is additions to our product portfolio. It could be in the area of probiotics, it could be in areas which are close to probiotics as well, but to grow our portfolio offerings with offerings that which -- where we can leverage our current knowledge, our current capabilities in helping that company or that business to grow further. So that is one axis. And from a geography perspective, those can be a little bit everywhere around the world, to be honest. It could be product-owning companies, it could be research companies and so on and so forth. So there is no specific geographic focus on that -- on those. If we talk about our other axis of business development activities, it is about enlarging our footprint as well in geography, okay? So -- and we have a particular focus there on the APAC and EMEA region. But with the right company, it could as well be in the U.S. We are -- we have a relatively strong position in the U.S. But we are not a huge player in that market. But first and foremost, I would say the focus would be in APAC and EMEA. But if we find a really good strategic fit in the U.S., for example, or North America, that could also be of interest to us. And in terms of size, we have a strong strategic shareholder in our company, who are willing to support us in our growth ambitions as a company. And that can, of course, help us perhaps also target potential acquisition candidates of certain size. But then it's also a question of, all right, it's the strategic fit, it's the timing right, it's the pipeline and all those elements. But we have a quite broad search range, I would say, in terms of potential sizes of acquisitions. And I think you can have a look at, for example, the previous acquisition that was made when the U.S. operations was acquired. Up to that level, it's probably within sort of good reason.

[Operator]

[Operator Instructions] Okay. There seems to be no further questions coming through from the participant lines. So I'll hand back to our speakers for the closing comments.

[Tom Ronnlund, Chief Executive Officer]

Okay. Thank you very much for attending today's call. I hope to speak to you at our presentation of our Q4 results, which happens in February. Until that, have a great day and weekend, and thanks for calling in today. Thank you.

[Henrik Lundkvist, Chief Financial Officer]

Bye-bye.