Probi AB

STO:PROB

Earnings Call Transcript 2022-Q3

[Operator]

Hello, and welcome to Probi's Q3 Report 2022. [Operator Instructions] Today, I am pleased to present CEO, Tom Ronnlund; and CFO, Henrik Lundkvist. Please go ahead.

[Tom Rönnlund, executive]

Thank you. Welcome, and good morning, and thank you for dialing in to Probi's presentation of our Q3 results for 2022. Together with me, as usual, I have our CFO, Henrik Lundkvist, as well. Please move to the next slide, please.

And here, I ask you to familiarize yourselves with our safe harbor statement. Please move to the next slide, please.

So in today's agenda, we will have an overview of our Q3 results, our financial review as well as some comments on our outlook moving forward.

Please move to Slide #4. So in the third quarter and as communicated last week in our market update, we did not meet our targets in Q3 that we had set for ourselves internally. We closed the quarter at SEK 145 million. These revenues were in this quarter, supported by the strong dollar, which led to our currency adjusted performance being of our objective and disappointing as such. Our EBITDA came in at SEK 36 million, which represents a margin of 25% in the quarter.

We have had particular challenges in region Americas in the third quarter, where our performance was well below previous year, particularly in currency-adjusted terms. While we still see a good development in this region with more recently acquired ClinBac customers, this has not been sufficient to offset mixed orders and a slowdown market, slower development, particularly in the LiveBac range in the region for us.

We furthermore in the quarter also experienced a raw material shortage, which impacted our production temporarily and led to disruption in certain customer deliveries. This shortage was widespread, didn't impact only us and affected multiple suppliers. But it has since been resolved, and we have increased our stock levels and make sure also that we have validated both [indiscernible] suppliers to ensure that we do not experience similar impact in the future.

EMEA is slightly down. It's a region EMEA is slightly down in the third quarter compared to previous year. We are generally otherwise developing quite well in the region, and we have a positive trend with several customers -- with several customer accounts. We also signed 2 new agreements with customers in the quarter, and these will be launching Probi ClinBac concept within the next few months towards the end of this year and early next year. The performance in EMEA is somewhat hampered by Perrigo's performance in their launch in the marketplace. As that launch has not gone according to their expectations, and this means also that the contribution to Probi from this particular customer is lower than what we expected earlier this year.

At the same time, we grew in APAC, our smallest region. We had a good pace in growth in Q3 -- sorry, Q3 compared to last year. We continue to see very good development with several of our customers across the region, including Sinopharm in China, who are now in launch or prelaunch phase with 4 different product concepts based on Probi offerings. We also have a good pipeline in the APAC region and continue to maintain a positive outlook on the opportunities for our company in this growing region. The market growth in APAC continues to outpace U.S. and Europe. And the customer sentiment there is currently more positive than in certain other markets.

In the quarter, we also finished an exciting clinical pilot study in gut-brain area or in mental health with 132 study subjects. I will explain a little bit more on that later in the presentation.

Please move to Slide #5. As mentioned, our net sales came in at SEK 145 million in the quarter, which was 9% lower than in Q3 2021 in reported terms. In currency-adjusted terms, though, our sales were 22% lower than previous year. Our sales for the first 9 months was slightly above SEK 474 million, which is 3% lower than previous year in reported terms. But adjusted for currencies and the tailwind from the strong dollar, this represents a decline for the first 9 months of 13%.

Our EBITDA in the quarter was SEK 36.3 million compared to SEK 42.3 million last year. Our margin in Q3 was through this then 25% in the quarter compared to 27% last year. Our lower EBITDA margin is mainly a result of lower net sales and volumes, but it also carries higher cost in certain areas as we continue to invest from an OpEx perspective in our commercial capabilities. In the quarter, we also recorded costs, which were related to business development activities, and if we adjust for these, our EBITDA margin would have been 1 percentage point higher, and we would have landed at 26%.

We are having a challenge in the U.S. as mentioned, particularly on our LiveBac portfolio, and which on top of that then was extra impacted by the supply chain disturbances that we mentioned. We're also seeing that some customers in the U.S. are adjusting their ordering patterns expecting further impact by the inflation and the macroeconomic conditions on consumer spending.

In EMEA and APAC, we do not see currently a similar trend. The market is for now performing quite well, and we do not see an increased sharp decline in the market demand right now.

From an EBITDA perspective, we're falling short of our long-term target of 29% as we've also commented on before. We do have positive impact from our manufacturing upgrade, but it is being offset by raw material cost increases and rising labor costs and of course, also our volumes, which are not satisfactory at the moment.

And as earlier mentioned, this leads to that we will not, this year, reach our long-term target of 29% EBITDA and particularly then basically based on the development that we currently see in the Americas.

If we move to the next slide, please, which is Slide #6. So in the Americas, we posted sales of SEK 112 million in the quarter. And if we look, which is a quite sharp decline in currency-adjusted terms. If we look at the first 9 months, we saw a decline of 3% in reported terms, while the currency adjusted terms -- the currency adjusted terms, were down by 16% for the first 9 months. The gross margin in the U.S. was impacted in the quarter. We had 36% in gross margin in the quarter, which was lower than previous quarter. And these were mainly impacted by the lower volumes, which offset the advantages we see from internalized production at the same time. And this led to a gross margin of 38% year-to-date.

And in region EMEA, we had a -- our revenues fell by 3% compared to Q3 last year. But -- and also this leads to minus 6% for the first 9 months. But if we correct for onetime milestone payments in last year, our underlying performance in EMEA is actually more positive than that and we grew our sales by 3% for the first 9 months of the year. We had a healthy gross margin in region EMEA in the quarter, and which was mainly an effect of a favorable product mix in Q3.

If we look to the APAC region, we actually have a positive development there. We grew our revenues by 16% in the third quarter, admittedly from a lower base last year. But this positive development, we see good signs of that being able to continue into the future. And for the first 9 months, we had a growth of approximately 4%. Also a positive development in gross margin, also again then based on a favorable product mix for the APAC region.

If we move to the next slide, please, #7. Just briefly to provide you with a bit of an update on our R&D pipeline and launches that we are planning for moving forward. So currently, we're conducting clinical trials in several different areas. We are doing studies in existing health areas where we currently...

[Operator]

This is the operator speaking. It seems that we have lost our speaker who will try to reconnect. I don't know if you want to take over, Henrik.

[Henrik Lundkvist, executive]

Yes. Let's settle down and see if Tom can reconnect here within short.

[Tom Rönnlund, executive]

Apologies for that, some technical challenges. I'm dialing in from the U.S. for this call and something went wrong there. So my apology to that. Anyhow, if we continue on our R&D pipeline there. I did mention our ongoing human clinical trial in China. For gut health, an important element for us to drive additional success in the Chinese market, which is growing quite healthily for us already today. But with additional clinical data, we see further opportunities to grow the market there.

We're also conducting an ongoing trial in bone health, our second trial in human -- second human clinical trial in bone health with -- in collaboration with the university in Australia, which is an additional important study to further strengthen our position in bone health which is garnering increased interest from many customers around the world.

EU health areas. We have recently concluded as mentioned, a pilot study in the gut-brain axis. And in mood, stress and sleep, I will get back to that. And we're also conducting studies and preclinical work in the area of vaginal health as well for developing offering to strengthen our position even further in the female health segment.

New product opportunities. We are currently working on spore-forming probiotics and symbiotic. And of course, our [indiscernible] collaboration as well. And we are looking at rolling out new offerings and product opportunities in these fields within the next 9 to 12-month period to allow our commercial teams additional opportunities to drive continued success.

If we move to the next slide, please, Slide #8. So our recently concluded or completed a pilot study in the gut-brain axis represents an important opportunity for Probi to enter into a growing market segment. In products, which are focused on mental health and the gut-brain axis, there is currently quite few scientifically validated products on the market. But there is a strong growing commercial and consumer interest in the field as the [ late ] between our gut microbiota and its impact also on our mental health and state is increasing, both from a scientific point of view, but also from a consumer awareness perspective.

We are seeing brand owners across the world, capturing this opportunity and putting product into the market, and there's been a quite strong development in this field over the past few years. In 2017, as presented by the [indiscernible], intelligence they were tracking on a global level, approximately 49 products available in the market for some 5 years -- 4, 5 years ago. And last year, it was around 250 products available in this field.

And what is also very interesting to see is that the gut-brain access in relation to probiotics is also increasing amongst consumers. The graph here on the picture represents the number of online customer reviews on gut-brain product through a period of years here from December 2017 to June 2021. And you can see a clear spike here in the first half of 2021. We also -- I was in contact with this research institute quite recently and we're seeing a continued trend here with online reviews by consumers on products, on probiotic products for the gut-brain axis.

So it fits very nicely that we have recently concluded or completed our study in this field, which we call [indiscernible] stress 21. This study is specifically targeting development and new offerings for the gut-brain axis market segment. It is a decently large clinical pilot study, and we have conducted in such a way that we can use the data for the study potentially, if the results are positive to enter with the commercial offerings, but also to give us further pointers to future research into the area to strengthen the body of evidence behind any products from Probi this field.

What we've done is that we use a proprietary Probi strain in a 12-week study in a placebo-controlled manner on healthy subjects who [ dissipate ] moderate stress. Why healthy subjects? Well, it is important for -- to conduct studies in healthy subjects at certain countries, regulatory environment doesn't allow use of studies on study subject to have a diagnosis or who are ill or -- who have the diagnosis.

The study parameters that we are looking at in this study is stress level, cognition, mood, sleep quality and inflammation. And as earlier mentioned, we had 132 study participants. They have all been through the protocol. And we are currently analyzing and working on the data and results from the study is expected plant in Q4 this year. And we, of course, are hoping that they are positive so that we can continue to enter this market space. Okay.

Please move to the next slide, please. And I will hand over to Henrik for the financial review.

[Henrik Lundkvist, executive]

Okay. Thank you, Tom, and good morning, everyone. I will now walk you through the financial section of the report. So please turn to Page #10. As earlier mentioned, we reported net sales of SEK 145 million in the quarter, which was SEK 14 million lower than last year or down 9%. We had a positive FX effect of SEK 21 million, which means that net sales were down by 22% compared to last year.

Our EBITDA landed at SEK 36 million in Q3, which was SEK 6 million lower than last year and was negatively affected by lower sales volumes. The EBITDA margin amounted to 25% in the quarter compared to 27% last year. We did have business development costs in Q3 that amounted to SEK 1.1 million. And adjusted for this, the EBITDA margin was 26%. EBIT was 40% lower than last year, and net income and earnings per share were 33% lower than last year.

Please turn to Page 11. Net income for the third quarter landed at SEK 12 million, which was SEK 7 million lower than last year. Compared to last year, we had a negative sales volume effect of SEK 40 million in the quarter. We also had a gross margin effect of minus SEK 2 million, which also was related or connected to lower sales volumes. Our reported operating expenses increased by SEK 2 million, but adjusted for currencies, they actually decreased by SEK 2 million. This decrease in operating expenses mainly came from R&D due to phasing effects on our R&D projects.

The FX component was large this quarter, and we had a positive impact of SEK 4 million. The financial expenses and tax expenses were together SEK 3 million lower than last year.

Now turning to Page 12. The gross operating cash flow amounted to SEK 124 million for the first 9 months, which demonstrates a healthy business model. We had a positive cash flow effect from lower working capital by SEK 22 million, mainly due to lower accounts receivables. Paid taxes amounted to SEK 15 million for the first 9 months of the year. Our CapEx amounted to SEK 45 million year-to-date, and the largest part was related to investments in our manufacturing sites in U.S., but also rebuilding an upgrade of our laboratory in Lund.

We have paid dividends to our shareholders in May, which amounted to SEK 15 million, which was SEK 2 million more than the year before. The cash flow from financing activities was related to payments and interest for lease obligation and amounted to SEK 12 million. And we had a positive exchange rate effect of SEK 18 million.

So to summarize, our cash generation continues to be strong. We generated additional SEK 77 million in cash in the first 9 months, even if we made significant investments to our manufacturing side, and paid dividend to our shareholders.

Please turn to Page 13. We have a balance sheet that is very strong, and we continue to have no external loans. Our equity amounts to SEK 1.5 billion, which is yes, gives us an equity ratio of 91%. This is, of course, a good position to be in, in the current macroeconomic uncertainties and it also enabled us to further investigate interest in business development projects with focus on growing our business.

Now turning to Page 14 and handing over to Tom again.

[Tom Rönnlund, executive]

Thank you, Henrik. Thank you. And please turn to Page #15. As mentioned earlier, we are not happy about our performance in the third quarter. And even though we've had market headwind as well as some production challenges based on the raw material shortage for a period of time, which led to a bit of a backlog that we're working our way through as we speak, we continue to strive to get back to growth as a company. The U.S. market is right now or particularly from a LiveBac perspective, not an easy marketplace at the moment. We do, however, see that it seems like our customers or the market has been quite cautious in reordering and making sure that the cycle through their inventory as they are -- sort of assessing the market sentiment amongst consumers.

So far, the consumer market sentiment doesn't seem to have declined that much, but many of our customers are wary of sitting with high stock or stock levels if that would occur. From our perspective, we are investing and making sure that we build our technical capabilities to further enhance our LiveBac portfolio, LiveBac is an important element of our U.S. business. So we're making technical investment in this field to further strengthen our competitiveness there.

We've also made sure that we have the adequate commercial resources on the U.S. market to be able to capture the opportunities that are there. At the same time, our ClinBac offerings, which is a very important focus for us in growing in the U.S. as well alongside LiveBac, is performing well. Recent -- if we look at recently acquired ClinBac customers, we actually have a growth of approximately 18% year-to-date in that segment in the U.S.

At the same time, it's not been enough to offset the challenges that we've seen on the LiveBac side, but we do see that we can further increase our competitiveness in this field also through the technical investment and capability expansion that we have been through and continue to go through as well.

EMEA and APAC are actually performing quite well as regions for us. Of course, we're striving for even higher growth in these regions. But we do have a pipeline of good customers as well as other projects ongoing as well to increase our speed of growth in these markets.

And overall, as well, our innovation engine in R&D will over the next 9 to 12 months also deliver additional opportunities and product launches for us as well that can support us in driving our growth further than where we have been so far. We are well under the way in the manufacturing upgrade that we have been working on for quite a long period of time. We have increased our capacity in our facility significantly. And with the last pieces of equipment that have come in now over the past 3 to 6 months, we are ready to be able to serve the market with that capacity.

The advantages in internalizing production, we have internalized a lot of our production through this period. The advantages on a gross margin perspective have not become visible to us yet due to the fact that we are running with lower volumes than what we had planned for.

But all in all, with a strong pipeline of new launches, a strong pipeline of customers as well. We do maintain a positive outlook for our ability to return to growth in next year as a company.

With that, please turn to Page 16, and we'll open up for questions and answers.

[Operator]

[Operator Instructions] And our first question comes from the line of Mattias Vadsten from SEB.

[Mattias Vadsten, analyst]

A few from me. The weakness that you're experiencing right now, is that an effect of mainly weaker momentum for LiveBac, I mean it sounds so. And are you then growing the ClinBac portfolio overall? And then if you could remind us on the split between those 2 product segments. That's the first one.

[Tom Rönnlund, executive]

Yes. Thanks, Mattias. Good question. And we are seeing a stronger momentum in ClinBac, yes, both in the U.S. as well as in the other regions. If we look at our sales split in Europe or in EMEA, it's almost exclusively, I would say, ClinBac offerings. And in APAC, it is about -- probably about 85% of our sales is based on ClinBac today. Whilst in the U.S., the relationship is somewhat different.

Overall, on a company level, it is approximately 50-50 split between the 2 offering types. And in the U.S., as I did mention, we've had -- we do have a couple of large customers who have gone through various types of product upgrades, which have impacted the amount of our ClinBac going into those products, which has had a bit of a [indiscernible] effect in this year. But if we look at other customers who have been recently launched over the past couple of years, we actually see a quite strong growth in that segment. So it is really in our LiveBac, LiveBac offering range where we have suffered this year.

[Mattias Vadsten, analyst]

Sorry, I was on mute. And then my next one, you said that you expect a small decline to net sales for the full year. Just to confirm, is that in organic terms or in absolute actual sales terms, just to understand better.

[Tom Rönnlund, executive]

It is on a reported basis, Mattias. And we -- of course, I mean, Q4 is not over at this moment. But we need to make sure that we catch up on the backlog that we got from Q3 and also making sure that everything goes out through the doors here before the end of the year. But we want to be a bit cautious here. So yes, that is correct.

[Mattias Vadsten, analyst]

Yes. I was just [ concerned ]. It would have been quite aggressive if it was organic, but -- then a little bit more about the ClinBac customers in the U.S. You spoke a little bit about it in the presentation, but you see potential for growth next year. And if the consumer weakens further, that may be tough in my opinion, any concrete incremental delta that you see? I mean you talked about both new product concepts and new customers, but can we get some more -- what are you seeing as the most important drivers in your book to achieve this?

[Tom Rönnlund, executive]

There's a couple of few important drivers. But I think recently, we have I mean we're expecting, for example, probably around 2, 3 new customers in ClinBac that we are in advanced negotiations with for launches in early next year. Those customers have not pulled back on their ambitions there. They see opportunities with our portfolio. These are quite sizable customers. Of course, the first orders during launch will not be huge, but they also build a foundation for future opportunities with ClinBac in the U.S.

Also a little bit further down the pipeline, we have some significantly large U.S.-based customers who are interested in our concept. Unfortunately, the business development timelines for these contracts is quite long. And of course, not all contracts turn into a success either. But as we have multiple of these in play, we do see an opportunity to actually have that as an additional growth driver for next year.

New product opportunities is another area. Of course, the gut-brain study data will be important to see if we can even based on this pilot study, as it's actually quite well powered with more than 100 patients, which there aren't many studies in this field actually today in that area. So if we have positive data there, we can potentially actually go to the market a bit quicker than sort of than normally a pilot study would allow.

Then our opportunities within [ Spores, Blis ] and symbiotics add to those opportunities there as well. But of course, I mean, we wish to make sure that we get the momentum back behind our LiveBac as well. They are an important contributor to us on an overall level. So that is also why we're making capabilities investments there to further increase the competitiveness of that portfolio as well in the changing marketplace.

So all in all, of course, it's dependent on how the U.S. consumers will behave. But we've also seen that clinically validated product concepts, most likely because the consumer actually feels a difference compared to taking products which doesn't have that clinical validation. Actually quite [ can fare ] well also in periods of downturn. But of course, it will be dependent on if the U.S. market comes to a screeching halt economically, that could affect the picture. But right now, we are not getting those signals from our customers.

[Mattias Vadsten, analyst]

Perfect. That leads me to my last question actually. On Blis, I mean, you didn't mention that in the report. How is this moving forward and update just to remind us of where you stand there would be perfect.

[Tom Rönnlund, executive]

Yes. So we haven't started the -- so we're currently producing and using certain Blis materials in products that we're delivering to customers. We have not yet started the launch of powder sales in the U.S., where we see the biggest opportunity on Blis. But that will happen here in early next year. It's been based on what we need to make sure that we have produced sufficient stability data on the strains that we have produced in-house.

So unfortunately, we have to wait in real time for that. But so far, it looks positive, but we need to gather additional months of data before we can go out with the powder launch, where we see bigger commercial opportunities and where we can really start to tap into the potential that, that represents.

[Operator]

And as there are currently no further questions, I will hand the word back to the speakers for any final comments. Please go ahead.

[Tom Rönnlund, executive]

Okay. Thank you for the attention this morning. Thank you for dialing in. And please turn to the last page of the presentation. And here, you also have our financial calendar for the coming year. And the next time we'll be together is on January 27, when we will present our fourth quarter and year-end report.

Looking forward to that, wishing you a nice weekend once you get there, and thank you for your attention.

[Operator]

This now concludes today's conference call. Thank you all for attending. You may now disconnect your line.