Probi AB

STO:PROB

Earnings Call Analysis

Probi's Q3 Results: Sales Decline Amid Operational Improvements

In Q3 2024, Probi reported net sales of SEK 144 million, a decline of 8% year-over-year, with organic growth down 5%. However, the EBITDA margin improved to 20%, up from 18% the previous year. The EMEA region saw significant year-to-date growth of 29%, while APAC struggled due to economic challenges in China. New product launches, including Probi Sense focused on cognitive health, are underway. Management remains confident in aligning 2024 results with last year, emphasizing operational enhancements and upcoming marketing efforts in Q4.

Strong Performance Amidst Challenges

Probi reported SEK 144 million in net sales for Q3 2024, reflecting a 5% decline in organic growth compared to the same quarter last year, showcasing the company's efforts to navigate a challenging environment dominated by a contraction in the U.S. probiotic market. However, the company also noted that EBITDA margin improved to 20%, an increase of 2 percentage points from Q3 2023, signaling operational efficiencies taking hold.

Regional Insights: Americas, EMEA, and APAC

The company’s U.S. operations, which represent 75% of sales, faced a contraction as the overall probiotic market experienced fluctuations following pandemic peaks. The EMEA region demonstrated a strong performance with a 29% increase in sales year-to-date, driven by normalization after a significant excess inventory correction in 2023. Conversely, sales in the APAC region fell short of expectations, primarily due to an economic slowdown in China, which impacted customer demand and order frequency.

Strategic Initiatives: Branding and Product Launches

Notably, Probi announced a rebranding of its B2C product line in the Nordics, which is expected to yield positive results moving forward. The company plans to intensify marketing campaigns in Q4 and has launched a new product, Probi Sense, aimed at enhancing their product offerings in mental health. The company views these developments as crucial steps in leveraging their market presence.

Cost Management and Operational Efficiency

Probi demonstrated prudent cost management this quarter, with a focus on operational improvements rather than merely cutting expenses. While there was an acknowledgment of the challenges in regions like APAC, the management indicated confidence in the sustained improvements in production efficiencies. Operating cash flow for the nine-month period stands at SEK 85 million, underscoring solid cash generation despite recent sales headwinds.

Outlook and Market Expectations

Looking forward, Probi anticipates maintaining performance in line with the results from last year, reaffirming this outlook in their discussions. While there are no explicit revenue forecasts, the overall North American market is projected to experience a modest growth rate of 2% to 3% going forward, providing a cautious yet optimistic backdrop for the company's future growth.

Earnings Call Transcript 2024-Q3

[Operator]

Welcome to Probi Q3 Report 2024. [Operator Instructions] Now I will hand the conference over to CEO, Anita Johansen; and CFO, Per Lindblad. Please go ahead.

[Anita Johansen, executive]

Good morning. Welcome, and thank you for dialing in to Probi's presentation of our Q3 results for 2024. With me, I have Per Lindblad, the CFO of Probi. And my name is Anita Johansen, I'm the CEO of Probi.

Please take a few moments to familiarize yourself with the safe harbor statements. And this is the agenda of our presentation today. So here are the highlights of Q3, which in contrast to the second quarter was a slow quarter.

On the right side, you can see that the net sales totaled SEK 144 million and the EBITDA margin of Q3 was 20%. Per will talk a little bit more about these numbers in the coming slides.

With regards to our business operations, this quarter was characterized by the following highlights. Our sales activities continue with strong customer engagements through a workshop we had in APAC. We had trade show exhibition and customer meetings. Also, we have completed a rebranding of our business-to-consumer product line in the Nordics, and we are now finalizing a new corporate identity to also enhance our market presence for the B2B. Our optimization efforts in our U.S. operations are now yielding tangible results, and we can already see the improvements.

Our new consumer product, Probi Sense, which continues the strain, HEAL9, was launched in the Nordics just after the quarter closed. And from a research perspective, we have several interesting and exciting new results. First of all, we have a new study in mice that suggests that our strain, HEAL9, may serve as a potential for a prudent option for mitigating mild cognitive impairment and potentially even Alzheimer's disease.

Also, we have recently announced a research collaboration and an intention to collaborate on a new study with Global BHP BrainTrust and the FINGERS Brain Health Institute, which is aimed at reducing dementia risk. Lastly, we also successfully completed estimate a 4-pillar audit in our U.S. operations, and this will cement our commitment to sustainable and ethical business practices.

And now I will hand over to Per for the financial review.

[Per Lindblad, executive]

Thank you, Anita. Yes, the sales in Q3 was SEK 144 million. But I'll also highlight our business is 75% in the U.S. Hence, the organic growth is the most relevant metric to gauge the overall sales performance.

In Q3, we saw organic growth of 5% down versus same quarter in 2023. But also what you see here is that the reported growth is down 8% versus last year. So the relevant context for this result is that the overall U.S. probiotic market on a volume basis has contracted since the peak under the pandemic. This is according to the leading market research source, Euromonitor. Beyond this, we also saw various timing impacts in Q3.

For the other markets being EMEA. Overall, EMEA was flat versus last year. That is actually covering that B2B has overall very good traction, but B2C was impacted by timing as we are positioning to leverage the new branding in Q4. The growth in APAC region is negatively impacted by the general economic slowdown in China, and I will cover a little bit more in the following slides.

For EBITDA, the result is 20% in Q3. This is an improvement of EBITDA margin of 2 percentage points against Q3 last year. And we find that quite exciting because this is coming, as Anita said, that we have seen improvements in our production KPIs and in Q3, we actually see those improvements starting to flow into the P&L and improving the gross profit and the EBITDA.

Now the regional segments on a year-to-date basis. Again, Americas in constant currency down 1% versus last year. I mentioned earlier the relevant contracts with the contracted market. But we will also really focus now, and that's what our sales team is doing, is to build the pipeline. That's what it's all about. And this will involve various activities, including that on site seeing next week, we'll promote really at the major U.S. trade show, SupplySide West, in that region. And here, we'll showcase both the new branding as well as launch of the metabolic health concept.

Specifically for the U.S., the gross profit margin is down on a year-to-date basis. But very importantly, it was actually up in Q3. So in H1, we saw that gross profit was impacted by the added resources, for example, in operations to facilitate the improvement in production, and the result is exactly what we see now. And we are, as mentioned, quite excited for this.

EMEA sales is up significantly compared to 2023, actually, 29% on a year-to-date basis. Most of those improvements is related to low comparisons in 2023. We already mentioned that we have a few big accounts which had to reduce overstocking in '23. And now that EMEA sales is normalizing, this is a favorable impact. And we also, in '23, had very significant impact from in-sourcing of our B2C business.

The sales in Q3 is actually at level with last year. And as mentioned, this is good news as B2C, if reduced, should facilitate the new branding in Q4. The high growth in EMEA helped Probi overall to improve profitability. This, as EMEA has, as you can tell from the slides, an above-average profitability. So this is driving the overall profitability for Probi. Yet note that the margin is below last year, specifically for EMEA, though that is having very specific reasons in customer and product mix.

Now on APAC. Sales in Q3 was below expectations and come after similar soft sales in previous quarters. Sales in the APAC region was impacted by a general economic slowdown specifically in China and softer market conditions, which has caused delays in product launches and reduced commercial structure.

Probi continued its market activity at a high pace in the region to maintain momentum and force a long-term relationship. But importantly, Probi has maintained the market position and not lost any customers. On the gross margin inventory, it was up versus last year, yet on a year-to-date impacted by adverse customer mix.

The net income for Q3 as compared to Q3 last year shows the sales volume was down, as reported earlier, organically 5%, which is here quantified an adverse volume impact of SEK 3.5 million. The gross profit is favorably impacted due to the improved margins in Q3, SEK 2.4 million.

OpEx is improved, which as mentioned in the report, for example, higher capitalization of R&D costs, timing of marketing costs for B2C and a few other parts. Overall, impact is 0.5 for the quarter. The financial result is also driven by FX gains and loss for bank accounts and [ bond ] currency. And overall, this means that net income is SEK 4.0 million for the quarter, which compares to SEK 6.4 million last year and hence, SEK 2.4 million found in the quarter.

Solid cash generation on a year-to-date basis. Operating cash flow of SEK 85 million for the 9-month period. We continue to invest in Q3, and now it's at the level of SEK 38 million year-to-date. This CapEx cover both plant and machine in our production facilities, but also R&D project costs to support the sales pipeline.

Financing by large is the lease cost related to our 2 production sites in the U.S. And as this is a year-to-date statement, we also include the Q2 dividend payout of SEK 50 million. All in all, resulting of a cash end-of-period of SEK 349 million. And now I'd like to hand over to Anita.

[Anita Johansen, executive]

Thank you, Per. So this past year has been a pivotal period of internal transformation aimed at unlocking the full potential of Probi. Let me emphasize 3 key focus areas where we are seeing progress.

One, we've seen tangible improvements in our operations. And two, we continue to build new clients on our product portfolio, and we continue to bring new state-of-the-art advanced biotics solutions to market. And three, we have been investing in our marketing and sales resources and strengthening and reinventing our market presence, and we will continue to focus hard on our efforts to accelerating our growth.

So we are proud of the progress so far, although we do recognize it's an ongoing journey and still a work for me. We're committed to maintaining a steady course with a focus on long-term growth and sustainable success. So this concludes our presentation of the Q3 interim report 2024, and now there's time for questions.

[Operator]

[Operator Instructions] The next question comes from Philip Ekengren from ABG SC.

[Philip Ekengren, analyst]

I have a few questions, and I plan to take them one by one. But first, if we can get some color on the different regions. So EMEA was strong in Q2 and flat now. I would like some clarification on the commercial efforts you're making in the Nordic region related to the B2C business. Did they start now during Q3 and will continue in Q4? Or should we expect this to start yielding some results on sales already in Q4?

[Anita Johansen, executive]

So I can start and maybe Per can follow up. So first of all, what you will see now is you go out to, for example, in the Swedish pharmacies, you will see our products are now getting a new artwork, basically. So a new design, and we're rolling this out starting early October. So you will see that out in the pharmacies now.

Because of that rollout of new artwork, we have, how do you say that, we have declined the sales of the old artwork. Obviously, we want to have this change over as quickly as possible. So we have had limited sales to the pharmacies in the last few months, and now we are expecting to fill up the sales in the coming months in the fourth quarter.

And also this fourth quarter now when we have the new artwork in place and also our new introduction of Probi Sense, so a new launch, we will then intensify the campaigns with our customers, the pharmacies in the Nordic region. So the campaigns will increase, and hopefully, we will see -- we expect to see much more activity. I don't know if you want to add anything, Per.

[Per Lindblad, executive]

No, I think that covers very well.

[Philip Ekengren, analyst]

Perfect. Very clear. And if we look at APAC, so China is comparing negatively here. Would you like to elaborate what's happening in the market and if you are making any mitigating activities to protect sales going forward?

[Anita Johansen, executive]

Yes. I mean, what is happening in the APAC market, what we see is specifically related to China. And everybody knows that when you look into China right now, they have some macroeconomic challenges overall in the Chinese market and consumers are carefully considering where to spend their money. So that, of course, affects our customers in China.

They have -- they are putting consumer products to market with our ingredients. So our customers are seeing decline in the sales. And hence, they are reducing the need for ingredients for a while. So they are not putting orders as often as we would have expected, so to speak. They have more inventory than expected. So that's basically what we see from our customers, that they are seeing slower sales out. We are not seeing any, how do you say, we're not losing any customers, but they're just seeing slower markets.

[Per Lindblad, executive]

Yes. And adding to this, this is the short-term impact. But clearly, the APAC market is still very, very attractive. It's huge. So we have these bumps on the roads, but we continue to invest in the market. There's high focus on the team. We have development tools specifically targeting this market. So we see these bumps, but we have steady course ahead.

[Anita Johansen, executive]

And maybe I can add to that. I mean, I've been in APAC several times this year. And last time I was in Bangkok, where we had a full day with more than 20 customers, 20 different companies that we are engaging with. And they are also from China, but also other markets in APAC. And there's a very high interest to Probi's products, both the existing products that we've had for a long time, but also our new innovations, there's high interest. But also, of course, it will take time for our customers to implement in their innovation portfolios. We know that. But the interest is definitely there also in China.

[Philip Ekengren, analyst]

Got it. And in the U.S., you're highlighting that the demand is lower and volumes were lower. Can you say anything about what you expect going forward in U.S. specifically?

[Per Lindblad, executive]

It is very, very difficult to predict the market. But 1 source, which we are kind of putting effort and credit to, is Euromonitor, the leading market research company. They are having an outlook for the North American market of 2% to 3% value growth over the future years. So we think that the slowdown we are seeing is coming after a record year under the pandemic. So we are not concerned for the overall market outlook in the Americas.

But a little bit like APAC in that we see in various parts of our business that there's ups and downs, especially by quarters, but also by years. So again, it's steady course, and we continue to invest in the North American market. It's huge for us and the market is huge, so it's steady course.

[Philip Ekengren, analyst]

Got it. And if we look at the cost control. You had some very good cost control protected the margins throughout this quarter. Would you like to give some more color on that and maybe comment on what we can expect in the coming quarters as well.

[Per Lindblad, executive]

First of all, let me say, we will today not give forward-looking statements. But as we read in our report and we also use language to say that we are quite excited by the improvements and the same as we say, tangible improvements in our production KPIs is obviously excellent news. And I think we can say there's obviously no reason to think that it should go backwards. We have invested lots of resources, as we said earlier, to accomplish these results. So we are confident that these results are here to stay. And yes, we are excited by the results and...

[Anita Johansen, executive]

Yes. Maybe I can add to that because if I understand your question correct, I mean, yes, we have taken very prudent cost control in this quarter. We know we had some challenges on our sales, especially from APAC. Hence, we've also been limiting our expenses, so to speak, and only traveling when it's absolutely needed. When we have to see customers, of course, we will travel. But we're taking this control everyone internally to make sure we're not spending money unwisely.

[Philip Ekengren, analyst]

Sounds very good. And then final question from me...

[Per Lindblad, executive]

But adding to that -- okay.

[Philip Ekengren, analyst]

Sorry, Per, please go ahead.

[Per Lindblad, executive]

No, I wanted to build on Anita's comment that cost control is not kind of the main driving factor in the numbers. It is what we said. It's production. It is kind of timing in OpEx overall. And yes, we are a small company. We manage our money well. We spend only what is needed, and that obviously helps. But it's not driving the EBITDA in the quarter. I wanted to make that clear.

[Anita Johansen, executive]

Thank you, Philip. Do you have more questions?

[Philip Ekengren, analyst]

Maybe just a final question. You previously said that you wanted to stay in line with 2023 numbers. Is it still the goal for this year?

[Anita Johansen, executive]

Yes, we have no other information than what we have previously declared in the Q2 report, which is expecting to be in line with last year's result. Yes.

[Operator]

[Operator Instructions] The next question comes from Rolf Karp from [indiscernible].

[Unknown Analyst]

Just 2 questions. Could you please give us some flavor around competition? What are the competitors doing currently? And what do you see going forward?

[Anita Johansen, executive]

Thank you, Rolf, on that question. On competition, I mean, I can mostly speak about Probi, obviously. But of course, we see consolidation in the industry, right? So some of our competitors have created some major, yes, mergers and acquisitions, basically. So they are probably busy with their internally focused alignment of their organization, I would guess. Obviously, I do not know. So that's 1 thing.

Other than that, I don't really know. I mean, I think what Probi really can benefit from is we have excellent science. And also we have science and product launches in new areas where our competitors are not really settled at this point in time. So we have from last year and also this year now in the Nordics with our Probi Sense, the probiotics that is beneficial for our mental health, that is something that is quite unique in the industry.

And as Per slightly alluded to in one of his comments in the slides. Next week, we are going to SupplySide West, which is the biggest event in the North America. And we are actually going to launch not only our new updated branding and visual identity, but we're also going to launch a new product next week. So follow us. And that's also in an area that is very new in the probiotics industry, which is metabolic health.

So I mean, competition, obviously, they are busy. But we don't feel like we are threatened at this point with our product launches and our business.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Anita Johansen, executive]

Thank you. So now please note this financial calendar, which is updated dates for the coming year where we would, of course, invite you to join us and listen to how it's going for Probi. And then I'll just add back to say thank you for listening, and have a wonderful rest of your day. Thank you.