Probi AB
STO:PROB
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Probi AB
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Ladies and gentlemen, welcome to the Probi Q4 2017 report. [Operator Instructions]Today, I'm pleased to hand you over to CEO, Peter Nählstedt. Please begin.
Well, good morning, everyone, and welcome to Probi's Q4 conference call. My name is Peter Nählstedt, CEO of Probi, and I will present the summary of this last quarter and the progress made on our strategic goals. I'm also joined by Probi's CFO, Jörn Andreas, who is joining me in this presentation and will give you a deeper view on the financial situation. Next slide, please. The agenda, as I alluded to, will start with an overview from my side followed by the financial review by Jörn Andreas, and then I will finalize with our goals. And at the end of the call, we will, as I said, open the lines for questions.Next slide, please. Probi has, in short time, only over the last 3 years, become a significant player in the probiotics area. We obtained SEK 612 million of sales in 2017, with a 26% profitability. We operate in 4 centers: R&D, sales and marketing and management in Lund, Sweden; sales offices in U.S.A. and Singapore; and 2 production units in U.S.A. We offer our customers value as we have a sole focus on probiotics and the complete value chain, and we do have an edge in our strong product portfolio based on solid scientific background. We act as a fast, small and nimble company, but we do have the backing and the strength of an international group. Next slide, please. Coming into the financial situation then of the year, we had -- during the fourth quarter our sales and profitability suffered from a significant reduction of demand from one of our largest customers. The customer has been going through a destocking of a raw material that was purchased from Probi late 2016 and early 2017. Still, with this bad situation, for the full year, our total sales grew 38%, driven by the successful acquisition we made in U.S.A. and growth we have had with other customers. Our profitability in absolute numbers on EBITDA level is also positively developing, although the ratio was reduced from 2016. And the reason for the ratio reduction is due to the destocking situation and the changed product mix. But it is still well above our long-range target, which is over 20%. I think, in 2017, we made significant strides on our strategic agenda, and also some very specific milestones were hit in the quarter. We signed a major agreement with a global fast-moving consumer goods leader in our Functional Food business, which was one of our key targets for this year. We also delivered cross-sales synergies with product developed in Sweden sold by our acquired sales force in U.S.A. and commercialized by a new client in the U.S. as a women's product, and that's the FerroSorb concept. The FerroSorb concept is based on successful clinical trials here in Lund, and we have used those to submit the new health claim application in Europe based on the positive result.Next slide, please. So as explained on the earlier slide, the destocking impacted Consumer Healthcare during the fourth quarter, but of course, the area is still growing significantly due mainly by the acquisition. Our Functional Food business is rendering high interest with new customers and we think we have a good pipeline. The underlying volume growth in Functional Food of 2017 is offset by a decrease in royalty rate, but I'd like to mention that this is now the last year where we have this situation. And from now on, volume growth will equal sales growth in Functional Food for Probi. Next slide, please. In 2017, we have further worked on our -- improving our sales focus, and we have also strengthened our organization in U.S.A., in Europe and in Asia. And as you can see, we have a very strong year-over-year growth in Europe and in Asia with 58%. This is according to our plans. But I should mention we believe that we are -- only just out of the starting blocks of building up a significant business in this region. As you might note, our sales in Sweden is still larger than our sales in Europe. We do have now a strong North American sales footprint, and the growth is driven by our -- mainly by our acquisition. Next slide, please. I'd like to elaborate a little further on the deal we made with a global fast-moving consumer goods company. So the company will be launching our bacteria in North America in a category leading brand. The deal will have material and very significant impact on the Functional Food business as such and will be very important for our growth going forward. We are now working with the client on transferring our technology to the customer, and we look forward to launching in 2019. In the years to come after that, we can also look forward to possible other extensions in other markets as the company, as mentioned, has a global presence and plans for the brand. We think not only is this a significant milestone commercially for Probi, but it is also a recognition for our quality product, our reputation and shows our ability to create large business opportunities with large companies in the international arena, and we have, with it, fulfilled one of our strategic goals for 2017. Next slide, please. Another key success factor for Probi now and in the years to come is the ability to commercialize new science into new products. In iron uptake, we have 5 successful clinical trials showing 30% increase in iron uptake from a regular diet in women of childbearing age. This is important as it can help women avoid iron deficiency, which is common and impacts quality of life negatively. We have already commercialized this concept in Sweden, Europe and Asia. And now, we have a company with a top brand in U.S. moving ahead with the launch, and we've already made the first shipment. This deal is also important from the point that it is a synergy between the acquired operation and the Swedish legacy business. The product was sold by our new U.S. team. This would be manufactured as a finished product in our own facility in the U.S.A. and the customer enjoys a seamless experience from science, product idea and fully produced product. For FerroSorb specifically, the great scientific foundation I was alluding to has now been further expanded as we have new positive results on clinical trial design for our 5 studies. This means we were able to submit a new health claim application to the European Food Safety Authority, which of course, if it's approved, should lead to an increased success rate in Europe. Next slide, please. And with that, I -- introduction, I leave the word to Jörn Andreas for a presentation of our financials.
Thank you, Peter. And good morning, everyone, and thanks for joining us. Let me now move on with the financial review of the full year 2017. And for this, please turn to Page 11. Probi's net sales for the full year 2017 amounted to SEK 612 million, which is an increase of SEK 169 million or 38% in reported currency, from SEK 443 million in 2016. Organic growth was a negative SEK 49 million or minus 11%, as we are working through the destocking program initiated by one of our largest customers. Excluding the destocking, so organic growth with other customers was 24% or SEK 57 million for the full year 2017 and 11% for Q4 2017, respectively, compared with the prior year period. The full year growth was SEK 218 million or 49% year-on-year, corresponding to the currency-neutral base effect of 3 quarters of our acquired U.S. operation. EBITDA for the full year increased by 3% from the prior year, and the EBITDA margin was 25.7% in 2017. In comparing the margin with the preceding year, please remember that we are now consolidating Nutraceutix for the full year for the first time and that we have also high comparables due to extra campaign volumes that we shipped in the fourth quarter of 2016. Net income for the period decreased 32% to SEK 69 million versus 2016, and EPS decreased by 44% to SEK 6.06 per share. Please note, however, that 2016 results included a onetime gain of SEK 7.4 million in the financial result and 2017 figures are, of course, impacted by the PPA amortization and a onetime noncash tax charge due to the recent enactment of the U.S. tax reform. If you were to remove these items, adjusted EPS would be approximately SEK 8.72 per share for 2017. Please move now to Page 12 for the reconciliation of net income. For the full year 2017, EBIT increased to SEK 16 million compared to prior year, which excludes additional PPA amortization expenses, which totaled SEK 35 million in 2017. The financial result was SEK 18 million lower than prior year. This is mainly driven by a full year interest expense related to our borrowings and somewhat important comparable since -- as I already mentioned, since we had, in 2016, the onetime hedging gain of SEK 7.4 million. Tax expense was SEK 23 million in 2017, down SEK 2 million compared to 2016. I already mentioned that due to the recent enactment of the U.S. Tax Cuts and Jobs Act, Probi recognized a noncash tax charge of SEK 3 million in the tax result of the fourth quarter of 2017 coming from a valuation adjustment of the deferred tax assets, and this altered the high effective tax rate in the fourth quarter of 2017. Please turn to the next page, 13, to take a closer look at the cash flow generation. For the full year 2017, gross operating cash flow rose SEK 28 million to SEK 163 million, mainly driven by higher sales and solid cash generation in the acquired U.S. operations. CapEx increased by SEK 8 million, versus prior, to SEK 26 million, which reflects higher investments in R&D and our investment in process efficiency and quality improvement. As you remember from our previous presentation, the minus SEK 48 million cash flow from financing includes a dividend payment of SEK 11 million and the early redemption of bank borrowings of SEK 32 million that we made at the end of Q2 2017. Moving on to the next slide, 14, please, for a look at the balance sheet which remains strong. Net debt further decreased to SEK 21 million and leverage ratio to 0.14x EBITDA as a result of the solid cash flow generation. Total equity amount to SEK 885 million at the end of the period, which represents an equity ratio of 80%. With that, I'd like to hand it back to Peter.
Thank you very much, Jörn. We can go on to the next slide, and again to the next, which would be Slide #16. So we'd like to summarize now on 2017 and how we delivered on our goals. We set up the following goals for the year: To continue the Probi growth story and expand in Asia. We have had a significant deal pipeline and a strengthened organization in Asia. We've managed to grow our sales 58% in Asia, and we have launched new products both with new and with existing customers.We also wanted to capitalize on our strong assets in the Functional Food business area, and we have delivered a major agreement with a global fast-moving consumer goods company, and we have also had a successful introduction, for instance, of a new dairy product on one of the more important markets of Asia. We wanted to fully realize the synergies between Probi U.S.A., the acquired operation, and Probi Sweden, and we did see some very first important synergy deals delivered. The FerroSorb concept was sold by our U.S. sales force and manufactured in our own factory. And we have also launched a new range of Probi Select, which is based on science developed here in Lund, where we also saw a first product introduction in the U.S.A. in 2017. Finally, we know what made Probi successful in the first place. It is the solid foundation on science. And we also, while we are expanding, need to stick to our roots, continue to generate world-class clinical documentation. During the year, we concluded 5 clinical trials and had a successful outcome on certain endpoints in all. Based on one of them, we were able to resubmit a new EFSA application, which, of course, we are hopeful will have an approval in 2018. Next slide, please. As I said, we see a great opportunity for Probi to grow in all important markets. And to continue our growth, we need to keep investing in key growth areas of our organization, clinical trials, product development and manufacturing capabilities. And even though we are, at the moment, going through this period of destocking, which we sent out a profit warning about in September of 2017 for -- which will impact our quarter 3, quarter 4 and quarter 1. So even in a situation when we are experiencing that, we think it is important that Probi keeps on investing into organization and in product development and in the manufacturing capability so that we can grow our current partnerships, enter new markets, develop new products and also enter new indications. So we want to maintain our strategic direction also in a short-term headwind that we're currently experiencing. And the board and the CEO, myself, we have balanced the need of those decided investments versus the short-term shareholder return with the dividend, and have concluded that our company will create much stronger shareholder value by investing funds into growth areas. The decision is based on the business development that we saw in 2017, which we have explained, and will also, on the investment decisions we made in that year, to create future growth platforms for Probi. It does not impact our dividend policy, and it should not be seen as a prediction of our business performance in 2018 or a potential change in policy. I believe in continuing to invest to build the leading probiotic company. And with that, we can leave the lines for questions.
[Operator Instructions] And we have one question from the line of Björn Olander from Mugarta Equity Research.
I have -- start with the destocking, its impacts. I mean, this was mentioned in the Q3 report and so it shouldn't be a surprise. What you did mention in the Q3 was that the impact in that quarter was less than SEK 50 million, and that it would be a more severe impact in Q4. So of course, what was the impact in Q4 for this effect?
Yes. So Björn, you're right, we -- let me answer the question this way. When we made the profit warning in September, we said the impact would be about SEK 50 million per quarter. And after 2 quarters, we are on that track, meaning that the total destocking effect is a little above SEK 100 million, for both these quarters combined.
Okay, so for the both. And then you also -- as you also mentioned in the Q3, you expected a negative impact also in Q1. So first of all, what type of visibility do you have on that? Is that sort of already quite determined you to order procedures and so on? Or do you have visibility on the impact of Q1 as well?
Yes, we still believe in the outlook we gave, which was around SEK 50 million per quarter for these 3 quarters. And we believe -- but we do believe that quarter 1 will have a similar impact as we saw in quarter 4.
Okay. So last quarter, dynamic question then, you don't mention anything about Q2. So of course, the natural question would be would it be impacting in Q2 as well, do you think?
I think, for now, we are not announcing anything like that. We are following the situation with our customers very carefully, and then -- so that we can start to see how the business picks up later in the year. But our lead time is not extending all the way into quarter 2. So that's not known.
Okay. So there is a risk that there could be some negative impact also in Q2?
No, I wouldn't say that. But we don't judge that as we'd -- we think that the business will start to pick up in quarter 2.
Okay. Yes, that's about the quarter, but a more sort of forward-looking and important issue, I think, is the agreement in Functional Foods for North America that you recently announced. That, of course, have a major impact for the smaller business area of Functional Food. Could you elaborate a bit about the potential for this agreement in North America, sales levels and so on?
So what we said is that the deal will be material for Probi for sure, for the total group. And it is very, very significant for our Functional Food business area. And obviously, with the North American market being so much larger than the Swedish market and that this product is -- our bacteria will be introduced in an existing category brand, it will be significant. But I don't want to go into exactly how much or so on, because that prediction doesn't really exist on our side. This is also a little bit exactly when into -- in 2019 that we can see the launch, and that's also unclear at this time. But we know that we have a binding agreement, we have a committed project, which is ongoing, and the launch is targeted for 2019.
And this is on an existing brand, it sounds like a sort of major player. And this, of course, needs to be sort of implemented in the processes and so on. But it seems like it's -- you mentioned the second half of 2019, that's 1.5 years away. Does it have to take that long to launch a potential for positive surprise time-wise?
Of course. I mean, it's in our interest and also in the customers' that we complete this process as fast as we can. But the timetable is stretching into around the half year mark of 2019. So -- but exactly as you said, Björn, our task is not at all of the timeline, our task is to do it as fast as we can.
Yes, exactly. You also mentioned in this call that this is sort of a -- indicated this as a major player with a global footprint, at least also outside North America. Although that's not part of the current deal, is that something that you are sort of looking into to extend the agreement to outside North America?
Yes, the short answer is yes, that's a possibility, but further down the line in timing. I should just clarify, Björn, that the reason for -- it is in multiple different SKUs that the customer is developing, which is also why it's a little complex to give predictions.
Okay. But it will the sort of one launch with a broad variety of products? Or will products be sort of taken up one by one?
No, it should be a broad introduction as we understand it.
Okay. Last question, you also mentioned that -- and explained the decision to not pay on the dividend this year. What is the -- do you see major acquisitions as one of the reasons for this or is it more internal investments?
Yes, so there are several areas of internal investments that we want to do, including investing in more clinical trials and manufacturing capability, for sure. But I think when it comes acquisitions, we have had the search light on for the last time, and if something is becoming very close, we want to be able to act and act fast, and then we think it's a good idea to have a strong cash position in the company.
[Operator Instructions]
We have some questions that came in over e-mail that we could answer in between. And their one question is around Ipsen, the Ipsen agreement that we announced last year already developing. So we think that Ipsen launched in the market that they committed to, the 3 markets they committed to in 2017. And they are progressing to 5 more markets in 2018. What we see is that business -- Ipsen's business model of marketing to health care practitioner, it does, as expected, take a little bit of time before we see the buildup in orders. But we started to see some positive signs in one of the major markets that they launched in, and -- but the business will build up during '18 and will be far from the full effect of the deal in '18.
And we have one more question from the telephone line from David Zetterlund from Invium Partners.
Again, on the global Functional Foods deal, you say that the products will be launched mid-'19. But does that mean that the client would not -- or the customer would not order before that? Or could there be some inventory build in the first half of '19 in anticipation of the -- of that launch?
There will be a little bit of orders before, most likely as we're making pilot runs and so on. But as this is a Functional Foods deal, the business model is more based on the customer sales than product shipment over revenue. So the major impact would be after the launch.
Okay. And what kind of revenue is that, is that a royalty stream or is it product sales?
No, it is a royalty stream.
[Operator Instructions] And as we have no further questions from the telephone lines, I'll hand back to the conference to our speakers.
Well, thank you for your attention and your questions, and we look forward to present later in the year as we go ahead with our Q1 report.