BRAIN Biotech AG

XETRA:BNN

Earnings Call Transcript 2020-Q1

[Manfred Bender, CFO & Member of Management Board]

Here on our side, we are Adriaan Moelker, CEO of BRAIN; and myself, Manfred Bender, CFO. We will shortly present the numbers that we announced early this morning, and we will answer your questions about the numbers. And of course, we will also comment on other topics.But before we start, Adriaan Moelker, our CEO, who attends this call first time, will take the opportunity to introduce himself. Adriaan, it's your turn.

[Operator]

[Operator Instructions]

[Adriaan Moelker, Chairman of the Management Board & CEO]

Yes. Thank you, Manfred. Adriaan Moelker here. Thank you all for joining the call. I'm excited to be here myself and to have joined BRAIN few weeks ago. So this is week #4 for me. And let me first introduce myself shortly.I'm Dutch by nationality, and I have handled the -- several roles in several companies, particularly to the biotechnology space, and you must have read that in the announcement. I started my career in the early '90s with Gist-Brocades, which was a premier Dutch biotech company then. And through several companies, I added the experience in -- particularly in enzymes. So from Gist-Brocades, I went to the Genencor, which is now a part of DuPont, for 10 years. After that, in '05, I joined AB Enzymes in Darmstadt, here around the corner, and moved my family to Germany. So with that, I concluded, I don't know, roughly 20-plus years in enzymes and biotechnology. And in the last 6 years, I was at a printing consumables company called Flint Group, a private equity owned by Goldman Sachs and Koch Industries, totally different but, again, focusing on innovation, on pipeline management, on high-tech businesses and actually expanding my skills in different industries.I'm excited to join BRAIN, a new BRAIN, obviously, in my previous roles in Genencor, Gist and in AB Enzymes, not really as a competitor then but as a collaborator and as a very good technology supplier and service provider in specific technology areas. So I knew BRAIN all along, and I was excited to be asked to be a CEO of this company because I see it has vast potential. And I can tell you that in the last 4 weeks, I have done my rounds in the company here and learned a lot about the technology. And I've been really impressed with the depth of technology, the breadth of technology, which was exciting to see and which I look forward to bringing to commercial use and to the benefit of us all in the future.With that, I think I should conclude the introduction. I'm sure we will meet in the future, and we'll have a chance to exchange ideas and views. But just to conclude, let me say I look forward to all the discussions and to hearing what questions there may be in the future.Over to you, Manfred.

[Manfred Bender, CFO & Member of Management Board]

Thank you, Adriaan. So Adriaan and I agreed that the numbers of Q1, which ended December 31, are my numbers, so I will comment on these.Before I do that, I would like to give you some information about the other news we announced yesterday. You all -- I think you all have seen it. Dr. Marquart left the Supervisory Board with immediate effect as a result of differing opinions and some strategic questions in the Supervisory Board. We had to reflect Dr. Marquart's decision, and we say thank you to him for his contribution to the work at the Supervisory Board. Adriaan and I want to point out that this has no impact on our work as the Management Board. We will continue as we started and -- to run the company as we used -- as we are used to do.So now let's talk about the numbers, which I would say are quite good for the first quarter of the year '19/'20.First, a look back on the revenues in the fiscal year '18/'19. Revenues grew by 42% to a level of EUR 38.6 million in total for the previous year. The question now is will BRAIN continue the growth in 2019/2020.In Q1, revenues increased from EUR 9.4 million by 9.4% to EUR 10.3 million. Please keep in mind that we divested Monteil end of June last year like-for-like, means eliminating this effect, we would have shown an organic growth of 15.4%.Our segment, BioScience, contributed nicely to the overall growth. Revenues of this segment increased by 42.8% to EUR 4 million, coming from EUR 2.8 million in the previous year. This development is due to new and follow-up projects. You know that BioScience segment includes our new product development and our Tailor-Made Solutions business. Our science segment develops very well.Revenues of BioIndustrial decreased by 4.9% to EUR 6.3 million due to the divestment of Monteil and some delays in the commissioning of the new production facilities of Biocatalysts and WeissBioTech. Organically, this segment grew by 3.4%.We are now focused on B2B business. And with the increased production side of Biocatalysts and the new facilities of WeissBioTech, we are prepared for further growth of the segment, BioIndustrial.Let's have a look on the other side of the P&L, the expenses. Material expenses in total increased from EUR 3.5 million to EUR 4.2 million mainly due to higher material consumption in BioScience but also to slightly higher material costs in BioIndustrial. Personnel expenses in total increased slightly from EUR 4.2 million to EUR 4.5 million. But as a percentage of total operating performance, they have been stable. Other expenses decreased from EUR 2.2 million to EUR 2 million.As a result of the described development, EBITDA in Q1 amounted to minus EUR 0.2 million, which is slightly below the previous year's first quarter, where we had EUR 0.0 million or a red 0. Main reason is cost related with the production ramp-up of Biocatalysts and the move of WeissBioTech from France to Büttelborn.Outlook. We are confident that we are able to continue our significant growth in the coming quarters and that we are able to improve our profitability significantly.That's a very short run through our business in Q1 from our side. We hope that we have given you a good overview, and we are now prepared to answer your questions. Thank you very much.

[Operator]

[Operator Instructions]

[Markus Mayer, Lead Analyst of Chemicals]

It's Markus Mayer from Baader-Helvea. I would have several questions, if I may. Firstly, maybe, on Adriaan Moelker. What would be -- I think, obviously the most familiar? How have you the -- how have your first experience and observations, now as you're onboard for a month, differ from your expectations before you've started? That would be my first question.

[Adriaan Moelker, Chairman of the Management Board & CEO]

If I understood correctly, since the line is difficult to hear, how are my expectations now different from the expectations before I started.

[Markus Mayer, Lead Analyst of Chemicals]

Absolutely. Sorry for the bad line.

[Adriaan Moelker, Chairman of the Management Board & CEO]

Yes. So going in, I would have thought the new product development pipeline was smaller, but actually the new product development pipeline was larger than I anticipated. So there is lots of -- and you, no doubt, are -- were more aware of that than myself before I started. But product development pipeline, the projects there, which we don't share whether it's -- all these projects, they're very diverse and wide.The other thing I thought, the existing products business was slightly bigger, but the fact is that it's slightly less than what I had thought. But clearly, my vision -- my view is colored by my time at AB Enzymes. So -- and looking at this from the outside, it's slightly different.I have to say, and I said that before, that I've been totally impressed with the depth of technology that allows these projects to be run and that allows the breadth of opportunity exploration that BRAIN actually has across microorganisms, across enzymes, across bioactives. That is really broad. And great team, by the way. So I've been very pleased in learning all these things in the first 4 weeks.

[Markus Mayer, Lead Analyst of Chemicals]

Okay. And what are the largest challenges you have observed? Or what do you expect to be the largest challenges?

[Adriaan Moelker, Chairman of the Management Board & CEO]

Well, clearly, product reality is one of the largest challenges. We've got so many projects. But turning those projects into reality and getting it on product sales is essentially going -- and monetizing the investments that have been done is the biggest challenge.And then you talk about increasing the profits, you talk about EBITDA, you talk about increasing the product business. So -- but turning those projects into real money, if you like, is one of the biggest challenges for sure.

[Markus Mayer, Lead Analyst of Chemicals]

Okay. Then I have a question on Mr. Bender. You referred to start-up costs in the first 2 months of this year for Cardiff and also Büttelborn. Could you quantify this and also the higher material costs you've just referred maybe also and guidance on how are the start-up costs now? Also the material costs might evolve over the next quarters?

[Manfred Bender, CFO & Member of Management Board]

So I cannot really quantify that. Now I'm here, I would assume that the start-up costs were roughly EUR 250,000. The higher material costs, I have no special number for.

[Markus Mayer, Lead Analyst of Chemicals]

And would there be further start-up costs in also the second quarter of this year? And how long should we basically model in the start-up costs?

[Manfred Bender, CFO & Member of Management Board]

The second quarter will be impacted by the start-up costs as well.

[Adriaan Moelker, Chairman of the Management Board & CEO]

Any questions?

[Manfred Bender, CFO & Member of Management Board]

Any more questions?

[Dennis Berzhanin, Analyst]

This is Dennis Berzhanin from Pareto Securities. Can you hear me?

[Adriaan Moelker, Chairman of the Management Board & CEO]

Yes, we can.

[Dennis Berzhanin, Analyst]

Great. So my first question was just a follow-up to the previous question to Adriaan. First of all, welcome to the company. And my question was in relation to the -- your comment about -- that your expectation of the existing product business was not as big as you thought previously. I was wondering if you -- what are your plans to make this product sales business bigger? Are you thinking about a potential external growth or anything else like?

[Adriaan Moelker, Chairman of the Management Board & CEO]

Yes. And it's important topic, of course. I haven't really decided. But clearly, building the product business is a priority of mine, and particularly also in enzymes since that's where my experience, of course, has been built up. And to grow the enzymes business, it's a classical penetrating your existing markets more with the good products that we've got in WeissBioTech and in Biocatalysts. It's inventing new products that are in the pipeline, as you well know.But in the longer-term future, for sure, I'm also looking at acquisitions and looking at what should we do there. And of course, utilizing my network in the industry to assess and quantify these opportunities. So I'm not excluding anything, but let it be known that the growth of the product business is clearly a priority to me.

[Dennis Berzhanin, Analyst]

Great. Great. And then another follow-up on the previous question regarding the start-up costs. So thank you for quantifying the impact and it would be carried over to the second quarter.Now the other comment I noticed was in terms of the organic revenue growth for BioIndustrials, which was at 3.4%, and of course, this was held back from the missing business from these new production facilities. What are your aspirations to -- once these facilities are online, how much do you see the uptick in the organic revenue growth in the BioIndustrial segment?

[Manfred Bender, CFO & Member of Management Board]

Well, yes, that's a difficult question because that would mean a guidance now for the full year, which I'm not prepared to give you now. I would say with the running facilities, growth of that segment should move towards a high single-digit percentage.

[Dennis Berzhanin, Analyst]

Great. I appreciate that. I know it's a hard question to answer, but any kind of color is great. And last question, just switching to the BioScience. Just trying to understand the growth. There was a very good year-over-year growth, and it looks like this was a combination of things from higher volumes from existing business first...

[Manfred Bender, CFO & Member of Management Board]

Yes. Combination is one of our -- that was a combination of different positive things, if you see...

[Dennis Berzhanin, Analyst]

Right. Could you provide any color of how much of the growth was from the existing business? How much was these -- the new -- the addition of the new products?

[Manfred Bender, CFO & Member of Management Board]

So most of that growth was coming from existing business. I can't give you a detailed percentage, but it's -- most of that growth came from existing business.

[Falko Friedrichs, Research Analyst]

It's Falko from Deutsche Bank. Can you hear me?

[Manfred Bender, CFO & Member of Management Board]

Yes. Sure.

[Falko Friedrichs, Research Analyst]

I have 3 questions as well really, 2 for Mr. Moelker, please. Firstly, how do you plan to change the commercialization strategy of the company now? And will that require additional resources potentially such as additional sales teams going forward?Secondly, and have you met with all of the large partners and for your promising product candidates already? And do you intend to continue with all of them? Or do you rather look at everything very closely now and then potentially make any changes?And then the third question for Mr. Bender. And how sufficient is your cash balance to run the business over the next 1 to 2 years?

[Adriaan Moelker, Chairman of the Management Board & CEO]

Okay. Thank you. First, on the commercialization question and adding resources. The products business is running in some of the larger companies particularly. And so the larger companies have sales force. They have commercial products going forward. And it is always an assessment. Do we have enough people? Do we have the right mix? Do we have enough agent distributors?Clearly, expanding the business is a priority. Do we need to hire people for that? I'm not sure yet. And I'm, of course, in my fourth week assessing what resources we need and where. Where are we understaffed? Where are we overstaffed? And refining the organization accordingly. It may result in additional salespeople, but I'm not clear that that is the case yet. So sorry, I could not be able to give you any clarity there, but I'm in the assessment phase, that is something important for me to look at.Your second question, have I met with partners? I've met with several partners, not with all. The days have just been too short. But I've met with several, and I've gotten a good view on several of the projects that we're running.I have been to all of the larger companies, Biocatalysts, WeissBioTech, L. A. Schmitt, AnalytiCon Discovery. So I met with all of those. I've seen all of these businesses, so I'm getting my feet under the table for sure.And then the follow-on question to that was, if I remember well, would I keep all the projects? And I would say that is that -- probably not, but that is -- and a logical consequence of good project and portfolio management.In portfolio management, the way I see is we would always assess the potential and the risk and the fit with our strategy and the resources we've got. And we'd always be assessing whether it makes sense to continue or does it not make sense to continue. So I fully expect some projects to be expanded. I still expect some projects to be run as they are today, and I fully expect some projects to be stopped. Also I expect that we would add new projects where we think that makes sense. And of course, we have a pipeline of new ideas, which I cannot talk about here, but that is typical projects and portfolio management and actually part with the business of being in biotechnology every day. So the answer to that is, yes, we will continuously assess and upgrade our portfolio for the biggest value to the company.

[Manfred Bender, CFO & Member of Management Board]

Okay. And last question was sent to me. It's about our cash position and our balance sheet. So the answer is also related to Adriaan's answer which he gave. It depends. So for our daily business, which is running as planned, I'm happy with the cash position, and I think it's sufficient. But depending on strategic decisions, which we together will make in the coming weeks or months, maybe expanding new product development portfolio or not, that's depending on this, or doing any strategic things together with our partners or maybe increasing the capital of our subsidiaries of the -- our subsidiary company where we want to participate. So that strategic decision could cause the situation that we -- where we are looking for fresh money? Yes, that's theoretically possible, but not for the daily business.

[Falko Friedrichs, Research Analyst]

Okay. And one quick follow-up, if I may. Are all launch time lines for the large projects on track for the next 1, 2, 3 years? Or have you noticed any delays recently?

[Manfred Bender, CFO & Member of Management Board]

Sorry. Can you say it again?

[Falko Friedrichs, Research Analyst]

Of course. When it comes to the launch time lines for the large projects such as sugar, salt, green mining, are all of these on track over the next 1, 2, 3 years? Or have you noticed any delays?

[Manfred Bender, CFO & Member of Management Board]

No, we have not yet noticed any delays. So they are all more or less on track.

[Markus Mayer, Lead Analyst of Chemicals]

It's Markus Mayer again from Baader-Helvea. I have some -- an add-on question on this cash flow or cash burn question. Q3 had a somewhat higher cash burn than the quarters before. What is a good run rate for you? I guess Q3, you also had extra costs from this product, et cetera. Maybe you can guide us here what are the cash burn expectation for this year. And there is some -- also then a kind of development you also guided in your -- that you expect a significant growth and improvement in profitability. This is then also one-to-one mirrored in the cash flow as well?

[Manfred Bender, CFO & Member of Management Board]

That's difficult to make a guidance for that because it's depending on the debt development, of course, or revenue development, of course. So sorry, I can't give you a good guidance now for cash burn.

[Adriaan Moelker, Chairman of the Management Board & CEO]

Any other questions?

[Manfred Bender, CFO & Member of Management Board]

Any more questions?

[Unknown Analyst]

Yes. So can you hear me?

[Manfred Bender, CFO & Member of Management Board]

Yes.

[Adriaan Moelker, Chairman of the Management Board & CEO]

Yes.

[Unknown Analyst]

This is [indiscernible] Bank. First of all, a warm welcome and best regards to Adriaan. I have a question as well regarding the pipeline. So you mentioned already that there are quite a lot of pipelines and projects in the portfolio. I'm just wondering, which of these are you the most excited about? Where do you think there's a lot of potential? Which ones might you consider actually cutting if you have already assessed the situation? Or maybe you're still in the process of doing that? So that would be my first question.The second one is you -- the company took a EUR 880,000 hit on equity-accounted investments. Just wanted to clarify whether this is actually with regards to Monteil? Or where this position is coming from?And the last one would be, well, obviously you said in your guidance, which you provided when you released your full year numbers, that you expect adjusted EBITDA still to be negative but also to see quite an uptick in profitability in both segments. So I'm wondering, right now your EBITDA margin in BioIndustrial has dropped quite significantly, obviously, due to ramp-ups and new production facilities. So do you expect profitability to go up significantly over the next few quarters, especially in the second half of your year? Because ultimately, it has to if you so desire to improve your EBITDA result this year. So this would be kind of wondering when exactly you expect or whether you expect profitability uptick in this segment? And also which drivers in this year could be potentially leading to additional revenue growth in BioIndustrials? Yes, that would be all.

[Adriaan Moelker, Chairman of the Management Board & CEO]

Yes. Thank you for your question, and thank you for the welcome. And on a sidenote, I just feel really welcomed here. The people have been very welcoming. So just to give you a little bit of flavor.Which projects am I most excited with? I'm still in the assessment phase, of course. Very difficult to say that. But I can say this, is that I visited the SolasCure in London, the team there, and I was really excited with what has been shown there in the wound cleaning arena, something that I haven't totally anticipated. But it was very exciting to see and with a good team and a good plan going forward. So that's one that I would single out and say that is truly exciting.The others, too early to comment. But again, the breadth of technology is so amazing that it will take me a few months to get everything assessed and figured out. But I'm repeating myself when I say that the depth and breadth is really good, and it's more a question of how do we bring these projects to market as soon as possible and how do we get the commercial traction on those.Manfred, do you want to take the EBITDA question?

[Manfred Bender, CFO & Member of Management Board]

Yes, I will do. So your first question was about the EUR 800,000 equity investment. They are related to SolasCure. You know SolasCure, we -- at SolasCure, we only have a minority. So this is not consolidated and this is dispositioned.So about the earnings of -- or EBITDA of BioIndustrial, yes, that was burdened by extra costs for the move and the ramp-up of the factory in England. So that is the reason. And as I said earlier, we expect some other -- some more costs or additional costs coming in the next quarter, but then we will come to a normal level.And on the other side, we had a very strong -- in terms of margin, we had a very strong first quarter last year. So that is -- those are the reasons why this margin was weaker in first quarter 2019/2020. So with growing revenues, and we expect, of course, because Adriaan has good context to the business, we expect that we can improve our revenues in the run of the year. And with that growing business, we definitely will have also growing margin. Then I'm -- we are really confident.Any additional questions? So then we say thank you. And before we close the analyst call, I would like to remind you on some other meeting schedules: March 5, so next Thursday, our Annual General Meeting for the year 2019/'20 in Zwingenberg; and the next call will be on May 29, 2020, 6-month financials for the year 2019 and 2020. So maybe we meet some of you in Zwingenberg next week or we meet anywhere else in the world or at our next call in end of May. So thank you very much for attending our call and have a good day. And stay calm in the busy days of the stock exchange. Thank you very much.

[Adriaan Moelker, Chairman of the Management Board & CEO]

Thank you all.