BioGaia AB (publ) (BIOGB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the BioGaia Q4 Report 2020. Today, I'm pleased to present Isabelle Ducellier, CEO. [Operator Instructions] Please begin your meeting.

Yes. Thank you, and good morning, everybody. Isabelle and Alex here. So we're going to present you the quarter 4 2020 and speak about the whole year, 2020. So if you go to Page 2, regarding our executive summary, what is important to remember. First, our total sales are minus 10%. But we have really to emphasize the fact that we've been particularly helped by the weak Swedish krona, especially towards the dollar. And so if you exclude this currency impact, the sales are down on the Q4 by only 4%. And obviously, as we said before, the main explanation, I mean, on top of the exchange is the currency is, as well, the COVID-19. So if we look at the full year perspective, our sales are down with 3% and 2% if you exclude the currency impact. Looking at region. The sales decreased in EMEA and APAC slightly but they increased in Americas. And that is mainly thanks to the omnichannel strategy that we started to implement 2 years ago. Looking at the product. The sales decreased somewhat for BioGaia Protectis tablets but increased for BioGaia Prodentis and BioGaia Gastrus. And regarding the latest decision, you might have read the trust message, I mean, yesterday evening. The Board proposed at the upcoming Annual General Meeting on the 6th May 2021, approval ordinary dividend according to the policy of SEK 3.41 per share compared to SEK 3.75 last year. Next page, please. Well, the quarter 4, what has happened? So basically, on the 12th of October, we already warned you that the estimated sales will be negatively affected, both in quarter 3 and quarter 4. On the 30th of October, we announced that we have successfully completed a directed issue and the directed issue was oversubscribed. And we have the pleasure to welcome on board 2 strategic investors, Cargill, the American company, very strong in nutrition, both the animal health and human; and EQT Public Value Fund. Yesterday evening, after the Board, we announced as well that the company has decided to revise the dividend policy to pay a shareholder dividend equal to 50% of profit after tax in the parent company compared to a previous 40%. Next page, please. Looking at the different launches and despite the difficult situation not being able to launch during big events due to the COVID situation, we'll be, anyway, able to launch a couple of new products in new countries. I'm not going to go through the whole list. I just would like to emphasize the launch of BioGaia Prodentis MUM. And you can see the packaging done in Japan. So in Japan, as you know, our biggest SKU is Prodentis, so oral health. And so we decided to extend the range available for patients. And this BioGaia Prodentis MUM is, as it says, for pregnant woman, who happens to have much more problem with gums, more bleeding gums due to the hormone changing in the body. And this new product have been extremely well received by the dentists and the patients in Japan. I would like as well to emphasizing in the oral health the launch of BioGaia Prodentis in the U.S. Here as well, very promising, first -- I mean, first order and discussion with the dentists in the U.S. So we start with Prodentis for adults, really focusing on it. And there will be more to come in the future still in the oral health in the U.S. Next page, please. If you look at the set of segments. For the quarter 4, the pediatrics has been decreasing by 11%, which is mainly due to the decrease in sales of the Protectis tablets, whereas the drops remain flat. For the adult segment, that decreased by 5%. And here as well, it's mainly due to the Protectis tablet. Having said that, I just would like to emphasize the fact that if we look at Protectis tablets with vitamin D or without, I mean, actually, the Protectis tablet plus vitamin D increased quite a lot but the normal tablet decreased. And here as well, that's due to the COVID situation. Consumers are very well aware that you need to boost your immune system and that vitamin D is appropriate for that. And therefore, we could see the increase of the Protectis tablet plus vitamin D. On the year basis, we ended up with a decrease of minus 3%, equally spread between pediatrics and adult. Next page, please. I mean regarding the gross margin per segment, well, it's pretty stable, both at quarter 4 level and on the year basis. So I don't have too much more to add. So if we can go to the next page, please. Then we can look at the sales per geographical market. So starting with quarter 4, you will see a strong decrease in EMEA. This is still, I mean, us during Q3. We have a main issue in Italy. And that has affected, again, us a lot in the quarter 4. Okay, minus 22% is not really a nice figure to look at. But it's high -- I mean it's not a market where we're doing pretty well like France and Germany, Belgium and Eastern Europe. So on the year basis, we have minus 7% for EMEA. Looking at APAC, normally, we're used to a very strong increase in APAC. During the quarter, we are minus 2% and it's mainly due to Hong Kong. So Hong Kong has been double hurt by the COVID but as well with all the political and demonstration issue there on the country. So very, very much hurt. And it's a pretty big market for us in Asia. But in China, we keep growing very fast, both in the quarter and during the year. What is interesting to notice here is that we did a survey in China to see the brand awareness and the brand position of BioGaia drops. And we are very happy to announce that now, BioGaia drops for pediatrics, the #2 biggest brand for pediatrics products. So we are very, very happy about that. Looking at Americas, so we have a good quarter and a good year. It's mainly driven by North America. Lat Am, during the quarter 4, has been decreasing. On the year basis, Lat Am is flat. But here as well, if we try to remain positive, we've done here as well, we checked the sell-out. And on the year basis, 2020, in Lat Am, we were #3 brand for a long time. And at the end in November 2020, for the first time, we are #2 probiotics brand in Lat Am after Enterogermina, which is a brand owned by Sanofi. So we are very happy because as the first time it happened, we've taken market share in sell-out. So the figures are not extraordinary. But in this context, we've taken market share. Next page, please. Alex, if you can take us through the financial?

Okay. Yes. So we move to Slide #9, OpEx. So if we look at our OpEx, operating expenses, we see that our operating expenses increased with 10%. This can mainly be explained by negative currency effects. You can see that on the line called Other under OpEx Core. We have a cost of SEK 8.2 million versus basically 0 in the same period last year. And the other reason for the OpEx increase is that our noncore OpEx increased from SEK 7 million to SEK 8.3 million. And the noncore OpEx is basically the cost for MetaboGen and BioGaia Pharma, where we're expanding our activities. So if you add those 2 together, that is -- those are the main explanations why the costs were increasing compared to the same quarter last year. If we now look at our OpEx core, the different cost lines, you will see that our sales costs were 11% lower than last year for the quarter and for the full year, 7% over the last year. Our admin costs are 5% higher for the quarter and 6% higher for the year. If you look at our R&D costs, those are 29% higher, which then, of course, it looks like a lot. And one of the reasons is that during the quarter, we started several projects that we -- or clinical studies and projects that we could not really start in this third quarter due to the COVID-19 situation. So therefore, we have some costs in the fourth quarter which we should have had, so to speak, in the third quarter. And if you look at the full year for the R&D cost, it is still lower, 7% lower than in the previous year. But in the quarter, you see a higher cost. And then again, to summarize then, all in all, this means that our OpEx were 10% higher compared to last year. We're also -- in the quarter, we had a cost of about SEK 3 million for business development activities. Those are mainly activities then relating to evaluating potential acquisitions for the company. So we are active in that field. And we have -- the quarter has been negatively affected by those costs of SEK 3 million. But as you know, we have not pursued anything yet. We move on to the next slide, Slide #10, the profit and loss statement. To summarize then, you can see that our sales was down 10% and our gross profit down 9%. Our operating expenses for the quarter up 10%, as we just discussed. And that leads to an EBIT of SEK 45 million versus SEK 68 million in the previous year, so 34% down and a margin of 24% versus 33% in the last year. And then if we just then also look at the full year, since we have the full year behind us, you can see that our sales then declined 3%. Our gross profit also declined 3%. Our OpEx declined 1% and our EBIT declined 6%. And obviously, we are not happy with that. But considering the circumstances, we are trying to make the best of the situation. We move on to Slide #11, cash flow. So if we look at the cash flow from operating activities before changes in working capital, it was about SEK 30 million versus SEK 50 million in the same period last year. And we have the changes in working capital, which were SEK 25 million, which is what we should have. I mean as we have a decline in sales, we should have positive effects on the working capital. So that effect was mainly in the quarter, SEK 25 million. And then the cash flow from operating activities after changes in working capital was about SEK 55 million compared to SEK 17 million in the last year. And then, of course, we have this very large item of cash flow from financing activities, which is the cash flow from the directed issue that we made, leading to an overall cash flow for the period of about SEK 1.2 billion. And the cash at the end of the period is about SEK 1.5 billion. So with that, I hand over to Isabelle for some concluding remarks.

Thank you. And my first point is regarding the situation in Italy and Spain because that's basically where most of the loss then comes from. And as we already explained, it's mainly due to the lockdown situation during the COVID-19. And -- because consumers could not go to the pharmacy to buy the product. They could not go to the doctor to be recommended to buy the product. And on top of that, one of our key indications with probiotics is when we take it together with antibiotics. But as people stayed home, I mean, people have not been sick. So there have been no -- which is good, in a sense. But there has been no prescription of antibiotics and, therefore, no prescription of recommendation of probiotics. So that's one of the main reasons. Obviously, in the country where we've initiated the omnichannel strategy, the situation is really different. I mean it's a really, really good year for us in the U.S., which is really our biggest omnichannel pilot market. So that is extremely encouraging for the future. Here in the U.S., I mean we both expand the portfolio in terms of products, in terms of channel. So that's something that will help -- I mean that's really our benchmark for what we want to do in the future. In the meantime, I mean we've been really trying to monitor our costs closely. We knew that Q3 and Q4 were going to be a bit difficult in term of sales. And I think that's what we've been able to demonstrate. So even though -- I mean, obviously, I would more be happy to present a double-digit increase for 2020. It is not the case. But we remain confident that our long-term ambition are achievable. This omnichannel strategy implemented works. So we just have to leverage it in a broader number of countries. But now -- so we are ready for questions. So please, operator.

[Operator Instructions] The first question comes from Kristofer Liljeberg from Carnegie.

I have 4 questions, but let's take 3 now and then I'll get back to the queue. So first, really, how quickly do you think sales growth will return? So what are you hearing from your sales partners, distributors? What did they tell you about the demand situation? And maybe even more important, their inventories and the inventories among their customers? My second question relates to operating cost. I understand what you say about higher R&D costs in the quarter. It seems there have been some temporary effects. But when it comes to selling costs, what's the reason they're only down SEK 6 million year-over-year when there are no traveling exhibitions, et cetera? Is it so that you have done any larger consumer marketing campaigns affecting costs in the quarter? And then the third quarter, the new dividend policy, it looks a little bit strange since you have raised money and talking about being more active doing M&A. So why you also increase the dividend policy at the same time?

Thank you, Kristofer. So starting with your question number ahead, the one about how sales will return. Talking to our partner, basically, they say that the 2 first quarters are going to be, I mean, pretty stable, but that they see the vaccine effects starting for Q3 and Q4. So that's basically how they see the year. Regarding inventories, we've not seen any -- I mean we had a bit of an issue in the Q3, as we said -- discussed last time. But we don't think that there is a big inventory buildup at the partner level. They have been -- I mean they learned from Q2 to Q3. So they have been pretty cautious. And looking at the order book we have in front of us for Q1, we don't see any strange happening in terms of inventory. So that's for your first question. And then...

Sorry, a follow-up on that. So the sales decline of 4% organically in Q4, do you think that represents more where the underlying market was in -- or the end-user demand in the fourth quarter?

That's a good question. I do believe that demand is stronger than that. Availability has been still an issue. And all the small sickness that normally you should have during winter has not happened. But the prevention trend is very big. I mean we got so much question about the immune system, how probiotics works. That -- I think that part of the business, we'll be able to sustain a bigger demand than minus 4% for the quarter to come.

Okay. And when you say feedback from sales partners, sales will be stable in the first 2 quarters, is that...

I think that will be stable plus and -- but rebounds in Q3, Q4.

Okay. So a little bit of growth, both in first and second quarter, best guess. Okay.

If we go to operating costs regarding the R&D, so as Alex explained, indeed, some delayed. We've not been able to do the clinical study, the recruitment. I mean to be as -- we cannot recruit patients to hospital. And that's what that has impacted from Q3 to Q4...

But I'm more interested in -- I understand that. But the marketing costs are up, I think, SEK 70 million versus the third quarter.

Yes. But if you allow me to continue on R&D, I just wanted to say as well something is that we've initiated a study in [indiscernible] that was not in the budget and we started that in December. We've been contracted by [indiscernible] to perform a study to -- with their notice to see how if you take probiotics -- I mean Protectis, in that case, widely, with vitamin D, how it's going to have an impact on your immune system. So -- and that was not planned in the budget. But we found it so interesting to check that we say, okay, let's start that. The intervention period is about 6 months. So we have today recruited 130 people out of -- I mean we have to recruit 300 as far as I recall. We will have an endpoint in June. And we do expect to be able to communicate on the results in October. And normally, we don't communicate on the study we start. But it has been published on the website of the [indiscernible] so we can be very open with it. So but that's an explanation as well why the R&D increased by 29%. Now to your question about sales. So basically, yes, indeed, we've not been traveling. But you know our P&L better than us. And you know that traveling cost is not exactly the main part of our budget. We've basically increased some consumer campaign and it's mainly in the U.S. because here, we can monitor that when we invest more, we sell more. And therefore, we've been decided to increase our marketing investments mainly in the U.S. market and mainly to sustain traffic on the 4 main e-commerce platforms.

Okay. Interesting. So -- and will you -- was this something special for Q4? Or is this something you plan to continue?

I mean we want to focus on the most interesting market, and U.S. is one of these. So this over investment is going to continue in 2021. So yes, there is more to come on that side. But there is more product to be launched as well. So I mean U.S. will be a very key focus market for us in 2021.

And then just on the dividend.

Yes. So the dividend policy, I mean the proposition come from the Board yesterday. And basically, the decision has been taken to increase from 40% to 50%. It remains to be voted, of course, at the general assembly in May. And that's basically -- I mean we've always said 40%. And normally, we've been distributing much more and was more close to 100% than 40%. But in that case now we didn't deliver any -- distribute any extra dividend. So that's why -- and the situation of the company is pretty good. So that's why we've decided to propose this increase from 40% to 50%.

Okay. That -- it makes sense, of course, with extra dividend therefore.

[Operator Instructions] The next question comes from Daniel Albin from Danske Bank.

So I have 3 questions, and maybe we can take them one by one. The first question coming back to your medical marketing model. Wondering if you could elaborate a bit more on what type of doctor visits the main -- which is the main sales channel, if you could relate to which types of area would be interesting? And also a follow-up on that question. Maybe more long-term now, when doctor visits are becoming virtual, how do you see your sort of medical marketing model being long-lasting in, say, more virtual doctor visits? So that's the first question.

Yes. Thank you, Daniel, for that. Basically, the -- as 80% of our sales are pediatric products, normally, our partner are mainly visiting pediatricians. So -- and that remains the case. But we want to focus more on the adult portfolio. And within this adult portfolio, I think the type of doctors and physicians our partners are focusing on are mainly gastroenterologists. So if we look at France, we launched Gastrus in the quarter 3 2020. And -- but we prepared the launch by really talking to the gastroenterology association, finding some KOLs in the gastroenterology space. And that's exactly what Abbott is doing as well in Latin America. So a lot of -- I mean a lot of visits to gastroenterologists. For the U.S., we've been already visiting the pediatrician and the gastroenterologist. But the new type of physicians we started to visit is gynecologist because here, we want really to focus on the pregnant women. We want really to own that space, this 1,000 first day of life. When you enter into your last quarter of pregnancy, then the gynecologist in U.S. would recommend that you start to take Protectis because it's good for the mother and it's good for the baby. And then we start as well -- when they are visiting, their gynecologist will say, well, don't forget, when you deliver your baby, in order not to -- your baby to our colleagues, think about the drop. So -- and we've been even sponsoring these boxes that mothers receive. When they give birth at the hospital, they get boxes with a lot of samples. And now the BioGaia drop is in there. And then we start to talk to the mother as well with their toddler, while visiting their gynecologist. So all this gynecologic space is new to us for the U.S. and is, for the moment, mainly U.S., a bit Germany. And that -- and the late -- I mean the last group is more dentist. But that will be mainly in Japan and now in the U.S and here as well, it's very new. So we have contacted the Dental American Association, both for adult and soon in pediatrics as well. Does it answer your question?

Yes. And are meetings becoming more virtual also?

Yes. I mean that' a very interesting question because we are figuring out -- now we work very much on social media to reach the consumer digitally. So that's something we are really focusing on. We have as well developed a lot of online platform -- education platform towards healthcare professional. So we have the BioGaia Academy for pediatrician that -- we ran the second edition this year. Now we have developed a new one called -- it's our partner, Pediatric Education Platform. So here as well, they have modules but different type of strain, not only our, by the way, but more in general probiotics as well. So we had a lot of web seminar that on -- our partner launched that our partner can use. So for the partner and the consumer, we developed a lot of things. For the moment, I cannot say we've find exactly the way how we should work all this crew and all these doctors online. But that's something which is interesting to follow.

Okay. And my second question on future outlook and profitability. Are you still comfortable with the 34% EBIT margin level as a long-term target and going into next -- or going into 2021, 2022?

Yes. I mean that's the target we've been focusing on. My position is currently a bit high. But that's the target we've been given and that's the target we're going to follow.