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

Welcome to BioGaia Q1 Report for 2023. [Operator Instructions] Now I will hand the conference over to CEO, Isabelle Ducellier. Please, go ahead.

Thank you, and welcome to BioGaia Interim Management Statement Q1 '23, as we have already sent a revised profit warning. I think the good surprise effect is over, but I have some information that I think you will find interesting to add to that press release. So in this Q1 '23, once again, a very strong quarter. Now it's the seventh quarter in a row with a high double-digit increase. So, but record that's the first time in 1 quarter, then we sold more than SEK 300 million. So we sold SEK 366 million, which is our record for 1 quarter. So a lot of record after the record '22 year at SEK 1 billion turnover. So we are very happy about that. And as we've been very cautious in terms of spending. You can see as well our EBIT margin that has increased to 40%. Next page, please. In term of key events, we have quite a lot of things have happened during Q1. I will not comment on the fact that, okay, I will start another position. We can discuss that later. But more important, we launched 2 new products, 1 in the U.S., which is a totally new category. It's in the cosmetic category and that one of the first pediatric probiotic cosmetic product. It's an ointment for baby skin. So we launched it in the U.S. because here we have a very strong route to market. That's a kind of pilot launch for us. It's a new type of product, but we are very hopeful with that one. The second one, we just launched, it's called Prenatal Care for women, and it's a probiotic with our main strain, DSM 17938, together with everything what pregnant mother would need. So instead of buying from the shelf vitamins, or zinc or folic acid and probiotics, she will get everything she needs during pregnancy, and we even recommend to start to take it while thinking to be pregnant because it is very good for the mother. So this prenatal care product will be available for order in Q3, and we do expect rolling out launches in '24 in about 20 markets. So a very exciting time. It's always for us a pleasure to launch new products. Innovation is important for BioGaia. It is always a bit of time, but now we have 2 products out, very key and in the target group. Next page, please. So as I mentioned in my introduction, plus 29% increase for the quarter with 90% purely organic. If we look per type of product, the pediatrics have been doing extremely strong, plus 37%, which is exactly what we said last time. Okay, recession happening, will have an impact on our sales. And I'm pretty convinced that the sales of our drops for colic baby are very resilient because you really need to solve a problem, and there is no other alternative. And the plus 37%, I think, demonstrates that perfectly. As well said, the adult is a bit more challenged because one is recession, you might wait for buying something for yourself, you don't wait for your baby, but for yourself, you might -- I mean, privilege another type of spending. So a slightly decrease of minus 7%, which is mainly on our Protectis tabs. But I don't think we should be worried too much. We had a very strong year even for adults in '22 with an increase of 30% of the Adult portfolio. Next page, please. Sales per region. So if you remember, by 2022, we had a fantastic increase in EMEA of plus 52% and that was really the pure effect of recovery after COVID. The whole industry opened, pharmacy well ordering, consumer were out in the pharmacy and buying. So we have very tough comparable for Europe for Q1, and that explains the minus 5%. On top of that, we had a price increase that has been announced in '22 with full implementation in '23. And so we knew that our market, mainly in Eastern Europe have bought a bit more in '22. So that has a slight effect as well on Q1. But the very good news is that what we said would happen in Asia Pacific is happening, with China opening up, Japan opening up after COVID restrictions. We see a fantastic demand on APAC, a really strong quarter, plus 72% increase. And the main country is China, but we see as well in Korea. I mean the recession has not really impacted Asia. It's the contrary. Everything is opening up, and you see the impact on sales. And last, region, Americas, for the first time, Americas is 39% of our total sales, which is exactly the same thing as the whole Europe. And that has never happened. So now Europe and Americas are as big for us, at least during this quarter. And why is it doing well in America, it's one, U.S., still going extremely strong. And the team had one fun fact, for the first time in March '23, they sold more than $1 million to Amazon -- via Amazon so which has never happened before. So very strong in the U.S. And then we opened BioGaia Canada. We worked with Ferring before. We opened Canada in -- as BioGaia in January. So we have the chance to be able to attract 2 super strong talent from Ferring that work for us now and a lot of synergy from the U.S. We didn't have to recruit any specific marketing team in Canada. We just use the team from the U.S. So they develop content for both U.S. and Canada, work very well, same language, same culture and almost the same type of clients. So here as well, Amazon is very, very big for us in Canada. And then for the clients as that was the same guys from Ferring. It's almost transparent from them and especially Costco, which is very big in Canada. We see increase in demand, and it works very well. The last impact to explain the good figures of Americas is as well Brazil, where we had some -- I mean, some order that end up in Q1 could have land up in Q4 last year. So Brazil is doing very strongly here as well. So a very, very happy development of sales in Americas. Next page, please. So in terms of gross margin, we've been very, very, very careful because we have, as everybody else, increased in terms of cost of goods on our glass bottle, on the raw material, so we've been very cautious. We had this price increase to compensate partly. We've been looking at our spending. So we've been able to maintain a gross margin at 72%. Of course, if you want to find a problem in that report, we might tell you, but in '22, the gross margin was 73%, which is 1% under, but I think we've been pretty good to monitor the inflation and we have already announced last week a new price increase for '23, which is going to start in Q3 '23. Next page, please. And now I will pass over to Alex, who is going to comment the financial figures. Thank you.

Thank you, Isabelle. So to summarize, the revenues were SEK 366 million, which was a growth of 29%. The profits, operating profits were SEK 148 million, and the margin was 40%. If we move on and look at sales, then our sales growth of 29% consisted of organic growth of 19% and the currency effect of 10%. So about 1/3 of the growth was due to currency and the rest is organic. We look then at our expenses. Our OpEx increased with 7%, and excluding some adjustments, a growth of 10%. Sales costs grew with 22% from SEK 72 million to SEK 88 million, and that growth is mainly related to the increased sales. Certain items in our sales costs are related -- correlated with the sales. Then as for the R&D costs, they declined with 25% from SEK 25 million to SEK 19 million. And the main explanation is basically timing effects of different studies that we're doing. So this is not a sustainable level. It will increase. It is due to the timing of clinical studies, basically. And then all in all, that meant an increase of 7% of the OpEx. If we then look at the P&L that summarizes the situation, we see them, as we have mentioned, the sales growth of 29% and operating margin of 72% versus 71% in quarter 1 last year and an OpEx increased by 7%. And that then led to an increase in operating profit of 55%. And excluding some adjustments, -- the adjusted EBIT was SEK 150 million versus SEK 100 million one year ago. So a growth of exactly 50%. And then the adjusted operating margin was 41%. Earnings per share at SEK 1.15 versus SEK 0.76 last year. As for the cash flow, Cash flow from operating activities before changes in working capital was SEK 122 million versus SEK 81 million. So that is an effect of increased profits we are making and change in working capital were negative in the quarter of SEK 24 million. This is nothing strange. It's more of a timing effect of when the sales happened in the quarter and things like that. So it will normalize in the next quarter. And the cash flow from operating activities was SEK 98 million versus SEK 93 million one year ago. And the cash flow -- total cash flow for the period then SEK 94 million, which was an increase of 9%. Cash at the end of the period is still strong at SEK 1.58 billion versus SEK 1.57 billion one year ago. Then the balance sheet is more of a reference. I will not go through it. And with that, I'll hand over to Isabelle for some concluding remarks.

Yes. Thank you, Alex. So my conclusion is just to say we have 29% sales growth. We are continuing the success story. As I said, 7 quarters in a row with double-digit increase. This quarter, it's really, really thanks to Americas and APAC that I presented before. And so which means that despite this collaboration and with the 7 quarter in our back of good figures we remain very confident that we will be able to reach our set financial goals. So we maintain them with a 34% EBIT margin. So now I'm happy to take questions.

[Operator Instructions] The next question comes from Mattias Vadsten from SEB.

Good to see a strong quarter. And firstly, I wanted to ask if you're willing to disclose if there were any orders that were supposed to come in Q2 that instead hit Q1? And if you're willing to quantify those in that case, and if you agree with me that it's more sensible to look at, let's say, flat development in Q2 where margin will increase, let's say, given a very strong Q1 where inventories are probably a tad high at some distributors and maybe in some pharmacies in, for instance, Canada, where you were strong here initially, if you agree to this understanding or if you could help us in any direction.

Yes. Thank you, Mattias. To answer your first question, do we have Q2 order that moved to Q1? The answer is no. Clearly, no. The question 2, do we expect a flat development for Q2, then my answer will be more, yes. But I think we should look at Q1 plus Q2 together where we will grow. There will be -- I mean, between Q1 and Q2, I think that's the most important to have a global view on it. So we foresee increase. But Q2 will not be at the same level as Q1, which is exceptionally good.

I agree that you should try to look at more last 12 months or half year. So I agree with that. And the next question relates to price increases. If you could quantify the impact of prices here in Q1 and do you expect further price increases from here? Or is the price increase you pressed through at the turn of the year, what we should expect here? That's my next question.

Yes. So we announced a price increase in March last year '22 to our partner. And then depending on the contract, we've been rolling out different months. Full impact of the '22 price increase started in January '23. And now we've announced last week a new price increase to our distributor. So here as well, we cannot change the price more than one per year, mainly depending on the contract. So it will start to roll out from Q3 '23, with full effect probably in January next year. So we have already anticipated, we have looked at the COGS increase on the glasses, on the raw material, and we passed already the information to distributor. I'm very happy about it.

And my last question, R&D came in fairly low. You described that this should come up in coming quarters. But where do you see this level more medium term, previously, that has been, let's say, 30% of sales or something. Then on the research part, we've seen some launches here that you discussed in March, April, but I wonder if you could share some insights to which are the most important areas in terms of focus now? And if you're willing to share any insights on the next-generation probiotics that you have been mentioning more recently, I would say,.

Yes. So I will answer all these questions at once because why we didn't spend that much on R&D quarter 1, it's basically because our main R&D program is you have very good data for our next-generation probiotics to replace the drop where we will be out of pattern in '26. So our full focus is on the next generation of drops. And meaning that we have to recruit babies. And for some reason, the world is stopping doing babies. So it's difficult to get good baby for the clinical study. So -- and we had a plan to run the recruitment and the clinical study in 1 or 2 centers. But now we realize that we have to open new centers to recruit more babies so that our clinical study will impact. So we have delayed in the spending because we have delayed in recruitment of these babies. And the main focus area is really to come up with the next generation of drops which we do believe will be even better at the current one.

The next question comes from Kristofer Liljeberg from Carnegie Investment Bank.

Maybe start with a follow-up on the R&D question. So I don't know if you answered really what type of level for R&D we should expect going forward? Does this start -- you will conduct -- does it mean R&D costs will increase dramatically from not this quarter level, but what we have seen in previous quarters?

No, I think we will maintain the same level as before, around 13% of turnover, which has been normally what we've been spending on R&D. And our effort for this, what we call NGC next-generation clinical product, will be -- I mean, will happen during 3 years. So we start with safety study, and then we do the, I mean, prevention study, we do treatment today. And so we start that not at the same time. Obviously, because we need sometimes to have the answer from the first safety study before being able to proceed. So at the end of the day, we will have -- it's a massive investment in R&D because it's very important for the company. But together, there will be 13% of turnover as usual.

And on the new price increase, is it possible to quantify how large it will be?

It is quantify. I'm looking at Alex now. Shall I disclose figures or not?

Yes, you can say, yes.

So I'm allowed to disclose that we've announced an increase of 6%. Last year, we had an increase by 9%. So together, there will be an increase by 15%.

And again, this is not going to impact all markets?

Yes, it is going to impact all markets, but not at the same time, depending on when we sign the contract and when we are able to change the price. So there are older contracts with different terms. All the new contract -- the contracts are exactly the same, but we have all contracts with Nestle, where we have different roles. So that really depends. But I mean, it's ongoing the same way it has been ongoing for '22 price increase.

And how are you thinking about pricing when it comes to markets where you sell directly, like North America, for example?

Yes. I mean, on one hand, we don't have to negotiate with the partner. I just have to negotiate with our own people. It's not easier sometimes. But by definition, we can be a bit more harder to say well it's happening now. Having said that, what is very important is to look at the competitive set. And U.S. is a super competitive market. It's a major probiotic market. So we are following on our main competitor price evolution prior to any adjustment. And the good thing is that now we've -- I mean, there are a lot of ways to do price elasticity analysis via digital tools very quickly. So we can even test it, say, okay, can we pass on that level of prices and see the impact on sales? And if we reach too high level and you see you lose more sales than you can increase in value then you can moderate and change. So Amazon is fantastic. The price -- I mean you can change the price every 5 minutes, if you wish so, and that's what we're doing. So that we....

So have you increased prices in the U.S.?

I mean we just sell -- I mean it's almost 70% on Amazon. So we just change the price on Amazon, and that's happening very -- I mean, very quickly in 1 second. We can sometimes when you have this buy box that you have to own and it's changing all the time. So in order to be able to maintain it you can play on the prices, have a small decrease. You get back the buy box, and then you increase it again. It's extremely -- I mean, the elasticity on price on Amazon is the job as it is. We have one guy only working on it all day.

And on the topic of Amazon, do you see any risk here of being too dependent on them?