Cambridge Nutritional Sciences plc (CNSL.L) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Cambridge Nutritional Sciences plc interim results presentation. [Operator Instructions]. Before we begin, we'd like to submit the following poll, and if you give that your kind attention, I'll sure the company will be most grateful. I'd now like to hand over to Chair, Simon Douglas. Good afternoon.

Good afternoon, everyone, and thank you for your time this afternoon. It's very much appreciated. As you know, this is the presentation to take you through some of the details of our half year results up to the 30th of September. The RNS was released this morning, but we hope we can add some value to you this afternoon through this presentation. Just by way of introduction, my name is Simon Douglas. I am the Chair of Cambridge Nutritional Sciences, and I've had a wide-ranging background in health care, diagnostics and pharma and have been the Chair since February 2021. With me, I suppose and I'm sure that sort most of you know, is our CEO, Jag Grewal, and he has had a wide-ranging experience in the health and nutrition business, and been with the company for many years, and has led us through the last 12, 18 months and boasts as to what I think is a very solid position that you'll hear about more today. Jag will do most of the talking today. He knows the business backwards. I will be available at the end for questions. So Jag, over to you.

Thank you, Simon, and good afternoon, everybody. Welcome to the half year presentation for Cambridge Nutritional Sciences and I'd like to take you through a brief introduction to the company, some key operational highlights, importantly, the financials, and really then looking forward in terms of the foundation for growth, our future growth strategy, and then we'll end with a summary and then we'll certainly answer as many questions as time allows us to. So for those who aren't familiar with the organization and Cambridge Nutritional Sciences and what we do as a business, over a couple of restructuring and changes in the organization, we are now solely focused on health and nutrition testing or sometimes called personalized nutrition testing, and we've been in this marketplace for a long time. We hold a leadership position in the marketplace around food sensitivity testing. And the bulk of our business is based in over 85 countries globally, and we sell our products and services through business partners and distributors in over 85 countries globally. We work with health care professionals in those 85 countries globally to ensure that we are providing high-quality test results to make informed decisions largely to patients. And I also call them health care consumers because a lot of our business is private pay, particularly those who are suffering with long-term health conditions such as chronic illnesses such as irritable bowel syndrome, for example. Our key routes of markets and the way we differentiate ourselves is through educating through health and science, and that's what drives our brand in those marketplaces accordingly. We work closely with global business partners. We sit in the middle of that circle and sell through a distribution network that then sells our products and services to laboratories worldwide who then sell their services on to health care professionals, and then ultimately, the health care consumer. And we're really targeting those health care consumers that are living with chronic long-term inflammatory conditions, and IBS is a good example of that, or to health care consumers wishing to maintain health and wellness. And this area is a particularly topical area at the moment, where increasingly, long-term conditions are being linked to poor nutrition and poor diets. And our brands are, as you can see, in 4 key areas. The major part of our revenues and our business is our FoodPrint product. This is a microarray-based technology that is used by over 160 laboratories worldwide and really allows the analysis of IgG antibodies, which is defined as food sensitivity to over 200 different foods, off a couple of drops of blood, which allows the health care consumer or the health care professional to take a finger prick, take some drops of blood and send that to the nearest laboratory operating a FoodPrint system. We also have our Food Detective products, and that's a very well-recognized brand, particularly in clinic settings. So this allows a clinic, a health care professional, to run a test for 59 common foods, and that test can be reported within 40 minutes at a near patient setting. So within a very short space of time, a patient visiting that clinic can get a set of results and be managed accordingly. Increasingly our patients and our customers are demanding a digital solution to receiving their results and engaging with each other. We've got MyHealth Tracker, which I'll talk more about later on, which is our digital app system that allows the practitioner to engage the patients, work their test results and also provides symptom tracking and wellness diaries. And then in the U.K., we have our own laboratory using our own products which addresses that market more directly. So that will offer FoodPrint testing as well as some other functional medical tests to health care professionals here in the U.K. So let's have a look at what we've been up to in the first half of our financial year. And I'm really pleased to report that our first half revenues compared to the prior period, first half of the prior financial year, have grown 44% to GBP 4.9 million. I'm really pleased with that effort. As some of you may know, we had a backlog of orders at the end of the prior financial year. And having cleared that, we reported a good healthy growth in our revenues. And I really want to thank the teams based in our manufacturing sites for delivering a strong operational performance, improving yields and improving our productivity and getting kits and tests out to our customers. We've always flagged that the U.S.A. is an important target market for us, and I'm very pleased to say that we've gone live on our first U.S.A. lab customer, and will be working with others over the coming months and years to increase our revenues in what is a very attractive market to be in. As well as working at food sensitivity, we've also been working on microbiome and menu expansion, and we've now moved into a trial phase in the U.K. as we look to then do that, fine-tune the product offering and then commercialize in the U.K. and then beyond. We've continued to roll out our app, MyHealth Tracker in the U.K. We look to convert everybody in the early part of next year on to that app, and we've also had an installation in one European country, which is great news. And from a personal point of view, we've had an appointment of a new Nonexecutive Director, Carolyn Rand, who has personally supported me a lot in the business and is a useful and very important addition to the Board going forward. So let's have a look at the numbers. And again, as I said, I'm really pleased with the sales performance in the first half of the year. Tempering expectations, some of that was backlog that we had at the end of the prior financial year, but nevertheless, I'm very pleased with that performance. And more importantly, with gross profit going up as well and our margins going up at the same time, that's largely been down to product mix, where more products for FoodPrint has been shipped in the first half of the year, but also improvement in productivity in yields and a lower level of scrap that we experienced compared to the prior year. And all of that has meant that we've had a good breakeven position going forward in the first half. And if we look at the sales splits geographically, Europe is quite a mature market, but we've seen a return to growth, again, largely from clearing the backlog. Particularly want to highlight the success we've had here in the U.K. where we deploy what I call the model playbook directly into the marketplace, working closely with our nutritional therapists as our practitioners, but also having a successful partnership with a direct-to-consumer white label partner that addresses the market segments that we just don't have the skills for in terms of social media and marketing. So that's really driven our sales quite impressively in the U.K. in the first half of the financial year. And if we look at our sales in terms of product, FoodPrint does represent the bulk of our sales revenue. And again, that's the product line that had a bit of a backlog from the prior financial year, and that's driven our product mix on revenues at our margins in the first half. Food Detective sales is quite a mature market. It's more of a market builder in certain countries around the world, and we've also noticed that there's been a greater demand for FoodPrint sales over Food Detective, where, I guess, from a post-COVID world, people are more used to testing and asking for tests that are laboratory-based, which gives much more information, and in our case, many more foods in the profile that we offer our customers. So looking forward, we're really focusing in on personalized nutrition and really building a foundation for future growth as a stand-alone business. As explained before, and we're really drawing a line hopefully under this, we did have some production challenges in Q4 of the prior financial year. But through a network that we used, Chartwell Consulting, who came in for a couple of months, looked at our processes, looked at our equipment, looked at what we were doing in terms of troubleshooting and root cause analysis, embedded a set of skills within our operations team and our manufacturing teams, and they've taken those skills on from the work that we did with Chartwell Consulting to improve our FoodPrint yields compared to where they were before, which has meant that we've been able to meet the demand and also improve our margin, improve our scrap going forward. We've built on those skills and actually have now installed a permanent continuous improvement function within the operations team that will work across the business in further improving productivity and efficiency and changing the culture of the business going forward. So this is really a foundation building exercise that really becomes the final stages of becoming a truly stand-alone business going forward. And part of that foundation is eventually moving into a new building in the future. That's something we're still looking to do, however, we've drawn the line and you can see a picture there of a previous building that did not meet our specifications. So we have time until summer 2025 to look at our options, and what we're doing is looking at what we need in a new building for future growth and scalability in our business in the future. We're also continuing to evaluate alternative technologies for manufacturing FoodPrint in the long term. We've been using some aging equipment. We do recognize there's much better technologies out there to scale up our production, to be more efficient, to have even higher yields and be more productive for the long term. And really, I guess, part of drawing a line under the past, but we do have to comment on it because it's still -- it's something that we're working on, is an ongoing dispute with the DHSC going back to a COVID-19 lateral flow test contract. There really is no further progress to report. We have been quite aggressive in pursuing a counterclaim against the Department of Health in response to their claim for the GBP 2.5 million. We firmly believe as a Board and our advisers believe that we are confident that we have a compelling case not only for not paying the GBP 2.5 million that allegedly is owed to the Department of Health, but to pursue the counter claim, which is a much higher number than that. So that's just ongoing. The relationship with the DHSC, the speed at which they're working at is very slow and we can't really predict or forecast when this will be closed off, but we're working very hard to do that. And in terms of future growth strategy, we have a very clear plan of where we see future growth for the organization. And really, it's divided into 3 core areas. One is organic growth. In the marketplace today, there is increased demand, not only for home health testing post-COVID, but an increased awareness within the population and also the medical fraternity in how nutrition plays a role in chronic long-term inflammatory disease. We have a position already in food sensitivity in those 85 countries globally, and the way it differentiates ourselves is through scientific education and driving awareness of these tests that in turn drive demand to our customers, either our own lab in the U.K. or the 160-plus labs around the world. And what will drive that even more is the digital technology, that MyHealth Tracker app, that will cement our position and engage our patients much more reasonably going forward. Geographic expansion is always the next bucket of growth, and we're very much focusing on the U.S. And we're also working closely with our partner in China to drive those Food Detective sales in the marketplace. And then building on the fact that we have a clear leadership position in personalized nutrition testing, we're very aware of the demand for additional tests in that area, and we're working on particularly microbiome testing going forward, which will add to the wealth of data that we're providing our customers, our health care professionals, who can then better manage their patients going forward. The digital platform, the MyHealth Tracker app, is so much more than a system that provides test results to patients and their health care professionals. This really allows the health care professionals to engage the customer, their patients and work with them over a much longer period of time and develop a relationship with them. We can see what foods need to be avoided or replaced, and there are symptom trackers and a wellness diary built into the tracker app already. We're the first to market in our segment, and at the moment, what we've done is launch that in the U.K., and we're rolling that out amongst U.K. health care professionals before launching it more widely internationally. And the benefits to the customer can't be understated. This is quite unique in the marketplace. As well as providing digital results for both the health care professional and the patient, it really, as I said before, binds the professional with the patient in a much longer-term relationship, which we then have access to as well. And more importantly, it builds a better understanding of what's going on in the marketplace. We will then, on the back of this, be able to build and develop a much more comprehensive database of information, patient results, symptoms and clinical outcomes, which in itself provides huge intangible value to the organization where health care, in general, is moving to a much more data-driven basis, and the use of AI and machine learning can then mine this data to better understand health care, to better understand outcomes and give much more scientific credibility to the work we're doing to make it much more mainstream in the future. And there's huge commercial benefits for CNS as well. It provides a much greater barrier to switching from our technologies to the competition. It locks in our customers, be it laboratories, health care professionals and the consumer. It gives a huge opportunity for follow-up testing, repeat testing and adding other tests to the menu in the patient journey. And if necessary, gets us more directly known in key markets where at the moment, we are several steps removed from the health care consumer who is actually parting with their own cash to pay for the test. I said before we've had really great growth in the U.K. market, driven by the activities of our sales and marketing team. And CNSLab sales grew by 7% in the first half compared to the prior first half as well. We've been focusing as well on the U.S. market. The U.S. market alone is estimated to be the largest and most established market in the world for food sensitivity testing. That is a big consumer market, anyway, for home sampling and sending to labs. We've now got our first laboratory live and actively selling FoodPrint tests into that marketplace, and we're working with a number of other partners to broaden that geography and also broaden the sales channels in which they can market FoodPrint to as well. And within core business as well, we've also had new business partners appointed in 3 new countries, so that continues our expanding footprint globally. And building on that position globally of well-established channels with working with business partners who are good at driving demand, good at operating in the personalized nutrition space, we're looking to build a wider menu of complementary gut health tests. And we're going to start with microbiome. Microbiome is very prevalent in clinical discussions around gut health and is really very much seen as unlocking the role of nutrition in chronic health disease going forward. We want to have a clear position in microbiome testing. Our marketplace and our customers today are demanding that, which gives a much more comprehensive personalized nutrition assessment for their patients and adding value to that pathway as well. As I said, we're working with a partner who is a bioinformatics company who are able to provide a test report very much like a FoodPrint report, which can be provided to the health care professional and to the health care consumer. And at the moment, what we're doing is testing that marketplace in the U.K. to ensure that product is defined correctly before we then go more into a fuller launch firstly in the U.K. and then globally in other markets. So in summary, we are building now on the foundation. We're now focused as CNS on personalized nutrition testing. I believe and the team below me believe that to be a very exciting area in medicine and really is the future to understanding and dealing with what is an epidemic rise of chronic long-term conditions. I'm really pleased to report our first half revenue was strong, and we had growth to GBP 4.9 million. And as I said before, delighted that the team in embedding skills from the work we did with Chartwell Consulting to improve operational efficiencies and yields and further improve our margins going forward. We're a well-capitalized business with cash in the bank and a strong balance sheet, and we're building a new team and a new culture in Cambridge to deliver growth in the future. We're building on our existing global leadership position. We're not moving into a new area with the commercial and development risk that we've had in the past. And certainly, the fast-growing personalized nutritional segment is a very exciting place to be in. And we differentiate ourselves from the competition through science and education. We work with key opinion leaders around the world, and we really take a thought leadership position in this marketplace that takes us forward. And then we can grow from this foundation. We are targeting new geographies. The U.S.A. is a particular focus for us as well. And I can't underestimate the difference MyHealth Tracker will make to our customers and to our business going forward as we become a sort of much more digitally connected business that is dealing with the data and extremely useful data that can drive the science on the outcomes much more effectively than it can do today. And once you've got that digital spine and that leadership position globally, then adding many to that which is demanded by our customers is rightly important. We're now taking the first steps with microbiome. We'll deal with that first because that is a much larger opportunity, and then we'll address the nutrigenomic segment, which is looking at DNA analysis and looking at your genes and how they impact the way the patient can metabolize food going forward. So that's the summary. Thank you for listening to the presentation. And we'll now hand over back to Marc, who will have some questions.

That's great. Simon, Jack. Thank you very much indeed for updating investors, and I'll shortly bring back your camera up for the Q&A. [Operator Instructions] I just want the company take a few moments to review the questions submitted already. I'd just like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed via your Investor Meet Company dashboard. Simon, Jack, we have received a number of questions from investors. And I know we had this meeting schedule for now, but you do have another investor presentation immediately after. So let me go through these questions while I can and anything we don't get through, I'll present to you post today's meeting. First question relating to the U.S., really, the U.S.A. market is a target market. What progress has been made?

Yes. I kind of covered this a little bit on the onset. It is an absolutely target market. It's a big market. Even from a diagnostics point of view, it's recognized as the single largest market globally. So we've gone live with our first customer, and they are commercializing FoodPrint and selling those tests. And they're an existing lab that's been doing functional medicine tests for a while. So they address very much the segment that we address around the world, and then we're working with 2 other labs working through their validation approvals, one of which will also address the sort of functional medicine nutrition markets as well. And the other one will actually address a more direct-to-consumer market at the same time. But we expect to make progress with them in the next calendar year, with a probable go-live in the start of our next financial year.

Great. Next question, what's happening with the Alva site?

Omega Diagnostics used to have 2 sites. The Alva site was in Scotland, and the site in Ely near Cambridgeshire is where Health & Nutrition was based. The Alva site consisted of lateral flow manufacturing and a CD4 HIV business. Earlier last year, we made the decision that we really wanted to focus the company on health and nutrition. It had a great exciting future. It was turning over money and contributing cash. So we made the decision to divest the businesses and the site in Scotland. We've sold the CD4 business, and we also sold the sites with the 100 members of staff, and from their point of view, none of them lost their job. Some of our central services were based in Alva. And over the last 6, 9 months, we have slowly extracted some of those central services such as some finances, a little bit of HR and also some quality functions. And we've been then rebuilding those in Cambridge. And we're now in a position that we really have very little to do, almost nothing to do, with the Alva site at all. So the independent site is now owned by a Chinese company called Orient Gene, and we're now centralized in Ely and focused very much so in the Health & Nutrition business. So really Alva now is independent from us, really.

That's great. Investor here looking for a little bit of clarity. Let me just read this out in full, hopefully I can get it across. But can you clarify the role of IgG testing plays in supporting professionals treating their patients? The reason I ask is there's little clinical evidence that these tests can diagnose intolerances when compared to IgE tests. My understanding is that IgG indicates that you are not intolerant to certain food stuff, so there's -- so therefore, beneficial as screening test rather than a diagnostic test. I hope I've got that across. But if you can give a bit clarity there, that would be great.

That's a very good question. Very, very atypical question, thank you for asking, whoever submitted that. So first of all, let me just explain the difference between IgG antibodies and IgE antibodies. So IgE antibodies are related to allergy. So allergy is a more immediate reaction, not only to food, but it can be pet dander, pet fur, things in the air, such as pollen, et cetera. So it's a very different mechanism in your body that reacts quite quickly, and I'm sure there are members of the audience here that either have or know people who have allergies. Then what I'd like to do is explain the difference between food intolerances and food sensitivity. So in the past, and we've been guilty of this as well, we've called this division and this product line with food intolerance divisional products when actually it's a food sensitivity. And let me explain the difference there as well. So food intolerance is when you're usually lacking something either from a genetic perspective or from an enzyme perspective that means that you can't process a particular food. A good example or one of the most common examples is lactose intolerance. So you're actually missing the enzyme that allows you to digest. Okay. So that's a function of your body having an inability to process a certain food. When you're developing IgG antibodies, and IgG antibodies are long-term memory antibodies in your blood that sit around for ages, and then if they react to something, they cause a longer-term inflammatory response. And that's increasingly known as food sensitivity. And that's one we call our test, food sensitivity test. And the reason you produce food IgG antibodies is normally down to poor gut health. And poor gut health is related increasingly to a huge number of factors. And when we see that every day in news and in social media, things like ultra processed foods, too much sugar in the diet, not enough fiber or plant matter in the diet, and the list is endless. Also sleep and activity is heavily linked to poor gut health. And when you have poor gut health, you will then not digest your food properly. Some of that will enter your bloodstream, and that's where your body reacts with IgG antibodies. And if that level of IgG antibodies gets higher and higher and higher, you will then have some sort of long-term inflammatory response. So that's where we sit as a food sensitivity test. I guess it is a screening test, but it typically is done when a person is suffering from long-term chronic inflammatory disease. IBS is a good example. And again, I'm sure members of the audience believe they have or know someone close to them who have suffered from irritable bowel syndrome or IBS. And that's where understanding your antibodies and what you're generating against certain foods helps that patient along that pathway.

Great. I had a number of questions about the U.S. So guys, obviously, we've touched on that. If there's anything further to add to Ali, to Nathan, to your questions around that, we can obviously make those available post the meeting. Perhaps I can just go to this question. I noted that MEDICA is still using the Omega Diagnostics brand. Can you explain the reason for this over the Cambridge Nutritional Sciences brand?

Yes, that's a very good question. And obviously, prior to this, we were Omega Diagnostics Group PLC, and subsequent to the AGM in August, we changed our PLC name to CNS, which much more reflects what we stand for and what we do as a business going forward. [indiscernible] to our customers today, which are typically our distribution customers, and that's the customers we meet mainly at MEDICA. And I think if you go to MEDICA, I hope you can say hello. We still have to market our products because they are registered in export countries as Omega Diagnostics. If we were to change the name of the manufacturer, we would have to reregister all our products as CNS Limited in all those countries. We'll do that when we move sites because we're going to need to reregister our products anyway to get a change of address. And at that point in time, we will transact as CNS plc to our customers. But up to that point in time, Omega Diagnostics Limited is still a subsidiary of CNS plc.

Great. As I said, I'm mindful of time. I know you had this meeting just recently scheduled, so I'm mindful that I don't [indiscernible] further. Mike, Charles, Ian, Lucas, your other questions, we can make anything available to you post the meeting. And if there's any additional responses that we haven't covered off throughout the presentation, we can look to do something about that then. Jag, Simon, I know investor feedback will be particularly important to you both, and I know -- I'll shortly redirect those on the call to give you their thoughts and expectations. But perhaps, Simon, if I can just come back to you, just to ask you for a few closing comments, and then as I say, I'll redirect those on the call to give you their feedback.

Thank you. Thank you for the audience for logging in this afternoon. We hope you enjoyed the presentation. I think people who have followed the company will see that we have come a long way. Like any company that goes through significant changes, refocuses, realigns their business in a different location, there are many challenges, which we have faced. Bluntly, it's been a bit bumpy ride, but I think the bumps have been very much smoothed off now. And I'm really looking forward to the next 12 months. I think you've seen that we have delivered a solid revenue performance this half, and we are on track to deliver the independent forecasts for the year-end. The health tracker, MyHealth Tracker, I think, is a game changer going forward. It's early days. It's just been rolled out, but I think that will really differentiate ourselves in the marketplace. And [indiscernible] something for me, looking forward is very exciting. Slightly longer term, the introduction of the microbiome test, I think, again, is another very exciting next step. These things will take a while to penetrate the market, adding it into the IgG food sensitivity offering that we've already got will create a really solid company over the next few years. I'm excited about the future. No point is looking back. The future, I think, is very solid, and let's look forward to the next 6 to 12 months. Thank you again for listening. We really appreciate your support, and our shareholder base at the moment is very interested in what we're doing, hence, we have to duck out slightly early today. Apologies for that.

That's great. Thank you. Simon, Jack, thank you once again for updating investors this afternoon. The company is asking investors not to close this session as we're now automatically redirecting investors to provide your feedback in order that the company can better understand your views and expectations. This will only take a few moments to complete, but I'm sure it will be greatly valued by the company. On behalf of the management team at Cambridge Nutritional Sciences plc, I would like to thank you for attending this afternoon's presentation, and good afternoon to you all.