ECO Animal Health Group plc (EAH) Earnings Call Transcript & Summary

Good morning, and thank you to those of you who are joining us today to hear from ECO Animal Health, who announced their full year results yesterday. If you haven't seen it already, we have published a research note, which you can find up on our website. But the purpose for today is hear from the management team, go through the presentation and take Q&A at the end. So feel free to submit some questions as we listen to the presentation via the Q&A button in the Zoom app. But for now, I will hand you over to David Hall, CEO.

Thank you very much, Hannah. Welcome, everybody, again. Thank you for joining. It's an absolute pleasure to take you through our results. The highlights are that we had an improved performance at the top revenue line of a growth of 10% over last year. That was a broad-based growth across most major regions. Also very happily, we were able to expand profitability that led to both improved margins and a growth in EBITDA and both revenue and EBITDA were ahead of the revised market consensus that was revised upwards in March of this year. Also very notably, we are delivering on our strategy of diversifying our portfolio and delivering to the market innovative new products. And we did that by launching earlier this month, our first vaccine out of our self-funded R&D portfolio, and that was ECOVAXXIN MS. That is a mycoplasma vaccine for laying hens and helping them produce eggs in the best way possible. So that means that we are positioned to growth, and we are validating our R&D pipeline as it's beginning to exit and show maturity and launch products into Europe, and there's further launches in the future. So next slide, please. We will take you through some of the financial highlights.

Thank you. Chris Wilks, CFO. First of all, a summary of the financial highlights. We'll get into some more detail later on. That 10% increase in revenue, which David mentioned on the previous slide, took us to GBP 87.5 million of revenue. We were working against the headwind of currencies during this period. Over 50% of our revenue is recorded in U.S. dollars. So that resulted in a headwind on revenue. So restating that on a constant currency basis at last year's exchange rates would have given us an increase of 14% to GBP 91 million. China increased 5% in the year, which was a pleasing performance. And that would have been 9% on a constant currency basis. Again, the Chinese RMB was an adverse effect during the period. North America was plus 22%. More on that later, very exciting, very pleased with that performance. That's the largest territory there, obviously being the U.S., but it also includes Canada. South-East Asia or rather more properly as we call it South and South-East Asia is a region which incorporates India as a major poultry market and then the countries around South-East Asia, Pacific Rim being Thailand, Vietnam, Indonesia, Malaysia, Philippines. This combined territory reduced by 3%. Now within that, India was the territory that really reduced. If you pro forma India out, the rest of the territories increased by a very pleasing 52%. India was a reduced in period. Two reasons for that. One was some bird flu avian influenza, which was affecting the region or the country for a while, therefore, restricting the ability to visit customers and get into treatment. But secondly, we did restrict product flow into that market for reasons of controlling the credit exposure in that market. The -- and that actually resulted in us putting in an increased provision to cover the doubtful debt position relating to that customer. Latin America, which is dominated by Brazil was up 15%. Within that, Brazil increased 25%. So a very pleasing performance there. Now moving on to the rest of the financials. In addition to that increase in revenue, we also increased our gross margins by 3.5% from last year, homing in on -- on 50%, which is very pleasing. And that margin increase has been sustained post year-end. So we're actually seeing a very strong trading margins as we speak today. Adjusted EBITDA was an increase of 16%. This, as David mentioned earlier, beat the revised expectations of the market by about 4%. So very pleasing indeed. And again, of course, that increased our EBITDA margin. So EBITDA expressed as a percentage of revenue. We're now just about 10%, which is pleasing, demonstrating the operational gearing in this business, more revenue falls straight to the bottom line. And earnings per share as a result of all of that increased by almost 1/3, again, very pleasing to see that, and we're now getting into solid EPS numbers. Net cash was fairly constant, about GBP 25 million. We'll talk more about cash as we go through this presentation, but it's really that balance of cash, which allows us the freedom to develop -- fully develop, fully fund our R&D program and new product development program. And our progression through that portfolio has been very strong this year, resulting in the first vaccine launch just after the year-end. So I'll just give you a brief overview of ECO and our strategy and why we're at an inflection point. So we currently have a strong core business, which, as we've shown, based on our flagship product has got robust broad-based revenue and a good margin profile. We are in a market that is needing good therapies and good treatments, and we have clinical advantages with Aivlosin over older molecules. And there is also a growth opportunities that we are exploiting for the use in complex diseases, mycoplasma eliminations and PRRS management, which continue to be a challenge to the swine industry, and that allows us to continue to drive growth here and to take share. So that's what's in the strong business. Next slide, please, Hannah. Our focus is on livestock with a particular focus on poultry and swine. And we are putting our efforts into the preventative segments, that's vaccines. Why are we doing that? That's because there is strong growth in the preventative section of the market. And also poultry and swine have good growth potential backed up by the demographic trends of the need for greater protein to supply the human population. So that's our focus, livestock species and with a double-click on poultry and swine and preventative. So that's what we're doing. We have a growth pipeline to satisfy that. And we are targeting our R&D investment, and that is now delivering results. We have, in the period, received approval of our first vaccine and post-period launched that one. So that is great. That allows us to diversify the business. That allows us to exploit the growing market. And important also to note is that our targeted R&D investment is funded. We have no debt. It's funded from our robust core business. Next slide, please. So what we're doing is we are addressing the market need that's already there, and we are applying innovation from our pipeline to allow us to access that. Next slide, please. And if you add it all together, we have managed to have a late-stage portfolio that is now containing 3 products, one of which is in launch phase. In our clinical stage, which is mid-stage, we've got 4 products or 4 projects and 2 earlier-stage assets. So we are beginning to, with the maturity of the pipeline, increase the value of that portfolio because the risk-adjusted NPV, net present value is increasing as we decrease the risk as that portfolio matures. So that's ECO at a glance, strong core business. We're at an inflection point with the R&D, launching products and growth in the future portfolio.

Very good. So we'll go into some detail around the financials. First, revenue, and this is our segmental analysis, which we presented year-on-year. So we've got 5 years' worth of history here presented on slide in our 6 segments, geographical segments. China and Japan are grouped together. Japan is about 10% as numbers. So really, you see this as China as being the principal number on the left there. Good growth coming through this year after 4 successive years of decline. So that was pleasing to see. Although cautionary note on this, since year-end, China has been relatively slow, and that is driven principally by local economics being poor for the swine producers, the pig farmers are struggling pork prices down and therefore, they're not making any money. In fact, they're making losses per pig raised. So clearly, the opportunity for treatment of disease is absent or low. It's not unusual to be to have low trading at this time of year. China, like most of our markets, serving the Northern Hemisphere, conform to a season, which is low treatment during the summer months, low disease incidents and higher disease incidence in winter leading to higher rates of treatment and therefore, greater demand for Aivlosin. China absolutely conforms to that, and we expect, therefore, as we get into the colder months, that China will come back. That should also coincide with a readjustment in that market of the supply and demand. At the moment, there's too much supply of pork, hence, the downward pressure on pork prices. That is correcting through these months of the summer and should have corrected during -- by the time we get into the winter. In North America, I mentioned this earlier that we've had very strong growth, and that comes on the back of previous years of very strong growth. This is excellent, very, very pleasing to see, and it comes from a combination of more effective sales processes, market share gains, the efficacy of Aivlosin compared to its competing products, therefore, it being the product of choice and some sort of holistic approach to the market where we help producers to manage disease, go through a program of disease elimination and improvement in productivity. So a very, very pleasing performance there. I mentioned South and South-East Asia in my opening remarks. That there, we demonstrate the 52% underlying growth if you strip out India. And so the region has performed well, India being the only slight difficulty. Now with India, we fully expect to recover the receivables position. So it was very much a cautionary approach to our provisioning in that -- against that particular customer. We are trading very well with them since year-end. We've received a good amount of cash since year-end, and we're continuing to supply them with products. So actively managing that position and expect to get back to a normalized approach there. Latin America, I mentioned Brazil. Brazil is a very interesting development as a territory for us. Up until about a year ago, we traded in Brazil through a distributor, an exclusive distributor for Aivlosin. And there's really one customer where we went direct. The rest of the market is supplied by the distributor. This year, we have taken the whole market into our own hands, cut out that distributor and are going direct to customers. So not only are we increasing revenue by doing that, but also increasing margins, and that's an excellent, excellent result. Europe, pretty much flat, slightly down. We had the process of changing out a distributor, a key distributor in that region in this last year. The new distributors in place now, and we expect better performance in this current year and years to come. Remembering, of course, that EU and Europe is where we're launching our vaccine. That's the first market to be launching in. And we'll talk about that more later on. But so the effect of that will be an uptick from the vaccine revenue. Rest of world is just a nice little increase this year. So next slide, please. Gross margin performance, we presented this bridge before. Components of that are FX, costs, mix. And so when we look at this, we mentioned that FX was a headwind for revenue this year. If there's a headwind on revenue, then there's a tailwind when it comes to costs. And in particular, we buy the active ingredient for Aivlosin in U.S. dollars. So that acts as a natural hedge against those headwinds. So we see the 1.4% offsets the 2.2% down. By far, the biggest component of this margin accretion is the reduction in cost of sales. And this is all about the active ingredient in Aivlosin. The key a key input cost to that product. And we've managed to negotiate for 2 years now reductions in input costs, and this is the effect of that coming through. There is a further benefit in the year in which we're in coming from a reduction that we got at the beginning of the year, and that is feeding through into the margins that we're currently seeing. So hence, that 48.6%, absolutely sustainable. If not, we can expect seeing it increase a little bit. A small effect from geographical mix this year, 0.3% and then 0.6% is other, principally pricing and 1 or 2 other bits. Next slide. We'll talk about R&D. R&D has been pretty consistent in terms of the amount of cash we've deployed into this each year, GBP 8.6 million last year and GBP 8.8 million this year. The particular mix of where it lands in the accounts does vary according to what we're doing. And so the evolution of the yellow bar, which is the amount capitalized into the balance sheet tells you something about the maturity of the portfolio. You only start to capitalize expenditure when you get to a certain confidence level about a successful product falling out of the program. When you reach that confidence level, that certainty of success, then you're required to capitalize. So clearly, back in 2022, the bulk of the expenditure was on earlier-stage programs where the confidence level was lower. And as those programs matured, you can see the increase in the amounts capitalized. This year, for the first time in 4 years, 5 years, we saw a reduction in capitalization, meaning products have started to fall out of the our R&D program or R&D pipeline and more of the expenditure was related to earlier-stage programs. So I think this helps to describe how the portfolio is moving along, and we'll talk more about R&D in just a moment. So EBITDA bridge similar to gross margin bridge. We've got revenue increase, which greatly contributed to the increase in gross margin, together with gross margins itself, increase the profitability. The GBP 4.1 million additional costs -- so, this is overheads, GBP 3.5 million of it was this additional provision for doubtful debt, which we put in related to the Indian customer I referred to earlier. So actually, the underlying increase in overheads was relatively low. And then we just talked about R&D we talked about the increase in the quantum of R&D or the proportion of R&D, which was charged to the P&L as opposed to capitalized. That's the effect of it, the GBP 1.3 million additional charge to the P&L. So then moving along to the balance sheet piece, Hannah, thank you very much. The biggest numbers on the balance sheet relate to working capital as in prior years. You can see usefully the stock days and debtor days chart top right has reduced successively over 5 years, showing the good working capital management that we've employed in the business, and that's managed the amount of cash tied up in stock and debtors down to a better level CFO will never be happy with 100 days in debtors or even 109 days in stock. But practically, we're reaching the limit of where we can take this. There might be a small improvement to come, but we'll keep bearing down on it, but I think you shouldn't expect too much more coming out of this as we go forward. But nevertheless, that really has driven cash balances up to this GBP 25 million level. For those that don't haven't seen this company before, just a quick word on structure. In China, we operate through a 51% owned subsidiary, meaning because we have 51% and because we own the IP entirely in that subsidiary, we have to consolidate P&L and balance sheet into the group results. So hence, this is 100% of the China subsidiary. Now when we dividend out cash from China, which is practically the only method of repatriating cash from China, clearly, we lose 49% of that to the China partner. And therefore, it's right to consider that there's a portion of that GBP 25 million cash that we don't actually own because on dividends, we lose that. So the chart bottom right pro formas out the 49% of the China cash to leave what is actually owned by ECO and the shareholders of ECO. So you see a very nice progression over 5 years to nearly GBP 20 million of cash. Now if we move on and develop this argument -- this analysis a little bit further. In order to really sort of demonstrate the value, innate value within ECO and perhaps simplify the way to look at the group, you can think of ECO in 3 parts. There's a business which operates worldwide outside of China, selling Aivlosin and other products into all these markets. And if you do that over 5 years, you can see that the revenue has grown. We're well over GBP 60 million of revenue with increasing gross margins, which is now 52% in this last year. So that's marched up as well. And that has generated increasing EBITDA demonstrated by the chart at top right, which is generating over GBP 10 million of EBITDA within the business. That is pro forming out the R&D effort, and we'll come to that in a minute. Now in addition to this sort of revenue-generating, profit-generating core to the business, you can think about the China business as being an investment from which we receive an annual dividend. The dividends just charted out over the last 5 years has been pretty consistent at the sort of GBP 2 million to GBP 3 million a year level. And the March '27 position is going to be actually stronger than what you're seeing here on the chart for March '26. So a very strong year of dividends coming there. And so those dividends are consistent, and I can confidently say that those will be consistent at this kind of level, irrespective of trading in China. And the reason I can say that is because there's an excess of cash in China, as you saw from the previous slide. And secondly, that there is an excess of distributable reserves there. So we can -- we've got the confidence of being able to distribute out those dividends. So we're getting -- we've got non-China cash of something like GBP 14 million if you think about the core. In addition, we're getting the sort of GBP 2 million to GBP 3 million a year of dividend inflow. And that allows us to fully fund our R&D efforts, our R&D portfolio, which, as you saw from previous slides, GBP 8 million to GBP 10 million is what we're spending each year in that program, and it's resulting in some great new products, the first of which we launched this year. Moving on then, Hannah, please.

So turning to that growth engine of R&D. This shows in yellow our late stage, which are almost completely mature now. The GBP 22 million for ECOVAXXIN MS is our estimate of peak sales, peak year revenue. And we estimate that, that takes about 5 years in each market to reach peak, and we virtually finished that program. So you can -- we expect licensure in the U.S. relatively shortly towards the end of this calendar year, and we're already rolling it out from the EU. We have applied for extra geo expansion licenses already applied for a market in Latin America and one in South-East Asia. So once you've got these major regulatory approvals, in Europe. And then subsequently in U.S., then you can expand out to other markets that rely on that approval. So approval in the EU has allowed us to already geo expand and very little R&D left to complete on that. So a very nice market, and I'll talk a little bit about that in a little bit more detail. We are developing a mini mycoplasma portfolio really because our second mycoplasma vaccine also for chickens is well advanced. A little bit of completion of R&D to do there, but it's very close to finishing that program to submission and then subsequent launch in the 2028 time frame. And at the same time, we have a very complementary injectable anti-infective ECOFlor, which has a great safety profile and a really good therapeutic profile that we are also in the late stages of. So those are the near-term very late-stage products that I was referring to earlier. And then we have 2 clinical stage. These -- we're continuing to advance our bivalent vaccine on the top and a monoclonal program. These have high value and high reward, but there is also more work to do on these, hence, somewhat larger numbers to complete on R&D and the time lines are expected to be a couple of years after the ECOVAXXIN and ECOFlor in terms of reaching the market. So that's our current wave. A little bit of a double-click on our near term. So our near term, and we've got a geographical rollout timetable here for you. If you combine that together, this is GBP 36 million of peak year revenue by our estimates, 5 years to peak, a relatively small amount of R&D still to complete about 10% of that peak year revenue still to do and a large number of approvals and launches coming in the next 12 to 24 months during this period. You can -- as I say, we can -- we've already expanded out from Europe into Latin America and South-East Asia from approvals, and this will continue the same on ECOVAXXIN MG. So we're really, really beginning to validate our R&D portfolio because we've got a major market approval and first launch and the geo expansion is already underway. So very helpful near-term drivers here that will contribute to our long-term value. Next slide, please. This is our -- why are we doing this? So we have already an existing position in mycoplasmas and our 2 innovative vaccines, ECOVAXXIN MS and ECOVAXXIN MG are complementary to what we're already doing, and they are addressing a need in the market. So they are -- there is a prevalence of this disease. They are economically damaging diseases. We have a position in this market. That's why we think we can exploit this through our existing commercial channels and add a little bit of additional expertise in that distribution channel and in our in-house commercial team, increasing our technical strength here and increasing some of our key account coverage. That's the level of investment that we need to exploit these 2 new vaccines. Next slide, please. Just going to double-click a little bit on our European launch because this is important for us. It's an inflection point. So we launched MS in Europe at the beginning of this month, an extremely well-received event. We had a large representation of layers because this is targeted layer birds in the -- at the conference. So that was very pleasing, great reception. Next slide, please, and I'll show you why this is important. The disease that the ECOVAXXIN MS prevents is highly prevalent. So you've -- it's a very prevalent disease, about half the layers can be impacted even greater in Spain, for example. So it's a highly prevalent disease and not very many options to prevent this disease. So we're entering a market that is highly prevalent. And if we go on to the next slide, we can see that this is a market that the Mycoplasma, MS causes significant economic damage. So it's a prevalent disease. This disease causes significant egg production loss, around about 10%, 11% with a range there. It also causes abnormal eggs, so you get downgrades in quality and there's a little bit of mortality, but mainly it's egg loss. And our label and our innovative vaccine has got the best label excuse the fire alarm sound. Hopefully, that will go off. So what I was saying is that there's a significant prevalence of this disease, a significant economic impact, and we have an innovative vaccine that's got an exquisite range of claims on it better than anything else in the market, and there is only one vaccine available as a competitor in Europe. So a very, very nice opportunity here. Next slide, please. So that takes us to our summary and outlook, and we've got a little bit of an investment case here. So our core business is robust and delivering growth at the top line and growing margins. And that is because we're in a good position to control and help producers control infectious disease, and we have a great position in the market already. So the core business and the cash flow from the business and the margins that we're executing already is good. What will drive our future growth is our R&D portfolio. That has got some near-term assets, one in the market already. And in fact, over the next 5 to 6 years, we can have up to 9 new products in the market and 15 approvals in the major authorities, the likes of Europe and the U.S. We've already proven out by launch, and we will see in the next time that we talk, we'll be able to give you more detail on the market uptake. We expect nice market uptake of ECOVAXXIN MS. There will be a period of test and trial, but we -- a nice market here to peak in 5 years. And as mentioned, we've already begun the geo expansion. So core business and future growth coming together very nicely. And so in total summary, just to repeat, results and EBITDA ahead of consensus. We're diversing our portfolio, and we've got a great portfolio behind even the first launch. And in terms of outlook on our final slide, is we have post-period end, trading is in line, except for China, given the reasons that already explained, tough market conditions at the moment. We expect the supply and demand equation to improve as we get to the winter. Our margins, as we've shown, are sustainable and growing. We have delivered the first product from our pipeline, which is excellent news and is delivering on our strategy. And to augment that, we are also pursuing in-licensing and strategic opportunities. We've made an internal appointment as a Head of Business Development to pursue these. Why do we need to do this? Well, as our pipeline matures and products pop out of that, we want to refresh the pipeline and where we see good opportunities for late-stage products that can go through our existing network of R&D and our existing commercial structure, that's what we're looking for. And that's why we are pursuing in that area as our R&D portfolio comes to fruition. So I hope that's given an overview of where we are, what we're doing, what the investment case and the future looks like. And I'll turn it back to Hannah and any questions, please.

Thank you. Can you -- perhaps on you, Chris, can you provide a little more detail around the increase in bad debt provisions?

Sure. Yes. I mean I think we should classify this provision as a doubtful -- a provision for doubtful debt rather than bad debt. Nothing has gone bad at this time. During 2026, we witnessed a slowdown in payments from this Indian customer I referred to earlier. And that, combined with the quantum of the debt has caused us to just take a cautious view of that, which is why we've increased the provision.

Okay. Question here around the -- around Aivlosin, its additional potential and its growth in North America. Obviously, you mentioned North America and its growth there because of superior efficacy. You're also talking about ongoing product development, more formulations and more species. Are both connected? And can you give us some indication of how much Aivlosin has improved over the last 5 years and how much more you see over the next 5 years?

So we've continued in the past 5 years, for example, we've added claims in North America, for example, for use in breeding animals, south safety as it's called. That has expanded the use that allows us to use it across all of the species. So that's a species or a part species expansion and a geographic expansion. We've also got in poultry a 0 -- in certain parts of the world, a 0 egg withdrawal. So that means that you can use the product whenever you want because it doesn't transfer into eggs. In the U.S., we've had -- we've seen 3 reasons -- broad reasons for growth, highly efficacious, customer intimacy helping them solve problems and using complex diseases and perhaps a fourth one beating the competition because of the properties. There is also some opportunity. We don't sell in North America, Aivlosin into poultry. So we're exploring opportunities to expand into poultry. We -- that requires some additional work to do and FDA approval, but we are pursuing that. And that would look for a 5%-ish growth, maybe a little bit more in North America on that basis.

This individual would like just a little bit more explanation. Obviously, you don't manufacture your products, but you also note that half of the inventory is raw materials. Why is that the case? How does it work?

So we have a CMO network. And for our core business, we have a CMO, they make the active ingredient, the API, and that's transferred to us and we fill and finish. So we complete the raw ingredients. And so we are -- we have that raw ingredient in our own warehouses on our balance sheet, and then we convert that into final product. And we do that in a number of different facilities, one owned in China and other CMOs in other parts of the world that near the customer, so Europe and North America broadly. So we have that on our balance sheet.

Just to add a little bit to that, the raw ingredients, the so-called active pharmaceutical ingredients represents about 2/3 of our input to Aivlosin. Hence, the reason why that represents quite a large proportion of our inventory holding. CMO, by the way, is contract manufacturing organization just to interpret the TLA.

Thank you, Chris. Well, perhaps -- this is a nice segue then if we're talking about the cost of raw ingredients. If we take a longer-term view on gross margin, with efficiency and scale gains through the launch of the new products, what can we hope for as a longer-term ambition?

Well, let me explain that in 2 ways. So right now, our first vaccine is margin accretive, so slightly higher than what we currently have. What we expect as we grow volumes is that we can grow that efficiency of production in our vaccine portfolio. It's volume based. As we get more volumes, we will get further margin growth based on the volume and the efficiency. So that will be margin accretive for -- going forward for the next 5 years to each peak of that. We will -- we've been able to show the last 3 years margin growth of our core business, and that looks sustainable. So the margin outlook for those 2 factors looks nice and positive, and we should be above 50% comfortably in our -- particularly in our vaccine portfolio and getting there also on our core business and then progressing up through the 50s.

Changes in the pipeline valuation. There was an NPV 6 months ago of GBP 180 million. Now we're talking GBP 140 million. So what's the driver behind that?

The driver behind that is that we have some products coming off there. And so a positive driver is products moving out of the portfolio and a positive driver is late stage becoming more certain. We have taken one product out of the development portfolio because it didn't reach the required clinical efficacy we had. That had about an GBP 8 million risk-adjusted NPV. That was what we call necrotic enteritis. We took that out early, normal process of R&D development, and we got into -- it's one of the benefits of being in animal health. We got into the target species chickens early, and we looked and we didn't find the sufficient value in that as yet or sufficient value to take it forward. So without spending further money on well, we removed that from the program. So that took some of the NPV down. And to replace that, we put one new product in that we haven't valued in the portfolio fully in the NPV, so that's not contributing. But we -- to replace the one that we killed, we put one in and one is pending. The one in has a lower risk profile. It is a vaccine for use in pigs against a disease that is not well covered by existing products and looks to have broader protection. So we put that in, but that's not valued in the portfolio as yet because we're still -- we're still doing the final figures on that. So those are the 2 main reasons.

Chris, where is your cash held? Is it in China or the U.K.?

It's both. And I think there's an analysis in the release, but about GBP 11 million is in China in the 51% owned subsidiary. And the rest is a combination of the U.K. and other subsidiaries, so Brazil, Mexico, a bit in Japan.

And who are your competitors to PRRS? So that's the largest product in your vaccine pipeline?