EQL Pharma AB (publ) (EQL.ST) Q2 FY2026 Earnings Call Transcript & Summary

Okay. So warmly welcome to the Presentation of the Second Quarter. As you can imagine, it's been a few very busy months here for us at EQL trying to work out our different challenges. Right now, me and Anna are in India, traveling around, working together with suppliers. So I hope the network connection is [ strong ]. But we will do like normally. I will go through some financial parts, mainly focusing around, of course, the challenges that we've had in the second quarter and focusing on how we are working to resolve those, also giving an update on business development and portfolio development to give you a feeling for a little more how we're working long term to secure our growth. So let us start with looking at the quarter 2. So I think that most of you know, it was a very weak quarter for EQL. So sales only grew by 1%, and this was mainly driven by several unexpected delivery disturbances from -- for some of our key products and also for some of our really high-margin products. So this means in effect that since we have been growing, we have basically been growing by 40% since 2019. We have also increased our cost base to be able to deliver on future requirements, also to be able to handle the growing portfolio. So that means if we are stock-out on some of the really important products, first of all, it drives down gross margin, of course. Secondly, it will impact EBITDA quite severely since the OpEx base is higher. So the gross margin was down to 38% in the quarter, and that is basically driven by the fact that we've been stock-out on some of the really high-performing products in the portfolio. I think we still have somebody that needs to mute. Maybe, Anna, you can help me unmute. Thank you. EBITDA margin, 10%, obviously, which is far, far away from our target and also far away from how we delivered in the same quarter last year. But it's basically for the same reason what was mentioned above. CapEx was a little lower in the quarter. And there is no -- let's say, there is no conscious reason for that. We are not doing anything to slow down our CapEx spending at this point. That's not where we are. It's more about timing with projects meeting different milestones. So CapEx is expected to be higher again in Q3, which is basically a good thing because it means that our projects are meeting their time lines and that we can add new products to the portfolio. The growth outlook for '25-'26 is adjusted to around 15% with an EBITDA outlook, I don't want to say, forecast because normally we don't forecast EBITDA, but I wanted to comment on it at least. So it is our estimate that it will be around 20% for the full year. And our leverage ratio is currently at our internal limit of 4.0, which means that we need to monitor our leverage very, very clearly. There are no external covenants or so activated on this level. But internally, we are, of course, reviewing it extra carefully. And with basically the key topic being to bring up the EBITDA again, which I am hopeful that we will be able to do already here in the third quarter and gradually curing this number. In September, also, there was an exercise -- early September, there was an exercise of a warrant program in the company by me and a couple of other colleagues who choose to increase their ownership in the company because we obviously believe a lot in what we're doing over time. So that meant SEK 31 million cash addition to the company, which means that we now have a comparatively strong cash position of SEK 78 million, which will come in very handy here with the business development initiatives, which I will come to. So on the business dev side, Mellozzan has been approved in Turkey in the quarter. And our partner there, they expect to launch it in Turkey in the second half of our financial year '26-'27. So that will be very exciting to follow. They also expect their approval for Kazakhstan during that period. So the Kazakhstan procedure is a little slower than the Turkish procedure. So we are waiting for that as well. Mellozzan has also been launched in the U.K. by our partner, Medice, which is a good milestone. We have the organic growth initiatives for Germany and the Netherlands. So during the quarter, our 2 heads of Germany and Netherlands have been onboarded to the company. The Dutch Head, Philip Sousa. He started 1st of September and has been in onboarding and started his work to identify niche products for the Netherlands. And our Head of Germany, Matej Wrabicz, started 1st of October and has been onboarded to the company and is looking for good products for Germany as well. So what we are doing here is that we are trying to basically repeat what we have done for the Nordics, where we were able to find approximately 100 niche products based on the Nordic demography. We will aim to do that also for the German and the Dutch markets. In parallel to that, we will, of course, also see if any of the current products that we have in the portfolio or pipeline will make sense to launch in Germany and the Netherlands that we will be able to, let's say, generate some quick successes in those countries. And basically, the target for these 2 initiatives. So when we presented our 5-year plan, our new 5-year plan in March of 2025, we have not yet decided for this initiative. So this becomes like an add-on to the plan. And our target with these 2 initiatives separately is that within the span of this 5-year period, so before '28-'29, that we shall have some significant sales contribution from these 2 markets. Specialty Generics, which is also a new organic growth initiative that was launched during the Capital Markets Day in March is progressing well. And we aim to launch the first Specialty Generics products of more significant character we aim to launch in the next fiscal year, so '26-'27. On the operations side, obviously, we have a very, very high focus right now on solving the supply issues that we have been facing, both solving them operationally in the short term, but also making sure in the long term that we are more robustly built for handling supply deviations like that. And I will come to that in the next slide. Also, of course, very, very high focus on the pipeline right now, so to add products for the Specialty Generics business unit and as quickly as we can generate our first launch portfolios for Germany and those into the regulatory phases and thereafter into launch phases. So if we look at -- zoom in a little bit on the issues that we faced in the quarter regarding deliveries, we have done quite thorough root cause analysis, trying to understand why have certain supply delays happened and how can we manage it into the future. So it has been decided in EQL management and also together with our Board of Directors who have been carefully coaching us on this topic to, first of all, upgrade our forecasting procedures to another level. So we have, I would say, fairly good forecasting today, but we mainly work with forecasting on a quarterly basis and we can upgrade that to work more granularly on forecasting and also working even closer with our customers on their forecasting in their markets. We have to date been living in Microsoft Excel basically, believe it or not. So during my years on EQL Pharma, we went from SEK 30 million revenue to SEK 400 million revenue. We have been managing that with more and more complex Excel models, but we have now decided that we need to move into a proper ERP system because our universe has become too complex to handle in Excel basically. And that is one way why I would say that you can view some of these operational issues we're having right now as, let's say, growth pain or Vaxtvark in Swedish. So a company that has been growing on average 40% now for 5, 6 years. We view it as quite, let's say, quite natural that we move into process, technology, organizational challenges that we need to solve, of course, but these are known and solvable challenges. So we have also decided to establish a proper supplier relationship management and to upgrade the ones that we're already having. So basically utilizing the full toolbox, the full sourcing toolbox of supplier relationship management with more regular performance reviews with suppliers, more clearly defined KPIs and metrics with key suppliers to make sure that we have the same view on reality and tracking the most important parameters. Fourthly, here on the list, we have our internal safety stock policies, which obviously here in some cases, we have deviated from. And we should basically never deviate from our safety stock policy. Our safety stock is a stock level you should never go below. So we need to increase our diligence in managing those safety stock levels. We have also identified a couple of improvement areas between our supply team and sales team. So basically bringing those 2 teams closer together and upgrading our sales and operations planning cycle, both on tactical and operational level to make sure that we are in control of supply. Same as supplier relationship management on the supplier side, we want to strengthen our key account management on the customer side. So it's basically the inverted process, just how to work together with our customers in the best way. So for example, for Mellozzan and for Memprex, volumes are growing quite heavily year-on-year. And it's very important for us to work closely together with our customers and manage their expectations and forecasts and see how we can be the best possible partner to our customers. We have also, in some of the cases for these supply delays, we have had products where the production -- where there have been deviations in production, telling us basically that the production technologies are not 100% stable. So we have identified the key products there where we need to work on really identifying the root causes of production batches being out of spec or being impossible or unable to release to the market. And just to give you a little bit of feeling what sort of KPIs we are tracking here to make sure that we are going in the right direction. So we have one KPI that we call lost sales due to stock shortage. And what that means is basically any sales opportunity that we as a company lost due to poor planning because that is a very important KPI because that is in our control, in our own control. So that one we will -- we are tracking and we will be tracking and try to bring down as much as possible, of course. The other extreme, what can happen is, of course, if we have too high inventory levels, there is a risk of scrapping. So we're also following a KPI we call scrapping due to poor planning. In every company, sometimes there is scrapping. It can be due to poor planning or it can be due to some market conditions changing. But in this case, we follow the scrapping that we will have due to, let's say, our own misplanning. That will give us a good indication of where we need to improve. Finally, we're looking at something we call percent of SKU. So SKU means stock keeping units. So it's basically an individual product. So we have one KPI we call percentage of SKUs or products whose inventory are under control, where we are between our safety stock level and our maximum stock level. And that will be tracked and followed and supply accuracy, of course. Moving forward to the overall plan, looking here. It is for -- it's basically for the first time here that we are lagging a little bit behind our plan. And it is due to the lost sales opportunities due to supply deviations. And we will catch up with the plan. I don't know exactly when we will be on track with the plan again. So in this year, it looks like we will grow approximately 15% and next year obviously looks a lot stronger for the time being. We have also decided to -- since we do not only measure our sales growth, we also have our EBITDA target. So we have now, as a company, decided that we will focus extra much on the EBITDA levels going into next year and see what can really be done there because now we have reached such a critical mass of sales that we can really start working in a structural way with our COGS mass, with our OpEx mass, with our interest costs and so on to really, really take responsibility also for the bottom line here. And that will then in the long run answer the question when we want to stabilize at EBITDA level somewhere above 25%, what can that above 25% actually mean. The snapshot again of the portfolio and pipeline. So no launched products in the quarter here. That was also I forgot to mention earlier. We had 2 launches, 2 quite nice launches that were planned here for second quarter that were also delayed into the fourth quarter due to supply delays, which obviously impacts the result in the quarter quite heavily. Still 46 products in the pipeline here. And in the bottom right, you can see the latest update of the view of expected launches per year going forward. Just reiteration of the targets. So reiterating my point here that we, of course, focus both on top line growth and on EBITDA margin. But I think that it can make a lot of sense now also having seen in the quarter. I think was very powerful for us to see how just a few supply deviations can impact our EBITDA so, so much. And we haven't really seen it before because we haven't been in that situation before. But it was a very powerful realization that I think motivates everybody to work really, really hard on all the lines in the P&L basically. So I think I will stop there and I will open up for questions. So if you have questions, you can either -- I think Arvid was first.

So first off on supply and sourcing. I guess, if you would characterize it, how would you describe the development and visibility for the products you've been unable to restock since the profit warning in September? And I understand that the ERP system is still being implemented, but do you feel like you now have a plan with enough buffer to avoid additional stock-outs going forward? I'll start there.

So in a situation where you are stock-out on a couple of important products, of course, priority 1 is to get back in stock with all those products, and that we are focusing on really hard. And in that case, every single product has sort of a story in itself that activities that we need to complete before we can release new product to the market. I feel I have a lot more visibility now than what we had when we did the profit warning, which is also a reason for my guidance of around 15% sales growth. So on some of the products now, we have firm delivery lines. On others, we are still working, but sort of firming it up.

Okay. Fair enough. And maybe a quick follow-up on that one. And based on your working hypothesis, when do you expect these sort of higher-margin products that you currently don't have stock to be back in full effect, which probably makes sense?

For one of them that is quite important to us, we hope to either be able to start sell it again in December or in January. It will depend a little bit on how the final transportation goes and it will depend also on how the quality release will go, but either January or December. For our second important product, we will get sequential deliveries in November, December, some in February, some in March. For the launch products, we are expecting now to launch one of them in Jan or Feb and the other hopefully in March, but I will have to come back on that one.

Okay. Fair enough. And maybe just the last one for me. So on the B2B side, it looks like a decent quarter given that you also had supply issues on this side as well. So how should we interpret that? Is there any major milestone baked into this related to Turkey or any other events? And what are your expectations for the full year?

There are no major milestones. So whatever is going on, on the B2B side is basically due to Mellozzan and Memprex deliveries. Also bear in mind, we had quite a few Memprex deliveries planned for the second quarter. But due to supply issues, we were not able to deliver those in second quarter. So it will be delivered in third and fourth quarter instead. But right now, my feeling for the B2B delivery pipeline for quarter 3 and quarter 4, that one is quite positive, I would say. So there, we could create a little bit of upside for ourselves. And I will check here in the chat. There was one question. Let's see. So we have a question from Max. [Foreign Language] Okay. So I interpret that basically as the same question that Arvid asked. So how does it look right now? And what do you expect forward regarding the stock-out high-margin products? Yes. So I think I tried to answer that as good as I could without taking into too much detail in our supply plans. But let's say, a gradual restocking here starting from December and onwards. There's a question from [ Krister. ] Why is the gross margin so low? With the additional or with the high-margin addition from the Medilink products, the gross margin should have increased. Okay. So on the gross margin side, there are things affecting in different directions. So it is true like Krister is saying that we launched the Medilink products here and they are in generally higher gross margin. The caveat with the Medilink products is that for a period of 9 to 12 months, we have to make use of transition services, transition services from Medilink. And let's say, business practice in these type of acquisitions is that the selling company charges 10% of total sales on that. So our gross margin is mechanically 10% lower for the initial period on those products. So they are performing sales-wise very [indiscernible] but gross margin-wise, in the first period here, they are performing a little worse. So that is one thing. Secondly, since I'm lacking a lot of my high-margin contributors like Doxycycline, like Pregabalin and some other products that typically contribute to drawing up the average gross margin. That also contributes to a little bit lower gross margin. And finally, the last thing is that one of the sort of major tender products that we won for the financial year '25-'26, we will have here a little bit lower margin initially since we need to come up with an optimal logistic solution for that product, which will be implemented here during the second half. So there is also some possibility to improve the margin on that product. So just let me know, Krister, in the chat, if you feel that I answered your question. And in the meantime, thumbs up from Krister. Not on the gross margin, I suppose, but on the explanation at least. A question from Rasmus. Could you provide some insight into the recruitment of the new CCO? Yes, I can provide some insight, but on a very high level. So we are in really, really final stages here with an amazing candidate that I think will be a very, very nice fit with EQL and be able to bring in a lot of energy, focus, seniority into our work. And as I say, we are in very, very late phases with this candidate. So I hope to be able to come back quite shortly regarding the future on that. Philip is having one question here. Have these shortage problems, and hence, the reduced profit affected your CapEx plans going forward in any way? That is a good question. I think all questions are good, but this one I like because it is really, really important to think about that. So when you are facing challenges like wood supply, how strongly should you react because we want to keep growing and there is fundamentally -- let's say, there is no fundamental issue with the demand. There is no fundamental issue with the business model. We are basically suffering some operational issues. So our philosophy has been that I don't want to slow down the CapEx plan too much. So what we will try to do to create some buffer basically in the leverage figure will be more related to the OpEx side of things and working on improving the EBITDA again and trying not to delay any projects or such if we don't have to. If we have to, we will do, but that would not be my primary selection. My primary selection would be to work a little bit with our OpEx, with our EBITDA. And before we touch the CapEx plan, I would rather look into the inventory build-up plan and see if we can release some cash from inventory before affecting the project too much. Any more questions here from everybody from anybody? In that case, just a few final words from my side. So I mean, over the past couple of years here, I'm quite proud about the growth that we have been able to deliver. Obviously, I'm not at all satisfied with this quarter here. This is not at all the type of results we want to present. But I feel that we have done very good exercises in the management team and together with our different functions, together with the Board to really understand where we need to focus and where we need to improve to be able to be robust on this new level where we are now on SEK 400 million revenue. So that is, I would say, something where I feel quite comfortable that the plan forward is clear and it's well analyzed and it's clear to us what we have to do. Victor has added one question. Could you remind us where, if any, covenants are on the bond had limit thresholds on your headroom? Yes. So we have set as internal sort of limit. We don't want to go above 4.0. And in the bond, we have 4.5 as the external covenant. But we, of course, aim to not go anything above 4 because that is what we have said that we should not go above and then we shall not do it.

Axel, it's just Victor again. I thought easier to speak instead of type it. On the last call, I think there were some questions on your CMO relationships and everything. In the recent events that's changed or are you thinking a bit more proactively about perhaps diversifying your CMO base and supply base going forward as well, especially as your products and scale kind of increases as well? Is that something on the horizon and something in the works right now?

Yes, it is something which we are working with. So of course, creating redundancy and second supplier options for our most important products. That is one thing, which is important in what you're mentioning. Also to, let's say, as we grow, create an even more diversified supplier base without, of course, creating a too fragmented supplier base. So it always has to be a balance there.

Excellent. And is it mainly regions like India, you're going and speaking to a lot of these CMOs or sort of kind of a diversified batch? And how are you finding discussions there on the quantities you're kind of speaking about? Are you having good traction with the guys you're speaking to?

Yes. I think we're having good discussions with a lot of different CDMOs in different geographies. So we basically, we don't have a geographic bias, let's say, when we select a CDMO, we try to focus on the specific technology needed to develop a certain product and then to deliver it in the commercial phase, and of course, on the commercials and then sort of geographics is secondary. But we are in constant discussions with a lot of different CDMOs, both in Europe and India basically. Another question from Krister here. What are the risks that we might see similar delivery problems in the future? Hard to say, I understand, but what is your thoughts on this? Yes. So I mean, I think we are going to see delivery deviations in the future, of course, as we have in the past. So remember, over the years -- over my years in EQL since 2018, we have had a lot of delivery challenges, but we have always managed to work it out internally so that it has in the end not significantly impacted any financial results, meaning we have been able to sort it out with safety stock levels. We have been able to sort it out with express handling and, let's say, local heroes in the company working it out. My feeling that we weren't able to do that this time is that we are -- we have a complexity now on a different level, which made it that we simply weren't able to sort of last minute get these deliveries here. So I'm quite sure that we are going to have certain delivery deviations into the future. But I think our responsibility now as a management team is to build an infrastructure around ourselves, with our suppliers, with our logistics partners, with our ERP system, with our planning module, everything so that whenever there is a supply deviation that we see that early and that we are able to mitigate it so that it doesn't impact the financial result. Maybe a little bit fluffy, Krister, but those are my reflections on that topic. Okay. So in that case, thank you all for dialing in, and thanks for good questions. I really hope that when we -- I don't only hope, I really believe that when we meet for the Q3 report, we will be looking at more EQL-like figures. So hoping to see you all next time in a more positive atmosphere. Thank you very much. Bye.