Mega Lifesciences Public Company Limited (MEGA) Earnings Call Transcript & Summary

[Audio Gap] So just to give you the initial flavor, I'm just going to begin with saying that the first half has been good compared to what we have done over the last year. In spite of COVID being at the peak, we have seen some good traction in especially 2 markets, Thailand and Vietnam, have done well. But overall, our branded business across the world we are in has done reasonably well. All brands, brands established. And not only just COVID products -- and I'm sure you'll have this question, we'll answer them as we go along, is it only COVID? No it's not only COVID. The hospitals are open now, and people are -- there's more traffic in the hospitals. So [Foreign Language] Even our drug business, we've seen improvements and traction in most of our markets. A lot of new products that are in pipeline are going along. So all the things that we are doing have promises, and there are issues in spite of the headwinds on fuel cost, energy cost. There have been price increases in a lot of materials. But in spite of all that, with improved efficiency and maybe management of cost, we are still performing well. Thus, the overall guidance, how are we going to do in the remaining half, we still hope to see that we'll continue not growing at the rate we grow in the first half. But overall, as we guided, we should end up with something close to last year of plus/minus 5% to 8%. I mean that's what we had guided [ to seeing ], plus/minus between single digit, not high, but in single-digit level growth in bottom line and top line. So we are still hoping that will happen in the next half. Are there headwinds? Some countries have some issues. Ukraine is one. But we are still doing business, and our business still continues to do fine. We don't expect to see a lot of growth, but we still expect to see business going on. Sri Lanka is one of the problem areas. But in spite of that, we have stocks. And I think [ many LCs ] are being open, goods are going, but it won't see what it used to be years before. So we may have to wait for a year or 2 for it to return to normal. But in spite of all that, we still have products going in, and we are hoping to see that continue over the next 6 to 12 months. Myanmar is a different story. There's a long discussion on that. We will talk about it a little bit more. So before I talk a lot more about the past and the future, future, we remain very focused that by 2025, as we have promised, to double our bottom line compared to our 2019 results. Our 2019 results were about 1,200. We had projected that by '25, we should reach THB 2.4 billion to THB 2.5 billion. I think we are on course. We still remain committed that THB 2.5 billion is very, very likely will happen by '25 with all the strategies we have in place, all the work we are doing. It's all going on the right direction. So I think we will achieve that. The special growth in the period of COVID are exceptions. In spite of that, it's good sign that we are maintaining that for the last 2 years. After COVID, general consumer sentiment around the world is that a lot of these products have actually gone -- will have come down, but they have still reached a new high. So the base has increased. So that's the good thing is a lot of products, the base number of users has gone up. The general wellness consumption has gone up. So a lot of our products which are registered as medicines, C, D, not just the [ fun ] products or the products for quick business during COVID, not those, but established brands are doing well. So I think we are in good position with the right products, right categories, right countries we are in. So looking at all that, seeing our history and seeing our brands, we are, again, as I said, very confident to deliver on our long-term growth. Short-term second half can be a little bit slower. If COVID starts to reduce and die down, there will be some impact. But the good thing is all the other products still continue to do well and will continue to grow. So we remain confident that we should be able to deliver that single-digit growth in the second half and overall for the year 2022. So I will stop here for the moment. [Foreign Language] Khun Francis will give you the background and the details of the financial statement for the half year and the quarter, and then we'll open up to Q&A. [Foreign Language] Khun Francis, over to you.

Thank you, sir. Good afternoon, everyone. On behalf of Mega Lifesciences, I will be taking you through Mega Lifesciences' H1 '22 performance and quarter 2 '22 performance. In H1 '22, overall revenue was THB 7.75 billion, reflecting a growth of 12.9% on Y-o-Y basis. Brands grew by 23.7%. All regions performed well. Southeast Asia, which constitutes 79.3% of the branded business, grew by 25.8%, while Africa grew by 23.6%. Distribution business grew by 3.5% on Y-o-Y basis. Overall, Mega We Care segment contributed to 51% of the total revenue as against 46.6% in H1 '21, while Maxxcare contributed to 47% of the total revenue as against 51.3% in H1 2021. OEM business remained steady at 2%. Overall gross profit improved to 43.7% of the operating revenue in H1 '22 as compared to 40.2% in H1 '21. The growth primarily driven by the high growth in branded business, which was causing a favorable revenue mix and better segmental gross margins. Mega We Care gross margins were 68% in H1 '22 as against 65.6% in H1 2021. Maxxcare gross margins remained steady at 17.5% in H1 2022 as against 17.2% in H1 2021. Overall net margin of Maxxcare business remained steady at 48.7%. SG&A expenses stood at 26.7% of the operating revenue for H1 '22, similar to H1 '21 where the SG&A expenses stood at 26.1%. Reported net profits were THB 1.182 billion, reflecting a growth of 41.5% in H1 '22. Adjusted net profits were THB 1.191 billion, reflecting a growth of 40% in H1 '22. Adjustments to net profits are arising out of currency gains and losses, losses from new businesses which are investments in future and material nonrecurring items of income and expenses. Overall, operating cash flows were THB 826 million, representing 70% of the net profits. We continue to be a net cash company with a very strong balance sheet. On the CapEx front, we have spent THB 187 million towards CapEx in H1 '22 with majority of the spending, THB 135 million, spent towards consolidation of manufacturing operations and capacity expansion in Thailand. On the new product side, over and above the 16 new unique products which we had launched in 2021, we plan to launch 26 new unique products in FY '22, 12 products in the nutraceutical category and 14 products in the prescription products category. On the second quarter '22 performance, overall revenue was THB 3.93 billion in second quarter '22, reflecting a growth of 9.3% on Y-o-Y basis. Brands grew by 16%. The distribution business grew by 4.6% on Y-o-Y basis. On the gross profits, overall, in second quarter '22, gross profit improved to 42.6% of the operating revenue as compared to 41.9% in second quarter '21. Mega We Care gross margins improved to 66.9% as against 66.8% in second quarter 2021. Maxxcare gross margins were 16.3% as against 17.7% in quarter 2 2021. Overall SG&A expenses stood at 27.6% of the operating revenue as compared to 26.5% of the operating revenue in quarter 2 2021. Reported net profits were THB 569 million, reflecting a growth of 13.3% in quarter 2. Adjusted net profits were THB 557 million, reflecting a growth of 15.2% in second quarter 2022. Going forward, apart from the 26 new products which we plan to launch in year '22, we also have 186 new products which are underdevelopment and which will be launched in the years to come. On the CapEx side, over and above the routine maintenance CapEx of $2 million to $3 million a year, we are also expecting to spend THB 506 million in the next 2 years, out of which THB 295 million will be spent towards consolidation of manufacturing operations and capacity expansion in Thailand and THB 46 million will be spent towards ESG. We also plan to spend THB 165 million towards adding new dosage form, warehouse and plant upgradation in our newly acquired Indonesian manufacturing plant. With this, I open the forum for Q&A, and we request you to give your name and the name of the institution that you represent. Thank you.

Thank you. Yes, please. I think Francis has covered most of the things [ I agree ]. And I think we have also talked about our ESG in the last session, explained what we are doing. And that's an initiative we have started for real purposes. Mega has been doing it for a long time. We use solar. We do a lot of variable motors, LED lighting for a long time. So we are there in many, many ways. We use single-use plastic. Our carbon footprint is very, very low anywhere around the world. So we do everything possible to run a good, clean, governed plant. We have a very high female-to-male ratio. We have [ hedge in ] businesses across. [ We're heavy ] not just in common workman places. So we have a very diverse and a very open environment in terms of governance. We are -- we've been doing this for 35 years. We have very little legal or issues with any government. I mean there are things that happen which are beyond our control or things we didn't know, but not by design. So as a company, we've been governed and made a practice of living our life. We are doing that CapEx, you know already. Indonesia is one area we are building a soft gel line, which will be -- we have to start the design and the construction work. So that's in progress. Other than that, there is no major initiative, except the factory that we're building in Thailand, which should be ready by the end of the year, the new section. And so we can move the old plant here. But no major expansion but new dosage forms in liquids and sachets and all of that, that we are doing. And some expansion in facility and capacity in Australia where we do a lot of our sachet and probiotic products. So that's largely -- and most of the investments are in new products; new doses; and the countries where we are investing and building a stronger Mega We Care and the We Care brand through our wellness We Care facilities where we do a lot of work in rehabilitation, disease management, lifestyle management; and then our digital work that we are doing not only to monetize but to reach our patients and doctors to health at home. And they are all connected into one ecosystem where we are doing things in many markets on diabetes, mother and child programs and connecting the consumer with the doctor and with their advisory services on health. So all this work is going on, and that's how we are planning to build a strong We Care brand, which is sustainable and can continue to deliver growth. In spite of the hiccups in the world market, we believe we are on the right track. And given some time with all these things happening, we should achieve our goals of that THB 2.5 billion or more by '25. I have nothing more to add, and I think I'm going to leave the floor now to questions. When I could preempt some of them and explain some of them, I'm sure those questions will come again. So better you ask and we shall answer. All right? [Foreign Language] Okay. Open to your questions, please.

Khun Vivek, this is Yuwanee from Maybank. I have a few questions. The first is on the second quarter. We saw that the gross margin declined Q-on-Q for both branded and distribution. Do you have any color on that or any explanation why is that?

Gross margin?

Declined Q-on-Q.

If you see on the branded business, gross margins are more or less stable. I think from 68 point something, that's dropped down to 67%. But we have always guided that this is not a sustainable level of gross margin for branded business. If you look at us historically, our gross margins have been in the 63% to 65% range. So we expect our gross margins to settle down at that range as we go along. What we are seeing this year is the high capacity utilization is leading to this high gross margins. And we feel that with cost inflation, everything going up slowly. Slowly, our gross margins will settle down to that 65%, 63% range. So our guidance on this remains the same that we have been saying that before. On the distribution side, I think there has been a change in product mix during this quarter. But fundamentally, the gross margins of 17.5%, I think by end of the year, we will still come to that. So it's quarter-to-quarter based on changes in products and, in principle, mix, this can change. So we don't expect -- nothing has changed fundamentally. You can see that despite all the challenges in Myanmar, our distribution business is still flat as we had guided. I mean we had actually guided a negative growth, but that is still not happened. We still were able to maintain the top line and the profitability as well. And we expect the gross margins to stabilize towards historical levels or at least towards last year's levels by end of the year. Thank you.

By stabilizing, you mean quarter-on-quarter, third quarter will decline? Or do you think...

I think it will come back to last year was 17 point...

[ 17.1% ].

And we will come back to that. I think that is the indication. Quarter 1 this year was also 17...

[indiscernible] 18%.

18%. So I think around that 17.5% mark towards the end of the year. That's what we expect.

And for branded as well? 66%?

Branded, I think probably 66%, around that in the next quarter.

My next question is about your guidance. You think it can grow 5% to 8%. If you break down into branded and distribution, what is the likelihood of -- what would be branded growth and what would be distribution growth?

We don't really break it down into that many details, but you can see the trends. Brand is still growing at...

Branded grew in the first half by how much? 23.7%.

And distribution is flat.

3.5%.

Yes. So if the trends continue, we are still looking at similar growth rate towards the end of the year. That's what we are guiding.

But overall, we are saying 8%, 9%. So brand will go down, and the distribution maybe flat...

Distribution, double-digit [indiscernible].

Overall, by the end of the year, to achieve that single digit, brand will probably also come down. That's our view that the brand will probably come down. And overall, we are saying 8% to 10% -- 5% to 10%. But at the moment, we are delivering overall growth of 12.9%, 13%, right? So there will be a decline in both. Distribution is being largely affected by Myanmar, especially consumer products. And ability to import pharma may not have that big a decline, but the consumer products can have, so volume-wise. So I think the branded business should grow but will not be at the same rates in the first half, and the second half will be a little lower. So that's why our guidance is that we can be anywhere between this 5% to 10% if things look good second half because a lot of the other products, as I said, the hospitals are opened up and non-COVID products are also doing well before. Allergy, loratadine, Gofen, all of them are showing growth. So it's not just that only vitamin C is doing well. So the other products in most of our markets are also doing well. In some markets, the COVID products are still good as Thailand and Vietnam. But other than that, largely, non-COVID businesses also doing well. So we will see some traction, some things changing in the second half, and that's the view we have. And that's the view we also see in most markets as well. But the good thing is these are old-time, established brands. So they are there for a long time. They don't drop away to the bottom because they already had a strong base and now they have a new base. So we have many good signs to it. So having said that, we are still hoping that we'll grow overall and we'll achieve this single-digit growth over profit last -- over last year also.

On the branded, do you see the vitamin sales went up in the second quarter as well? What -- I mean, you have medicine and I put it as vitamins. Quarter-on-quarter, it was flat. Did you see the change in the mix in that branded segment? What's happening to the vitamins post-COVID? What do you think?

We had growth of vitamins also in the second quarter. It's not that we didn't grow. We grew second quarter also. But sometimes, looking at this, it's not -- when you look quarter-to-quarter, it's not a very good number because the last year quarter -- last year's second quarter may have been a very high sales. So this year's second quarter will look bad against last year's second quarter. That's how you compare, right? Last year's second quarter was the peak of COVID. There was peak of stocking up. So I think it's not a very good measure to look at quarter compared to last year's quarter, but quarter compared to the first quarter this year. Again, the consumption of many, many products in the first quarter was higher because of COVID. So the second quarter, it's a little bit down. But overall, to achieve 27% -- 23.7% growth, it has to be across the board. So it's been everything, including drugs have grown. So when we say vitamins, we have consumer health. We have probiotics. We have medical nutrition. We have herbal medicine. We have pure vitamins. So they are not all COVID-related products. We also have over-the-counter drugs: Gofen and loratadine, Loreze, ZIRIN, all these. So I think all of them have shown growth, but the vitamin part and some of our cold cough medicine, EUGICA, had also grown. So that's also shown growth. So we see -- when we see growth here, we are growing over the whole half. I mean I don't know. But just quarter-to-quarter, between first quarter, second quarter is lower growth.

Yes. So our branded business [indiscernible].

Still grow. But compared to first quarter is...

[ Highest ].

Compared to first quarter will be still higher.

Okay. My last question is on Myanmar. I saw that they have a new kind of capital control. I'm not exactly sure what it means, but the 65% capital control in regards to the FX. Do you think the...

Myanmar, there are a lot of things going on. Yes, you're right. I mean there are a lot of things going on. This is a new -- [ one is they have allowed ] that you can import and buy dollar. Like in the old days, about 20 years ago when we are doing business, you can work with exporters, right? Exporters export things, and you can work with them and send money out. So that gives you the freedom to work with. So the import licenses, anyway, for pharmaceuticals are not banned, and you can still get import licenses, part 1. Part 2, exporters who export can -- you can buy from them and do -- but capital control means that 65% of it is not available. 35% of the export dollars are available for imports, right? So that's the second thing. And the third thing is you can also buy dollars in the open market. So for pharmaceutical companies, that's a good thing. In the older -- everything -- you can buy -- I mean, you can buy through these exporters. So all the export companies who are exporting goods, we can buy -- 35% of their export proceeds are available to us to buy for whatever we are importing. So that's the capital control that's coming. 65% of the money coming in cannot be -- is taken by the [ government ]...

Actually, it's better because before, 100% had to be converted. Now they're allowing -- 100% had to be converted in local currency. Now they're allowing 35% to be held as dollars. So it's actually a better improvement. Also, the detail [ as to ] our response to what is happening in Myanmar, we have filed with the stock exchange. You can have a look at that, too.

Okay. Last question, how does third quarter compare to second quarter. What's your take?

I think [ very difficult ].

Look at historically, fourth quarter is the biggest quarter. But last year, it was not the case. So because of COVID, we had a very, very big second quarter. Third quarter was big. Fourth quarter was not as big compared to otherwise, we -- and also, in our plan over the years, the pushing in the last quarter has gone away. So you don't see the fourth quarter as a very big quarter always. But third quarter was big. Fourth quarter was also good but not the biggest. Generally, fourth quarter is always the biggest. Second was the slowest. Historically, because of holidays and Songkran and all, second used to be the lowest.