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

Good afternoon, everyone. Thank you for joining the session. A warm welcome to all of you on behalf of Mega Lifesciences. I'll be taking you through a synopsis of the financial results for full year 2022 and fourth quarter 2022. Overall revenue in full year '22 was THB 15,686 million, reflecting a growth of 11% on Y-o-Y basis. Branded business revenue was THB 8,000 million, representing a growth of 16.6% on Y-o-Y basis. The growth in revenue in FY '22 is coming from Southeast Asia and Africa, driven by strong consumer demand for all product categories and partially driven by depreciation of the Thai baht. Distribution revenue was THB 7,320 million, representing a growth of 6% on Y-o-Y basis. Normalized, the growth was 1.1% on Y-o-Y basis. Despite the ongoing situation in Myanmar, we're still able to maintain the sales for the distribution business at similar levels as FY 2021, which was partially helped by Thai baht depreciation. Overall gross profits at THB 7,040 million improved to 44.9% of operating revenue in FY '22, as compared to 41.8% in FY 2021, given relatively high growth in branded business causing favorable revenue mix and better gross margins for branded business. Branded business gross margins at THB 5,397 million remained healthy at 67% in FY '22, compared to 66.2% in FY 2021. Standard gross margins for branded business are usually in the range of 63% to 65%, and we expect the same going forward. Distribution business gross margins at THB 1,520 million remains steady on a normalized basis at 18.1% in FY '22, as compared to 17.5% in FY 2021. The reported gross margins were slightly higher, at 20.8%. Normalization is required due to dual currency rate in Myanmar and temporary delay cause in remitting money back from Myanmar on a timely basis, which results in a higher sales, higher gross margin and correspondingly higher FX loss, but not materially impacting profitability. However, our net margins, which is EBITDA as a percentage to gross margins, remained steady at 45.9% in FY '22. Going forward, we can expect the normalized distribution margins to remain at similar levels as year FY '22 on a full year basis. SG&A expenses at THB 4,359 million remained steady at 27.8% of operating revenue in FY '22, which is quite similar to FY '21, where the SG&A expenses stood at 26.7% of operating revenue. Reported net profits were THB 2,240 million, reflecting a growth of 15.4% in FY '22. Adjusted net profits at THB 2,290 million reflected a growth of 21.7% in full year '22. Adjustments to net profits are made for ForEx gains and losses; losses from new businesses, which are investments in future; and material items of income and expenses, if any. Overall, the net profits have improved due to growth in branded business revenue, better segmented gross margins and stable SG&A. Operating cash flows were THB 1,997 million, representing 89.1% of net profits. We continue to be a net cash company with a strong balance sheet. On the CapEx trend, we have spent THB 320 million towards CapEx in FY '22, with the majority spending, approximately THB 243 million, towards consolidation of manufacturing operations and capacity expansion in Thailand. We plan to launch 23 new unique products in FY '23. On the fourth quarter '22 performance, overall revenue in fourth quarter '22 at THB 3.884 billion reflected a growth of 18.7% on Y-o-Y basis. Branded business revenue at THB 2.061 billion grew by 23.5% on a Y-o-Y basis. The growth in revenue in fourth quarter was again driven by strong consumer demand and partially driven by depreciation of Thai baht. Distribution business revenue at THB 1.752 billion grew by 15.2% on Y-o-Y basis. On a normalized basis, distribution revenue was up by 4.5%. Despite the challenges in Myanmar, distribution business remained stable, partially helped by Thai baht depreciation. Overall gross profits of THB 1.79 billion improved to 46.1% of operating revenue in fourth quarter '22, compared to 43.3% in fourth quarter '21, given stable revenue in branded business and relatively higher reported gross margins in distribution business, as explained earlier. Branded business gross margins of THB 1.35 billion remains steady at 65.3% in fourth quarter '22, which was quite similar to 65.7% in fourth quarter '21. Distribution business gross margins at THB 413 million on a normalized basis represented 22.6% of operating revenue in fourth quarter '22, compared to 18.7% in fourth quarter '21. SG&A expenses at THB 1.19 billion stood at 30.7% of operating revenue, which is quite similar to fourth quarter '21, where SG&A expenses stood at 27.5%. The spending in SG&A usually varies from quarter to quarter, and the higher spending in the fourth quarter '22 is as per plan. Reported net profits were THB 400 million, reflecting a decline of 19.2% on Y-o-Y basis in fourth quarter '22. However, adjusted net profits at THB 416 million reflected a growth of 6.5% on Y-o-Y basis. So this is in brief the synopsis of our financial results for full year '22 and fourth quarter '22. May I now request our CEO, Mr. Vivek Dhawan, to provide more insights on the business side and the guidance for year [ 2023 ]. Thank you.

Thank you, everyone. [Foreign Language] Thank you, Francis. You had Francis taking you through our performance results. I have Manoj here and Thomas also with me. So I'm just going to quickly take you through our guidance and also talk a little bit. I mean, the year 2022 has been good, and it's probably one of our best years in terms of bottom line profitability and sales growth. In spite of the turmoil around the world and the pressure we have had in Myanmar and Peru now and in Sri Lanka and in Ukraine and all these areas, and hopefully the worst is over, the pressure to the supply chain and the remaining issue that all of you know very well [indiscernible] energy price is going up, material difficulties around the world. But in spite of that, Mega has been able to clock its best year in history, I would think, in terms of bottom line. And that's a fact. But a lot of it also has to do with [indiscernible]. The baht has been helpful to some ratio. COVID also helped us in many areas. Some places, COVID was around, hasn't gone away, but hasn't been the only driver. The good thing is it is not the only driver. We have seen growth in the COVID products when we classify them at only about 8%, but our other business grew over 18%. So the good signs are is not only the COVID products that are growing. Number two, as we have mentioned in the past, the trend to wellness hasn't stopped. So a lot of people continue. It's got a new normal. It won't remain there, a lot of these products, a lot of them will come down, but they generally will have a new high. Because what we had in '19 is gone to a new level now and will probably stay there and grow from there. So that's a good thing. What we would have to say is we would grow normally, but we are probably growing faster than our plan. Our guidance has not changed. We promised you that we'll reach THB 2.5 billion in 2025 or thereabouts. You can say in '25, '26. But I think there's a very good likelihood that we will still achieve that THB 2.5 billion in spite of all the issues around or even better rate in 2025. We remain committed to that. So that's the focus. There has been a gain in the short term, and there is that thing in our hand that we have got from various reasons. But in spite of that, there are good signs. The strategy hasn't changed. Our direction hasn't changed. We are doing all the things that we promised. And we continue to work on that. Building good brand. Thailand is doing well. Malaysia has done well. Vietnam has done well in our consumer health area. So our over-the-counter, what we call self-medication, is performing better than all the other areas. Our prescription drug business is growing at a faster rate. And our pipeline hit somewhere around 170, 173 products under development in the different stages. I mean, Francis just mentioned we have a plan to launch 23 in 2023, but we have a 173-product pipeline which are under development and going on as we progress. So I think looking at the pipeline, the markets where we are and more stability coming in, fuel prices getting more stable, countries' economies getting a bit more stable and the situation, people are either learning to live with the situation, we should see a slight growth in 2023, in spite of the pressures in Myanmar, where we are seeing some losses in distribution revenue because of some one of our principals have decided to exit the country. That's probably an impact of, what, 7% turnover. But on the bottom line, very minimal impact on the bottom line. So things continue to carry on, and things have gotten better. Imports have become easier now. Money we can find and import. So with all that happening, we see -- probably see -- we'll see how things go. We don't -- we can't write a whole year in front of you, but we all believe that the next year should not be as bad as it was last year. So hopefully, things start to recover. That's our view. But having said that with Myanmar, Ukraine also, in spite of all the problems, business is carrying on. We're still able to import and sell, but some areas are disturbed. But in spite of that, we are profitable, and we expect to see some growth in 2023 as well. Sri Lanka is recovering. Again, [ LCs ] are opening up, products are going in. Again, we are seeing a recovery moving towards the earlier norms. So all these things are positive and we are hoping as we go forward this will add and accrue into our overall business. And we should still see on profitability anywhere in low- to mid-single-digit growth in profitability in 2023. That's the thinking we have based on this logic. If things change, we will keep you absolutely informed from time to time every quarter. At the moment, that's our internal plan, and that's what we are working on based on an internal strategic review that we do every year. We do budgeting every year in November. We review that in the first quarter again. And we do it every quarter. So we will keep you updated how things are moving in that direction. But having said that, I don't see any variance of our plan of 2025 that we shall hit our numbers without doubt in spite of all these hiccups that keep coming and going, coming our way. So we are confident of that happening. Good brands are being built in all the markets, and the branded business is the real driver. As the branded business grows and becomes bigger, the bottom lines become more stable and stay there. The distribution business contributes largely from Myanmar and number two is Cambodia. They are 2 markets. Vietnam probably ranks third in the ranking. I mean, the turnover is higher, but in terms of profitability and all these things. So [indiscernible] Myanmar. And the drug business or the pharma business in Myanmar is still very stable. And we do hope that the principals who are there are committed to the country. Their teams are there. They are still investing in the country. So we believe that with the great partners we have and our own branded business that the Burma Pharma business should continue to maintain and from there, as the country improves and gets better, should stay on, as compared to other people. So that's our belief. That's our thinking behind what we are telling you. It's based on logic, and we believe this should continue. So that's the story on how things will look like in '23 and the outlook that we are presenting to you. Other than that, a lot of other things that we have started working moving in the right direction. Indonesia, we had mentioned our products are getting registered. We have started to launch new drugs that are being imported. And also our local manufacturing is starting to grow there that we have started. And our plan to build facilities in progress, we are going to start something soon, in the next quarter. We will start appointing the contractor and start building an additional facility to make soft gels. We are also getting some licenses to launch some of our products in Vietnam soon -- sorry, in Indonesia. So 2 or 3 products should get approved in the second quarter and we should be launching them as well. So that's the update on our Indonesia products import licenses. Many new products have been approved and launches are starting to happen. As we mentioned, we need a local facility to do that. And so imports have begun. And also transfer what we call a license transfer for local manufacturing is also being done. So you're doing tech transfers and new product development is happening in Indonesia. That's part one, and we hope to see improvements every year by year until we reach breakeven in profitability and grow our sales from that [ $10 million to the $40 billion, $50 billion ] like we are projecting the year '25, '26. So we are moving in the right direction. We are moving there, and I hope we will get there as planned. Vietnam. We have a plan. We have mentioned to you we are looking at investing in Vietnam to build a site to make sure that we cater to the local requirement, local laws. That's also a plan in progress. Nothing finalized yet. So these are other areas. We have Thailand [indiscernible] facilities nearly ready. Now we are waiting to do testing, getting approvals on GMV. So that should also start and move in that area. So investment in facilities, supply chain and capacity building in all the areas is moving in the right direction. Other than that, CBD, nothing much yet. No really update as and when the product gets approval we should be in the market. But I don't believe that it has a major impact on our growth and bottom line and top line. [indiscernible] is there. We are not in recreational marijuana. We are not into recreational CBD. We are into medical CBD. We are only selling extracts and we're only going to sell products that are approved by the law. So we have to wait and get that moving in that direction. [indiscernible]. This is now consolidated under one company, under one brand, called Natural We Care, an extension of Mega We Care. Like we have the pure pharmaceutical, we have the over-the-counter drugs or self-medication, then we have the nutraceutical in pill form, and these are [indiscernible] for us in nonpill form. So I think where we have launched it in Cambodia, we are also launched some in Vietnam, and we are working toward other launches around the region. So slowly, slowly becoming and is growing towards the THB 100 million that we are planning to move there. So I think that that part of the branded product in the food health in other dosage forms that we are working on, which is a new area where we are directing food, easy to use, regular use on functional claims and for good health benefits [indiscernible] scientifically known. So I think it's a work in progress, and we are moving towards that. And it's growing. It's growing every year. So that's what's happening on our new area. Wellness [indiscernible] Center remains our CSR, our social objective of helping people to stay healthy as long as you live. So we are doing a lot of work in educating people, running programs from cancer camps to diabetic camps to stress relief to heart disease. And we are promoting knowledge, working along with our brands for our own colleagues internally, externally. And that continues to become a source of invigorating the brand Mega what we stand for, the purpose we are here for. So that's also moving in the right direction. So other than that, I have nothing more to add. I think I've covered most of our areas that we are involved in at the moment. Maybe it's a good idea now to move this to a Q&A. If you have questions, we can take them, start them now, unless I've missed anything. Anything you want me to touch on? I think we are ready for Q&A, and we shall answer. I mean, most of the areas if they are covered, if you have heard them, we can also repeat them again. But if you have questions, please, as we request you every time, please give us your name and the organization you represent. And then we shall try and answer those questions. If we can't do justice to them now, Mr. Thomas, Mr. Francis, Mr. Manoj are available to talk to you even after this call is over, right? Okay. So that's it. Thank you so much. Over to you.

This is Yuwanee, from Maybank. I actually have a number of questions. Can you please be more specific about your guidance? You say you will grow revenue slightly this year. What do you mean by that?

I don't know how specific I can be. I'm saying that our bottom line will grow in the single digits, between 0 to 10% in the low to mid-single digits. Top line can be flat, can be minor growth. We'll have to see. Because it also depends on -- a large part of our business is also distribution, right? Because we have, what, 50%, 48%, in that range. So distribution business having dropped 7% in Myanmar and some other impacts on consumer businesses. Where most of our partners are finding ways to restart local manufacturing, et cetera, they are doing, but some may have an impact on it, and it could affect the top line. It could affect, but we don't know how things work out because they're all working on Plan B contingency plans and local manufacturing plans. If they don't get it happen on time, then it could have an impact on top line. But the impact on bottom line is very limited. And the biggest thing is, yes, our branded business that we control we still say is going to grow in that single digit. But we've had phenomenal growth in the last 2 years. So you can't take last 2 years, which have also got COVID, I don't think [indiscernible] to extrapolate. So we are saying we should still see growth in our branded business. The distribution business could have some impacts, negative impacts. And overall, we may be flat or maybe see some growth. But bottom line should be -- still be protected or should see mid- to low-single-digit growth. That's what we are projecting. That's what we think is going to happen based on the facts that I've shared with you. But we'll keep reviewing it every quarter and coming back to you.

So top line, single digit for branded and distribution, flat.

Yes.

Second question, about Sri Lanka. I heard that the government is hiking the electricity price by 66%. So how is it impacting you economy-wise and [indiscernible]?

[indiscernible] small stake in Sri Lanka. We are not very big. I mean, electricity prices definitely affects the whole country, but Mega is very small. We are, what, 3%?

5%.

It's such a small part of our overall business that even in spite of all the problems last year with [ LCs ] not available, we are still profitable. So we are hoping to see growth next year. But the impact is so little in Sri Lanka on the overall bottom line and overall sales. It shouldn't show or have a big impact. But yes, fuel prices have gone up. Pharmaceutical prices are going up. A lot of things have moved up in that direction. Interest rates are up. So it's a little bit harder because -- and IMF wants them to do that. And they are paying their first loan back, I read yesterday, some $2.6 billion they are paying back this coming week. So they have to comply in order to get the IMF -- the conditions have to be met in order to revive the economy. But the good thing is the tourists are back, hotels are getting fuller. Tea exports are going to start. So I think those are some good signs in a small economy. So chances of revival are good, and we are hoping that things are looking better. We can see things are looking better, to be honest. From what we saw last year until today, things are better.

Okay. Coming back to your guidance, I remember that this time last year you had quite a bearish guidance, like what you do have now, but then you made something like 15% increase in profit. What could be the upside for this year based on the [indiscernible]?

I wish I had the crystal ball you have, but we can only imagine baht helps. These things are not in our hand. We have no control over them. Baht, number one. COVID came back in some places; that maybe helps a little bit. But the good thing is the stable part of our business doesn't go anywhere, right? When we were at THB 1,500 million in '19, and we said we'll become THB 2.5 billion, that's the plan. But there are some additional bumps because of A, B, and C. These are additional bumps that are coming. But our direction that we are on and I think if you look at the pipeline, if you look at regular growth, if you look at the business growth, real growth in pharmaceutical health care, pipeline, countries we are in, brands we are building. So we are there. We still remain absolutely confident that we'll deliver the number that we have told. Now you had bumps. We expect us to be able to predict that is very difficult, I think. But if things go very well because our products are up and running, a lot of products are seeing growth, you could see maybe slightly better than what we are projecting. But at the moment, looking at facts, you can call us optimists. We are not the most -- we're probably a little bit more conservative [indiscernible] optimistic. Or maybe we remain pessimist so we don't give you a very high number and then just sorry. But looking at facts, we think it's a very reasonable assumption. Because we don't know how things will pan out, how dollar looks like, how all these things. But people are now used to the crisis. They're used to the fuel problems. And it's all they learned to live with it, right? So hopefully, hopefully -- and we are in difficult places. We are not in India that is growing. We are in Sri Lanka. We are in Burma. Vietnam is one that is very, very -- is a very growth country, but also very -- a very difficult country. Most people see growth there, but the profitability in Vietnam is not great for most people. So it's a very tough country, but there's a lot of growth happening in Vietnam. So we are there. And we see Indonesia as the next engine also if we can get it right. I'm not saying we'll get it right, but it's also got potential to grow in the next 10 years. Everybody is banking on Indonesia with the [indiscernible] and future of EVs and all these things. So the hope is there that we are in the right places. We have the right products. We have the right people. So that's where we are coming from. I don't know if it makes any sense or not, but I can't -- I don't know what more to tell you.

Okay. My last question is, what could explain the FX loss, large FX loss in the fourth quarter? What was the driver? And then what do you expect going forward in terms of FX gain and loss?

I would ask our finance team to answer that question. I'm not going to try and do that. I'm sure there is a reason, very good logic behind it.

So in Quarter 4, the FX loss was mainly coming because of the baht appreciation. The baht appreciated from close to -- it was THB 37, THB 38 in the end of Quarter 3, slipped down to THB 34. So that was a major reason why there was a FX loss in Quarter 4. And thereafter, the baht has remained stable at THB 34 in January and February. And overall, if you look at it in any particular year -- see, we don't look at FX loss from a quarter-to-quarter basis, from an overall basis. If you look at our historically past 5, 10, 50 years, our ForEx loss has never been about 1% of the overall turnover. So that's where we are in terms of ForEx loss. But in terms of quarter 4, it was specifically because of the significant baht depreciation which happened.

My name is Harry, from Virgin Asset Management. The first question I had was on 2022, just if you could give us a bit more color on the branded side, particularly, like the contribution from certain, like, areas, certain products or certain countries and how much, like, you think was COVID versus non-COVID. If you can give any more color on 2022, that would be really helpful.

We don't really separate country-wide data on our business. But as you know, Asia is, what, over 72%, 73%...

Southeast Asia. [indiscernible].

Southeast Asia is 79%. And I think Southeast Asia has done well. And among the top countries' performance is probably Thailand, Vietnam, have really done well. And they are also a large part of the turnover as well, right? So both have done reasonably well and contributed to the growth because they are also large portions of their business as well branded business. But having said that, it is not that Africa has not performed well. They have also grown. Africa has also grown. So when we say Africa, it's only sub-Saharan. We are only in sub-Sahara, starting from Ethiopia, all the way down to Ghana, right? That's where we are. So that's also shown growth. Southeast Asia is #1, and then comes Africa, #2. Others have not been that significant because from Latin America to Ukraine are probably flattish or very small, 1%, 2% growth, mainly largely because of war and Colombia is very new. We just started it. So it can't be very predictable. And Peru had its own issues last year. So I think these are the 2 areas which have shown the largest growth. Product categories growth, our prescription business has shown a much higher growth because hospitals started to open up. So that is good. Because we were over last year -- before, it was largely COVID products, but last year it was a lot of prescription products, a lot of our self-medication products. So the COVID-related products had a lower growth, if you look at it in the total. If we see our growth in the branded business is, what, 16% overall, the COVID-related products is a smaller part of it and the others are much higher part of that. So that's something that I can tell you for a fact. The prescription business has grown higher and the self-medication have gone at double the rate than at the rate, double the rate. And the COVID-related, when we also look at COVID product [indiscernible] they are also regular part of [indiscernible] just not COVID. We've been selling them for a long time, except a few, 1 or 2 of them, that were added during COVID. We needed to add 20 products during COVID. There are only 2 products that came under COVID, a spray, mouth spray, and one of our regular [indiscernible]. So they have also done well, but they are also a regular part of our product portfolio. So other than that, large part are normal products that we sell anyway, most of the time, [indiscernible] part of our regular portfolio. And they were always a large part of Mega's portfolio before COVID as well. The growth there hasn't been very high. They've probably tapered off. The real growth is prescription and self-medication. I don't know if that gives you the real flavor, because we don't give percentages and growth separate here and I don't have it with me at the moment also, to be honest.

Sure. That's fair enough. And you mentioned as well the acceleration in kind of awareness of health and wellness, et cetera, and how that was kind of accelerated by COVID. I mean, is there anything that you can -- like any studies that you've done and data to substantiate, like, the increased purchases coming from people [indiscernible]?

I see data from [ NBJ ]. I see U.S. data, the sales of supplements worldwide, U.S. alone, [indiscernible]. Even '22, they have seen growth, but they are predicting, everybody predicting a flatter '23, a little bit more flatter or smaller growth. Because when we look at it, they have seen such growth over the years. But I think even after COVID -- COVID was not as prevalent in '22, but still supplements, they dropped. They didn't drop off 50%. They did drop off 8%, 10%. But then other things, people continued to look after their health by using other products. So maybe at that time, they were all stuck on Vitamin C, D and there were things like elderberry and they were -- some of them were very focused only on COVID and immunity. But then after that, a lot of things have dropped off, but they haven't come down to the same level in sales. As I said that, a lot of other products that were not as big before have also started to grow. Related products lead general health, well-being and people are starting to come out more. So I think overall there is some increase in brands that people trusted, and they have started to use some of the products which are not only COVID. And that's also started to happen. And we see that from the published data as well. Growth in herbal supplements, herbal medicine that was not as big before. Growth in some areas like gut health, other things that people are starting to go out more, so they are starting to look after their health more. And data is showing in Euromonitor, in [ NBJ ] and [indiscernible] Business Journal, et cetera, on herbal brands where we look at the herbal medicine used in the U.S. So wherever there's data available, we can see those signs that they are higher than before COVID. And some that were in COVID have dropped down, but the other products have gone up. So it's a balance. So you have not seen the whole market drop off. I don't know why the market should have gone down by 20%, 30%. But there are other things that have gone up and adjusted it, and still there is an overall balance of growth in the market. That's what we are seeing, like fish oil, general heart health. So Long COVID-related products, we were also looking after balancing Long COVID, staying healthy. A bit of that also come into minds and people are using products more [indiscernible]. So there is some bump in products that were not COVID and there is some reduction in [indiscernible]. Some people just [indiscernible], okay, now let me take, but they're not regular. But this has happened. And this is probably the true fact. And we can also see it in some of our product sales as well. So it's corroborated but part of what we are seeing also factually.

Got it. That's very helpful. And just lastly, in terms of going forward, like, could you just comment on the sensitivity of the company to, like, tourism spend, particularly, you mentioned in Sri Lanka but also Thailand. I think about increased consumers on the ground in the form of tourists. Like, does that have an impact? And then also with regards to inflation levels, like, do you see much of a sensitivity of your consumer to price levels and how that could possibly impact, going forward?

Fortunately, Mega is not reliant on tourist travel who buy our products. I think we have a very small portion of our business with travelers buying. We have never -- our brands are locally consumed and are something that we have built on the strength of the capability behind the product. We have for years and years historically spent our lives, I spent my life building the products 30 years with good quality, right ingredient, right quality, right dose, scientifically proven. And we have built it like a medicine. So if people start to take them and they take them for a reason, they are not -- we don't sell them as fools. There is no magic in it. We don't advertise movie stars and say, eat them today. We don't do that. So we are trying to convince you on health and lifestyle and changes, and that's where we come from. It's a hard job. It takes time. That's why we don't see 1 year 100% growth and the next year negative 200, minus 200. We don't do that. We have a very slow and steady growth rate because we convince. And once people are convinced -- if you have diabetes and you [indiscernible], you have neuropathy, you need to take vitamin B, B complex. So there are brands of that nature. In the world, you have the [indiscernible] and then Mega has Nat B. If you have pain, you have Nurophen and you have Gofen. It's obviously a very effective, fast-acting product. And if you need to cure that, you take Gofen. So similarly, we have many similar areas where our products are focused om, and we continue to work there, work on it and educate people. So if you believe, yes, there's inflation, yes, there are all these issues, but as that group of people and the amount of product that we sell, we are targeting only a very small part of the population. Maybe not the topmost end of the world. Maybe some of them also the rich and the famous also use our product. But in this B+/A+ category or C in that group, the impact of inflation and not being able to use our product regularly might be there, but it is not going to be as large as only in the C, D, E categories, where we only sell cheap low-end products which they can say, "I don't need it, let me not waste my money on it because I might well save it for something else." It's possible, but I don't see that as a very, very big impact because we are not that masked at the moment. There are some products, but they are anyway very cheap. [indiscernible] sells one of them, one of them in Vietnam, in 20,000 outlets. But then again, there are only a [indiscernible]. It's only VND 800, right? So the impact is not very large on that kind of product. So that's the view we have. If we are trusted, we are believed. You still want to stay healthy, you spend some money on your health. And if you are going to use a drug to cure a cough, if you believe in [indiscernible] and natural solutions, there is a better, safer solution, you want to give it to your children, you probably use our product first before you go and buy a drug. So I think it's this trust and building the capability, and it takes a while. And that's where we come from. But again, this is our view, and we continue in that direction. And we see results as well. We see continued results in [indiscernible]. We have had -- not now, [indiscernible] and we also thought, oh, the market will go under and nobody will buy anything [indiscernible]. But it didn't happen. And I don't know. We will find out. I may be completely proven wrong. You may be right, but I don't think it should be that way. I don't think we should go that -- we should probably see a big impact of inflation also on our business.

I just have one question about your prescription segment. Correct me if I'm wrong, but I think normally the margin for this business should be about 18%. And for the past 2 quarters, the margin for this segment has really been drawn out flat because of remittances, as you have mentioned. And earlier in the call, I believe you said you expect margins in 2023 to normalize over the same level at 2022, and that comes to about 20%, 21%. So does it mean there will be a similar kind of remittances in the coming quarters? And can you remind us structurally where the margin [indiscernible] for this business?

[indiscernible], if I understand your question correctly, you are asking about the gross margins going forward, right?

Yes. Because normally, right, structurally, the margin for this business, as you have always guided, should be about 18% to 17%, 18%, but we have seen a number in the low 20s for the past 2 quarters. And so what we can expect, going forward? And will there be any more remittances [indiscernible] in the coming quarters?

So [indiscernible], as explained earlier, our normalized gross margins usually are in the 17% to 18% range. And even in FY '22, the margins on a normalized basis were around 18%. So as explained earlier, the normalization was done because we have a dual currency rate in Myanmar, which, to some extent, impacts the sales, gross margins and SG&A. And we also had some ForEx losses coming from delays, which were temporary in nature, while remitting funds from Myanmar, especially in July/August 22. And most of these losses were recovered from principals, but because of accounting requirements of IFRS the gross margins appeared inflated and the FX losses also appeared inflated. But when we normalize it for these events, the gross margins still remain at around 18% on a full year basis. So this kind of increase in gross margins, the reported gross margins, can be expected going forward as well because the dual currency rate will continue even in '23. But on the normalized basis, the gross margins should still hold at around 18%. I hope that answers your...

This is [indiscernible]. I just wonder about your utilization and capacity for branded business. Even with [indiscernible], if your utilization rate is currently underutilized, should we expect more operating leverage, going forward? And is the capacity you have right now, can you achieve the guidance in 2025?

I think we are prepared in terms of capacity. We have now developed and increased our plant capacity in all areas and realigned our manufacturing for drugs, for OTCs, for supplements, for food. Because there are regulatory requirements. Also to have the right plans. This is also -- a lot of things change in GMP as time goes by. So I think in capacity terms, we are aligned. We have created enough space to expand. We are investing in machinery, from blister packing to [indiscernible] filling, et cetera, new ones over the next 1, 2 years. So we have enough ability to produce internally whatever we are doing, and we should be able to meet the requirements in '25 for our growth and whatever plan we have. A lot of our products are also coming from outsourced partners, where we also have a plan in place where we work with them. So a lot of the drugs we don't manufacture in some cases. Then, as you see, the Indonesian plant is being refurbished and grown. So that's also happening. And Australia plant has also seen capacity enhancements, and some machinery investments have been made there in that plant as well. And hopefully, over time, we may also see something happening in Vietnam. We don't know yet, but we'll get back. Because I think all these capacity requirements and outsourcing will make sure that we'll achieve our '25 goal. Now having better operating margins because we have capacity better utilization, that's a possibility as we utilize more. Whenever you produce more, you see more -- you see better results. Operating costs are always there. They are fixed. And I think as we go forward, we are also tightening up. We are doing a lot of stuff at the factory, ESG, a lot of work on the environment, a lot of work on managing efficiency, improving outputs. So a lot of things have been done over the years, and we have become more efficient in those terms. And as things get bigger, your variability also reduces as brands get bigger, your production runs become longer, right? But at the same time, our model, as you know, we have a lot of SKUs, we have a lot of products. So the variability is huge, SKUs. So we need flexibility to respond to demand. 33 countries. I keep saying 33 countries, some 200 products. You multiply them and the supply, you see how much complexity and different packaging, different requirements. And law, regulatory requirements. So I think it creates a lot of variability. And for that, you need to have some excess. So we don't work on the 100% capacity. We always work on the 70%, 80%. As we get closer, we have to start thinking of expanding our capabilities or else you can't respond to demand. The demand in the front is far more important than the cost of creating capacity. So that's not been the challenge. But efficiency is there in what we produce. I mean, you work at 98%, things like that. So a lot of things we have done in terms of material usages, manpower product, 1000 capsules. A lot of improvement in automation. So we are continuously working on that area. I don't know if we answered some of your questions. If not, maybe we'll have a second detail to explain that we do some day.

May I add one more thing? You asked for any further operating leverage. Our gross margins have been very high already, about 67%. And historically, we have been doing 63% to 65%. Yes, there will be operating leverage as we utilize more. But there are also costs. Salaries go up and stuff like that. So if you're asking us if the gross margins are going to improve, no, it won't. All the chances are that it will come down a bit more. So thank you.

[indiscernible] the percentage should come down. Very high.

And baht can have an impact. I don't think [indiscernible].

Competition, baht.

I see. My second question would be, coming out of COVID, should we see more of the selling expense as during the COVID people just rushed to buy stuff that made them feel healthy. But coming out of COVID, I speculate that some maybe just feel that they don't need supplements anymore. So I just wondered, in 2023, do you need more of the marketing budget or the promotion?

Before I let Vivek explain, one thing that you need to notice is that even before COVID, our SG&A expenses were 28.5%. During COVID, it dropped to 27.5%. So there is no big impact we had, big change that has happened. So I don't think going ahead also it's going to hugely change. As a percentage...

You go back to 28.5%, you stay there at 28.5%. that 27% to 29% in the guidance. You stay in that range. It doesn't go up or change very much. You don't just start advertising just because you're losing sales or sale. People will go out of COVID, will not come back by telling them more. So we do branding business on a regular basis in some form or the other, and we'll continue to do that. We shifted some to online, we went on TV, we do on the front, we do in stores. So some of the things that probably changed in-store became a little less. That will probably go up. Traveling will go up because people can travel more. But in Thailand, we were still traveling. We never -- I mean, we hardly stopped traveling, to be honest. Many other countries, we did. So some things will go up a little bit. But I think within that 1%, it should cover the original cost of travel, trips, et cetera, that was missing. And with the right allocation, it will not have a very major, major impact. It can't become 20% and become 35%. I don't think so. I doubt that we are going to [indiscernible]. We've never been. Even before COVID, we were not there. I don't think after COVID we'll go in that direction. Because our model is not that. We are not a TV-oriented and debt model-oriented business, right? We don't do that. So I have my serious doubt. But there's definitely going to be a growth because it had already started. I think it's already reflected in '22. Because by '22, Vietnam was traveling. Everyone in the country, they had parties, they were traveling, they were all across. Their planes were flying. Everybody was visiting the other cities. Thailand was doing it anyway. So there were only a few markets where there were still restrictions. I think travel, all the expenses have only begun in '22, majority of '22. So should not have a very, very large difference in the end of it actually. It shouldn't go up. It's within that 27.5%, 28.5%, as we said. I don't think -- I mean, I don't see a very big difference coming out of that for that reason.

I see. My last question would be the products you are going to launch in the pipeline. Could you provide some more [indiscernible]? Like, is it more the herbal product that you mentioned is growing really fast? Or is it a product that is [indiscernible]?

[indiscernible] products that we have, we have a lot of products in that category of prescription product. There are drugs, medicines prescribed by the doctor. So the large portfolio of 23, I don't know the number, probably 13, 14 products...

18 products.

18 products are real drugs, drug, drug, and 5 of them what we call them consumer health. Consumer health has some herbal medicines, some -- so 18 products are all branded generics and 5 products are in the list of we call consumer health. We divide our business into 3 categories. Pharmaceutical health care, purely pharma, prescription-based doctor based. Consumer health care has over-the-counter, self-medication and supplements, vitamins, herbals. So we expect to see 5 products in that category and 18 products in the pharmaceutical category. And in the natural health care that we have all the natural foods and food-related health products, there we don't identify how many there. Also we're going to launch some 6, 7 SKUs, some drinks, some teas, some other stuff and gummies for children [indiscernible]. That's another [indiscernible] we don't report yet, because it's still a very small business. The expectation is 23 products in '23: 18 pharmaceuticals, 5 consumer health. Consumer health means supplements and herbals, all put together.

[indiscernible]. I have 3 questions. The first one, the easy question, could you please share on revenue contributions from, like, consumer health, medical health and OTC as a range of [indiscernible] will be fine?

Overall breakup of our Maxxcare and our branded business is what now?

53% is coming from branded...

53% is branded, 45%...

47% is coming from...

Maxxcare. And 2% comes from our OEM.

No, no, no. I mean, like supplementary and...

One minute. Out of 100%, 53% is brand, 47% is Maxxcare. There is 2% as OEM. Now in the branded Mega We Care business, we have 60% is our supplementary business, 10% is the over-the-counter or self-medication. This is what we call consumer health, 60 plus 10. And 30% is pure pharmaceutical at the moment. So it's 70/30 at the moment, around there, plus/minus 3%, 4% here and there depending on the quarter. And then pharmaceutical health care business will grow and become bigger, moving towards 40%. That's the possibility in the next 1, 2, 3 years. You will see the consumer health care business becoming 60% and the pharma health care becoming 40%, that kind of proportion.

Very clear. And my second question is about the gross margin from distribution business. You said that the gross margin is normalized at 18%, right around 18%, but the reported number is like 24%, 23%. And after your explanation earlier from the earlier question, should I assume that we should see abnormal high gross margin from distribution business quite for some time, right? I'm correct? Just to be clear on the guidance on the distribution margin.

Yes, because there is a dual currency rate, which is [indiscernible]. Going forward, we will have this for some time, until the time the deal currency rate is merged into one rate. The normalized gross margins should still remain at the same level, which is around 18%.

Okay. So the implication is that, looking forward, once the currency is quite less volatile, I mean, like flat, the distribution margin should come down to normalized at 18%. Am I correct?

I think what Francis is trying to say is it's already at 18%. It is not that it will come to 18%. See, the dual currency -- maybe I'll explain it once more. Today, in Myanmar, there is a bank rate, which is approximately MMK 2,000 to $1. But there is a market rate which is MMK 2,800, or thereabouts. As per IFRS, the auditors insist on using MMK 2,000 as the rate to account. But actually, in practice, we have to pay MMK 2,800 to buy dollars. So because of this, there is a difference between how we account. Because in Myanmar, we sell in kyat at MMK 2,800. But when we convert that into Thai baht, we have to first divide it with dollars, which we are using MMK 2,000. Actually, we should be using MMK 2,800, right? So because of this, there is an impact, and the net effect of the impact is that the gross margins show up much higher. And when we remit out, this loss goes as a ForEx loss. So because of this IFRS restriction, we have to account like that, and which looks like our gross margins have improved, actually does not. So that's why we are saying when we normalize, we are still 18.1%. We have been 18.1%. We will continue to be that. And as the dual currency becomes one, this exaggerated gross margins will also go. I hope it's clear. [indiscernible] on this? I hope it's clear.

Okay. Now more clear. Actually, it's not 24%. It is 18%. it is just the way it's represented because of accounting requirements. So it is still 18%.

Understood. Okay. Okay. Understood. Very clear. And my last question is about Indonesia. Could you please give color on Indonesia, like revenue contributions or like operations. Like, I'm not sure I remember right or wrong. Indonesia is still a loss contribution, right?

Yes. It's a new country. It's a loss. We just bought a factory there, and because 2 years was COVID we could not revamp and do anything. And we were, as we mentioned to you, that our objective there is to start imports of medicine, which we started to register. Registration takes 3 years. So the first 3 years, you start to get approvals. So now, starting last year some and beginning '23, we are starting to get new drug approvals to import, number one. So you will start to see from '23 a growth in revenue both coming from what is made locally in the plant and what we are importing as pharmaceuticals into the country. Because only pharmaceutical companies can import. So you will start to see improvement in that happening from '23 onwards. Then we can report to you how the performance is. And we said by '25, we should achieve breakeven or start to get better, but the turnover will grow from $10 million to $15 million to $30 million, or something like that, between right now to '23. That's our plan. And that's what we are working towards: locally manufactured, important pharmaceutical and consumer health, like we do in Thailand, which we import also. Both, all 3. And we are also making our consumer health there. So we are making some of our self-medication products like Gofen also locally to produce in the country. So all these 3 things we are doing there: the pure pharmaceutical health care; prescription drug, be it self-medication, OTC; and the consumer health. All 3. So this will start to happen this year. This year, we should have all 3. So we will need 2 to 3 years to see the results of this. We are already over time. So I think we can do another 1 or 2 last questions before we close off. So sorry. And then we will answer whatever you have within in the mail directly to you and put it down, please.

Just on gross margin again, I tried to ask you directly about the FX loss. When you say it's actually 18%, it means the 5% is netted off somewhere. Is that through your FX gain or loss, something like that? Is that correct?

So the gross margins are higher by 5%, but that gets netted off by the ForEx.

So when you net it off, that's what you mean by 18%, right?

Exactly.

So if you have no further questions, then we would like to close this call. Thank you very much for joining the session. Thank you.

Thank you, everybody. Thank you, [indiscernible], all of you, and thank you for being there, supporting us and believing in us. And I'm confident, as I said, '25 we'll be there. '23 should be also look alright if things don't get too bad. And we are confident that we are doing the right things. We haven't changed our strategy at all. We are moving in the right direction. And we are focused only on human wellness, your wellness, your health, helping you to stay healthy as long as you live. So thank you again. See you next quarter. And in between, if you have any help, any questions, Manoj, Francis, Thomas, they're all there. If you need me, I'm also at your service. So thank you so much.