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

All right. [Foreign Language] Good afternoon. My name is Vivek, Vivek Dhawan, CEO of Mega Lifesciences. I'm here with my colleagues, Mr. Manoj, Deputy CFO; Mr. Francis, [indiscernible] Finance. We are all here today to present Q1 results, performance and give you some flavor of what's going to happen in the next part of the year. [Foreign Language] So we will try and answer your question, English, Thai, whatever we can. Thank you for attending. So over to you, Mr. Manoj today -- and I'll then later on, have a short session. Thank you. Thank you, everybody. Thank you very much.

Thank you, sir. A warm welcome to everyone to the first quarter 2023 earnings call and thank you for your participation. So this is how the agenda for today's session would be. I will be providing a brief synopsis of the financial performance of first quarter 2023. And then our CEO, Mr. Vivek Dhawan, will provide his views on first quarter '23 as well as the future guidance for the year. And finally, we will open the forum for the Q&A. When we will have the session on Q&A. We would request you to please let know your name and the company you're representing, while you're raising your questions. So thank you very much for participation. So this is how we go on the first quarter 2023 performance. Our overall revenue has been at THB 3,728 million for first quarter 2023 representing a decline of 2.4% Y-o-Y, which is mainly coming from the distribution business. Segment-wise, the branded business has remained flat. In quarter 1 2022, our branded business had grew at 32.6%. So we already had a very high base in -- for quarter 1 2023. So in spite of that high base, we have been able to maintain our branded business at flat for quarter 1 2023, which itself is a significant achievement. Southeast Asia remained stable and Africa grew by 5.6%, all represented by stable consumer demand. The distribution business, if you look at it on a normalized basis, normalization done because of the dual currency impact in Myanmar, which we explained in our earlier earnings call. The distribution business normalized has degrown by 12.8%. However, reported numbers decline has been at 4%. So overall, distribution business is declining primarily also because of one of the principles which we lost -- which we already guided in our fourth quarter 2022 earnings call. So overall, a decline of 2.4%, again, mainly coming from distribution in the business as explained. While the branded business remains quite strong and stable as compared to quarter 1 2022, which was a very high-growth quarter in last year. Overall, if you look at the gross margins, the gross margins for first quarter 2023 has been at 43.6%, which is very similar to what we had in first quarter 2022, which was at 44.9%. So this is on an overall basis coming to the segmentation. The gross margins for branded business for 1Q 2022 was at 69%, whereas in first quarter 2023, it has reached to sustainable levels. And as we have guided, between 63% to 65% as always, the first quarter 2023 has been at 64.6%. Last year in first quarter 2022, there was a high gross margin primarily arising on account of product mix and high level of productions, which we had in first quarter 2022, which has resulted in a very abnormally high gross margin quarter 1 2022, which during the year tapered down to 67% by the year-end FY 2022. Distribution business gross margins normalized have been at 19.9%, which is at similar levels of quarter 1 2022, where the gross margins were 18.8%. SG&A expenses have been at 27.6%, which is very similar to FY 2022 levels where the SG&A expenses was 27.8%. You would have noticed in quarter 1 2022, our SG&A expenses was abnormally low at 25.9% because our quarter-to-quarter spendings are not linear. And by the year-end 2022, our SG&A expenses were at 27.8%. So overall, if you look at the SG&A expenses, they are also fairly similar to last year FY 2022. The adjusted net profits have been at THB 546 million, representing a small decline of 4.3% as compared to first quarter 2023. The adjustments which we have done through the net profits are mainly arising on account of ForEx losses. In 1Q 2023, we had a ForEx loss primarily arising on account of appreciation of THB to USD, which has resulted in higher ForEx loss in first quarter 2023. And we have also normalized the SG&A expenses because first quarter 2022, the SG&A expenses were abnormally lower, which gradually went up by the year-end 2022 and reached to a similar levels as we have incurred in first quarter 2023. Overall, our reported net profits have been at THB 453 million, representing a decline of 26.1%. The operating cash flow has been at THB 311 million, which represents 69% of net profits. We continue to remain a net cash company with a strong balance sheet. The overall CapEx spending, which we did in first quarter 2023 was THB 53 million, which was majorly towards THB 22 million for consolidation of manufacturing operations and capacity expansion in Thailand and THB 13 million we spent for innovation of our office in Thailand. On the new product launches, we plan to launch 25 new products in FY 2023 representing 70% of it coming from prescription and 30% coming from Nutra. In quarter 1, 2023, we launched 6 new products, which are 5 from Nutra and 1 from prescription, which gradually in coming 3 years, will start contributing equally to the top line and the bottom line. So this is a brief synopsis of first quarter 2023. Now may I request our CEO, Mr. Vivek Dhawan to share his views on the results as well as guidance for the year. Thank you.

Thank you, Manoj. Thank you. I think you have a flavor of what's happened. And I think everybody is quite aware that '20, '21, '22 were COVID years and COVID years, if you look at the '19 results and you see our profitability was somewhere around THB 1.2 billion. In the last 3 years, we have -- we have actually delivered THB 1 billion over in 3 years' time, which is, I think, phenomenal. But a lot also had been helped with COVID, along with whatever else we were doing. So there is definitely -- one, there was -- everybody went into COVID products, and everybody started to sell vitamin C while Mega also did. But we still have a very stable and a strong vitamins C business. But what we are seeing in quarter 1, 2023 is normal. We expected that what you saw in '22 first quarter was a surge in Thailand, and it was the best ever quarter in history. So we cannot take '22 as a basis for the whole year. So that's the first thing. Second is our vitamin C business, even though it's declined has not come back to the '19 levels, it is still at a new base. So a lot of the products that we are doing for immunity, for health have got and reached a new level. The good sign is many of our products still are very stable and are there, are still maintaining their top level as they were during the last 2, 3 years. There are a few very related to only immunity and they have an impact, but as I said, over the years, they were not there. Some were very small, have become much bigger and they continue to remain there. The expectation on a normal behavior there at a new level. Number two, all our other businesses, which are non-COVID related are doing reasonably well, are not only stable, they are also growing our drug business. Our drug business, which has also become now over nearly 40% of our total turnover is also performing very well. As Manoj just mentioned, we have got 25 new products to be launched in '23. We are developing nearly 152 new products. They are in our pipeline. So these all plans that we have put in place continue and they will remain and they are going to deliver on our planned -- we had promised you, we had projected to you that by '25, '26, we should be doubling our profit somewhere to the range of THB 2.4 billion, THB 2.5 billion. And I am sure, we are on track to deliver that. That's the medium-term 2025 guidance. What's going to happen in this year, I think looking at the situation that we are in today, we are hoping for a flat year. We were talking about, let's see how the quarter 1 looks like, quarter 1, quarter 2 flat or slightly better or slightly lower. So plus/minus single digit is what we are expecting. And the reason also to do with distribution in Myanmar has been impacted with the political scenario there. But despite of that, our drug business holds on and is still doing reasonably well. Some parts of the business are not, but the impact on profits are not phenomenal. But still, the growth potential is not what it used to be in Myanmar. And with the drama around the world, Ukraine, Sudan, Sri Lanka, we have seen difficult times. But we are very confident that coming forward, these all things are going to improve, and they should be positive for whatever we are doing in all these markets. So our focus still remains Asia, Southeast Asia, as you know, we invested money in Indonesia. Now we are seeing some very good traction in Indonesia. Things are getting better. We have got a lot of registrations in oncology now, and we have started to launch them [indiscernible] products. We've also started to increase capacity in our facilities there and it's now producing on a regular basis. Our plant modification and development was planned at THB 160 million, I think, and that's also now in the final stages of finalizing and we should start building by quarter 3. Hopefully, we should be building and in a year's time, we're ready to launch a few other products that we plan to make there. So that's enhancing, making capacities bigger, launching a soft capsule line and all those things we are doing. So -- all these things are in progress, and we remain confident that we should be achieving our goals in '25. Africa plans are still there, and we are still working. I mean they have also been hit with this Ukraine war, oil prices and all that and currency exchange rates have gone haywire but having said that, population future in sub-Saharan Africa, [ 600 million ] people and our branded business and the product range we have from Ethiopia down to Ghana, we remain committed and we remain excited about Africa. And we think, given the time we should be there. We opened Colombia about 1.5 years ago. We are having good traction there. Peru as well, we have started to cover not only [ chain ] but also pharmacies and launching other products. So between Peru, Colombia and some other smaller markets, we are also looking at Latin America. So given some time, we should see more traction coming out from our branded business on all these areas. Another commitment we have just made with our Board and come to an agreement that we should be investing another $20 million approximately in Vietnam. We set up a drug facility, very dedicated to a special type of very unique NDDS, new drug development, dosage forms, which will also -- more detail will come out, but we are hoping to be ready and start -- at least start the building process in the next 4, 5 months' time. That's the plan. So that's another investment in building our strength in the country where we have presence for the last -- since '93. So it's already what 20 -- nearly 30 years, getting close to 30 years in Vietnam. So we have a strong team and we see that as the future for future development. So -- so I think from my side, that's about it, all the other things move and are progressing well. We continue to build the Mega We Care brand, the credibility, the work we are doing to our wellness center, content creation, reaching out to the consumer. That hasn't stopped at all. We are fully back in trade. We are -- activities are up 100%. We are in the pharmacies, consumer engagement programs and doing a lot of other work that we are doing across the world wherever we are. So things are back to normal, and that's why, as you saw the SG&A is not 25, but it's 27-point-something, which is our general average in that range, 28, 27.5, 28-point something. So -- on an average basis, it's the same. Last year, first quarter was lower, but at the end it averaged out. So I think Manoj just tried to explain this to you. So we can't look at the quarter. We can't only look at 1 year. Mega is in business, has been building brand for the last 30 years, and we believe the next 5 years also, we are not going to change this path. Credibility, strong brands, brand [indiscernible], right dosage forms, clinically proven and in all the areas that we are in [indiscernible] our OTC drugs, our drugs, our supplements and supplement, which are medical supplements and then all the complementary medicine and all the other things that we do, even foods that also help in managing similar disease and health conditions, including lifestyle, where we are doing education work, at our wellness center. A lot of programs and connecting to our end consumer. So all this carries on and we remain confident that we should be able to deliver on our promise and build a regionally strong healthy company that continues to be a part of your life, part of consumer life and helping them in their wellness journey. So that's what it is. That's what from my side. I'm going to open the floor up to questions now. So as Manoj said, please tell us your name, company name and your question, and we'll try and answer them as quickly as possible. Anything we missed, we are available all the time on [ call air ]. Please do contact us. We -- our team here is ready to answer, take your questions and get back to you. That's about it. Yes, please, over to you. Thank you very much. Are there any online questions? Yes, please, carry on.

This is Thanapol from CGS-CIMB. Just one question on Vietnam. You mentioned earlier that you are investing in a facility in Vietnam, right? I'm not sure I've caught the details of -- if you could reiterate that. Is it the same as what you had hoped to build in Myanmar a few years ago where it was a research facility?

It's a little bit different. I think a little bit different. Myanmar, we were looking at an integrated back-end facility with API. In Vietnam, we are going to build a European world-class pharmaceutical only facility. And largely focused on Vietnam business and for drug supplies to our other markets as well. But it is still very targeting Vietnam market because Vietnam also has regulatory requirements. There are -- like Indonesia, like Thailand, many countries are working the other way around. They have centralized production, but a lot of the countries are also very inward-looking. They want local production. There are certain benefits of [ government tendering ], et cetera, et cetera. So there are reasons and also from a point of view of what we produce and market in multiple countries, products that we do. So our plan is to invest and build a facility, which is medicine of our drug [indiscernible] prescription drug focused at the moment. That's our plan.

So by facility, you made a manufacturing facility? Or is it a research facility?

Yes, yes. Exactly, you're right.

So you -- so you'll be making drugs in Vietnam?

Yes, we will -- we'll be making finished formulation -- finished products, yes.

Okay. But from what I understand your current utilization at your existing plants in Thailand, I mean, not even close to 4. So is there a reason to build such facility in Vietnam?

I think I've tried to explain this before as well in pharma plants, you don't try to -- you can't run them for full capacity. Capacity depends on 1 shift, 2 shift, 3 shift. In this facility in Thailand is very different. We run a 3 shift because you -- this is a 24-hour plant. But most pharma plants only run 1 shift because of the requirement, because of the way they are structured, you make -- you don't run the 3 shifts, generally not, but you can because there are a lot of requirements of quality assurance, quality control. You need to have a lot of people on the ground while you run the shifts at night. So generally, they're on 1 shift. And b, it's also to do with the requirement. In Indonesia, you have to produce locally as you understand. You have to have a pharma company producing locally. Imports are only allowed for certain products if they are not produced in the country and are still under patent, et cetera, et cetera. So similarly, in Vietnam, there are certain requirements, there's certain benefits, certain advantages in competing in certain categories. So this is designed for largely to succeed in Vietnam. And those products we don't make in Thailand anyway. So it's not something that we are shifting from Thailand to Vietnam. They are probably at the moment being imported from different places. So -- it's a different strategy. It's a Vietnam focused strategy, but with the potential to also sell similar products in other markets where we are already doing that. So we are registered with similar products in our 30 -- 20 countries. So it could become a supplies point for the market. But that's not the reason why it's being is being done for Vietnam.

Okay. That's quite clear. And maybe just another question on -- if you can comment on how each country performs relative to each other in the first quarter? And how do you see it going forward?

Each country what? Sorry, I didn't get [indiscernible]

How each country performed in your branded business?

We don't go by country performance, I think, but generally, the trend is very similar. COVID-related products when we call [indiscernible] a few of them, which are very COVID-related have seen a decline. Worldwide as well, if you look at American market, Indian market, everybody has declined 50%, 60% and you will see that. You'll probably look around, you will see that in the consumer business. So -- but in our case, the declines are not that much in the -- we have seen growth in non-COVID products going up by 13%, 14%. We have seen declines in COVID product, which anyway made up -- if we have a 100 portfolio, our supplements are 60% and the drugs are 40%, out of that 60%, I would say, 20% or 30% of them are COVID-related -- could be -- we can define them as COVID, not all are COVID. I mean multi-vitamins are not COVID, but people took more because of COVID. So 20%, 30% are [indiscernible], probably. And that has seen a decline -- that has seen a decline, meaning it grew 40%, 50% is [indiscernible] declined 20%. So it's still higher than 2019 but it's declined compared to '22, especially first quarter, because first quarter was huge. When COVID came to hit Thailand again and it became when Thailand became very big. There are not other companies as much. So there has been a decline overall in most places. But the great thing is that the other product we have Gofen, Loreze, [indiscernible], ZIRIN. All of them are doing very well and they have held off very well. They have a lot of products and non-COVID products. Mega has lot of non-COVID products. So we have a huge range for sleep and cough and cold and all the other things. So they are not going away and grow by [indiscernible] so they are healthy. One part of it is declined, the other parts are growing. The drug business has started to grow again because [indiscernible] are open, people are going back to the hospitals, doctor -- surgeries are coming back. So a lot of products that has slowed down and clinics are closed down in 2021, '22, are seeing an upward trend now. So the hospital business you're seeing an upward. So I think it's a mixed bag, good thing for us. We have a good balance. We have drug. We have over-the-counter drugs. We have vitamin mineral. We have herbal medicine. We have medical nutrition. We have -- we have product that are sold for diabetes, product that are sold for eye health, product -- which are not related to COVID all of them. So -- our balanced portfolio impact is there, but is there and it can be seen but at the same time, other things are growing. So that's where we are coming from. And we said we were not assuming, if you looked only at if we have a 100% COVID product, we would definitely have to project decline. But we are seeing that if things change, it could be in the second half, things are -- all the other things start to change, we could still see flatter or single-digit, low single-digit growth, but we are only saying we are going to be flat and plus -- between plus minus single digits. That's our projection. We are still hoping that things look that way. And as we get more information in the second quarter, we will present to you again because that's where our details are coming from, looking at the results that we see in our -- in depth.

I'm Narumon from KKPS. I have just a few questions. Yes, first on the gross profit margin for distributions business. You said that the gross margin is normalized at 19.9% at the first quarter, right? But if you look at the history, you run distribution margin like 18%. So should we assume that 19.9% or something like that is a new normal like margin or -- and how come the distribution margin improve a lot, given the decelerating Myanmar business?

I think you should stick to 18% to 18.5%. I think sometimes the product mix, maybe the mix in the first quarter is largely pharma. [indiscernible] so it can happen because the consumer business is a little bit more effective with licenses and other things are foreign exchange, things also add up, right? I think the correction already happened. We -- one of our consumers -- we already informed. One of our consumer business also left. So there's probably a little bit of a mix change, which is a lower margin [indiscernible] drop off at a higher margin, still remain. And also in distribution, we also provide services, right? So when we say margin, there's also different kind of services. Some are marketing services [indiscernible] services. So there'll be a bit of development. Generally, I think 18% to 18.5% is a good number to take. But I don't know, it's probably in that range. It hasn't gone -- I mean we look at [indiscernible] hasn't really changed very much, has it there? This may be a bit more exceptional you think first quarter.

Yes. Yes. But normally, generally last year also, we did 18.1% [indiscernible].

So 18.1% [indiscernible]. So 18% to 18.5%, I think [indiscernible].

Okay. So could you please share the percentage of like medicine sales contributions versus like complementary. The sales price...

I think overall is -- I think now we are touching -- our Rx business is about 40%, and the supplement overall complementary medicine, as we call medical supplements, are about 60%. And in that, we say [indiscernible] business is about 20%, 30% in that range. So something like that. So I think that's a general guidance. It may be plus/minus 2%, 3% is not exactly the same every quarter, but that's the range. And I think over time, I believe with the drug pipeline being bigger and the drug industry is anyway bigger, it's 10x bigger than the supplement business, if you look at it worldwide. So I think our drug business should become a larger proportion of our business. So it's probably edged higher in the next 2, 3 years to -- 2 years to about 50%. That's probably the -- by looking at the number of products and the size of the market that we are doing, that's what we think will happen. But it's a good balance of over-the-counter drugs what we call over-the-counter OTC or self medication. But also in our consumer health, we also have both over-the-counter drug, we have cough, we have cold. We have pain. We have allergy. We have [indiscernible] health and we have supplements and all these things. So it's a mixture. Even over-the-counter, we have some drugs pure medicines, right? So...

Yes. So could you please remind me on the gross margin for drug and supplementary?

Very, very similar. I think the -- thing was we had a good first quarter, so that that's what Manoj was saying, we had about 69 points something because of low SG&A and high production and first quarter was huge. So we were showing a 69%. But generally, we see around 64%, 65% in that range or average between the whole -- Mega weekend branded business averages around somewhere there. I think it's in the old days was 62% to 64%. I think that was the range. It's a little bit better now. A bit impact of the foreign exchange was there. Another impact was high production was there and product mix also was there and then low SG&A as well, right? So the first quarter looked very good. But the whole year, we ended about 64.9% or 65%.

Last year was 67%. Generally...

Year before?

Year before was around 65-something.

64%, 65% we did. I mean if you look at '22, '21 also, but prior to that, it was 63%, 63.9% So that will be -- COVID we did a little bit better because of higher production. And production rates go up, I mean, your absorption of basic -- I mean, operating expenses get spread out. So that also reduces that a little bit. That's a little bit higher outputs, number one. Number two, also to do with some [ foreign exchange ]. Number three, also to do with product mix. So all these 3 things have some impact. But generally, it is there, 64%, 65%.

Correct.

Okay. And my last question for now is regarding to your business plan, you said that in 2023, this is quite a flat year, right? But you can -- I mean, you mean like a slightly decline is possible. So my question is that -- what is the key risk -- the further key risks to your business plan for this year?

Key? Sorry, the key?

The risk. The risk. What...

There is no -- no, the key risk is only -- the risk was already gone for it. So when there's panic people buy in panic, right, and people buy more, I think that probably is over. To my mind, that panic buying is over. The only key risk now lie with competitors. But I think a lot of people came into this business thinking that wellness industry, huge COVID everybody give them more vitamin C and more vitamin C and more with vitamin C that's what they were doing, make everything to do with health. So everybody is into wellness, you name it. Everybody is not something, which is a drink, chewing gum, chewable candy, everything has -- so I think that's the challenge. But I think we are not as much involved in that area because our products are largely medicines. They contain the right dose, they're high strength. So we still have a very strong base. We will come back to a higher base, and we will have to live with it, and we have to create all these new products that we are building and Mega has a new huge pipeline of drugs, of over-the-counter drugs and of medical supplements. Like you see, we launched EUGICA, [indiscernible]. So some many things we have in our pipeline, AB Pro, Normagut. So we are not only focusing on just trying to create magic tonight. But today -- because this is the flavor of the month. This is being -- we have been doing this for the last 25, 30 years, and we have got to do it for the next 30 years and then build incredible business of products that work. So I'm not so -- I mean there is [indiscernible] a risk, but the risk can only be mitigated by remaining focused and becoming very customer-centric and using products that work, products that have a scientific basis. So we are pursuing that path diligently, honestly and building a brand that is effective, that is credible and that you believe in and that you also use -- I use it every day and myself because I believe -- I believe in what we make and people who use this. I think that's where the differentiation lies and we need to work on it. I think we need to continue not in short term, not in magic. But I think long term, think solution, think cures and think helping in people where they have efficiency. So I think that direction is not changed. That's my view, and that's our view across the country. And wherever we are doing it well, we see regular products that don't drop, products are continuing, people are buying. But we can't help that panic situation because that happened for that period, right? And that has to come down and things will start to go up. But it was -- it's only for a small part of our product range. We never sold favipiravir. We never sold remdesivir. We never sold all the products that became drugs for only COVID. So we don't have them. So we don't have an impact. A lot of companies sell a lot of all the other drugs -- drugs for COVID only. We didn't sell vaccines. We didn't sell mask. We don't have masks, we don't have vaccine. We don't have all this. That has no impact on our business. Only supplement, which is good because got people got to know them, and they are -- where the consumption levels are probably higher than what they used to be in '19, right? So at least it's a newer base. And from there, we have to develop and grow it further. So yes, I'm sorry, we can't keep maintain that level because from $1.2 billion to $2.2 billion is not a joke in 3 years, but I'm sure we are going to be there and build on top of it, right? That's the correct thing. And that's a good thing also, right?

Yes. I understood. Actually, we actually don't know what -- I mean, what is the normalized consumer behavior after COVID -- demand [indiscernible]...

I can tell you that we used to sell extra about $100 of vitamin C and it became $200 [indiscernible] still -- if it drops it down to $150 [indiscernible] become back to $100. So the good thing before COVID, we were already selling. We were #1 or #2 in vitamin C in this country, right? So it was nothing and nothing to do with COVID at all. It was zero COVID. But after COVID it became double -- but it did not come back to zero. So it is higher than what it used to be. So it's a new base.

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