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Edited Transcript of BIOG B.ST earnings conference call or presentation 23-Oct-19 7:30am GMT

Q3 2019 Biogaia AB Earnings Call

Stockholm Oct 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Biogaia AB earnings conference call or presentation Wednesday, October 23, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Isabelle Valerie Ghislaine Ducellier

BioGaia AB (publ) - CEO

* Margareta Hagman

BioGaia AB (publ) - EVP of Accounting, Finance & IR

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Conference Call Participants

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* Daniel Albin

Danske Bank Markets Equity Research - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the BioGaia Q3 report 2019. Today, I am pleased to present Isabelle Ducellier, CEO. (Operator Instructions)

Speakers, please begin.

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Isabelle Valerie Ghislaine Ducellier, BioGaia AB (publ) - CEO [2]

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Yes, good morning, Isabelle speaking, and thank you for joining BioGaia's telephone conference regarding Q3 2019.

Next page, please. Regarding the quarter 3, we have, unfortunately, a sales decrease of 4% and that is due mainly to the decrease of royalty that we have been speaking about for the quarter, but as well a new item that we didn't focus, a delivery delay coming from our supplier of aluminum blister in Belgium, namely Sanico. So despite the Sanico problem, we have pretty good growth in Adult segment with 8%, with a modest sales growth of our products in Pediatrics by 3%. We have good sales for our Protectis drops not affected by Sanico at all as we produce our drops at Eslöv in the south of Sweden. And despite Sanico, we managed anyway to have a good sales of Gastrus tablets and BioGaia Prodentis lozenges mainly driven by Asia. Regarding Protectis tablets, unfortunately here, we've been really affected by the Sanico problem, the IT problem they have faced so that they could not produce the blister for us, and we know that we will have a bit of impact in the Q4, as they have a big backlog not only for BioGaia but as well for all their pharma clients that they have to produce and package drugs for.

Regarding the sales per region, we are very, very happy with Asia Pacific. We had super strong Q1 and Q2 and we have as well, again, a very strong Q3, mainly driven by China, Japan and Vietnam, but I will come back to that later in the slide. Americas, very strong as well by 17%. And we have -- we are a bit disappointed by Europe and here as well I come back to that later.

Next page, please. In term of key events, we have opened Uruguay. We have signed an agreement with Abbott. So Abbott is definitely now a very big partner for us in LatAm. We worked -- we started with them in Mexico. And now we are with them in almost 6 or 7 countries in Latin America. So we're very happy about that. Uruguay is a small market, but what is interesting for us is that a lot of people from Argentina are buying at the border with Uruguay, so we do hope to have as well a bit of sales for the Argentinian consumer, as we don't have any distributor in Argentina as we speak. We are looking into the opportunity to find a partner, but we are very cautious for -- I mean to find the right one.

In term of new launches, worth to mention the launch of Protectis tablets in the U.S., BioGaia Gastrus in Mexico. And here as well, we can really sense a lot of traction for Gastrus in LatAm, so there will be more launches in the years to come. BioGaia Prodentis in Greece. So we are very happy to open now a business for oral health in Greece. Have the launch of Protectis drops and tablets in Ghana. So here, Ghana will be now our third market in Africa. We are extremely strong in South Africa. As you know, it's one of our historical markets, but unfortunately, our sales and marketing (inaudible) are not under BioGaia brands. Now we are selling pretty well in Kenya as well, and Ghana is a tough country.

In term of research, we have published a very interesting study in Thailand regarding Gastrus in -- so we've run a big study there that demonstrates that if you use Gastrus together with quadruple therapy when you have Helicobacter pylori. I mean the treatment works much better, which is positive because it works better but as well because then it decreases the risk of antibiotic resistance.

Next page, please. Sales per segment. No need to mention the royalty issue. In terms of products, I mean Q3 for Pediatrics is a bit low. Having said that, I would like to keep in mind all the time the fact that we have extremely strong rolling 12 with 14% increase and even accumulated Q3 12%. So I don't think we should focus too much on the quarter figures, but we have to admit it. In terms of Adult, a good quarter. Super strong accumulated and super strong rolling 12. So plus 35% on the Adult. We are very happy because that's the new strategy we implemented, and it starts to pay back, of course, on a smaller volume base but very interesting. So if you look at the total sales rolling 12, we have a SEK 770 million showing an increase by 10%, which is more than the probiotics market in general.

Next page, please. Gross margin per segment. Well, it's basically the same figure quarter-after-quarter, so a slight decrease for Pediatrics due to loss of royalties. Stable for Adult Health, slightly under the level of gross margin than for Pediatrics.

Next page, please. In terms of sales per geographical market. As I mentioned in the introduction, extremely strong quarter accumulated here for APAC, and that's driven by China. It's for the drops. I mean our Chinese partner were in Stockholm and in Eslöv last week, and they claim that, at least online, they consider BioGaia as being the #1 brand for Pediatrics, so they are super happy. And now they are so strong online that they even think that they will go off-line more and more. So very positive in China, a very good partnership, very talented in terms of digital.

For Japan, we've been a bit suffering from the Sanico problem for Prodentis, but the good news is that after a lot of discussion, we have one of our partners there, Alfresa, starting to focus on (inaudible) and -- which is, of course, very interesting for us. Japan is a bit different country than the rest. Normally, we always start by the Pediatrics product and our drops. But in Japan that's not the case. And actually, the drops -- the percentage of our sales are very small for drops. So we are starting there. And they are targeting the C-section babies. And indeed Japanese are not doing as many babies as Chinese. It's only 1 million newborn last year, but 20% of them are born via C-section. And therefore, we do believe that our ways to target these new babies with our drops will be very positive for the future. And then we actually notice that Vietnam, which is as well a pretty new market for, is starting to deliver very strongly. So we are very positive about this prospect for Vietnam.

Regarding Americas, good figures for the whole region, I mean both North America and South America, but it's mainly driven by U.S. Both Everidis for BioGaia brands but as well Gerber that launched in Q2 2 new SKUs. In Canada, strong figure here as well. We have our partner Ferring. They have a new management in place. So it took a bit of time for them to settle the new company, but now it's doing very well. And for the South America, Mexico is doing very strong. Abbott is doing a fantastic job, but here as well Nestlé on the local basis is doing a good job. And on top of that, we have our center of excellence. I think BioGaia is a very well-established brand and corporate name in Mexico. But I have to admit that Brazil was a bit disappointed. We basically had to change the -- slightly change the name of our brand that were created and the Anvisa, the regulatory authorities for the U.S. too close to credit, so they have been obliged to slightly change brand name, and therefore, it takes always a bit of time for the consumer to find this product back. Even if it's small changes, and they've done a lot of marketing campaigns to explain the change. I mean we can feel that it will take some months to go back on track. The disappointing region, obviously, is EMEA for us. Having said that, the minus 8% for the region -- yes. So I mean it doesn't show exactly what is happening. We have some -- a lot of markets doing very strongly, like France or like Ukraine, but we have 2 problems. The first one being Germany. And here as well, it's come from a change in regulatory. Before, probiotics were considered as food for medical purposes and therefore were reimbursed. And then the regulatory landscape changed. And suddenly probiotics are not reimbursed anymore. And therefore, consumer prefer to get something which is reimbursed rather than to have out of pocket probiotics. And so we're suffering quite a lot in Germany, which is mainly the reason of the decrease of the whole EMEA. But we are as well a bit struggling with Ewopharma, our partner based in [Swiss] but covering all Eastern Europe. So very different here as well, there are 15 markets. Some are doing strong, some are not doing strong. But they had a very, very big 2018 year. And it's difficult to grow from the very big years 2019, '18.

Next page, please. Income statements. So we've tried to manage our operating cost this quarter. We knew that there will be a challenging spell, so we've tried to be as -- I mean we've tried to manage all our expenses. So we have just an increase by 6%. But on the rolling 12, it's an increase by 13%, which is on line with what I would like to have. We have sales increase by 10%, operating expenses by 13% in -- for BioGaia. We are really in an increasing phase and a lot of investment possibilities. So I'm quite happy with that evolution for the rolling 12. The EBIT margin remained strong. Okay. I know it's decreased a bit. 34%, we've been communicating all the time, but 30% remained pretty strong.

Next page, please. Balance sheet and not a lot of things to comment except that as you know from Q2. So now we have plan to buy the remaining 8% shares of MetaboGen, so you can see the SEK 11.4 million in the noncurrent leasing liabilities. And we decided to capitalize the ERP system for SEK 4.8 million. So meaning that we will have to start to amortize during 3 years starting next year. You can as well notice an increase on property, plant and equipment, which is driven by new investments we've had in Eslöv. We really want to secure the production of our drops, and we needed new production areas. So we have opened a new production area. This is going to be full up and running as from January. And that will help us mainly for Protectis minipacks. So this aluminum that you have powder into, we will be able to produce more automatically. Today, it's a lot of manual operation, which is not -- neither good nor efficient.

Next page, please. For the cash flow, nothing special for the quarter. So basically -- but if you look at accumulated Q3, we've been impacted by an extra tax payment in Q1, have increased dividend in Q2, but nothing special regarding this quarter.

Next page, please. As a conclusion, I would say that indeed we have had a complicated Q3. So we knew about Nestlé. Nothing was surprised, but we didn't have in mind that Sanico will have this problem. I mean we've been working for Sanico for 15 years. We're running our risk mitigation per supplier every year. I mean Sanico's name has never been showing up because they've been doing all the time a fantastic job for us, never taking anything. But that happened this year, explaining the process warning we've been publishing. They are back on track. They have invested in a lot of extra stuff. They've recruited about 50 extra people to increase the production capacity. For BioGaia, today, we were on one speed line. As from January, we'll be beyond 2 speed lines. So they have done everything possible working on 3 shifts to recap, but they have a big backlog. So 2019 is going to be a challenging year. When I presented Q1, I said, it's going to be a transition year because I'm a very positive person but transition turns to be a bit challenging. Having said that, we have really to keep in mind that the -- we started the year with minus SEK 40 million. It's about 5% of the MAT turnover of Q3 '19. So it's a lot to absorb. And -- so we neither need this external supply issue on top of the rest. What is important anyway to say is that I'm not worried because we don't have any problem with demand. On the contrary, our problem is that we are not able to produce enough to answer the demand. And the demand is worldwide strong. A bit of plateauing in EMEA but Americas is strong, APAC is strong. So I'm not concerned. As long as there is a consumer demand, I think that's the luxury problem we are facing. And we have this credibility to help physicians and KOL. Thanks to our internationally renowned research network and all the research we are publishing. So which is our key point of differentiation and a strong, strong asset. So I would conclude by saying that with SEK 770 million on a 12-month basis driven by APAC plus 40%, Americas plus 28%, and to a lesser extent, EMEA, we have carefully managed our costs and BioGaia is still doing a strong plus 10% while being able to maintain an EBITDA at 32% level.

And I will finish that call by saying that unfortunately you and I are going to miss Margareta who has decided to leave the company. She will say a few words now. And just saying that we have recruited a new CFO. Because he said he will start in November. And I will come back with further information very, very soon. Please, Margareta.

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Margareta Hagman, BioGaia AB (publ) - EVP of Accounting, Finance & IR [3]

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I just want to say thank you for the cooperation with all you investors, and it has been a great time. It has been a fantastic journey during these 23 years I've been in the company. It has a special place in my heart, and I will continue to follow the company because I'm still a shareholder. Thank you very much.

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Isabelle Valerie Ghislaine Ducellier, BioGaia AB (publ) - CEO [4]

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Thank you. And now we are ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Daniel Albin from Danske Bank. Daniel, can you hear us?

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Daniel Albin, Danske Bank Markets Equity Research - Research Analyst [2]

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Sorry, I was mute. So my first question is regarding the delivery delays. I wonder if you could further clarify or maybe quantify the negative effects on missed sales in this quarter and also going in, in Q4? And just secondly to confirm and clarify is the production fully back on track with Sanico? That's my first question.

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Isabelle Valerie Ghislaine Ducellier, BioGaia AB (publ) - CEO [3]

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Yes. Thank you, Daniel. In terms of quantifying, we, obviously, have done the exercise, but we don't intend to disclose the figures exactly. We've been suffering on 2 stuff. The first stuff is, okay, something that we have not been able to invoice. But -- which is worse. It's basically the lost sales because we've been out of stock. We've been out of stock in Japan, we've been out of stock in U.S. And when you are out of stock you never recap 100% on the loss of sales, and which is pretty complicated to calculate. But having said that, when you say is the production back on track? The answer is yes. And they are even producing much more than before. And they are continuing -- they will be able, thanks to the new speed line in January to produce even more. So it's back on track, but the backlog is pretty big. So I keep calling to say, "Well, don't forget us." I can tell you, they don't forget us. We are their #3 biggest customer. So we -- I think they have been prioritizing us. And then what we've done as well is that we've called our distributors to say, "Could you order by full batch." The fact is that we're very kind. So we take the order, we don't say it has to be this minimum. So sometimes they send an order for half batch, and for Sanico it means, okay, they have to clean the line to start the production, to stop the production, to clean the line again, put something else. So instead of doing that, we said, well we try to consolidate all the order by full batch. So they take a bit of stock, perhaps, but at least in terms of production, is by far more efficient for Sanico and will reduce the backlog.

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Daniel Albin, Danske Bank Markets Equity Research - Research Analyst [4]

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Okay. Okay. Good. (inaudible) -- then in terms of growth rates and more particularly then in the different regions, where are you seeing the largest versus the lowest growth in terms of drops sales?

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Isabelle Valerie Ghislaine Ducellier, BioGaia AB (publ) - CEO [5]

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Yes. I mean drops, one of our main driver is China. China is selling mainly our drops. They had 18 million newborn last year. They have a very high penetration of our drops online. They have something which is called Doctor Mom that you can call 365 days, 24/24 and the mom buying BioGaia. So they call, they give the number or the last number and the customer service is able to answer them about question they could have about their babies, colic, constipation, you name it. So they can guarantee a delivery throughout China in 33 hours 53 minutes, I got the figures from them last week so that's why I do remember. And basically, this is the main driver for us. But -- so having said that, the drops in Europe are established. So here, you cannot expect with the democracy we have in Europe in major markets to have double digits forever. If we are able to maintain strong single-digit in Europe for the drops, we are very happy. We are already #1. So here, it's really to defend our market share. But in the rest of the world, we are first entrant. I mean in Asia, we were the first one. And we can see that even we have some infringement problems, so which is negative in a sense that it's always a problem with infringement. But having said that, it means that we are starting to be very big in China.

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Daniel Albin, Danske Bank Markets Equity Research - Research Analyst [6]

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Okay. And just I think last quarter you said that you grew triple digits in China. Is that still the case in Q3?

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Isabelle Valerie Ghislaine Ducellier, BioGaia AB (publ) - CEO [7]

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Yes.

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Daniel Albin, Danske Bank Markets Equity Research - Research Analyst [8]

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Okay. Yes. And my third question and last one. It's on -- you're mentioning the regulatory change of labeling in Germany. I guess -- what's your take on how this will pan out? And -- thus how do you see demand developing following this?

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Isabelle Valerie Ghislaine Ducellier, BioGaia AB (publ) - CEO [9]

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I have to admit I'm a bit worried. I mean Germans, they manage their budgets very cautiously. And if they can buy something which is reimbursed and they do believe it does the job, they will probably go for it. So that's not the market I will invest on mainly next year. I think that we will have -- that will be a bad year and that will take time to recover.

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Operator [10]

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(Operator Instructions) And as there are no further questions, I will hand the word back to Isabelle for any final comments.

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Isabelle Valerie Ghislaine Ducellier, BioGaia AB (publ) - CEO [11]

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No, I don't have any final comments except that I will miss Margarita. And I wish you all a very nice day. Thank you. Bye-bye.

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Operator [12]

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This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.