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Edited Transcript of NATTO.OL earnings conference call or presentation 6-May-20 8:00am GMT

Q1 2020 Nattopharma ASA Earnings Call

Jun 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Nattopharma ASA earnings conference call or presentation Wednesday, May 6, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Kjetil Ramsøy

NattoPharma ASA - CEO

* Robert Schrama

NattoPharma ASA - CFO

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Presentation

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Kjetil Ramsøy, NattoPharma ASA - CEO [1]

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Welcome, everyone, to the first quarter earnings release for NattoPharma. My name is Kjetil Ramsøy, and I'm the CEO of the company. I will be joined today by Robert Schrama, our CFO, who will later bring you through the financials.

Last year, we said that we were going to have face-to-face presentations for our quarterly releases. The current situation with the COVID-19 has unfortunately made us change those plans. And hopefully, this situation goes back to normal, and we can also invite you to a more live presentation in the near future.

As usual, we start with the disclaimer. We will, in this presentation, provide some future-looking statements. They will be connected with risks. And we, therefore, ask you to make sure that you don't put undue reliance on those statements in your investments in the company.

The agenda today, we will go through some operational highlights. We will go through the finance highlights, and then we will end with a Q&A. And everyone listening on the webcast, you can now start sending in your questions through the webcast, and then we will come back to them at the end of the presentation.

So operational highlights. I will, as usual, start with a short glimpse of some financial key elements. We will come back to the financials later. But as always, it's good to start with revenue and EBITDA as 2 key metrics for our performance. And the first quarter has been outstanding. It has been a flying start to the year, and we see that K2 is now really taking momentum in the market. Looking at the revenue and compare it with the first quarter last year, it's more than 100% growth.

More realistic comparison maybe is to the second -- to the fourth quarter last year. And in that comparison, it's still almost 50% growth. So Q1 has really been extraordinary. On the EBITDA, we have also excellent performance. We see that the model when we come to the high levels of revenue and volume that we pushed through in the third quarter. The model is really profitable. We can take a lot of volume without increasing our operating expenses. So it's a milestone to be able to pass NOK 10 million in adjusted EBITDA for a quarter that a few years ago would be a dream. Now it's a reality.

So we are all facing unprecedented times here with the COVID-19 situation impacting all of us. And in NattoPharma, one of the first things that we did was to try to understand how this is going to implement -- impact us, and how can we take care of our employees? First and foremost, that's our concern and make sure that they have everything they need on under such circumstances. And that in the next phase will enable us to also serve our customers.

And we earlier on went into measures to make sure that we could operate as normal, at least as close to normal as possible during the times that we went through. We see that on the supply situation in the first quarter, there is really no negative impact that we can say, has significantly affected our operations. The lockdown in India is continuing and was now extended again this week. And the third phase of the lockdown is now expected to be lasting until the 17th of May. And that situation do put some tension on the supply chain, and we are working with our partners to see that we are taking all actions to mitigate any supply issues related to that.

Upon the massive lockdown that happened in the middle of March in many regions, we also saw quite dramatic impact in the international logistics. And a lot of freight carriers, they weren't able to operate. That has started to normalize, and we see now that flow of goods between regions is actually working quite smoothly. During the whole period, we haven't really had any impact on the outbound to our customers. We have been able to deliver our goods as expected to our customers on the outbound.

Another impact of the COVID-19, which we also announced today in a press release -- or not a press release, but a stock market notice, is that we are changing the date for our Annual General Meeting. The Annual General Meeting was intended to be on the 28th of May, if I remember correctly. We have seen that we need to push that to the 19th of June, and it's much related to us being able to practically understand how we can do the AGM without a physical presence that is normally required. There are arrangements now that will allow us to do that. So we just wanted to have some more cushion there on the timing so that we can plan for that properly.

Looking at the market and the product mix. We've already said that the market in the first quarter was really outstanding. It also continues at least in the foreseeable, to see -- to look very strong. We, as mentioned, do not have any impacts in the first quarter on the COVID-19 except from actually a positive increase in demand. We see that the natural products category is increasing faster than the synthetic for the moment. And much of that is related to some significant customers in the U.S. region. If we look at the volumes as such, what we shipped in March as a company is more than we have shipped in any quarter in the past with the exception of Q4 2019. So the volume that we pushed through in March was outstanding, and it shows the ability of the whole NattoPharma team, and we -- what we can accomplish when we have the opportunity.

We said last year that we have started to rebalance a little bit on our SKU portfolio so as we are trying to focus more on a set of core SKUS. And then we have other products that will be more on a kind of a custom-made basis. Custom made, meaning more longer lead time than being in inventory. And that strategy that we started to implement during the second half of last year has really paid out now in the first half because we have had ample inventory of the main SKUS, enabling us to really meet the increased demand that we saw in the first quarter.

We also see that if the situation with the COVID-19 continues to now normalize a little bit, then countries open. We don't see that there will be any significant impact on the supply side. However, if there should be a second flare of the virus and countries see the need to again start a lockdown period to contain the spreading, we don't know how that potentially can impact. So there is always a risk here that we can't really control during these unprecedented times that we are facing.

Underlying message is that the market is strong. And we see from market participants in many regions of the world that they say that the demand for their health products and supplements products is just spiking. And albeit, there is a risk, we do believe that we see a significant uptick that we'll have -- that will last for hopefully a longer period.

NattoPharma has been the leader in the vitamin K2 segment for more than a decade, I would say, 15 years. We had our 15 years anniversary last year. So we are becoming a young adolescent. The work that NattoPharma has done to actually document and prove the vitamin K2 importance in our diet has now further been supported by another study that was released in the Netherlands a couple of weeks ago, showing that vitamin K status can potentially have an impact to the treatment of COVID-19 patients. We are, by no means saying that vitamin K2 is a treatment for COVID-19. That would be a statement we have no grounds to make. And therefore, we are more interested in seeing how we can now further document affected vitamin K2 has a greater impact on your general health. We have already said bone and cardiovascular. That has been in our message for a long time. We see by this study that is coming out that they have now indications that it also has strong positive effect on lung and other tissues, which is, for us, extremely important and builds up on the message that we have said for a long time. Vitamin K2 is an extremely important factor to increase the human health.

The study in the Netherlands has been performed without NattoPharma involvement. We are, however, in a dialogue now to see how we can participate and be a partner in the continuation of this work that has to be done to further evidence the findings in the first study. We don't -- we can't really go into details on that for the moment. So we will have to come back to the market at a later time when we see or if we see that, that is materializing.

Our new ingredient on the other side has unfortunately been impacted negatively by the COVID-19 situation. We have had clinical trials in healthy humans ongoing, one for athletic performance and one for mental acuity stress. And unfortunately, both of these will have to be restarted. We were not able to get enough patients through enough control points in the studies to actually make a significant outcome. So this will have negative impact to our launch of the product. We will continue to do what we have said before on the soft launch. We are working with select customers on launching it. But the official full-blown launch will unfortunately be delayed. And at the current stage, I am not able to say when we now can plan for the launch because that will be all dependent on when we can restart the clinical trials.

We have also said before that the new ingredient would be subject to a direct-to-consumer approach. And we have -- we still have the intention of pursuing that path. However, it will be impacted by, first of all, the official launch. And also the fact that launching a D2C is a different ballgame than we have been doing in the B2B. So some time to actually plan it and set it up for execution will be required. So I'm not expecting that we will have any revenue or commercial activity on that part in 2020. It will be definitely into 2021 before we see anything on that. And I suggest that we can come back to the market at a later stage and inform about the plans on this one when we see that it's materializing.

So I think from an operational side, that was what I have. And now I will introduce you to Robert Schrama, who is our new CFO, started the 9th of March. And Robert had perfect onboarding. He came to Norway -- living in the Netherlands, came to Norway, stayed for 4 days and had to leave back to the Netherlands because of the COVID-19 and has been practicing home office since. So Robert is joining us on audio link from the Netherlands, and we'll do the presentation from his home office.

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Robert Schrama, NattoPharma ASA - CFO [2]

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Okay. Good morning, everyone. I hope I'm audible. It's now my pleasure to talk you through our financials in more detail.

If we look at the revenue growth breakdown for the first quarter, then in Q1 compared to -- Q1 '20 compared to Q1 '19, you can see growth, in which we more than doubled our revenue. And we can break this down in different ways, as you can see in the slide. If we look at the waterfall, then first and foremost, we've seen a volume growth of 84%, Kjetil already mentioned, the highest volume in the history of NattoPharma, which is a great achievement.

And if we look into the product mix, then especially the natural products, 60%, have driven this. On the price mix -- there are 2 main observations: how much the paradigm shift of natural versus synthetic from 40-60 prior year to 60-40 this year; and the other thing that we see here with -- despite the growth, we've been able to actually retain our overall price in line with expectation.

So I'd say, we've benefited greatly from the depreciation of the Norwegian krone in the quarter, being pushed by our U.S. dollar and euro bill. If we look at from slightly different angle on the table at the bottom of slide. And we see 3 driver, organic, currency and COVID, 3 drivers there.

And we see that about 1/3 of our growth is from what we just see as COVID-19 hording related from our customer, where our customers have started to fill medicine levels. And as a result, we have seen pretty large volume orders coming in, also being shipped in the quarter. And nearly half of the growth we see is organic growth, with the caveat, I guess the blindfold, Q1 2019 was already low quarter in the history of 2019, and so right -- and the remainder, as shown in the waterfall, is the FX.

And now we'll go into the income statement highlights. As mentioned in the previous slide, we have more than doubled our revenue compared to the same quarter in '19. And also, if we look at Q4 '19, we had a plus 45% growth.

And when we look at this from a more regional angle, we see the biggest driver of revenue growth are EMEA and APAC. But it doesn't take away that the America has the -- importantly had a tremendous growth and is still the biggest area when we look at the largest pharma worlds. And it is gratifying to see that the growth is coming from all products.

Our gross margin came in at 42.2% this quarter, which is in line with the expectations when we look at the products and customer mix. Typically, it's lower -- at the lower end of guiding instruction by 3 -- I would say, 3 primary items.

We've received some large orders for Asia, which had been very competitively price. So it put some pressure on the margin. Generally, also on the -- in the rest of the world, we've seen larger orders coming in with, I mean, payment at better price, putting compression on the margin and booking communicated (inaudible) that we pay, new ruling on U.S. government authorities, which basically means that we have to refine and produce some important formulated products into the U.S., which put pressure on the margin, we -- which we guided 45%.

And our OpEx performance is strong. We see an increase in our operational expenses. 2 main drivers behind there are the depreciation as very -- also for U.S. dollar and euro for a bigger trend. And other than that, we've also hired some senior personnel during the Q1 '20, which -- to support the growth and increasing sales.

Overall, this results in a very gratifying EBITDA for the quarter of NOK 10.5 million or 18.7% compared to revenue. And it's another testament that our operating model works. So we can scale our activities without having to need to increasing our resources.

Then the balance sheet highlights. Not too many changes there. Intangible assets compared to the closing of last year, we took a certain level, no large investments there. As we develop this part we haven't configured the 2019. We expect to see first benefits to come of the quarter ahead and going on the amortization.

The inventories, compared to last year, it's a big increase. But if we look at the end of 2019, we were able to sustain the level of operating profit, pretty much at the state as we had. It's also a testament to that we are able to control supply from our supply chain and production facilities.

And financial assets that relates to Kaydence, no changes there during the quarter. So hopefully, we recognize the impairment together before. No changes in that respect. And the receivables have gone up, in line with the buildup in sales in the quarter, and scheduled set like March over 34 months. But we ended on a very high note on our receivables.

Our equity ratio has moved further in the quarter, apart from the fact that we had a very strong performance, and we also concluded the private placements early January, and you also see it coming back in our cash flow statement. And the other parts of the balance sheet are pretty much stable compared to Q1 last year and the end of year 2019.

Cash flow. So as I mentioned, we -- in early January, we concluded the private placements, and the remaining payment of NOK 9.2 million was received. The operational cash flow has been negative during the quarter, which is understandable when you bear in mind that we had a huge sales in March, which put a lot of cash into our receivables. And at the same time, we also were able to maintain our book levels at the same level.

We did not see much capital expenditure in the quarter, which is in line with planning. And 2 other notes on the cash flow is that we received the communication from our bank in the U.S. that we've been granted a loan under the COVID-19 government program, for the payment protection, the payroll protection program, which is approximately 100,000 -- $180,000. And the loan is to cover the payroll and some other OpEx expenses.

Further, later this month, we'll be -- as communicated previously, our Board members have exercised their options and will receive NOK 900,000 coming in later this month. We will get the cash contribution around the difficult position for the month ahead and I think it's fair to say that our cash is sufficient to oversee operation.

Then our outlook. Some changes there. We've increased our guiding on the top line from 20% to 30% to 35% to 50%. We stretched a little bit on -- in light of the uncertainties that comes with the COVID-19 situation. Our expectation on the gross margin have been retained with EBIT 47%; and similar for our EBITDA expectations to be between 10% to 15%

And it goes without saying, our OpEx has been adjusted and work from the -- and make sure that we continue the good order, our operating model in place to support the growth we have without adding many resources.

So that's it from the financial side. Kjetil, back to you.

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Kjetil Ramsøy, NattoPharma ASA - CEO [3]

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Thank you very much, Robert. And I think we should apologize for some variable sound quality there on your end, Robert. So we have to blame that on COVID-19 and the fact that we can't be in the same room. We will try to improve for next time.

So at this stage, we are over to the Q&A. And you have been able to submit questions during the presentation. So I will now read up some of the questions we have received and also give the answer to the best of my ability.

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Questions and Answers

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Kjetil Ramsøy, NattoPharma ASA - CEO [1]

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I see from what I have already received before the meeting started, a lot is, in my perspective, already answered through the presentation we have given.

One here is that, what pace do you expect to launch new ingredients the coming years?

We have obviously been working hard over the last 18 months to prepare the new ingredient that we launched in February 2019. Unfortunately, it has taken longer time, and now at the end, it has been impacted by COVID-19. So it's now uncertain when we can actually have the official launch. But we will come back to that as soon as possible. At the same time, we are always looking for new ingredients. The thing, though, with our message is always that we want the ingredients that we put in the market to be clinically validated. We want the products that we stand behind to be good for the human being. And when you take it, it has to be proven. If not, we will be going against our own message for the last 15 years. So that will always then require some more vetting before we launch a new product. But we have a few in the pipeline that we are working on, but it's too early to say when they can be -- come to fruition. We have been through the new ingredient. We know that it's going to be delayed now due to the situation. And if we are going to recognize revenue in 2020 versus later, is now still -- is at higher risk than it used to be, I have to say that. But we are still hoping, and we are still working towards that through the soft launch that we have.

Another question I have here on my phone. Why would you -- why would NattoPharma consider taking control over Kaydence Pharma? So in the presentation, we haven't really covered Kaydence. But in the report that we launched at 7:00 a.m. this morning, we have made a statement regarding Kaydence. And Kaydence is still in a suspense mode. So they are waiting for a decision with regards to further funding. So NattoPharma is currently weighing all options, continuing as is with the situation Kaydence is in and attract external funding, but also considering taking control over Kaydence again and run the company through the NattoPharma initiatives. It's being discussed, no conclusions have been taken. So we need to come back to the market once we have a decision on that one. The reason for taking Kaydence back into the NattoPharma fold would very much be to safeguard the IP portfolio that is in Kaydence. If the company is not able to take the next step in terms of getting funding, external funding, then we will have a strong self interest in making sure that we take care of the patents and ensure that we can continue using them in our supplement industry.

Do you have any update on the future price pressure? I think Robert alluded to it briefly in his statement on gross margins. We do see that as volumes increase, pricing will be slightly under pressure. I think that is expected, and we can't really avoid it. But the key thing there is for us to really capture the falling price curve with significantly higher volumes. And some of that is actually coming into play in the first quarter. So we believe that there will be price competition. I can't say how big it is going to be, but it is going to be some kind of price pressure.

Any guidance on CapEx for the upcoming periods? We completed a fairly large capital expenditure project last year with the renewal or the enhancement of our synthesis process. That concluded in the fourth quarter of 2019. We are not in a situation where we have started new projects of the same size, but we are always considering development projects to take the business to the next step. I don't think that we have specifically guided for significant CapEx this year. Should that happen, then we will make sure that we update on the next quarterly presentation on expectation on Capex.

Any comment on the level of volumes in April, revenue growth prospects for second quarter? I don't want to go into details on the second quarter at this stage. What we can say is that the general consensus in the market is that dietary supplements are seeing a very healthy development during this period. Looking at the market magazines and market media from the U.S., for instance, you see that many of our traditional B2B customers, they report significant growth. So it remains to see how this is impacted by COVID-19 versus what is actually an underlying long-term sustainable growth. So we will be careful making the statements.

On the second quarter, it's also worth noting that we are going to be early presenting the second quarter the year. We're coming on the 15th of July. And that means we are -- we have normally come in the end of August. So we are shortening that with more than a month this year. So we won't keep you in suspense. We will let you know the news on the second quarter as soon as we can.

Can you comment a little bit on the competition and how you view NattoPharma's position? In my view, NattoPharma is the best company within the K2 industry. It's no doubt that we have been leading this segment for the 15 years we have been in operation. And we will continue to fight for that position also in the future. I don't think that there is any company in the world that can -- in our market, that can actually compete with us since we have both a natural offering and a synthetic offering. We have competitors in the market, definitely. And they are also strong companies. But they don't have the complete portfolio of what NattoPharma can offer. We have the science. We have been leading the educational efforts over a decade, and we have the product offering. So I think we will be out there fighting and giving all our competitors a hard fight for the market going forward.

I think that rounds up the questions I have here available for the moment. So I think unless there are any other questions coming in the next minute, we will end this session. So if you have something you want to ask now, so please send it in.

Okay. I don't see any further questions. So with this, I want to thank everyone for listening in today. And please stay safe and follow the guidelines from our authorities to make sure that we stop spreading this COVID-19 virus. Thank you very much, everyone.