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Edited Transcript of NATTO.OL earnings conference call or presentation 13-Nov-19 9:00am GMT

Q3 2019 Nattopharma ASA Earnings Call

Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Nattopharma ASA earnings conference call or presentation Wednesday, November 13, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Kjetil Ramsøy

NattoPharma ASA - CEO & CFO

* Martin Lycke

NattoPharma ASA - VP of Finance

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Presentation

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Kjetil Ramsøy, NattoPharma ASA - CEO & CFO [1]

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Good morning, everyone. And welcome to the presentation of our results in the third quarter of 2019. I am Kjetil Ramsøy, and I am the CEO of NattoPharma. I'm joined today with Martin Lycke, and we will take you through the presentation today.

As usual, after the presentation, we will open for questions and you can submit these via the web during the presentation.

We begin with our customary disclaimer. Any forward-looking statements are based on reasonable assumptions, and they are subject to risk and uncertainty. You should, therefore, never place undue reliance on these statements.

During the presentation today, we will go through some operational highlights, some financial highlights, and we will end with the Q&A.

NattoPharma is celebrating 15 years as an operating company these days, and we do so by presenting our record third quarter in the company's history. We have a profitable growth compared to the same period last year, and a healthy EBITDA margin, but more on the numbers later in the presentation, and Martin will take you through the financials.

The supply issues we have been experiencing over the previous periods have been resolved, and we are now positioned to meet any increase in demand with a reasonable response time for both our national and synthetic product lines. The development project we have been running on the synthetic process is in the final stages and we see significant improvement in the process and as a result of that effort we are going through.

This will positively impact our cost of sales, and we will see these effects starting in 2020. This process improvement has been important to ensure continued delivery of the highest quality synthetic product on the market at competitive pricing and in scalable volumes. This is important as the global vitamin K2 market is growing, and we are seeing more and more interest from all regions in which we operate today.

In September, we exhibited for the first time at Vitafoods Asia held in Singapore. And the response we received during the show was very exciting. There is a high interest for developing new customer products based on K2 in the region. And going forward, we see this as one of our fastest-growing markets.

In early October, we exhibited at SupplySide West, the largest U.S. trade show for the dietary supplements raw material industry, bringing together more than 17,000 ingredient buyers and suppliers covering sectors, including dietary supplements, beverage, functional food, personal care and sports nutrition.

NattoPharma used this exhibit to launch our partner campaign, where we displayed a strong sampling of quality finished products from partners across the world using MenaQ7. With 10 cards showing quotes from select companies about what an extraordinary partner NattoPharma is and a difference MenaQ7 makes to their products.

In September, Norne Securities was engaged to act as a market maker to increase the traded volume in the NattoPharma share on Oslo OSEAX. Since the start of this agreement, we see an almost 5x higher traded volume compared to the prior 6 months. We believe that increased volume, together with continued good operational performance, will continue the share price increase to levels where the Board and management believe it should be based on our view of the business.

Over the last year, we have also increased activity around meetings with potential investors and traders. During these meetings, we get very positive feedback in -- and we believe that this is a strong momentum for NattoPharma and the interest from traders to start trading this year.

To further increase the communication with shareholders, we also consider hosting live face-to-face presentations for some or all of our quarterly presentations going forward. This will ensure that shareholders can have access to management during the year and will help to build confidence in the work being done to grow the company.

Keeping within our core principles of providing clinically validated ingredients that address real health concerns, we also continue the development of the new ingredient. The project is fully underway with the first human studies due to complete early in 2020 and a commercial launch scheduled for later in the year. These new technologies, combinations of the active ingredients and the delivery technology will be introduced as branded proprietary ingredients. This will not only tie the specific brand to the research, but also establish a product as unique offerings and not as commodities.

In order to create these unique offerings, we and our partners have developed an index of important actives and are subjecting the products to pharmacokinetic testing to establish uptake and buyer activity in humans.

Earlier this month, we granted the 24-month waiver in relation to all claims against Kaydence Pharma under the ongoing loan agreement, including accrued and future interest. The reason we provided this waiver is to enable the Board and management of Kaydence to continue their search for capital. We want to highlight that there is a significant financial risk related to the investment in Kaydence as funding is an ongoing process and the value of the investment and loan receivable is dependent on future capital injections. The investment will be subject to impairment testing in conjunction with annual closing at the end of the year. And unless there is a positive development in the funding activity of the company, it is likely that the full or partial write-down of the asset will be required.

Also in a Board meeting on Monday this week, Tom Pike, Chairman of the Board of Directors in Kaydence, announced that due to personal reasons, he wanted to step down from his position as Chairman. Tom will continue in the Board as an ordinary member. Erik Flatmark, a long-term Board member in Kaydence, has accepted the role as Chairman of the Board of Directors until the next Annual General Meeting is being held to formally elect a new Chairman.

With this, I want to hand you over to Martin, who will take you through the financials for the third quarter before we round off with a Q&A session.

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Martin Lycke, NattoPharma ASA - VP of Finance [2]

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All right. Hello, everyone, and welcome. I will now go through some slides on the financials. So we're very pleased to deliver an excellent third quarter for the company revenues came in at NOK 30.9 million, which is a 31% increase from last year. And also it's exciting to see that the rolling 12 months revenue is up 30%. And adjusted EBITDA came in at NOK 3.2 million, which is the strongest quarter on EBITDA ever. And it's good to see that the growth is continuing. As we said during our second quarter presentation, we have had a delay -- product launch delays at 2 of our customers, but they are coming back and one of them at the end of the year. And this is very good to see that we have customers coming back.

And also, I think the results show that our business model scales very well with volume, as we are able to turn around more products at the same cost base. On profitability, gross margins came in at 43%, which is within our guiding. And we do see that natural K2, including Natto to China is growing well, but it's also putting a downward pressure on margins. As we see sales of a couple of synthetic customers picking up again, we are hopeful that margins will improve.

On OpEx, it's a fairly regular month, nothing much to say about OpEx, it's a very good month for the company. In the fourth quarter, we attended the SupplySide West in the U.S., which means that OpEx for Q4 will be slightly higher. For cash, it's tight but it's controlled. We have operational cash flow year-to-date of minus NOK 3.7 million, which is mainly impacted by building of stock. And this is the first time in several years that NattoPharma has been in a position to deliver products timely, and we are confident that this will help immensely in building up customer confidence and sales. I would also like to say that this means that we are now able to start planning our productions much better. And this includes larger-sized batches, and I believe this will help both in terms of planning and margins going forward.

We are still looking for securing additional financing, but not at any cost. For the capital expenditure, as Kjetil touched upon this, it's related to the development projects, and we expect the effects to be shown in 2020. And we reiterate our guiding from the second quarter with the growth of 20% to 30% on revenue and a gross margins of 40%, 45%. And we aim for an adjusted EBITDA of NOK 10 million for the year. And with regards to 2020, we will come back to this next year, we are budgeting as we speak.

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Kjetil Ramsøy, NattoPharma ASA - CEO & CFO [3]

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Okay. Thank you, Martin. So let's go over to Q&A. Martin, I'll leave you to ask the questions.

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Questions and Answers

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Martin Lycke, NattoPharma ASA - VP of Finance [1]

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(Operator Instructions) I'll start with a question on the new ingredients. Basically regarding timing, and if you have any targets for sales in 2020?

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Kjetil Ramsøy, NattoPharma ASA - CEO & CFO [2]

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Yes. Timing of the launch has been slightly impacted by the ongoing clinical studies. They were scheduled to start during the summer, end of June time frame. And due to the development of the protocol and start up of those clinical studies, they enrolled the first patient pools starting in early September. So there is a delay there, and we expect now that shorter study will have results coming out mid-first quarter and the longer study will have results coming out mid-second quarter. We have started a soft launch of the product, meaning that we are talking with select customers on it, but we do not want to place a firm date for when we are actually launching it yet. We want to see the initial results of the clinical studies before we do so.

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Martin Lycke, NattoPharma ASA - VP of Finance [3]

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And there are a couple of questions on guiding on numbers, specifically on margins, EBITDA margins.

I can say as quickly about that. It's -- we will come back to the 2020 margins.

And also, the question relates to the scalability of our model, basically. And when we will see EBITDA increasing?

And that's really a balancing exercise, depending on how much we want to invest in sales and marketing, for instance, to grow more. So I can't really say that now we have sell before that 10% EBITDA margin is where we want to be for now. And that's basically what we can say now.

Let's see, some general questions on Investor Relations. I guess, you touched upon it in the presentation, Kjetil. Is there anything to note?

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Kjetil Ramsøy, NattoPharma ASA - CEO & CFO [4]

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No, in the Investor Relations, we have said before that we are increasing the activities process that we are continuing to work on. And we haven't been strong enough in the past, and we need to increase that effort going forward. We have already said that we are meeting more regularly with investors and traders, both in Norway and outside of Norway. And we will also try to be more accessible for shareholders next year by hosting a few face-to-face, either at our office or in combination with quarterly presentations like this. And gradually, we will be improving this as time goes on, definitely.

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Martin Lycke, NattoPharma ASA - VP of Finance [5]

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We actually have a question from -- right now from a investor saying, what do you think about some new studies and trends in media, showing that taking some vitamins is not so beneficial and no effect health?

I'm not sure what it's relating to it here.

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Kjetil Ramsøy, NattoPharma ASA - CEO & CFO [6]

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I think dependent on the objective you have when you make a statement, you can make a statement covering any conclusion you want. And there are a number of clinical studies, 100% supporting the value message we have in terms of the health benefits of taking vitamin K2. So in the floor of researchers and scientists, you will always find someone that has a different opinion than yourself. We will always rely on the solid work we are doing when we are making our clinical research and clinical services. So -- and more is coming on this. We have some new clinical studies, where data will be released during first half of 2020. And although they are double-blind, so we cannot really see the results yet. We do have very high hopes for the results of these studies.

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Martin Lycke, NattoPharma ASA - VP of Finance [7]

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Okay. So I have some very specific questions on the fourth quarter.

So I'll respond to some of it, he's basically asking about the sales growth, the gross margins and the OpEx in Q4. So I touched upon it briefly in my presentation, that we will have a slightly higher OpEx in Q4 compared to Q3. This is related to the trade show in the U.S., Las Vegas, which is the biggest one we have every year. Other than that, it's nothing major to comment on in OpEx. Gross margins, it's hard to say. It depends on many, many things, obviously. So I can't really say -- I like to stay within the guiding, like I said before. And in terms of hires, there's nothing much to say either on hires in the fourth quarter. So I think that's what I can say. Unless you want to say something more, Kjetil?

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Kjetil Ramsøy, NattoPharma ASA - CEO & CFO [8]

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No, not other than we are sticking to our guiding. And on a yearly basis, we still expect to be in the 20% to 30% growth and our gross margin between 40% and 45%. We have been faithful to that gross margin through the year and also to the sales growth out of our -- change in also Q2. For the first time, I think we have been vocal on where we aim our EBITDA. We haven't guided on that before, but I believe that we have a very good line of sight to deliver on that guiding as well. So apart from that, I think there's not much to add. We will still work on both improving margins, but that's a product mix issue. We will work on operating expenses and always be careful. So I think that is the best we can say at this stage. Any other questions?

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Martin Lycke, NattoPharma ASA - VP of Finance [9]

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I think we responded to those that we can say something about. If there's anything else, guys and girls, please send it in. We will be here for another couple of minutes at least.

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Kjetil Ramsøy, NattoPharma ASA - CEO & CFO [10]

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Yes, let's hold the line for a couple of minutes and see if there are other questions coming in during the time period, if not we will close down the call and.

At this stage, I don't think there are any more questions coming in through the webcast. So I want to take the opportunity to thank you all for listening in today, and I wish you all a great day. Thank you very much.