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Edited Transcript of NATTO.OL earnings conference call or presentation 21-Aug-19 8:00am GMT

Q2 2020 Nattopharma ASA Earnings Call

Sep 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Nattopharma ASA earnings conference call or presentation Wednesday, August 21, 2019 at 8:00:00am 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 our presentation of the second quarter and half year results for 2019. My name is Kjetil Ramsøy, and I am the CEO of NattoPharma. I'm joined today with Martin -- together with Martin Lycke, our Vice President of Finance, and he will take you through the numbers after my presentation. After the presentation, we will open up for questions, and you may submit your questions via the web during the presentation. As usual, we will begin with our customer disclaimer. Any forward-looking statements are based on reasonable assumptions, and they are subject to risks and uncertainty. We ask you therefore to not place any undue reliance on these statements.

The agenda today is that we will quickly walk you through some operational highlights. We will go through some financial highlights, and then we will have the Q&A at the end.

We continue to deliver profitable growth compared to the same period last year. However, I will not go into the details on these now, but leave those to Martin soon, who will take you through the numbers. Although the growth versus previous year is encouraging, several challenges have suppressed the previously guided revenue growth during the first half, in particular the complexities involved in the scale-up of our natural production capacity has resulted in a delay in delivery of customer orders in the period. This has picked up in the third quarter, and we will see a better position in the second half related to this issue. This is coupled with 2 of our more significant customer accounts: One in Europe and one in the U.S. They both revised their forecast due to strategic changes to the timing of their product launches. Both these factors have impacted our growth, resulting in a delay in expected revenue recognition to later this year and into early 2020.

The capital investment in the synthetic production project has been significant. In addition, during the period, we made a conscious decision to invest in building our inventory. This was to secure our ability to respond quickly to customer demand by providing the flexibility to produce a range of finished goods within a relatively short lead time. These 2 strategic decisions have made a significant impact to the cash balance. However, moving forward, we will see slower growth in inventory, which will reduce the need for further investing in the working capital over the coming months. We are also carefully assessing the needs for further working capital, and in this context, the Board and management continuously consider options for future funding, either through credit facilities or through new equity if that should be required.

Global sales continue to grow as our customers enjoy success both organically and via collaborative promotion together with us. The U.S. market continues to lead the growth. As an example, Carlson Labs, a long-time customer that generally do not include branded ingredients on their labels have now started to migrate their K2 products with a label incorporating the MenaQ7 logo. This is tying their products to the research, supporting MenaQ7 as the only vitamin K2 clinically proven to support bone and heart health. We also see strong results in Brazil and Australia and Asia, and in particular, China has continued to develop with very compelling potential.

We continue to lead the natural products industry education effort, enhancing our position as the K2 leader with our ongoing business-to-business outreach, emphasizing K2 research developments. Over the last 6 months, we have issued monthly press releases highlighting these developments and the company efforts in this area.

We have earlier announced our effort to drive a process to establish a recommended daily intake for vitamin K2, an RDI, with the goal of K2 being recognized and recommended by health authorities. Ultimately, this will lead to the inclusion of K2 into multivitamins for all ages, meal replacements and functional foods. In conjunction with this process, The International Journal of Molecular Science published a review paper, authored by NattoPharma sponsored PhD candidates and Professor Leon Schurgers at the University of Maastricht, which is part of the INTRICARE and EVOluTION research grants under the Horizon 2020 program. Our cooperation, we are proud of being part of as it validates our position as the market leader in the process to validate K2 as an important nutrition.

The development project to enhance the synthetic production process is now in the concluding stages, and we are extremely satisfied with the results to date. We now have a solid and efficient production process that can be deployed at any contract manufacturer that we choose to work with, providing us with stability and creating a stronger, faster and more agile organization that can meet customer demand that is many times higher than today's volume. Already this year, we will have available volume, which is 3 to 4x the gross volume we shipped during 2018.

In terms of our natural product, the planned increase in production capacity has now been completed. With heavy investments in production equipment, our partner has doubled capacity, and we can now look forward to stable supply of significantly higher volumes, which we anticipate will result in much stronger second half for this product line as revenue growth accelerates.

We are continuing a process to develop our new ingredient in the mood and energy segment. In-vivo research on animals is now complete, demonstrating enhanced bioavailability in preclinical pharmacokinetic studies, which suggests greater bioactivity compared to existing ingredients in the market.

Next, out of 2 human studies, which have been initiated. First results are expected later this year and positive outcome in these studies will allow our global sales team to begin introducing these technologies to select customers and prospects. As for previous guiding, and pending positive outcome from the ongoing clinical studies, we plan to commercial -- we plan for commercial revenue to begin towards the end of second -- first half of 2020.

Now that was the operational highlights, and then I will now leave you over to Martin to go through the financials before I come back and we have a Q&A.

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

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Hello, everyone. I will now go through some slides on the financials. So we are pleased to deliver a good second quarter, although slightly below our expectations. Revenues came in at NOK 30 million, which is a 10% increase compared to 2018. In the last 12 months, however, we have grown revenues 35%. Adjusted EBITDA came in at NOK 0.9 million. I believe it's now the 10th consecutive quarter with positive adjusted EBITDA. As we have said before, it's very important for us to demonstrate that we can grow profitably. As Kjetil touched upon, part of the recent revenues, and to some extent, our margins were slightly lower than we anticipated. It's a delay of sales to 2 customers. As we have said before, quarterly earnings will vary a bit depending on timing of sales and deliveries. We do have a stable customer base and a very good organic growth among many of them, but unfortunately we get impacted by delays like this.

These 2 customers are, however, not lost, and demand is expected to increase again towards the end of the year or in early 2020. So we are equally optimistic about the future. A few notes on our profitability. The gross margins came in at 39.2%, which is slightly below what we guided for the full year. We do see this is temporary due to an unfavorable combination of customer and product mix.

OpEx is pretty much on par with the last part of 2018 and in the first quarter, slightly higher than Q1 due to attendance at trade shows. Our focus is to get the most out of everything we spend to make sure we find the right balance between investing for the future and maintaining a profitable growth curve.

So looking at cash, we're not denying in that it is tight, but this was planned as we went into the year. We wanted to build some inventory to make sure we could deliver products. So this is the first time in several years, where we are in a position to deliver our products timely, and we are confident that this will help immensely in building up customer confidence and sales. And we're still considering alternative sources of financing, as Kjetil touched upon, but it's not that [any] cost. For capital expenditure, this relates largely to the development project for synthetic K2. So due to the second quarter coming in slightly weaker than we anticipated and due to the delay of deliveries to 2 customers, we are adjusting the estimated annual growth rate to 20% to 30%. We do maintain the guiding on gross margins at 40% to 45%. The supply situation is more stable. And we also have implemented measures on OpEx to make sure we can adjust. And we plan to update the guiding in November in conjunction with the Q3 report. That's it on the finances for now.

And then we will go through some questions.

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

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Thank you, Martin. So as we usually do, I will let Martin take the questions that we have received either through e-mail or through the web during the presentation, and we will try to answer as many as possible.

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Questions and Answers

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

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We got one question on payroll for the 2018 accounts, looking at average salary, which is a fair question. The reason it looks strange is because when you disclose amount of employees, you actually only disclose those that are on your payroll and not consultants, not hired personnel, et cetera. So we do have a few more full-time employees than was in the note in the 2018 statements.

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

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So in that context, Martin, maybe how many employees do we -- if you say, we are around 24 and the FTEs that we have in the annual report was...

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

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I can't recall the actual amount in the note at this time, but I believe we were 22 or 23 average 2018 and 24 now.

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

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So it's important to have that in mind when we look at the personnel costs on FTE as a ratio.

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

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Yes. We have some questions on the new ingredients. Any other information you can share. Is it delayed? What's going on?

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

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As I have said, we have previously announced that we expect revenue -- commercial revenue to start at the end of the first half of 2020, and we maintain that objective. It's important to understand that a development project like the one we entered into together with our partners earlier this year is always connected with risk. And some delays will often occur. The delay we have now in the clinical studies -- the human clinical studies is around 1.5 to 2 months. The protocols are now being designed, and the studies are in the initiation phase. So the first study, we expect to have more results late Q4 and early 2020 -- early Q1 2020. We don't want to go into details on the ingredient at this stage because we don't want to share too much with the current entrants in the market on the same ingredient because that will make them aware of what we're doing. We believe that based on the studies we have had so far, we have compelling results, and we believe that the product we are working on is far better than the competitors that we currently see in the market. But we need to perform the final studies on the human first. There is always risk.

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

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Some questions on expected volumes for 2020.

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

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Until we have been able to go out there and start soft selling it with select prospect customers, it's difficult to range the volumes. What I can say is that ingredient is in a emerging market. It's not a new ingredient, but it's a fairly small ingredient that has now gained rapid growth lately. And we see that it's a huge potential in the future.

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

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So any plans for any other ingredients in 2020 or beyond?

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

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We are constantly looking at other ingredients, and we're always assessing the opportunities we have available. It's however important to be cognizant of what we have said before. We will always have a high threshold in taking on the new ingredient based on our clinical validation process. We want ingredients -- NattoPharma stand behind, to always be validated as a true important nutrient. So we are probably scanning a lot of potential ingredients that we eventually say that we are not interested in pursuing because of the either clinical evidence or the position it has in the market. So once we are ready to say something more about new ingredients, we will share it with the market as soon as we can.

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Martin Lycke, NattoPharma ASA - VP of Finance [11]

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So there's one question regarding the guiding and why 2 customers can impact the guiding to this extent?

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Kjetil Ramsøy, NattoPharma ASA - CEO & CFO [12]

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The 2 customers that we're talking about are fairly significant customers. Both of them have good traction, but it has taken us little bit longer time for them to launch in the full markets that they plan. One of them is also impacted by the fact that they had intentions of launching a portfolio of products, the last one being early 2020. That has been put on hold. So for that reason, they stocked up a little bit more at the end of last year and that has been consumed in the other projects they have launched during 2020. What is good to see there is that they have now burned through that inventory, and they have already placed orders with us for new deliveries. So we see that, that is coming back on track. And as a small company -- fairly small company, we see that when we have customers of that impact, it will always be noticeable in our numbers. And as Martin said, we will see fluctuation between quarters on revenue. Timing is crucial here on these larger accounts.

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Martin Lycke, NattoPharma ASA - VP of Finance [13]

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Let's see. I've just got a few new questions here. It's a question on supply chain. So what kind of complexities are you experiencing with respect to the scale-up of production? And will this have any effect in second -- in the second half as well?

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Kjetil Ramsøy, NattoPharma ASA - CEO & CFO [14]

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First, the complexity is mostly relevant for the natural production capacity. And dealing with the natural production, we know that it's an organic production. It's the bacteria that needs to be fed the correct protein sources. And everything that relates to a organic bacterial strain and a production queue, that will always be somewhat more complicated than ramping up a synthetic process where you can, through chemistry control the whole process from A to C. We have been through the summer together with our partner, and we can say that the effort that has been put in has been tremendous. And as of Monday this week, meaning 19th of August, the full extension has been set in production. So we expect now that the natural capacity and supply is going to be at a much higher level in the coming 6 months than it was the first 6 months of 2019.

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Martin Lycke, NattoPharma ASA - VP of Finance [15]

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Let's see. It's a question on the EBITDA percentage going forward.

Like we said before, we want a long-term stable EBITDA. The goal long-term is around 10%. And the timing and potential of this, it depends on the revenues. So we're almost there. So it's a matter of adding a few more customers and getting into a more stable situation. So it's hard to say when that will be.

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Kjetil Ramsøy, NattoPharma ASA - CEO & CFO [16]

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As add-on to that, the Martin statement is very correct. And as an add-on to that, we can look at the fourth quarter last year, where our EBITDA margins were very attractive based on the fact that we could leverage the volume. We truly have volume as a key indicator for the EBITDA margin because our fixed cost basis, operating expenses is under control.

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Martin Lycke, NattoPharma ASA - VP of Finance [17]

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Scalability of the business is very, very good and volumes will drive the EBITDA in NattoPharma. So that's exciting. Also, a question about long-term inventory sales ratio. This depends on our portfolio, obviously. We'd like to keep it as low as possible. So we need about 3 months of revenues in inventory at any time at a minimum to be able to deliver and produce products. So I'd say that's the minimum on the top of my head.

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Kjetil Ramsøy, NattoPharma ASA - CEO & CFO [18]

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Yes, and in current situation, we are probably aiming to be slightly above that to ensure that we can maintain the credibility with our customers and deliver as they expect.

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Martin Lycke, NattoPharma ASA - VP of Finance [19]

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Yes. Also, some questions on Kaydence Pharma. If we can share anything about development in Kaydence?

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Kjetil Ramsøy, NattoPharma ASA - CEO & CFO [20]

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Yes. No, I will not have any updates for you on the Kaydence development at this stage. I will have to defer to the management in Kaydence to give that update when they are ready to present something. I know letter to the shareholders were sent, I believe, end of June, early July. And I believe that they planned to send a new one in the near future. I can, however, not commit to anything on that side.

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Martin Lycke, NattoPharma ASA - VP of Finance [21]

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So general question -- well, 2 questions on investor relations and liquidity and the share. What's a fair price is the question. Mid-8, is that a fair price? Any actions we have in this area?

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Kjetil Ramsøy, NattoPharma ASA - CEO & CFO [22]

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Well, on the share price, personally I believe that the share is undervalued in the stock market. And I can say that neither the management nor the board is happy with the volume and the liquidity in the share. And to change that is a time-consuming task. It's not happening in a quarter. It's not even happening in 2 quarters to be able to change the volume there. And we are working on trying to find the means of becoming more visible. So I can't share with you now what we're doing, but we are looking at that in terms of creating more visibility and interest for share.

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Martin Lycke, NattoPharma ASA - VP of Finance [23]

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Give me a second. A question on China demand, China sales, anything to share.

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Kjetil Ramsøy, NattoPharma ASA - CEO & CFO [24]

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No. As I -- I think I mentioned in my operational presentation, we see a very compelling potential in Asia and in China, in particular. We have been developing China over some time. And I've said before that we see huge growth there, and I stand by behind that. And we believe that China is going to be a significant market also for NattoPharma. It's however always a tricky country to operate in for regulatory purposes. So we need to play together with our local partner there to ensure that we are entering the market in a great way with new customers.

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Martin Lycke, NattoPharma ASA - VP of Finance [25]

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I think we've been through the main items here. I just got a new one, give us a second. Yes. So the question relates to -- after the production scale that we've had for the last 18 months maybe, do you have any numbers on the actual costs for this the past quarters? And if this will have a positive effect going forward?

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Kjetil Ramsøy, NattoPharma ASA - CEO & CFO [26]

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The cost for the scale-up, I think, Martin has briefly touched upon when it comes to the capital expenditure and the effects in our balance sheet on the asset that we have capitalized. That's on the synthetic project that we have been undergoing. The costs related to the scale-up of the natural lease carried by our partner, and it will not be visible in our cash flow or our balance sheet. So the benefit we take there is that the stability and the volume of product is increasing, and it will have no other negative impacts to us, apart from increased supply, more stable supply.

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Martin Lycke, NattoPharma ASA - VP of Finance [27]

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Okay. Well, we'll leave the line open here for any follow-up questions or more questions. So just go ahead if you have any.

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Kjetil Ramsøy, NattoPharma ASA - CEO & CFO [28]

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Okay. Martin, I don't think that we have more questions at this stage.

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Martin Lycke, NattoPharma ASA - VP of Finance [29]

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No.

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Kjetil Ramsøy, NattoPharma ASA - CEO & CFO [30]

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So with that, I will thank you everyone for listening in today. And I wish you all a pleasant day.

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Martin Lycke, NattoPharma ASA - VP of Finance [31]

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Thank you.