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Ladies and gentlemen, welcome to the BioGaia second quarter 2020 report. [Operator Instructions] Today, I'm pleased to present Isabelle Ducellier, CEO. Madam, please go ahead.
Thank you so much. And dear investor, Alex and I wish you welcome to BioGaia Q2 report. I hope you had nice holiday despite the special circumstances I will call it. So from the top line point of view, we have a good quarter, with a total sales increasing by 10%, mainly thanks to the increase of the sales in pediatric. If we look at pediatric product, the main SKU and the main increase comes from our drops. If we look at the Adult segment, it is driven mainly by Prodentis, or oral health probiotics and by gastric tablet. I will come back to that later. All our 2 regions are showing a growth at different pace with modest 1% for EMEA and a very strong double digit, both for APAC and for Americas. Next page, please. Obviously, as for Q1, unfortunately, the key event is the pandemic. Having said that, BioGaia continues to take a number of precautions to protect its employees and its business. So to date, we don't have any impact on operations. We have been able to maintain our production and to ship our product to our partner all around the world. For the Swedish investor, like you to know that you can now, under the protective capital on hand, via [indiscernible] and even now via apotea. So that's our new capital that we launched in Finland, we had a pilot launch in 2019. It's the main train Protectis DSM 17. But in capital format, which gives a very positive attribute that is a vegan product. Next Page 3. Despite some delay in our rollout of current product portfolio, we've been able to manage to have 9 launches in 7 countries during Q2. And as you can see in the list, we mainly launched Gastrus in 3 new countries and Protectis with vitamin D, and I will come back to the Vitamin D effect, which is probably driven by the COVID-19 pandemic. And we have to notice as well that we had our first launches in Malta with our new partner, [indiscernible]. Next page, please. If we look at the segments, I mean both pediatric and adults are growing, obviously, from a different volume base. But if you look at the Pediatrics, during the quarter, we have an increase by 10%, year-to-date 9% and Adult 8% both for the quarter and for the year-to-date. So the Pediatrics itself is mainly thanks to our protective track. And here as well, even if it's not specified because we don't communicate in detail. It's worth to mention that the vitamin D drops plant, vitamin D, has been growing even faster than the normal drops. And this is the case as well for tablet. Immune system has been a really consumer request all around the world. And the consumer are well aware that vitamin D, together with probiotics is good for immune system. And therefore, that explains the strong performance on our drops. If we look at the -- Adult increased by 8%. It's mainly due to BioGaia Prodentis, our oral health, both under Prodentis brands and under GUM brands, which is a partner we had in Europe. For Gastrus, the good sales are driven by the 3 different launches I mentioned before and by the good result in the U.S. market. Next page, please. In terms of gross margin, you can notice a reinforcement of our gross margin at 75% under Q2 versus 74% Q2 last year. And that is -- if we look at the Pediatrics, here, you see a 3% increase versus last quarter at 77%, which is mainly driven by the fact that we had a lot of production at our own facilities at BioGaia production in the south of Sweden. Regarding the Adults, basically the lower margin at 68% compared to 72% last quarter is mainly due to increased transportation costs due to the COVID-19 and mainly in 2 markets, Japan and the U.S. Next page, please. Looking at our sales geographic market. So for the quarter 2, as I mentioned, a moderate increase of 1% for EMEA. And basically, we had a very bad quarter in Italy and a very bad quarter in Finland, our 2 most traditional markets. We have to mention that these country are not selling the BioGaia brand. It's under their own brand. So which reinforced my conviction that is very important to develop BioGaia brands. But Italy has been really impacted by the full lockdown. And as we only sell in pharmacy, the consumer could not go out and to almost to go to the pharmacy to buy their stuff. And all the medical recommendation, and they were not able to go to the doctor either. So here, we had really -- I mean they have been really hit bad by the COVID-19. In Finland, the lockdown was not as bad as it was as well locked down, but it's mainly due to price hike in a very probiotic major market. Having said that, in the EMEA, we could mention a very strong increase coming from Spain, from France and from all the Eastern Europe countries. If we look at APAC now, so again, a very strong quarter, at plus 23%. I'm very sorry, there is noise, and it was not planned, there are labor in our building, sorry for that. So APAC is increasing by 23% for the Q2. And this is mainly thanks to China, but not only, here you are with in Vietnam and Indonesia, increasing stronger because they have been able to manage a switch from off-line to online very successfully. And then if we finalize with America, we have an increase by 17% for the quarter 2. And this is mainly driven by the U.S., but Canada is doing very well as well. And I just wanted to say a bit on the U.S. market because we had a very strong quarter, and it's driven both by Gerber, so the Nestlé subsidiary under the Gerber name. And by Everidis under BioGaia brand. And here as well, we've already started to have a very intensive online sales last year, but we are only listing at Amazon and Walmart. This year, we are able to be on the 4 main online platform so on top of Walmart and Amazon, we are now listed at Kroger and target. So we are extremely satisfied with the development of the U.S. market. Next page, please. So now I will pass over to Alex that will go through the financials.
Okay. So if we move on to Slide #9. Our operating expenses we see that during the quarter, our operating expenses decreased with 1% from SEK 85 million to SEK 84 million. This decrease was mainly due to savings or lower costs in marketing and sales and in R&D. The reason for the lower spending in sales is obviously due to COVID-19 and the fact that we have not been involved in as many conferences and meetings with customers as we normally do, which has led to lower cost. And for R&D, we have a lower cost spending mainly due to also slowdown of some of our studies, but also general cautiousness in terms of spending. And if we then look at, what we call, noncore OpEx, which is MetaboGen and BioGaia Pharma, we see a cost increase of about SEK 3 million, which is according to plan as we move on with those projects and companies. If we move on to Slide #10 and look at the P&L., which is basically a summary of what we have said so far. We see that our sales grew with 10%. Our OpEx decreased with 1%, and our EBIT increased with 28% from SEK 79 million to SEK 100 million. And this then equates a margin of 41% versus 35% in the same period last year. And year-to-date, our margin is 36% versus 32% last year. If we move on to Slide #11, which is the cash flow. We see that the cash flow from operating activities was SEK 37.8 million versus SEK 34 million in the same period last year. And our cash flow for the period was minus SEK 38 million versus minus SEK 155 million in the same period last year. And the main explanation for the better cash flow compared to the same period last year is that we have a lower dividend but also we have a better result in the company. And this leaves us then with the cash at the end of the period of SEK 243 million. So with that, I hand over to Isabelle for some concluding remarks.
Yes. As a conclusion, I would say that we have a healthy sales growth of 10%, mainly driven by, what I call, the online sales market. So namely U.S., Canada, China, Indonesia, Vietnam that are fueling our goals. We have a very nice round figures of SEK 100 million in EBIT for the quarter 2, which is a growth of 28% that we are very happy with. That's due to a combination of healthy sales and as well some saving, as Alex mentioned before. So this generates a 41% EBIT margin for this quarter. And so we have now 36% on year-to-date basis, which is higher than the expectation of 34%. So we have so far seen limited impact on COVID-19, but I think that it is important to mention that it's very difficult to predict future effects. The demand from consumer on prevention health product is very big and is going to grow, but we don't know the impact on economic crisis and capacity of consumers to spend on probiotics. And therefore, we have to remain -- remain cautious. Having said that, we have a very strong financial situation, so we should be well equipped to address [indiscernible] and opportunities. So with that, I'm very happy -- Alex and I are very happy to take questions, if you have any.
[Operator Instructions] Our first question comes from Kristofer Liljeberg, Carnegie.
It's Kristofer from Carnegie. Some question related to sales. I don't know if you agree, but it seems a bit difficult for you to get back sales in double digits. It's low sales growth in double digits. Is that still the ambition and if so, why is that not happening? You mentioned Italy here in the quarter, but should you also have some larger boost from delayed shipments in the first quarter. So that's the first part of the question.
Okay. So in terms of sales, I mean, it's 10%, which is double digit. A lot of it…
But I think it's -- sorry, but if you look at the true organic growth. I think it's 7 quarters since you were growing double-digit now.
Okay. And I mean we had okay Q1. For me, Q2 at plus 10%, it's still very good. I mean if you compare to some competitors, I mean [indiscernible] had plus 6, Christian Hansen plus 5. So we are doing better than the market, which has always been our ambition. Indeed, we have a very strong online sales, but the traditional retail has been really paralyzed. I mean if you look at Japan, I mean all the dental clinics are being closed, totally closed. And that's the only place we sell product. In Italy, the pharmacy -- I mean people could not go out in the street, they could not buy their stuff, and they would not have any access to Internet, then there was no sales. So at the end of the day, I think one balance the other, and we're able to generate plus 10%. I mean I'm pretty satisfied. And yes, so that's basically my answer.
So do you think that the net effect from COVID-19 and the lockdown has still been negative in the quarter, despite the positive impact on the e-commerce channel?
Now I think in terms of consumer awareness that you have to take care of your own health and that the best doctor you have is basically yourself. I think it's a trend that is here to stay. And therefore, we will not be held like other industry by the COVID-19 in the same way. So on the long-term perspective, I'm not super worried. Plus 10%, I mean, in the current base, I think it's good. I know you had 20% expectation. But I think it was very ambitious. And my plan is to have a good 2020 year. And we are here to stay, and we're here to have this about a level of increase, but not 20%.
Yes. Okay, sure. The price competition in Finland, how is that impacting you? Is it that you have to lower the price to the marketing partner? Or have they lost -- the partner lost some sales? And also in Italy, do you expect sales to pick up again in the third quarter? Or would you still be impacted from the lockdowns that has been there and the lag from when the sales partner are placing orders and you ship?
For Finland, so our main product is sold under the ground RELA. And RELA had 37% market share. So we are being in brand and obviously, so is difficult to maintain your leadership. And so 2 years ago, we saw a new competitor at a very, very discounted price. And we are not willing to decrease our retail selling price because we do believe we have a better [ strength ] than the competitor, and therefore, the consumer is really to pay for it. But for price-sensitive consumers, it has impacted us. Yes. Having said that, now, we have planned for Q3 and Q4 in terms of marketing activity. So we rather invest in marketing activities rather than decreasing retail selling price because we want to maintain our margin, and we want to maintain the premium positioning of the brand. As regards to Italy, I'm honestly a bit more worried there than I am in Finland or in the rest of Europe. Having said that, we work -- so we have distributor. And if we look at Recordati, which is our main distributor, [ we have NOOS ], it's a very professional pharma company. We are working with them in Spain as well and in Portugal. And in Spain and Portugal, we are creating a lot. So I hope that our Italian record are different -- are going to find a way to be more active and perhaps when they choose to look at online sales, but as their model is based on sales rep existing doctor and the sales rep are not allowed to sit the doctor there really has been impacted a lot.
Okay. I understand. And sorry, there's a lot of questions here. But the final one. Now with I think it's good to see a larger part of sales coming from e-commerce. Would that, in the end, mean that you becoming less dependent on the distributors? Could you even handle that internally?
I mean, technically, I think we can say yes. We just recruited a new key account manager specialized in e-commerce. But today, I mean, our key assets -- one of our key assets is our distributor network. So I don't see a winning solution to start to sell from Stockholm directly online everywhere in the world. I'm still convinced that for the partner we can enroll Amazon locally, they are better equipped to address their local online partner from the market. Having said that, if in some country, we don't have any good partner or if the partner are not willing to go online, then we might look at solution to under it by ourselves. But that will be, if our local partner is not professional enough. And most of them are -- I mean, Everidis in U.S. or in China, I mean, they are really amazing. We are learning from them. But now we've recruited one new guy. He started yesterday. And we have as well recruited a new marketing manager specializing B2C that started in June. And the plan is really to nurture all partner with social media content and with expertise in terms of e-commerce and content management.
[Operator Instructions] our next question comes from Daniel Albin, Danske Bank.
I have 2 questions. The first one relates a bit to gross margins this quarter. You mentioned that you have in-sourced more production. And I'm just wondering, is this a temporary vendor or more of a structural event that you've in-sourced more production going forward? And how will that translate into, say, higher gross margins even? That's my first question.
Okay. So when all these COVID-19 started, we decided to work in 2 shift at BioGaia production. We were not sure that we would be able in the future to ship our product. And therefore, we asked BioGaia production to work in 2 shifts, which reflect in the Q2. If it's temporary or not? It is temporary because now as from July, we started to work in one shift. We're back to normal. And the reason is that we have higher-margin if we produced by our own, but we increased the risk dramatically because if something would happen at BioGaia production like contamination, explosion, I mean, you don't know, then we have no backup plan. So we need to maintain 2 sources of supply for our drops. Drops are 80% of our business, so we cannot afford to have only one place where we produce our drops. And therefore, we need to maintain production of the drugs other suppliers to mitigate the risk.
Okay. And my second one, I'm wondering if you can elaborate a bit on, say, end consumption. And especially then in the regions, APAC and America is having very strong quarters. And are there any phasing effects? Or how is the end consumption in those regions?
We were a bit worried when we saw increasing order from APAC to say, well, are they building up or are the building for [ rail ] my answer will be that basically, there is no major stock up by partners and that the consumer has been buying because they want they want to prevent to be sick, with one extra exception being South Korea and Japan, because Japan, they could not sell at the dental clinic. So that would be the 2 exceptions for the rest. I mean, we didn't notice any stock up by the partner or by the trade.
[Operator Instructions] Our next question comes from Kristofer Liljeberg, Carnegie.
So coming back to the question related to sales and impact from the lockdown in Europe and America did you see most of this effect already in shipments to your sales partners in the second quarter? Or will you have a similar or larger or effect of this in the third quarter?
We didn't see that in Q2. It's a bit too early to say for Q3 as we can -- I mean, we are not disclosing any forecast for the coming quarter. But that's probably why we always said that we want to be cautious. I mean, Mexico has a total lockdown, and it's a very, very difficult health situation, but we have very strong figures in Q2 that might be slightly down in Q3. But I mean, as far as we speak now, it's not really gone.
But you had -- you mentioned, for example, Italy, with a partner there, there was…
Yes. Italy has been very open. That's where I'm all right.
Okay. But that's only big effect. Really, seems…
Yes, for the moment, yes. Because, I mean, even Spain has been a major lockdown and we have super strong figures. So to partner -- some partner find the way to maintain their sales have been extremely active organizing with -- seminar with doctors online. And in Lat Am, especially Abbott, I think we've had like 50 different web seminar with experts from all the around the world with thousands of doctor physician online listening to seminar so Abbott, so Mexico, Peru, Ecuador, I mean they're all been able to continue to grow their business online. But Italy, no, so that's really a matter of how well your partner is equipped.
We have no further questions, I will hand back to you for conclusion.
Yes, thank you so much for all these questions. And we talk to each other after our -- for the Q3. Have a nice day. Bye-bye.
Ladies and gentlemen, this concludes today's conference call. Thank you all for attending. You may now disconnect.