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The conference is now being recorded.Ladies and gentlemen. Welcome to Probi Q1 2020 report. Today, I'm pleased to present CEO, Tom Rönnlund; and CFO, Henrik Lundkvist. [Operator Instructions] Speakers, please begin.
Thank you, and a warm welcome to everybody dialing in or following this presentation via the web. Together with me here in Lund on a safe distance from each other, I have Henrik Lundkvist, our CFO; and myself, I am Tom Rönnlund, CEO of the company. So please move to Page #2. And please familiarize yourself with the safe harbor statement depicted here. And with that, you can move over to the third slide. For today's agenda, we will go through an executive overview with regards to key events and developments in the first quarter of 2020 for Probi. I will hand over the word to my colleague, Henrik, for a financial review. And we will conclude with an outlook and open up for a Q&A session as well towards the end of this call. Next picture, please. So a couple of points, summarizing the start of the year for Probi. We had a stable start to the year, where our sales revenues grew by 11%, adjusted for currency impact, which is in line with our ambition for growing our company further in the space of probiotics. It's been driven by a strong demand, both from existing as well as new customers. And we'll get back on comments on that moving forward as well. We also recently announced the initiation of a Joint Venture between Probi and the American healthcare company, Viva5, as well. We'll comment on that as well, a little bit further along in the presentation. And despite the ongoing COVID-19 crisis with all the dramatic impact it has on the world and on people and human lives, Probi has had in the quarter a limited operational impact caused by the COVID-19 pandemic. Next picture, please. So we just wanted to take the opportunity to comment a bit specifically on the impact on Probi by the COVID-19 pandemic. We, of course, share the concerns, together with the rest of the world in these uncertain and troubling times for public health, individual health as well as the overall impact on the greater economy. For Probi, the safety of our employees and the wider society as well is of utmost importance to us. That has resulted in us taking a number of extraordinary measures to ensure a safe working environment with extensive safety measures as well as cleaning protocols and associated actions with regards to homeworking policies and so on and so forth. In order to protect our employees as well as the wider society and at the same time, remain operational. We have had at -- our production facilities, we've had a higher than normal level of absence for periods of time, mainly caused by precautionary self-quarantine by team members but throughout this period, we have been able to maintain operational status with only minor delays in deliveries. At the same time, we have experienced an increased demand, particularly for immune supporting probiotic products, of which Probi has one of the most studied and well documented probiotic concept for immune health, and we have seen a surge in demand for this but also across a wider line of product as well, it seems like consumers have turned also to personal healthcare products in these -- in the times of the COVID-19 pandemic. At the same time, we are not able currently to accurately assess the longer-term impact of the consumer behavior in the light of the COVID-19 pandemic. But at the current moment, we have had a strong order flow in Q1. And we also have a good order book for the second quarter. But longer-term impact is a bit difficult to assess at this moment in time.Please turn to Page #6. In the quarter, we announced a joint venture together with the U.S.-based healthcare company, Viva 5 Corporation. This is a strategic joint venture for Probi where we intend to explore market opportunities outside of Probi's core business areas as such. This is in the field of spore forming bacteria, Bacillus Coagulans, more specifically. And where we are exploring opportunities to develop additional products and product concepts based on spore-forming bacteria, which are more robust and auto resistance to elevated temperatures compared to Lactobacilli.This allows the use of probiotics pore formers in different types of applications which differ from lack Lactobacilli, representing business opportunities that Probi is currently not exploring within Probi AB. We have a joint ownership in this joint venture, where Probi has a minority share right now of 49% of the share capital in this joint venture but with a future option to acquire a majority interest of the company. This is a long-term project together with Viva5. Probi has worked with Viva5 in the past as well, and we have identified this business opportunity as an interesting one to explore jointly. And the market in itself, where spore formers are used is a multimillion-dollar market opportunity. And we see the opportunity to develop VivaPro into a multimillion-dollar corporation as well. We do not expect any significant revenues or earnings in this company in 2020, but expected first revenues to come throughout the year of 2021 in this partnership.Next slide, please. So we are on Page #7. So in relation to our long-term financial targets, in the first quarter, we are happy to see that in terms of outperforming market growth, we delivered a currency non-adjusted net sales growth of plus 14%, strongly driven by the Americas, our region Americas, where we have both new and existing customers placing relatively large orders with us, partly driven by the surge in consumer demand or consumer purchases, most likely caused by the COVID-19 pandemic but also other products being launched together with existing and new partners. So this is a good start for our Americas region in 2020. In EMEA, however, we had a slightly negative development in the quarter. The underlying demand in the EMEA region continues to be good. And we have a number of interesting projects that we're working on and a number of new launches that have been carried out as well. So we expect EMEA to continue to be an important contributor to growth in the company. But particularly in this quarter as well as partly throughout this year, we will be affected in this region by redistribution of sales revenues to another one of our regions due to a renewed agreement with one of our customers, where parts of the business is transferred out of EMEA to another region. In APAC, despite the difficult circumstances in the first quarter caused by lockdowns in many of the markets due to the COVID-19 pandemic, we still have, even though it's on quite low levels, we still had a positive development with both new as well as existing customers in that region. So from a sales growth perspective, we are satisfied with the development in the company. However, on EBITDA, we fell below in the quarter vis-a-vis our communicated long-term objective of an EBITDA exceeding 20%. So we landed at 19% in the quarter, partly due -- affected by certain one-off items, where we have a temporary production disruption due to a malfunctioning piece of manufacturing equipment in the quarter, which caused the stand still for a brief period of time. And we also worked on a couple of strategic projects throughout the quarter, which are nonrecurring. And these together amount to about SEK 5 million in terms of impact on EBITDA, corresponding to approximately a 3 percentage points. We are, of course, not satisfied with this EBITDA number in -- or sorry, EBITDA margin in the quarter and are taking actions to ensure that we continue to operate comfortably over the 20% long-term communicated target. And we feel confident that this is possible for us, moving forward.Move to the next picture, please. We're on Page #8. We have commented on many of the dynamics depicted here. I would like to draw your attention, potentially also to some of the negative EBITDA impact that we experienced in the first quarter is also related to increased investments in our R&D program, which is, of course, a very important driver for the future for our company in order to continue to be at the forefront and lead the way in probiotic innovation and science as a company. We're also very happy that we, throughout the first quarter in 2020 have expanded our collaboration with one of our large American customers, which, over time, will lead to higher sales volumes with that particular customer. And at the same time, as the upgrade and update of their product range happens throughout 2020, we can expect potentially increased volatility in sales between quarters as we move 2020. The project, as such, is a very good project for Probi. It's based on our premium materials of probiotics and also encompasses a broader delivery commitment from Probi. So we are tying ourselves closely to this customer for a long term commitment, so very positive development here. If we turn to the next page, please. A couple of comments on the geographic market dynamics through the quarter. I think that particularly a couple of things here, important to point out. As mentioned, it seems like personal healthcare is of increased interest to consumers all over the world, most likely driven by the ongoing COVID-19 pandemic. And we see that clearly in the U.S. market where there's definitely a current increased demand from consumers. It could partly be driven by stocking effects but there are potentially also positive effects from increased compliance and increased attention to the area as such. And Probi's well positioned in this space to take advantage of those opportunities that, that might present moving forward as well. In the APAC region, the quarter was affected by the shutdown, particularly in China, which has delayed some of our projects and activities there. But there's also encouraging signs there at the same time. As of the last few days, our teams there have been able to start to interact with customers and driving projects also in physical meetings compared to only working over electronic tools. Okay. Next picture, please. So we're on picture #10. And here, we have outlined the net sales and profit divided by region. As I mentioned before, the performance in EMEA was -- the underlying demand from existing customers is positive. So we are happy about the development there. And the negative impact here is largely due to redistribution of sales revenues.In APAC, we had a healthy increase in percentages. It's still on low levels, but we are seeing a very positive pipeline there, this pipeline of new opportunities with customers despite the ongoing COVID-19 situation. In the quarter, we launched together with a new customer in South Korea, an immune enhancing offering as well, which seems to be off to a good start in the market.And of course, we are very happy to see that Americas had a very strong quarter driven both by the surge in consumer demand, but also coming from a couple of large new customer accounts as well, which is a very positive development there.If we turn our attention to the gross profit in the respective regions, the U.S. gross profit was affected by the temporary production disturbance that we had.And when it comes to the EMEA region, the gross profit there has been affected by the redistribution of some royalties over to product sales occurring in another region currently.So that is why the EMEA had a negative development in gross profit. And when it comes to the APAC region, again, quite small figures, but the decrease in gross margin there has been driven by actually increased investments with customer projects and new launches, which has driven up regulatory costs in order to be able to register and launch these products in the market.And this has affected the gross margin in the region. Moving forward, we plan to assume more normal levels also there.If we turn to the next page, please, on Page #11. A couple of other highlights occurring in the first quarter of 2020. As mentioned, we have not had any major delays in customer deliveries caused by COVID-19.And at the same time, we've also seen a significant increased interest in immune supporting products, which is positive for Probi.We have initiated the -- or established a joint venture together with VivaPro or with Viva5, which is an exciting opportunity for the future, very large project together with one of our largest American customers in a broadened delivery commitment from Probi, which will lead to higher sales volumes in the future.And we have also welcomed 3 new members to our executive management team so Mrs. Basudha Bhattarai-Johansson has joined us as Vice President of HR. Mr. Shane Judge, he has joined us as Vice President of Global Sales and Marketing; and Mrs. Hanne Risager Romedahl will join us in the summer as Vice President of Research and Development.So with that, I will be handing over the word to my colleague, Henrik here, for the financial review section.
Good morning, everyone. I will now walk you through the financial section here. So please turn to Page #13 here.In the sales bridge, you can see, as Tom earlier described that our sales increased by 14%, which mainly comes from increased sales in region Americas.11% was related to the organic growth and 3% was related to a positive exchange rate effect.Our EBITDA increased by 6%, but the margin was negatively affected by temporary disruption in production.And we also had unfavorable product mix in the quarter together with some additional business development expenses and R&D expenses.EBIT was slightly lower compared to Q1 2019 as a result of higher amortization and depreciation. Net income increased by 25%. And since there was no changes in the number of shares, the earnings per share also increased by 25%.Now turning to Page 14. As just mentioned, net income for the first quarter increased by 25%, which represents SEK 2 million and ended at SEK 11 million.The increase was mainly related to a volume effect from higher sales in Americas. We had a negative gross margin effect in the quarter of SEK 5 million, whereof SEK 3 million was related to the temporary disruption in production.And SEK 2 million was related to the unfavorable product mix. In the quarter, operating expenses were SEK 4 million higher compared to previous year due to increased expenses in connection with business development and R&D activities.The financial result was positive as an effect of the revaluation of our bank accounts denominated in foreign currency.Now turning to Page 15. For the first quarter, the gross operating cash flow amounted to SEK 34 million, which demonstrates a solid business model. We also had a favorable working capital effect of SEK 15 million, mainly coming from a temporary lower inventory level. Tax payments were high in the quarter as a result of low tax payments previous year in comparison with the final taxable result. CapEx was mainly related to the upgrade program of our manufacturing site in Redmond U.S., amounting to SEK 5 million, but also connected to further investments in clinical trials and patents amounting to SEK 2 million.The cash flow from financing activities are related to payments for the lease obligations and connected interest in accordance with IFRS 16.Except this, we also had some favorable exchange rate effect on our cash and cash equivalents. To summarize, our cash generation during the first quarter was good, and we generated additional SEK 28 million. Since we have a strong cash position, together with a robust business model, we terminated our bank agreement in the quarter in advance.That was originally due in July this year. Now moving to Page #16. Our balance sheet continues to be in good shape, and I will make a few comments on individual balance sheet items to explain some of the larger movements here.Our intangibles assets and goodwill are mainly denominated in U.S. dollars. And they have increased in the first quarter due to the exchange rate effect as a result of the weaker Swedish krona.Cash and cash equivalents increased by SEK 28 million, as we saw on previous slide, due to the healthy cash flow there.The rest of the balance sheet items have limited movements compared to year-end. So to summarize this slide, we have a strong balance sheet with an equity of SEK 1.4 billion and an equity ratio of 90%, which means we are well equipped going forward here.Now turning to Page 17 and handing over to Tom again.
Thank you, Henrik. Please turn to Page 18. So just briefly to summarize a bit with regards to the outlook for our various geographic markets as we have started 2020 and move forward through the year here.We have earlier communicated that the market sentiment in the Americas in terms of sort of overall market opportunity that it would probably, for this year, be in the low-digit area -- low-digit growth -- low single-digit growth, sorry, for that. But provided what we're seeing currently and if that can be sustained at an increased demand also throughout the year, perhaps this further along the year, should be revised towards the mid-single-digit growth for probiotics in the U.S. or in the Americas.In EMEA, we have not seen the same level of impact and surge in orders as has been noted in the U.S. in relation to the COVID-19 pandemic. So we do expect a continued stable growth in the European market as we move through this year.And in the APAC region, the Chinese market was definitely affected by -- in the first quarter by the COVID-19 pandemic. But we have also seen -- we are also seeing signs that the market is opening up and business life is returning to more normal. And there continues to be a strong underlying consumer demand in the region where Probi is well positioned to continue to grow throughout this year.The same thing goes for the Americas region. We have a clear focus in our teams to grow our premium range of products, and we have very promising initial start to the year from this perspective as well as see an opportunity of starting collaborations, which already have happened, but also a healthy pipeline for the rest of the year in terms of being able to increase our market share on this world's largest probiotic market.If we turn to Page 19. Just to update you a bit with regards to Probi's strategic focus areas as published in our annual report.We have -- we are working along 3 areas, which we feel are important for us to continue to drive growth in Probi, remain a profitable company as well as have a very bright future.These are focused around doubling our market footprint as a company and doubling ourselves over a long-term period, continuing to lead the way in probiotic innovation and science as well as maintaining a strong focus on manufacturing excellence. When it comes to driving the growth in the company, it's a very strong focus throughout our organization in growing our scientifically documented strains. With customers, we know that we have a very strong product portfolio that fits very well with the needs of many different types of customers. And we see great growth opportunities continued for Probi in this area.We have also increased our presence and will continue to do so in markets where we see growth opportunities. And as a third element to achieve this long-term objective, we will also enter into strategic partnerships at VivaPro, for example. It's an example of as well as making acquisitions as well as a strategic priority for our company.When it comes to leading the way in probiotic innovation and science, it is all about accelerating our new product development, both when it comes to scientifically validated new probiotic concepts, all the way from preclinical and early-stage clinical research over to patient trials and -- of new probiotic concept, but also of innovative delivery forms and product application opportunities to continue to see the healthy pipeline for Probi.And with regards to our manufacturing capabilities, we have already launched an upgrade program in our existing facilities. And over time, we will also look at partnerships to increase our manufacturing -- sorry, our manufacturing footprint in various parts of the world in order to be able to be responsive to customer needs and demands and to position Probi for a strong growth path for the future.So with that, let's turn to the next page, please, which is Page #20. Please observe. The next point here in our financial calendar is our annual General meeting, which will be held in Lund for those who can participate in person.Otherwise, we will also make sure that parts of the meeting is broadcasted online, in connection with the meeting.And we've also made arrangements for postal voting in accordance with the updated Swedish rules in this area as we need to make sure that we adhere to the authorities' advice when it comes to gatherings or large people gatherings.And after that, on the 17th of July, we're looking forward to be on the phone again for our Q2 interim report. So with that, thank you for -- from me and Henrik here, and we open up the floor for questions.
[Operator Instructions] And we have the first question from the line of Rickard Anderkrans, ABG.
So first question, looking at the strong growth in the U.S., could you estimate the impact from end customer stocking due to COVID-19?
So with end customer stocking -- what -- Rickard, with end customer stocking, could you please clarify a bit there?
Yes. Yes. So due to -- primarily due to stocking up effects, perhaps if you could comment on your customer? And then perhaps if you could comment on the end customer as well, given the B2B connection and then the subsequent B2C connect.
It's still very recent. We believe what we've seen is actually partly, firstly, an effect of stocking at the consumer level.So I mean, similar to other consumer goods that disappeared from shelves in many outlets, both in pharmacies as well as in brick-and-mortar stores, et cetera. People have probably also stocked up and emptied some shelves on some critical components in their personal health care sort of focus. And that needed to be replenished.So we believe that some of our -- we know that some of our customers wanted to make sure that they did that quickly.But also since then, we have continued to see a good demand. We don't have any idea of how much have currently because it's still very early that we have not been able to obtain that data in terms of if the consumer has stocked up by their house for very large -- or for a very long period of time. At the same time, we also believe that the current conditions actually could lead to higher compliance amongst the consumers.We know that on average, when it comes to daily supplements like probiotics, the compliance is to have somewhere between 30% and 40% normally.But of course, with a heightened focus on your personal health, it might be that you actually are consuming your probiotics more frequently than before.So it is difficult to assess. We don't have any clear data on if consumers are sitting on a large stockpile of products, but at the same time, we have encouraging signs from our customers who are continuing to order from us currently.
Right. Excellent. And looking at the immune products, could you comment on the share of sales in North America in terms of total sales? And what is the general margin profile of these products as well?
So the share of total sales of immune products in relation to -- it's a bit difficult to define because there are a number of probiotic concepts that we deliver to customers, which carry both gastrointestinal as well as certain immune messages to the consumer.So therefore, it is difficult to sort of split it in that sense and say, okay, this amount of percentage went to immune products only because the total portion of immune products only is quite small in our portfolio.But it also -- it also is used in other products which carry other types of claims. And we have seen all of these products actually increasing their sales. So therefore, I cannot -- unfortunately, not give you a concrete number on that.And with regards to the margin profile, we are working both with premium concepts in this field with very strong margins, but also more sort of generically available product as well.So I would say it's a mix of margins there, in line with our sort of overall margins on our probiotic concept.
And the next question comes from the line of Mattias Vadsten, SEB.
So on the gross margin here, can you please help us to understand what the impact on the expanded collaboration will be? And it would be great if you could sort of elaborate on the dynamics here.And what is your expectations for gross margins for the full year-on-year?
Could you please -- so that was 2 questions there, Mattias, as I got it. So one was with regards to sort of, okay, impact of the expanded collaboration on gross margin. And the other one, sort of, okay, where do we believe that we're going to land for the full year compared to previous year?
Yes, that's correct. And with the expanded collaboration, also the dynamics around the quarterly fluctuation, to be more specific.
Let me start by commenting on the expanded collaboration. And that's a project that we're moving into. And as I mentioned earlier, it is in relation also to a broadened delivery commitment to this particular customer, which means that we will be doing more steps in the production process compared to previously.And the project in itself is a quite significant one and where the first orders will be delivered by sometime around midyear this year.And as we are setting up a new process in order to accommodate the needs of the customer here, we have, of course, made our calculations in terms of what resources needs to go in there and set ourselves up to be able to swiftly respond to the customers' needs from this perspective.But any potential gross margin impact of that particular project is a little bit difficult to assess until we have actually started the production process.In our calculations, we have, of course, sort of -- yes, made assumptions with regards to each of the steps in the production process that we will be taking on. But provided that it's larger volumes than what we've handled in the past for this particular customer, we need to get the production process up and running before we see the true effect of that.But when it comes to gross margin impact or gross profit impact there, we expect that we currently, when we're looking at it, we are not seeing any major impact on our gross profit in that particular customer. But we have to work ourselves through the implementation of this project.
We should also mention that there is a stocking effect. So our customers, they actually held wholesale stock at the moment with the old formulation here that needs to be phased out over time, and then they need to rebuild their stock. And that will also take place here in the second quarter, moving into summer period.Some fluctuations here between Q2, Q3 here.
But overall, it's important to state that this is a positive project for Probi. We will experience largest health volumes in the future. And the other good element here is, of course, that it will be a broader commitment to the customer than what we've had previously.
Yes. And can you talk anything around sort of the gross margin development year-on-year for the full year?
Yes. So as we said, this is a premium product. So in general, if our volumes go up very much, this has a higher average compared to -- well, our average margin. But temporarily, we -- since the volumes will be slightly lower from the beginning. Yes, there might be some margin hit here in the first couple of quarters.
Yes, what I'm after, while disregarding the quarterly fluctuations and looking at sort of the full year 2020, it's not some -- it's not unreasonable to believe that the gross margin for the group could be flat. Would you say that, that's reasonable to believe?
Yes. Well, still a bit too early to evaluate. But I mean, it's really next year where we will see the full year effect of this. But obviously, we're aiming for having something very similar to this year on this customer. But depending on volume here moving forward and so on, there might be some volatility on that front.
There was one other element why it's under the current conditions in relation to the COVID-19 as well. We're seeing some initial increases in costs related to air fright. We saw -- we have seen some spikes in prices for certain raw materials that we use in our production process, et cetera.These all in isolation are relatively small. And we're still early on into sort of a strange world right now.So it makes it a bit difficult to give very strong predictions moving forward because there are certain components where we -- well, where we have purchases and where we are not in full control over the entire supply chain.So I think that plays in at a bit of a sort of uncertainty factor through the year, which makes it difficult for us to look into Q3 and Q4 and know exactly how those things will play out.
Okay. Sorry, if I can continue. So how should we interpret the increased admin expenses for the quarter that came in somewhat high? Should we see sort of a similar expansion in the remaining quarters or back to more normal...
No. That's also one-off part of that, approximately SEK 2 million is considered to be more of a one-off in Q1.
Okay. Perfect. And none of those SEK 2 million are connected to the production disruption, I guess?
No.
No, exactly. Perfect. And this -- my last question relates to R&D. So I would like to ask, what are your, regardless, in sort of healthy R&D to sales ratio going forward to deliver on your growth targets?
Yes. We have -- in our plan, we have an increased investment in R&D to deliver our long-term goals with more high-margin products, more documentation and so on. So that spends gone up a bit in Q1, and we expect that to be somewhere between 5,6 -- yes, 5,6 percentages of sales.
And there seems to be no further questions at this time. So I'll leave it back to the speakers.
Okay. Thank you so much, everybody listening here this morning for your attention and looking forward to speak to you again at the latest on the 17th of July. Have a nice day, and take care and stay safe.