Probi AB

STO:PROB

Earnings Call Transcript 2018-Q4

[Operator]

Hello, and welcome to the Probi AB Q4 2018 Report Call. [Operator Instructions] Today, I am pleased to present CEO, Tom Rönnlund; and CFO, Henrik Lundkvist. Please go ahead with your meeting.

[Tom Rönnlund, Chief Executive Officer]

Thank you very much for that. Good morning, everyone on the call here. I'm looking forward to share with you Probi AB's Q4 2018 financial results as well as full year performance. On the call here today with me, as was mentioned earlier, I have Henrik Lundkvist, our CFO in Probi AB.Please turn to Page #2. Please familiarize yourself with the statements concerning forward-looking statements and comments during this call on this slide.Please turn to Page #3. As mentioned, Tom Rönnlund, CFO in the -- sorry, CEO in the company since the 1st of January of this year. It's my first call, together with the audience here and together also with Henrik Lundkvist. I joined Probi AB on the 1st of January and now have some 6 weeks in getting to know the team, meeting customers and visiting our sites. Exciting company to join with great performance in the past and great opportunities also for the future.With me, I also have Henrik Lundkvist, who also joined us very recently. Henrik?

[Henrik Lundkvist, Chief Financial Officer]

Good morning, everyone. My name is Henrik Lundkvist. So I started as CFO, 7th of January this year, so I have now been working approximately 1 month at Probi. So except for the work with the year-end we've caught, I have also focused on traveling to all our sites during my first period here and to meet people face-to-face here. Now moving to Page 4.

[Tom Rönnlund, Chief Executive Officer]

Thank you. Today's agenda. We will have a executive overview of our performance in the last quarter of last year and some comments also on the full year of 2018. We will then move over to a closer look at our financials for the quarter and the full year as well as provide a little bit of thoughts in terms of the outlook for Probi AB moving forward in our third segment, and we will close off the call with a question and answer session.Please change to Slide #5. So if we have a look at the fourth quarter performance in Probi AB, we had a quite strong significant sales growth in the fourth quarter. On a full year annual basis, though, the sales development was virtually flat, slightly down versus full year of 2017, and as have been informed in the past, throughout last year as well, this was mainly caused by residual effects of a customer-specific destocking program that took place through 2017 and '18 in specifics.We're very happy to see that the company returned to growth during the second half of the year, particularly so, you can say also in Asia. Asia is still a fairly small region for Probi. We're making investments there and expanding our presence, and it had a very strong finish to the year as well.We also are happy that, throughout the fourth quarter, the team has been very active in launching new products, both in the U.S., China as well as select European markets, or EMEA markets.We have in the U.S., for example, introduced FerroSorb, a Probi solution for iron uptake, to new customers. We have been working very closely with a major Chinese player specialized on mothers and babies in the Chinese market in introducing product into the Chinese market based on a Probi strain, also an interesting opportunity for continued growth in the region for us. As well as in EMEA, we also had a major customer launch in the Turkish market as well with a local leading pharmaceutical company there who are introducing Probi's immune and digestive health concepts.We're also very happy to see that, after development and publication of strong scientific data in 2018, the company received its first commercial orders for the Osteo concept -- or Osteo product concept, which is an exciting solution for preventing bone loss in post-menopausal women. And the first commercial order I've mentioned came in through the fourth quarter. And we hope to see that product concept grow across the globe as we move forward.Next picture, please. Please move to Slide #6. If we have a slightly closer look at our different business segments in 2018 compared to the year before. As you probably are aware, we divide our business into 2 business areas. Consumer Healthcare, where we provide bulk -- raw material in bulk, finished goods, tablet, capsules, bottles, boxes, et cetera, all the way from raw material over to finished goods to our customers across the globe, which are normally pharmaceutical and health care-focused companies who are selling these to consumers.And in this business area, again affected by the U.S. customer-specific destocking program through the year, we had our -- so our revenues declined somewhat from SEK 578 million to SEK 567 million. Whilst we were happy to see that in our Functional Food segment, where we're working with leading brand owners in food and drink, we had a healthy growth of 9%, much driven by positive developments in the Asian region as well as continued positive royalty development in the Swedish market.If you turn to next slide, Slide #7. We have a breakdown of our performance across the region with regard to -- sorry, across the -- across our businesses in various geographies in the world. As you can see, if we single out the Americas region, our single biggest region in terms of sales revenues, accounting for roughly 74% of our total sales in 2018. We had a more marked decline there than what we had in other areas of the world as we were actually growing in other areas of the world.But as you can see here, we had a minus 7% decline versus the full year of 2017, if we're looking at the full year performance. And very much explained, as earlier mentioned, by the customer-specific destocking program.We're also seeing good customer wins at the same time in the American market for us. So we hope, definitely, to stabilize this position and create a new platform for growth in the Americas market -- or in the American market or in the U.S. market.We are, at the same time, seeing some indication of a softening growth of the total probiotic market in the U.S., which is one of the world's biggest within this segment, which is of course a development that we're monitoring closely, but also making sure that we're taking the right commercial actions to continue to be able to grow our business over there.I want to draw your attention particularly to our growth in the Asia Pacific region. As have been communicated before as well, I believe, we have a focus on the Chinese, South Korean as well as the Australian markets in our efforts. We have, through 2018, and particularly in the last quarter of 2018, increased our resources that are present in the geography, and we hope to be able to capitalize on that also going forward. We had a very healthy growth throughout last year, throughout the 2018, with plus 43% on a full year basis. And Probi continues to invest in this region to continue to grow our business there. We believe that we are only in our initial days of success in the Asian region.Both the Swedish market as well as EMEA as a total excluding Sweden, had positive development in 2018, as you can see here, in around 10% growth throughout the year.Please turn to next slide, Slide #8. So 2018, a little bit in summary, the company has been very busy in recovering from a quite challenging year where a historic customer-specific issue caused the company to have a weaker performance in the first half of 2018, but has rebounded well during the third and fourth quarter in 2018, providing us with good a platform moving into the future.We've had good product launches. We still see a strong interest for Probi's well-documented and scientifically proven product and strains as the market is seeking for both innovation, but also, importantly, well-documented products that they can use that really makes a difference for the consumers.We have signed new distribution agreements. We've entered into new markets. We have expanded our organization across the year, both within the US market as well as in the Asian market, to ensure that we have a more adequate geographical coverage and the ability to drive future growth in our company.We've also had very successful clinical programs throughout the year, which has concluded and data will be published as we move forward. But in particular, the outcome -- the successful outcome of the osteoporosis trial in post-menopausal women or prevention of bone loss, which came out during the year with very exciting results, we've already launched and are launching, the product concept around this and getting good customer attention from this as well. And it's a great example of Probi's both research and clinical excellence focus in building a robust foundation for our company to be able to compete in this marketplace.So if we turn to the next slide, which is Slide #9. I will be handing over the word to my colleague, Henrik Lundkvist, the CFO, to walk us through a little bit more in detail with regard to the financials from 2018.

[Henrik Lundkvist, Chief Financial Officer]

Thanks. So now moving to Page #10. In the sales bridge, we can see that there are only small movements compared to last year. Total sales went from SEK 612 million to SEK 604 million, which means the reduction of SEK 8 million or down 1%. We had a drop in organic growth by SEK 14 million, mainly explained by the customer-specific destocking program earlier mentioned here.On the other hand, we had a favorable exchange rate effect from a stronger U.S. dollar versus the Swedish krona, which partly compensated the decreased nominal sale.If we look at the condensed P&L, we can see that the EBITDA is about SEK 2 million lower compared to last year as a direct effect of the reduced sales. Our EBITDA margin remains at the same level as last year and well above our long-term target. Even though our EBITDA was lower than last year, net income has increased by 10%. This will be further explained on the next page. Since the number of share is unchanged, this also means that earnings per share improved with the same percentage rate as the net income.Now turning to Page 11. Net income last year was SEK 69 million, and this year we ended SEK 7 million higher at SEK 76 million. EBIT was slightly lower as a result of reduced sales even though it was partially offset by higher margins. The financial result was improved as an effect of favorable exchange rate, but also improved interest result due to the reduced borrowings compared to previous year. The income tax was slightly lower as a result of the lower operational result.Now turning to Page 12. We are very happy to see that the cash flow continues to be at a healthy level. And during the year, we generated additional SEK 43 million in cash, and the balance was SEK 199 million at the end of the year. Our working capital increased by SEK 12 million as a result a strong December sales that increased our trade receivable. So I would say this is more of a timing effect than anything else. The redemption of borrowings amounted to SEK 70 million.Now turning to Page 13. Our balance sheet continues to be very strong with an equity of more than SEK 1 billion and equity ratio of 85%. A couple of comments here as well. The increased goodwill value is a translation effect from a stronger U.S. dollar, so the underlying amount in U.S. dollar is unchanged. Trade receivables, as earlier mentioned, are high as a result of strong December. We have significantly reduced the level of borrowings, which also is reflected in the leverage ratio that is minus 0.52 at the end of the year.And that concludes the financial review. Now turning to Page 14 and handing over to Tom again.

[Tom Rönnlund, Chief Executive Officer]

Thank you. Thank you, Henrik. Thank you. So please, let's move over to Slide 15 and provide a little bit of comments with regard to looking forward for Probi AB.So as mentioned earlier, both me and Henrik have come into the company very recently, and I'm very happy to do so. We're coming into a company that has been through a quite challenging 18-month period, but with very positive signs back in the last 6 months, I would say, in terms of recuperating some of the performance that was affected previously with regard to the U.S.-specific issue mentioned throughout the call.We are acting in a marketplace which, on a global level, still have growth potential, both as a entire market, but also for Probi in particular. That growth is perhaps not necessarily happening in all the regions right now. As I mentioned earlier, the U.S. region might have a little bit of softening growth compared to historic numbers, but Probi still sees a great opportunity for our company based on our unique portfolio of product as well as our unique capabilities as a vertically integrated player in this marketplace to be able to serve our customers.We are increasing as an organization, moving forward, our investments in R&D to insure that we continue to be at the forefront of both innovation as well as clinical excellence and proof of actual effect in helping our consumers with their needs for products which are making a difference for their healthy life.We are continuing to broaden our presence in regions where we see good growth opportunities for our company. As mentioned, we have very recently added additional resources. We need to allow them some time to get in place and make sure that they deliver continued growth and expansion for Probi in those areas.We're a company which is in a very good financial condition. We've got a strong balance sheet. We've got a leadership team focused on both growing the business organically, but also seeking strategic partnerships and acquisitions that can help fuel our future development as a company.And against this backdrop, provided that we wish to maintain a financial flexibility for initiatives to strengthen Probi further, the Board of Directors has decided to propose the annual -- to the shareholders at the Annual General Meeting that no dividend will be paid for, for the 2018 financial year, but the funds would stay in the company to be able to be reinvested in our business expansion.And to conclude, I think both me and Henrik are very happy to have joined Probi. We see great potential in the company for the future, and we're looking forward to have these calls moving forward as well and -- throughout the year and the years to come and hopefully to be able -- hope to be able to present a continued positive development for Probi growing into an even bigger probiotic global player.Let's move over to Slide #16 where we will open up for Q&A in just a second. Just wish to draw your attention very briefly. We've had some minor updates to our earlier published financial calendar. And as you see here on the right-hand side of this picture, we have changed somewhat the date for the Q2 report for 2019 as well as the Q3 report for 2019. Please make a note of those dates. Looking forward to speak to you again at those meetings.So with that, I think we will be moving over to question-and-answer session. We have to check first if we have any online questions.Not at this moment. So that means that we will open up the call for questions from the audience.

[Operator]

[Operator Instructions] And it looks like there are no questions registered at this time, so I'll hand the call back to you speakers for your closing comments.

[Tom Rönnlund, Chief Executive Officer]

Okay. Thank you for that, and thank you for attending our call here today. Appreciate that you've made the time. And as mentioned before, hope to meet you again or speak to you again at least on the 29th of April when we present our first quarter results for 2019.With that, I wish you a very good day, and thank you for attending our session here.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.