BioGaia AB (publ)

Hi, this is Teresa Agnew, CEO of BioGaia, and Alex and I are here to share our Q2 results. For Q2, our sales were 384 million SEC, which is growth of 22%. That was mainly driven by growth in Asia Pacific as well as our Americas region. Sales in Europe, Middle East, Africa increased by 7%, Asia Pacific by 49%, and Americas by 22%. And we did have some orders due to quarterly variations in some of those areas, specifically in China and Brazil. Our EBIT was 134 million SEC, which is growth of 42%, and our EBIT margin is 35%. Earlier in the month of June, we actually announced that we are taking our business direct in Australia and New Zealand. This is really exciting for us. It is one of our future investments. Australia is actually the 12th largest probiotics market in the world, and we have a really big opportunity to grow in both Australia and New Zealand. Those are both markets where consumers understand probiotics and coming in with our products, our probiotics drops in the beginning. And then we will be expanding our other probiotics products in the future in the pharmacy channel as well as the grocery channel in Australia and New Zealand. So it's a big opportunity for us in terms of taking our business direct. And as you know, we have been successful in our other direct businesses. Prior to this, we were direct in six markets, so now that makes it eight markets. And our direct businesses typically are around 30% of our sales. So we anticipate this will continue to grow as we take in Australia and New Zealand direct now. Also on the news front in early July, we won our arbitration with our former Italian distributor, NUS, And we have recently, just last week, signed a long term contract with our sub distributor, Ricordati, which is a pharmaceutical company in Italy, Spain, Portugal, and a number of other markets. So they will now be our exclusive distributor of probiotics in Italy, as well as in Spain and Portugal. As you know, over the past couple of quarters, we have been talking about future investments in our business to continue our growth. So we are ramping up our investments in the second half of this year. We are projecting 75 to 85 million in the second half of costs on top of our normal operating costs. Some of those investments will be in marketing and sales activities. Specifically, we will focus on the US with a sales force that will be marketing and selling our probiotics products. As we said, we are launching our direct business in Australia and New Zealand. So that is another opportunity for investment for us. We will also be launching our first global advertising campaign and preparing for that launch that will be coming up in the nearer term. We are also investing on new products in R&D, on clinical studies for the future. So these are just some of the investments that we will be doing to drive our continued growth. Some of the launch events and other events in the quarter. So we had through our farm of best distributor in Italy, our bio-gyprotectives drops with vitamin D. And in the UK, which is one of our direct businesses, we have launched our bio-gyro predentist lozenges. So as we've talked about before, predentist is one of the brands that we are continuing to invest in. We've done extremely well in Japan, the US, Canada, and now we are driving even more emphasis on predentist in the UK. As I said in the overall introduction, we announced our own distribution in Australia and New Zealand and also announced our long term agreement with Rick or Dottie in the Italian market. So our sales, as I said, increased by 22 percent. Our pediatric sales increased by 32 percent, mainly due to increased sales of our protective drops. And sales increased in all regions and also specifically in markets such as China, Brazil and Canada. For the quarter, our adult sales decreased by 6 percent due to decreased sales of our protective tablets, mainly South Africa, Belgium and Japan. But this is due to quarterly variations for individual orders. And as you see for year to date, our overall pediatrics growth is at 11 percent and our overall adult health is at 10 percent. So our pediatrics business remains at around 79 percent of our total business. In terms of the regions, as I said, EMEA sales increased by 7 percent. This was mainly in Germany, Spain and Turkey. In Asia Pacific, our sales increased by 49 percent. And this was mainly in China, South Korea and Vietnam. And again, our sales were positively impacted by quarterly variations for orders in China. And in America, our sales increased by 22 percent, mainly in the US, Canada and Brazil. And again, our sales for the quarter were positively impacted by quarterly variations, specifically in Brazil. But as you can see, also our year to date growth in EMEA is 10 percent, in Asia Pacific is 25 percent and in the Americas is 3 percent for a total year to date growth of 11 percent. So now I'll turn it over to Alex to go through the financials in more detail.

Thank you, Teresa. So if we just summarize the quarter, we had revenues of 384 million, which was a growth of 22 percent. Our operating profit was 135 million, which was a growth of 42 percent. And the margin was 35 percent compared to 30 percent one year ago. Earnings per share at 1.10 and operating cash flow at 119 million. Thank you. Look at the sales bridge. We see that in the quarter and also year to date, there is basically no currency effect. It's very small and the whole growth actually then comes from organic growth. We move on to the gross margin. We have a total gross margin in the quarter of 74 percent versus 72 percent in the same quarter last year. For pediatrics, the margin improved from 74 percent to 77 and in adult health, it decreased from 67 percent to 61 percent. Now, the main reason for the decreasing adult health margin is a mixed effects. We have been selling more relatively of Prodentis, which is a product where we have a slightly lower margin compared to our protective tablets. So when we have a higher Prodentis sales in adult, the margin is getting lower here. And that is the main explanation for the lower margins both in the quarter and year to date. Move on to the operating expenses. Our total expenses increased with 13 percent. Sales and marketing costs increased with 23 percent, mainly due to the increased costs in the subsidiaries that we have and the investments we are making in those subsidiaries. In terms of R&D, the cost decreased actually from 38.8 to 26, decreased with 31 percent. This is mainly due to some timing and some periodization effects of clinical studies. The cost did increase actually compared to the quarter previous to this one. In terms of administrative costs, they declined with 49 percent. This is due to a reversal of an accrual that we had for the litigation fees in connection with the termination of the distribution agreement in Italy. And that had then a positive effect on the costs. There was a negative cost, so to speak, in the quarter. And therefore, we have such low costs here. And then we have the last line in OPEX is the other OPEX was minus 5.8 million versus plus 8.5. And that is due to that we have had in the quarter this year, we have had exchange losses and in the same quarter last year, we had exchange rate gains in the quarter. So all in all, then a total OPEX of 149 million versus 131 one year ago. If we then summarize and look at the profit and loss, we see that we have a sales of 384 million, a margin of 74 percent, gross margin of 74 percent, and an operating expense level of 149 million, leading to an EBIT of 135. And then the EBIT or operating profit then increased with 42 percent in this quarter compared to one year ago. If we look at the margin in percent, we have a margin of 35 percent versus 30 percent a year ago. And year to date, we have a margin of 37 percent versus 36 in the same period last year. Moving over to the cash flow. Cash flow from operating activities increased by 14 percent to 119 million. The increase is mainly due to higher operating profit despite the negative change in working capital. Cash flow from financing activities went from 296 million to 699. This is due to the increase due to the higher dividends paid this year. So in total, we paid dividends of 697 million versus 293 in the same period last year. And all in all, that leads to a cash flow for the period of 582 million versus 216, negative, 216, negative 582. And therefore, we have a cash at the end of the period of 1.8 billion SEC. So with that, I hand over to Theresa for some concluding remarks.

So as we said, BioGuy won the arbitration with our former Italian distributor, Nuus. And we have now started our new contract with Riccordati for the Italian market. As we said, our total sales increased by 22 percent in EMEA, specifically increased by 7 percent in sales in both the pediatrics and the adult health segment. Sales increasing mainly in Germany, Spain and Turkey. Asia Pacific continues its solid growth with 49 percent and was due to higher sales in the pediatric segment. And again, sales increased mainly in China, South Korea and Vietnam. And sales for the quarter in Asia Pacific were possibly impacted by quarterly variations for orders, specifically in China. America's sales increased by 22 percent, mainly in increased sales in both pediatrics and adult health products. And our sales mainly increased in the US, Canada and Brazil. And again, sales for the quarter were positively impacted by variations, specifically in Brazil. Alex said our operating expenses increased by 13 percent. Our EBIT margin is 35 percent. And as I described, we have been talking about the last couple of quarters that we would be ramping up investments and making some targeted investments. So we will be doing that and we will be driving continued growth. We are projecting our costs at 75 to 85 million SAC in the second half on top of our normal operating costs. And I did talk a little bit about where some of that focus will be, such as in the US and Canada, in Australia and New Zealand, in global advertising campaign that we will be starting at some point, as well as investments in our new direct businesses, Australia and New Zealand, and of course, continuing investment in our current direct businesses to continue to drive growth. So that is the overall summary for Q2 as well as year to date. And we can now open it up for questions.

If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Matthias Hegblom from Handelsbanken. Please go ahead.

Yes, good morning. A couple of questions, please. So firstly on the OpEx expansion of 75 to 85 million Krona. So what portion of that will be internal versus external cost? I'm trying to get a sense for how easy it will be for you to navigate these cost items as human initiative does not translate into higher growth than you anticipate. You spoke about the sales force in the US, so perhaps a bit more on the nature of these costs. And then secondly, is there a way for you to help us think about what magnitude of extra sales would be required for you to see that this investment is a wise one? Organic sales growth has been high for this company, often in excess of 15% for various time periods. So anything on that would be also appreciated.

Sure. So just a little bit more on the nature of the costs. So as I said, we will be investing in the US in a sales force which calls on health care professionals. So that is something that we are starting. Obviously, when you launch a sales force, it takes time to then see the overall growth from the sales organization. But we will also be starting some additional marketing over in the coming months, not immediately. But we will be launching some additional marketing also in the US as well as Canada and some of the other direct businesses. And so those efforts, we will be spending those are external costs because it's in media. So it will be external facing to consumers as well as health care professionals in terms of marketing costs. We will also be investing, as I said, in the Australian New Zealand business. Some of those costs will be internal because it is setting up the business, looking at things like infrastructure, ERP systems, third party logistics, just as we would do with any direct business that we would start up. But there's also external costs there because we're very happy to say that we have started shipping products to customers. So customers in Australia will be in the pharmacy channel and also in the grocery store channel. And so the costs that we have there, there will be some customer marketing retail, there will be some consumer marketing, there will be health care professional marketing. So just as we would with any direct business, there will be a percentage of internal costs to set up the business. But then there will also be external facing costs once we have the products distributed. So we are in that process of now of just starting to ship the products to retailers. So it will take time. It usually takes, oh, I would say four to eight weeks, depending on the retailer to get products distributed. So it will take some time to actually start to see some sales in the market. But that is going to be some costs for us, of course, both internal and external. And then there will be some other internal costs in terms of clinical studies that we're doing for new products. There will be some internal costs around product development for our future products. We will be able to announce some new products coming up over the course of the next year. So I won't give specific timing on that, but we will be launching some new products over the course of the next year. So hopefully that gives you a little description of the types of costs. We won't share the exact amounts, of course, but that gives you the nature of the costs, as your question was. And then in terms of sales growth expected, you know, we do not give guidance around sales growth, but we will be making strategic investments and we will be monitoring growth associated with our investment expectations. So we will be monitoring this on an ongoing basis. We have KPIs around this. So we are doing this to drive penetration of our brand. We are doing this to drive awareness, sales into the future of our brand in select targeted markets where we are making these strategic investments. So, you know, we won't share specific guidance around sales, but we do anticipate, you know, continued growth for the products that we will be marketing.

To follow up, please, and then I'll get back into Q. So firstly, maybe can you help us understand the time frame for how long you think it's reasonable to expect before this monitoring of the investment? You know, to see if that translates into what you would like to see. Is that a quarter? Is that a year? Maybe something on that. And then secondly, around your confidence in how this would translate into higher growth. Have you already experienced from your brief time here at Big I some similar nature of investments, all those smaller magnitudes that have translated into higher growth or what gives you confidence that this would be a successful investment? Thanks so much.

Yes. Yes. Good question. The time frame for monitoring will be on a quarterly basis as well as longer term. Some investments are more longer term such as an R&D and sales forces. Other investments are shorter term such as marketing, customer marketing efforts. So we will be monitoring short term as well as longer term. In terms of confidence and growth, we do have strong confidence in the investments that we're making. When we have been increasing our advertising and marketing in our direct markets, we have seen increased sales. So for example in the US, we have had record months in Amazon the past few months and we have been increasing some of our marketing costs in specific areas there. So what we like to do is we like to test things and then scale them more. So, you know, we have been testing some of the increased investments and now we'll be looking at scaling some of these things. So and in terms of sales force, you know, a lot of our partners that we work with around the world, they have sales forces. So they have commercial organizations that call on pediatricians and healthcare professionals, pharmacists and so forth. So there's a lot of really good evidence for the things that we're doing and what we're investing in even through that we've seen through our partners as well. So hopefully that answers your question.

Perfect. The next question comes from Mathias Vadsden from SEB. Please go ahead.

Hi, good morning. I have a follow-up there on the extra cost that you have announced. So you say 75 to 85 million extra OPEX in hedge two. So maybe is that compared to last year or what this normal OPEX to you in that regard? And then I was also wondering a little bit more on the extent to which these extra costs will stick In coming year and years. So an approximate split between short-term and long-term investments would be very helpful. That's the first one.

Okay, so just in terms of the 75 to 85 million. So we're looking at that. We're talking about that for the second half of this year. We won't share what additional investments will be beyond that at this point. You know, we will obviously be evaluating investments, looking at results and so forth. So we'll share more as that progresses. We won't share specifics around our normal operating costs. Just know that this is on top of our normal operating costs that we have because our operating costs are, you know, quite extensive from what we're talking about in terms of internal costs as well as external costs. So hopefully that gives you a little bit more guidance.

Okay. I was wondering about the so AIPAC is very strong again for Bujaya and you flagged some extra inventory build in China and then I wonder about the magnitude of this and also I have the corresponding question then regarding Brazil. That's the second one.

Okay, so in terms of China, they had to build inventory for some events that are coming up. So they have some significant events for the third quarter, which is why they wanted to build up more inventory for the events, the congresses, online e-commerce events, as well as they're launching our new packaging design. So this is something that it's a quarterly fluctuation in terms of preparing for these events. In Brazil, similarly in terms of preparing for events, but different types of events. So, you know, they have been launching our easy dropper. That seems to be going well is the feedback that we've gotten from them. That's our protective easy dropper. So they are continuing to prepare for their own, you know, events in

Q3. Sounds good. Then the last one, I mean you started the year now with 11 percent constant exchange rate growth, which is strong. So maybe a little bit on what you expect here for the full year. Do you expect this rate to continue or is that a very cautious way of looking at things given this extra investment that could convert to sales towards the end of the year or, you know, just some thoughts around how we should think about it. That's the last one.

Yeah, in terms of some of the additional costs, we're looking at continuing our growth, but some of those will not have an immediate effect. So some of these are going to be investments that will see returns on them over the course of the year, of the next year, you know, from this point, right? So we don't give particular guidance. You know, we think, you know, right now it's strong at 11 percent. You know, we hope to continue our growth, you know, where we have been and also hoping that these future investments will continue to drive growth moving forward above, you know, market. So that's always our goal is to grow above market. But we don't know the exact time frame and we don't give guidance. We know that some of these investments will be, you know, will start to see a return over the course of the next

year. Thanks for all the answers.

The next question comes from Christopher Liljeberg from Carnegie Investment Bank. Please go ahead.

Yeah, thank you. Good morning. Also question related to the extra cost. So based on what you say, it seems you will have higher cost also going forward, but should we expect now operating costs will be lower in 2025 versus 2024 or will they continue to increase or be flat, if you could help on that?

Yeah, we're going to be looking at the investments that we're making as I was saying on a quarterly, half year, a yearly basis. So, you know, we're not signaling right now of what the costs will be moving forward. We want to see some of the results over the course of the next year. So we'll be able to share more on that in the future, you know, as we evaluate and look at, you know, the investment potential and other things that we're going to be investing in. But these are very targeted strategic investments in very particular markets where we see opportunities for growth. So we aren't able to signal what the costs will be ongoing, but know that, you know, as our investments are successful, we will want to continue to invest to grow the business.

Okay, that's helpful. But at the same time, you stress in the report or stress in the report that you're committed to the longer term, 34% EBIT margin target. as you're monitoring this and want to see higher sales from the investments, are you aiming to be back at 34% EBIT margin in 2025? Or would you accept that to take maybe a year longer?

So we don't know yet in terms of the length of time because we'll continue to look at the investments over time, but we are committed to our long-term target. It is a long-term target for us, but we want to continue to invest in the business to make sure that we have a very healthy business and the things that we are investing in, such as brand building, awareness, penetration of our products, R&D, innovation, taking businesses direct. These are things that we feel confident in that will grow our business for the future.

Okay, and my final question when it comes to the timing of individual orders seems to have been both positive and negative effects. Is it fair to assume that this on the overall group has been a positive effect in the quarter?

Yes, in terms of this quarter for Q2, the growth of 22% has been positively affected by these order variations. So that is something like in China and Brazil and some other markets, they have been preparing for events coming up in Q3. So these are quarterly variations due to orders.

Actually, just one final question. You mentioned the new packaging design in China. Is that a specific thing for China or something that you will aim to do on a global scale as well?

So we are aiming to change our packaging globally, but each market will roll out at a different time. So we have already changed our packaging in Sweden. The BioGaia packaging has been changed in Sweden and now we are starting to roll this out in other markets. So each market, depending on regulatory timing because you have to do all your registrations and so forth, every market will be a little bit different. So it will take us really over the next couple of years to really roll out the packaging design change across the world.

Okay, thank you.

You're welcome. The next question comes from Matthias Heggblom from Handelsbanken. Please go ahead.

Yeah, two follow-ups, please. So on the new strain BGL47, it's clear from reading the recent publication that the hypothesis is that the strain will boast growth and activity of reutri. So can you help me understand how you think this could translate into clinical benefit in human trials? Faster impact on reduction of crying time or rather an even higher response rate if I use Colic as one example. So maybe help me understand how this could manifest. And then secondly, coming back to this OPEX expansion, but maybe from a different angle. Do you think BioGaia could have continued healthy growth without these investments or is it rather the alternative that without these investments BioGaia was to some extent running out of the cadence of the current growth? Thank you so much.

Yeah. So first question on BGL47. So this is a new patented strain for us. It's a bifidobacteria, so different than our borturide bacteria. So what we are looking at is the synergistic effect if we were to launch a product that would contain both of these strains. So then it would be a patented product for the future being that the BGL47 is a new strain. It's a little bit different in that bifidobacteria is not necessarily as effective for colic. So there are different things that each strain is indicated for. So this is something that we're looking at for overall gut health. Kind of in terms of their overall guts and gut balance and combining our two strains. We're looking to see these positive benefits for the future. So it's still being studied. So obviously when there's science involved you can't promise anything. It's just something that's really interesting that we're looking at. And then in terms of the overall growth question, I'm confident that BioGaia would continue to grow even without these additional investments. These additional investments are being made because we want to continue that growth trajectory over time. And we want to drive even more penetration and awareness of our brand both with healthcare professionals as well as consumers. So doing things like a global advertising campaign can be a real benefit to a brand in in terms of building brand awareness, benefits of the brand and positioning of our overall BioGaia brand.

That's very clear. Thank you so much.

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

So I want to thank everyone for listening in and thank you for the very good questions. And we look forward to speaking with you next quarter. Thank you.