Probi AB (publ)

Good morning, welcome and thank you for dialing in to PROBI's presentation of our Q3 results for 2024. With me I have Per Lindvall, the CFO of PROBI and my name is Anita Johansen, I'm the CEO of PROBI. Please take a few moments to familiarize yourself with this safe harbor statement. And this is the agenda of our presentation today. So here are the highlights of Q3, which in contrast to the second quarter was a slow quarter. On the right side, you can see that the net sales totalled 144 million Swedish kronors and the EBITDA margin of Q3 was 20%. Per will talk a little bit more about these numbers in the coming slides. With regards to our business operations, this quarter was characterized by the following highlights. Our sales activities continue with strong customer engagement through a workshop we had in APAC. We had trade show exhibition and customer meetings. Also, we have completed a rebranding of our business to consumer product line in the Nordics. And we are now finalizing a new corporate identity to also enhance our market presence for the B2B. Our optimizations efforts in our U.S. operations are now yielding tangible results, and we can already see the improvements. Our new consumer product, PropiSense, which contains the strain Heal9, was launched in the Nordics just after the quarter closed. And from a research perspective, we have several interesting and exciting new results. First of all, we have a new study in mice that suggests that our strain heel 9 may serve as a potential therapeutic option for mitigating mild cognitive impairment and potentially even Alzheimer's disease. Also, we have recently announced a research collaboration and an intention to collaborate on a new study with Global BHP Brain Trust and the Fingers Brain Health Institute, which is aimed at reducing dementia risk. Lastly, we also successfully completed a SMITA IV pillar audit in our U.S. operations, and this further cements our commitment to sustainable and ethical business practices. And now I'll hand over to Per for the financial review.

Thank you, Anita. Yeah, the sales in Q3 was 144 million SEK. But I'll also highlight our business is 75% in the US. Hence, the organic growth is the most relevant metric to gauge the overall sales performance. In Q3, we saw organic growth of 5% down versus same quarter in 2023. But also what you see here is that the reported growth is down 8% versus last year. So the relevant context for this result is that the overall US probiotic market on a volume basis has contracted since the peak under the pandemic. This is according to the leading market research source, Euromonitor. Beyond this, we also saw various timing impacts in Q3. For the other markets being EMEA, the overall EMEA was flat versus last year. That is actually covering that B2B has overall very good traction, but B2C was impacted by timing as we are positioning to leverage the new branding in Q4. The growth in APAC region is negatively impacted by the general economic slowdown in China. And I will cover a little bit more in the following slides. For EBITDA, the result is 20% in Q3. This is an improvement of the EBITDA margin of 2 percentage points against Q3 last year. And we find that quite exciting because this is covering, as Anita said, that we have seen improvements in our production KPIs and In Q3, we actually see those improvements starting to float into the P&L and improving the cross-profit and the EBITDA. Now the regional segments on a year-to-date basis. Again, America is in constant currency, down 1% versus last year. I mentioned earlier the relevant contacts with the contracting market. But we will also really focus now, and that's what our sales team is doing, is to build the pipeline. That's what it's all about. And this involves various activities, including that our entire team next week will promote Probi at the major US trade show Supply Side West in Las Vegas. And here we'll showcase both the new branding as well as launch of the metabolic health concept. Specifically for the US, the cross-profit margin is down on a year-to-date basis. But very importantly, it was actually up in Q3. So in H1, we saw that cross-profit was impacted by the added resources, for example, in operation to facilitate the improvements in production. And the result is exactly what we see now. And we are, as mentioned, quite excited by this. EMEA sales is up significantly compared to 2023, actually 29% on a year-to-date basis. Most of those improvements is related to low comparisons in 2023. We already mentioned that we have a few big accounts we've had to reduce overstocking in 2023, and now that EMEA sales is normalizing, this is a favorable impact. And we also in 23 had very significant impact from insourcing of our B2C business. The sales in Q3 is actually at level with last year. And as mentioned, this is good news as B2C is reduced to facilitate the new branding in Q4. The high growth in EMEA helps Probi overall to improve profitability. This as EMEA has, as you can tell from the slides, an above average profitability. So this is driving the overall profitability for Probi. yet noted that the margin is below last year, specifically for EMEA, though that is having very specific reasons in customer and product mix. Now on APAC, sales in Q3 was below expectations and come after similar soft sales in previous quarters. Sales in the APAC region was impacted by a general economic slowdown, specifically in China, and tougher market conditions, which has caused delays in product launches and reduced commercial traction. Huobi continued its market activity at a high pace in the region to maintain momentum and foster long-term relationship. But importantly, Probe has maintained the market position and not lost any customers. On the gross margin in Q3, it was up versus last year, yet on a year-to-date impact by adverse customer mix. The net income for Q3 as compared to Q3 last year shows the sales volume is down, as reported earlier, organically 5%. which is here quantified at an adverse volume impact of 3.5 million. The cross-profit is favorably impacted due to the improved margins in Q3, 2.4. OPEX is improved with, as mentioned in the report, for example, higher capitalization of R&D cost, timing of marketing cost for B2C, and a few other parts. Overall impact is 0.5 for the quarter. The financial result is also driven by FX gains and loss for bank accounts and foreign currency. And overall this means that net income is 4.0 million for the quarter which compares to 6.4 last year and hence 2.4 million down in the quarter. Solid cash generation on a year to date basis, operating cash flow of 85 million for the nine month period. We continue to invest in Q3 and now it's at a level of 38 million year to date. This CapEx cover both plant and machinery in our production facilities, but also R&D project costs to support the sales pipeline. Financing by large is the least cost related to our two production sites in the US. And as this is a year-to-date statement, we also here include the Q2 dividend payout of 15 million, all in all resulting of a cash end of period of 349 million. And now I'd like to hand over to Anita.

Thank you, Pierre. Next slide, please. So this past year has been a pivotal period of internal transformation aimed at unlocking the full potential of Probi. Let me emphasize three key focus areas where we are seeing progress. One, we are seeing tangible improvements in our operations. And two, we continue to build new science on our product portfolio, and we continue to bring new state-of-the-art advanced biotic solutions to market. And three, we have been investing in our marketing and sales resources and strengthening and reinventing our market presence, and we will continue to focus hard on our efforts to accelerating our growth. So we are proud of the progress so far, although we do recognize it's an ongoing journey and further work remains. We are committed to maintaining a steady course with a focus on long-term growth and sustainable success. So this concludes our presentation of the Q3 Interim Report 2024. And now there's time 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 Philip Ekingren from ABGSC. Please go ahead.

Thank you, operator, and good morning, Anita and Per. I have a few questions, and I plan to take them one by one. But first, if we can get some color on the different regions. So, I mean, I was strong in Q2 and flat now. I would like some clarification on the commercial efforts you're making in the Nordic region, mainly related to the B2C business. Did they start now during Q3 and will continue in Q4 or should we expect these to start yielding some results on sales already in Q4?

So I can start and maybe Per can follow up. So first of all, what you will see now, if you go out to, for example, in the Swedish pharmacies, you will see our products are now getting a new artwork, basically. So a new design. And we're rolling this out starting early October. So you will see that out in the pharmacies now. Because of that rollout of new artwork, we have... How do I say that? We have declined the sales of the old artwork. Obviously, we want to have this change over as quickly as possible. So we have had limited sales to the pharmacies in the last few months. And now we are expecting to fill up the shelves in the coming months in the fourth quarter. And also this fourth quarter now, when we have the new artwork in place and also our new introduction of the ProVisent, so a new launch, we will then intensify the campaigns with our customers of pharmacies in the Nordic region. So the campaigns will increase and hopefully we will see, we expect to see much more activity. I don't know if you want to add anything, Pierre.

No, I think that that covers very well.

Perfect. Very clear. Thank you. And if we look at APAC, so China is comparing negatively here. Would you like to elaborate what's happening in the market and if you're making any mitigating activities to protect sales going forward?

Yes, I mean, what is happening in the APEC market for what we see is specifically related to China. And everybody knows that when you look into China right now, they have some macroeconomic challenges overall in the Chinese market and consumers are carefully considering where to spend their money. So that, of course, affects our customers in China. They are putting consumer products to market with our ingredients. So our customers are seeing decline in the sales and hence they are reducing the need for ingredients for a while. So they are not putting orders as often as we would have expected, so to speak. They have more inventory than expected. So that's basically what we see from our customers that they are seeing slower sales out. We are not losing any customers, but they're just seeing slower market.

Yeah, and adding to this, this is the short-term impacts, but clearly the APAC market is still very, very attractive. It's huge. So we have these bumps on the road, but we continue to invest in the market. There's high focus from the team. We have development towards specifically targeting this market. So we see these bumps, but we have steady course ahead.

And maybe I can add to that. I mean, I've been in APEC several times this year, and last time I was in Bangkok, where we had a full day with more than 20 customers, 20 different companies that we are engaging with. And they are also from China, but also other markets in APEC. And there's a very high interest to PROBI's product, both the existing products that we've had for a long time, but also our new innovations. high interest, but also, of course, it will take time for our customers to implement in their innovation portfolios. We know that, but the interest is definitely there also in China.

Got it. Thanks. And in the US, you're highlighting that the demand is lower and volumes are lower. Can you say anything about what you expect going forward in US specifically?

It's very, very difficult to predict the market, but one source which we are kind of putting effort and credit to is that Euromonitor, the leading market research company, they are having an outlook for the North American market of 2% to 3% value growth over the future years. So we think that the slowdown we are seeing is coming after a record year under the pandemic. So we are not concerned for the overall market outlook in the Americas. But a little bit like APAC and that we see in various parts of our business that there's ups and downs, especially by quarters, but also by years. So again, it's steady course and we continue to invest in the North American market. It's huge for us and the market is huge. So steady course.

Got it. And if we look at the cost control, you had some very good cost control, protected the margins throughout this quarter. Would you like to give some more color in that and maybe comment on what we can expect in the coming quarters as well?

First of all, let me say we will today not give forward-looking statements. But as we read in our report and we also use language to say that we are quite excited by the improvements and seeing, as we say, tangible improvements in our production KPIs is obviously excellent news. And I think we can say there's obviously no reason to think that it should go backwards. We have invested lots of resources, as we said earlier, to accomplish these results. So we are confident that these results are here to stay. And yeah, we are excited by the results.

Maybe I can add to that because if I understand your question correctly, I mean, yes, we are taking very prudent cost control in this quarter. We know we have some challenges on our sales, especially from APAC. Hence, we've also been limiting our expenses, so to speak, and only traveling when it's absolutely needed. When we are to see customers, of course, we will travel. But we're taking this control, everyone internally, to make sure we're not spending money unwisely.

Sounds very good, thank you. And then final question for me.

Okay.

Sorry, please go ahead.

Norma, I wanted to build on Anita's comment that cost control is not the kind of the main driving factor in the numbers. It is what we said, it's production. It is kind of timing in OPEX overall. And yes, we are a small company. We manage our money well. We spend only what is needed. So, and that obviously helps, but it's not driving way behind the court, I think. I wanted to make that clear.

Thank you, Philip. Do you have more questions?

Maybe just a final question. You previously said that you wanted to stay in line with 2023 numbers. Is that still the goal for this year?

Yes. We have no other information than what we have previously declared in the Q2 report, which is expecting to be in line with last year's results. Yes.

Perfect. Thanks so much. All from me.

Thank you.

As a reminder, if you wish to ask a question, please dial pound key 5 on your telephone keypad. The next question comes from Rolf Karp from Akshi Sparana. Please go ahead.

Thank you. Just two questions. Could you please give us some flavor around competition? What are the competitors doing currently and what do you see going forward?

Thank you for that question. On competition, I mean, I can mostly speak about probi obviously, but of course we see consolidation in the industry, right? So some of our competitors have created some major mergers and acquisitions basically. So they are probably busy with their internally focused alignment of their organization. I would guess, obviously I do not know. So that's one thing. Other than that, I don't really know. I mean, I think what Probii really can benefit from is we have excellent science and also we have science and product launches in new areas where our competitors are not really settled at this point in time. So we have from last year and also this year now in the Nordics with our Probii Sense, the probiotic that is beneficial for our mental health. That is something that is quite unique in the industry. And as Pierre slightly alluded to in one of his comments in the slides, next week we're going to Supply Side West, which is the biggest event in the North America. And we are actually going to launch not only our new updated branding and visual identity, but we're also going to launch a new product next week. So follow us. And that's also in an area that is very new in the probiotics industry, which is metabolic health. So, I mean, competition, obviously, they are busy, but we don't feel like we are threatened at this point with our product launches and our business.

Okay, thank you for your answer. That concludes my question.

Thank you very much, Rolf.

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

Thank you. So now, please note this financial calendar, which is updated dates for the coming year, where we would, of course, invite you to join us and listen to how it's going for PROBI. And then I just have to say thank you for listening and have a wonderful rest of your day. Thank you.