Q2 2022 Vistin Pharma ASA Earnings Call OSLO Aug 19, 2022 (Thomson StreetEvents) -- Edited Transcript of Vistin Pharma ASA earnings conference call or presentation Friday, August 19, 2022 at 6:30:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Alexander Karlsen Vistin Pharma ASA - CFO * Magnus Tolleshaug Vistin Pharma ASA - Interim CEO, Chief Commercial Officer & Commercial Director ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, and thank you for standing by. Welcome to the Vistin Pharma Quarterly Report Q2 202 Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Alexander Karlsen. Please go ahead. -------------------------------------------------------------------------------- Alexander Karlsen, Vistin Pharma ASA - CFO [2] -------------------------------------------------------------------------------- Thank you, and good morning, everyone. Welcome to Vistin Pharma's Second Quarter and First Half presentation. Today's presentators will be myself, Alexander Karlsen, the CFO. And with me, I have Magnus Tolleshaug, the CCO and the interim CEO. I will now hand it over to you, Magnus. -------------------------------------------------------------------------------- Magnus Tolleshaug, Vistin Pharma ASA - Interim CEO, Chief Commercial Officer & Commercial Director [3] -------------------------------------------------------------------------------- Thank you, Alexander. I will go through the highlights of the second quarter and year-to-date 2022 results. The second quarter ended with a revenue of NOK 69 million versus NOK 67 million in Q2 2021, which represents a 3% increase. Due to the Metformin Expansion Project, ramp-up activities, there has been limitations on volume available for sale in the quarter. The year-to-date 2022 revenue ended at NOK 102 million compared to NOK 138 million year-to-date last year. The EBITDA in the quarter ended at NOK 4.7 million versus NOK 13.4 million in Q2 2021. The EBITDA was unfavorably affected by limited sales volume in the quarter. Start-up costs for the new line FX exchange rates and the record high electricity prices in the quarter. There have been start-up costs driven by onboarding of new operators and the quality control FTEs not fully utilized yet and semi-variable overhead costs. The year-to-date 2022 EBITDA ended at negative NOK 13.5 million versus a positive NOK 28.8 million year-to-date 2021. The volume output is gradually increasing as new line #2 ramps up. So the existing line #1 has been producing according to plan in the quarter. However, at a slightly reduced capacity due to a normal maintenance stop and also optimization of production with 2 lines. The new line #2 is producing at reduced capacity as part of the volume ramp-up phase, and capacity is expected to continue to ramp up gradually during Q3 and Q4 and reach an annual capacity rate of more than 5,500 metric tons by the end of 2022. And then annual capacity of approximately 7,000 metric tons is expected to be reached during 2023. Financial results is expected to continue to improve for next quarters as we get more volumes available for sale. Vistin Pharma, we are a pure-play metformin company with a bright outlook as we like to say. Diabetes is really one of the largest health emergencies in the 21st century, more than 5 million people, unfortunately, die of diabetes every year. And metformin is the gold standard treatment of type 2 diabetes. And therefore, we like to say that we see a bright outlook for Vistin Pharma, a leading global producer of premium, high-quality metformin to treat this illness. Then the global market demand for metformin is still growing and is expected to grow on a compound annual growth rate, CAGR, of around 5% to 6% at an annual basis. And we think our global market share will be approximately 15% with the new capacity fully utilized. Just shortly about metformin. Metformin is used as the first-line treatment for type 2 diabetes. It's used to treat lower and balance the blood sugar levels. It is, today, the most cost-efficient treatment with very limited side effects and a very long-term safety profile. It typically comes in a tablet form, either as plain tablets or combination tablets where plain tablet is about 80% of the volume or 75% of the volume. Or it can be combinations with metformin and other types of APIs as second and third-line treatments, either DDP4-inhibitors, SGLT2-inhibitor or other ways of combining. Within Vistin Pharma, we are selling our APIs to both product payments. Diabetes is really a global emergency. These are data from the International Diabetes Federation, and these are projections. But if the growth in the world continues like today, it is expected that around 578 million people will be suffering from diabetes in the year 2030, maybe up to 700 million people in the world will be suffering from diabetes in the 2045. So that's approximately a 50% increase from today. And out of all patients suffering from diabetes, about 90% are diabetes type 2 and 10% is type 1. Vistin Pharma, we do sell where we really have global coverage. We will sell all over the world, all the way from Japan in the East to U.S. and Latin America in the West. We have a sales organization so we have direct sales or we sell via distributors and agents. And we also have a large portion of our customers based, which are large international pharmaceutical companies based in Europe, with manufacturing in Europe, we are then transforming our API combining with excipients, making the finished dosage form and then selling the product, at least in more than 100 countries in the world. And with that, I think I will go to the financial review, and I will hand back to our CFO, Alexander Karlsen. -------------------------------------------------------------------------------- Alexander Karlsen, Vistin Pharma ASA - CFO [4] -------------------------------------------------------------------------------- Thank you, Magnus. Looking at the graphs for the quarterly and annual sales volume as long as touched on in the highlights. In the second quarter, there were still limitations involving low sale. However, we expect output and sales volume to increase going forward as we continue the ramp up. Looking at the revenue ended at around NOK 69 million compared to close to NOK 67 million same quarter last year, increase of 3%. Even with 11% decrease in sales volume, reflecting the increased prices we have now. Sales prices in the second quarter reflect the current raw materials and electricity prices. However, as we saw that raw material cost started to stabilize in end 2021 and the first quarter '22, the Ukraine situation has brought back volatility and further increased raw materials. And now we also see pretty high electricity prices, that we'll come back to a bit later. However, to be on top of this, we have quarterly dialogues with our main customers to negotiate sales prices, based on the volatility we see in the market. We also have a significantly portion of safety stock of the most important raw material -- materials to secure the ramp-up of the volumes. Going more to the operational result and EBITDA. It was also in this quarter, affected by the start of cost and onboarding. We're not still fully utilizing the new heads, but training and getting up to speed. We expect, however, this to turn around as we ramp up, and they are not expected to increase the manning in the second half even with the volume increase. For the semi-variable overhead costs like supply, tools and patterns, purchased services and part electricity, we do not expect that to increase linearly with production volume. As for many other production companies we heard about, electricity prices is a concern. Our electricity cost is up by around 300% in the second quarter 2022 compared to the same quarter last year. We have ongoing initiatives in [electron] to reduce the power consumption. Number 1 priority now is the net volume and the second priority is the initiatives to reduce the power consumption. So we come back to that with some more concrete information in the coming quarters. Having a look at the income statement, I think we touched on both the revenue and EBITDA. The earnings before taxes ended at around NOK 310,000 compared to around NOK 10.3 million in the same quarter last year. Depreciation ended at NOK 2.6 million in the quarter compared to NOK 3.2 million in the second quarter last year. We had some assets completing depreciation at the end of '21. That's why it's a bit low now. However, it's important to have in mind that, that as we start capitalization of MEP in the third quarter depreciation will increase going forward. Net finance ended at minus NOK 1.7 [billion] compared to a slightly positive figure of NOK 136,000 in Q2 last year, bringing net profit for the period at NOK 242,000. Moving on to the balance sheet. We continue to see an increase in the fixed assets driven by MEP. It's also a small increase in the deferred tax assets from second quarter last year, driven by the negative results so far this year, bringing total noncurrent assets to close to NOK 226.5 million. Going down to the current assets. There's quite a big increase in the inventory. This is mainly driven by raw materials. As we've mentioned, we have a significant portion of raw materials to secure the ramp-up. We're also having a look at the other receivable that's also quite a big increase, and that's driven by raw materials paid and received locally, but not still in the plant. So adding those 2 together, there are quite high working capital requirements, probably a bit too much raw material as of today. So we'll bleed out some of that during Q3 and Q4. We will still continue to keep and significantly save the stock, but at a slightly lower level that we had at the end of Q2. This brings total assets to close to NOK 371 million compared to around NOK 320 million at the end of Q2 last year. Having a look at the equity and the liability side of the balance sheet. We have equity of around NOK 261 million, which is around the 70% equity ratio. Our noncurrent liabilities, pretty stable, close to NOK 60 million, while we see an increase in current liabilities, again, linked to the volume ramp-up and the working capital, as we mentioned. So trade payables higher as we purchase more raw materials. We also have now the short-term debt as we have established a revolving credit facility to handle the planned liquidity effects from the ongoing expansion and the final net payments plus additional CapEx in the plant, for example, a new finished goods storage that we complete now in Q3. That brings the total equity and liabilities to close to NOK 371 million compared to around NOK 320 million for the same period last year. I think that was the highlight of the financial, Magnus. I'll then leave the word back to you. -------------------------------------------------------------------------------- Magnus Tolleshaug, Vistin Pharma ASA - Interim CEO, Chief Commercial Officer & Commercial Director [5] -------------------------------------------------------------------------------- Yes. Thank you, Alexander. I will give a brief update on the Metformin Expansion Project. So from the operational point, the -- as mentioned, the existing line #1 produced according to plan in the quarter, however, at a slightly reduced capacity due to normal maintenance stop and optimization of producing with the 2 lines. Line #2 is producing at reduced capacity as part of the volume ramp-up phase and also as mentioned, the capacity is expected to ramp up gradually during Q3 and Q4 this year and reach an annual capacity rate of more than 5,500 metric tons by the end of 2022. So that the annual capacity of approximately 7,000 metric tons is expected to be reached during 2023. The first commercial batch from the new line #2 was a shift out of our plants in the second quarter as planned. And the current organization is capable of handling the expected 2022 volumes without adding additional FTEs. From a financial point of view, the increased working capital, as Alexander talked about, requirement in the second quarter is driven by raw material stock and time from production start of line #2 to also from payment from customers. The cash flow is expected to improve from the fourth quarter this year. Raw material inventory will gradually be decreased during the second half as we see more stable supply from China and India. However, our significant safety stock will still be kept locally to support the ramp-up plan. And as of today, approximately 80% of the MEP and 50% of other planned CapEx in 2022 is paid as of end of June. The financial result is expected to continue to improve for the next quarters as we get more volumes available for sale. So to sum up, metformin market is expected to continue to grow by 5% to 6% annually compound annual growth rates. Diabetes is one of the largest health crisis of the 21st century. Metformin is expected to maintain its position as the gold standard treatment for type 2 diabetes in the foreseeable future. We see an attractive growth potential to be realized when the additional manufacturing capacity is available. The COVID-19 and Ukraine situation has been an eye opener to both authorities and the industry, leading to large pharma looking for lower risk supply chains and also short travel medicines. And Vistin Pharma is strategically well positioned as many European clients prefer high-quality supplies with short travel distances these days also. The expansion project to increase the capacity to plus/minus 7,000 metric tons is progressing. The first commercial batch from the second production line was shipped out from our plant in second quarter as planned. So that's something we're very proud of. And I think with that, we are done with second quarter presentation, and we open up for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) I will pass the call back to you, sir, as there are currently no phone questions. -------------------------------------------------------------------------------- Alexander Karlsen, Vistin Pharma ASA - CFO [2] -------------------------------------------------------------------------------- Thank you. I see we have already received quite a few questions relating to the webcast. I think quite a few of them are -- to summarize a few of them as there are general questions about costs and sale prices and negotiations with customers. So maybe you can comment a bit on that, Magnus. -------------------------------------------------------------------------------- Magnus Tolleshaug, Vistin Pharma ASA - Interim CEO, Chief Commercial Officer & Commercial Director [3] -------------------------------------------------------------------------------- Yes, the question here is whether we're able to bring some of our costs on the electricity and other costs on to our customers. And we are, as Alexander mentioned, we do have quarterly price negotiations with our main customers, and both freight costs, raw material and electricity is part of those negotiations. -------------------------------------------------------------------------------- Alexander Karlsen, Vistin Pharma ASA - CFO [4] -------------------------------------------------------------------------------- There's also a question about freight or how we see the freight and raw material costs going forward at the moment? -------------------------------------------------------------------------------- Magnus Tolleshaug, Vistin Pharma ASA - Interim CEO, Chief Commercial Officer & Commercial Director [5] -------------------------------------------------------------------------------- Yes. I can take that. We see -- in the past, the raw material prices and freight cost has, of course, rise very high. But going forward, at the moment, we do see that raw material prices at the moment is stable. And we also see that freight cost is slightly declining. So that's -- yes, that's the situation at the moment. -------------------------------------------------------------------------------- Alexander Karlsen, Vistin Pharma ASA - CFO [6] -------------------------------------------------------------------------------- I think I will be (inaudible) mainly concern you see now is the electricity prices. But for raw materials and freight, it's more stable. There are also some questions here regarding securing the customer for the new volume growing and contract et cetera. Maybe you can comment also on the business development activities, Magnus, about how we're progressing and how things are looking? -------------------------------------------------------------------------------- Magnus Tolleshaug, Vistin Pharma ASA - Interim CEO, Chief Commercial Officer & Commercial Director [7] -------------------------------------------------------------------------------- Yes. Also, we have a sales department. So we are working actively with both, of course, ensuring the demand to our existing customers who has a growing demand, but also looking actively to get new customers on board to completely -- our goal is to completely fill the manufacturing plant, of course, of the 7,000 metric tons as we go forward. So we're actively engaging into that activities. -------------------------------------------------------------------------------- Alexander Karlsen, Vistin Pharma ASA - CFO [8] -------------------------------------------------------------------------------- Next question is about our ASP selling prices. I can comment a bit on that. I feel that our selling prices, as mentioned, do reflect the cost level and a cost level we're seeing around in the market. I think for us now, it's more about getting the net volume up and running and getting the leverage there. And that will obviously benefit the financials. There are also a fresh question here about the production volumes in 2022. We have communicated something around that previous maybe you want to say something there, Magnus. -------------------------------------------------------------------------------- Magnus Tolleshaug, Vistin Pharma ASA - Interim CEO, Chief Commercial Officer & Commercial Director [9] -------------------------------------------------------------------------------- Yes, we did communicate that we previously set ourselves an ambitious goal to produce 5,000 tons in 2022, but we'll probably be closer to 4,000 tons this year. There's also a question here whether we are able to -- or whether we have secured sales of the volume that we will produce in the second half of 2022? I can say that all the volumes that we will produce in 2022 will be sold. -------------------------------------------------------------------------------- Alexander Karlsen, Vistin Pharma ASA - CFO [10] -------------------------------------------------------------------------------- There's also a concrete question on the operational expenses an increase there over last year and Q1. And what I can say is that the increase in operational expenses in the second quarter is all driven by electricity. We actually see some good productivity and cost increases on water waste, et cetera. But unfortunately, the electricity costs are going on all the way, increasing the operational cost in total. There's also a question here on the gross margin, and what to expect going forward? I think that gross margin is dependent on several factors. Obviously, it is our sales prices and the raw material costs, which is also affected by the FX as we sell most of our metformin in euros and purchase our raw materials in U.S. dollars. And so far, in 2022, this is kind of spread have kind of been unfavorable with the U.S. dollar strengthening versus the euro. But so we -- so the percentage of gross margin is difficult to predict. But we would expect to keep that current level and maybe slightly better going forward. There's also a question about manning going forward. As we said in the presentation, we do not expect to add any new FTEs in 2022. As previously communicated, we have said that going from around 3,500 tons to 7,000 ton production volume. We'll require around 50 new FTEs, mainly operators and quality control people. We think that number is probably less so to produce 7,000 tons, we will think we'll probably need in the range of plus/minus 12 heads compared to where we were at Q2 '21. There's some question about EBITDA for the next quarter, but we will not guide concrete numbers. So I think we'll keep to what we said in the presentation that as we get more product out of the plant, we will see sales volume increase and that will benefit this much going forward. It's obviously also, as we just mentioned, with adding few FTEs we're doubling the volume. And also, we mentioned variable costs will not increase linearly with the production volume. There are leverage going forward as we ramp up. There's also some cost on electricity. I think we communicated before that we use between 10 and 15 million-kilowatt hours annually. So I think then it's more up to you guys to calculate. But again, we have initiatives ongoing. So the plan is to take down consumption, but that will take some time. It's not a quick fix. I think now we have touched on all the questions, Magnus. So we will say thank you for now, and have a nice day, and that's all from us. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

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