Cambridge Nutritional Sciences plc (CNSL.L) Earnings Call Transcript

Good afternoon, and welcome to the Omega Diagnostics Group Final Results Investor Presentation. [Operator Instructions] I'd now like to hand over to Jag Grewal, CEO. Good afternoon.

Thank you, Paul. Thank you for the kind introduction and welcome to the presentation of the final results for FY '23, which is the financial year ending 31st of March 2023 for Omega Diagnostics. I'm Jag Grewal, I'm the Chief Executive of Omega Diagnostics. I've been with the organization for 12 years, originally starting as Commercial Director before moving into the Managing Director role of the Health and Nutrition division and then subsequently taken over as Chief Exec in 2022.

And I'm Chris Lea, I'm CFO. I've been with Omega now for just shy of 2 years. This is my third AIM-listed small cap stock as CFO within the last 10 years.

So this afternoon, I just want to take you through a brief introduction to the company. I'm sure many of you know a lot about Omega Diagnostics, but there may be people on the call who are unfamiliar with the organization. We'll take you through the key points of our business in the last FY. I canter through the financials, a business overview and more importantly, a forward-looking growth strategy and then ending with a summary and then taking your Q&A section at the end of presentation. So for those who are unfamiliar with Omega Diagnostics, we are now -- haven't been in the past, but now solely focused on health and nutrition diagnostics. And in fact, we're a market leader in food sensitivity in over 85 countries globally trusted by over 116 laboratories on a worldwide basis. We work largely through a distribution channel in global markets through distributors or business partners as we tend to call them, we develop those food sensitivity testing markets in their own specific regions. And those partners then sell our kits and our systems through [indiscernible] clinics, healthcare professionals and ultimately, the healthcare consumer, who is wanting to be tested for food sensitivities, where they may be suffering with a chronic long-term inflammatory conditions, which is often related to poor gut health, and they wish to improve their condition and wellness going forward. Our key products and our key brands in the marketplace, the first one is food detective. This is a point of care or near patient test that can test for reactions to 59 foods as a positive or negative test. That can be run on internet without any specialized equipment at an entry-level price for the marketplace. The bulk of our revenues for food-sensitivity testing is FoodPrint system. This is a highly specialized microarray, which allows a test to be run off a couple drops of blood of a fingerprint sample that can test, analyze and quantify reactions to over 220 different foods. And these are testing for antibodies, long-term antibodies or IgG antibodies that have been built up over time to foods that really -- shouldn't really be in the blood system at all, and it's mainly a good cause of a poor gut health. We have [indiscernible] which are basic laboratory tools used to name as around the world. This is actually a small part of our revenues to date where the bulk of our laboratory sales are FoodPrint kits. And actually, we've taken a decision to discontinue that shortly due to low level of sales and transition of our customers to FoodPrint testing. Here in the U.K., we have our own laboratory base at our site in Littleport in Cambridgeshire and that uses our FoodPrint technology to run test for customers in the U.K., largely focused on healthcare professionals such as nutritionists, naturopaths and functional medicine doctors. In terms of a brief summary of the last financial year, I will take you back to May, June, where we will sell restructuring the organization exiting from sites based up in Scotland and moving out of a Global Health area, largely focused on infectious disease, COVID testing, and HIV monitoring. We were successful in raising funds through placing and open offer, which happened in May, June of 2020. And those funds allowed us to restructure the company as well as give us a bit of time to sell CD4 products, which are time -- has been made under license at our previous site based up in Alva, Scotland. We completed the sale of CD4 in July 2022. And later on that year received the proceeds of the bulk of that sale, GBP 4 million, which are contingent on a successful WHO evaluation in Kenya of the CD4 test that allowed that product to remain on market and be prequalified for purchase by ad agencies and NGOs. In March '23, its adheres with our key strategy in providing a digital platform. We launched in the U.K. MyHealth Tracker as a digital app that we will roll that across other countries and other markets in due course. It was also pleasing to see that our major Chinese partner who was 2 years ago buying Food Detective from Chinese market, recommenced their ordering after a bit of a lull and a lot of that was down to lockdowns and COVID in the Chinese domestic market, but we're very pleased that they've recommenced their deliveries and have a strong outlook going forward. However, in quarter 4 of the financial year, I'm sure those have been following the company are fully well aware of. We experienced lower-than-expected production yields for our FoodPrint product line that resulted in an increase of loss and loan on expected revenues. This is very unfortunate and not so good for our financial results in the prior year, but we acted very, very quickly and implemented with the help of a consultancy firm called Chartwell Consulting, a recovery plan that today is now giving us strong results, much higher yields, as Chris will explain in a minute.

Okay. So thank you, Jag. So just to cover, first of all, the income statement for the year. They're not in line with the trading report that we put out in early April revenues of GBP 7.5 million and a GBP 2 million EBITDA loss. The revenue is GBP 7.5 million, it should have been higher, but for the production issues. Our order book strengthened very significantly from 1 year to the next. We entered this financial year with an order book of GBP 2.4 million, a GBP 1 million higher than prior year. And that really is reflecting the delay in our ability to supply customers with FoodPrint products as a result of the production yield issues we encountered over the winter. Knock-on effect of that was our high-level of scrap, so a lot of tests we were producing were failing in the quality control process. That's track hit the margin. We also had additional labor costs in terms of trying to ramp up our production and try to work our way through a backlog of quality control checks on our FoodPrint product. Our administrative costs were a little bit higher. Bear in mind this year, all of the admin costs for the business are having to be absorbed across the Health & Nutrition division. In the past, certain overheads were covered -- covering both divisions and the costs were split between our Global Health division and our Health & Nutrition business, particularly service functions like finance, HR, regulatory to a degree were servicing both divisions. Now all those costs are sitting within the Health and Nutrition continuing business. I'd just draw your attention to an exceptional item for this year, still GBP 0.5 million. This relates to the planned relocation to a new purpose-built facility in Ely. The landlord is still struggling to be able to complete the building to the agreed specification, has run out of money. We don't believe actually we're going to be able to take possession of that building anytime at all. And as a result, we have taken the decision to write off all the cumulative costs that we've incurred in terms of equipment, in terms of legal fees, in terms of design costs relating to that site. And I'll talk about that a little bit later on. And finally, in relation to the P&L for the year, we have a discontinued activity line, a loss of just under GBP 700,000. That relates to the CD4 business trading from April through to July in 2022. And you can see from here, the knock-on effect visually in terms of those numbers, revenue down 12%, primarily due to the shortage of available food products. Gross margin being hit primarily by increased raw material costs, scrappage costs and an element of additional production labor as we try to catch up in terms of production over the winter, a knock-on effect then to gross profit percentage, which has dropped by about 13 points year-on-year, and that is expected to reverse in the current year as we improve our production yields very significantly. And the net result was a GBP 2 million EBITDA loss compared to a small profit in the same period last year. Turning to the regional sales analysis. Most markets were down as a consequence of the product availability for FoodPrint with 2 notable exceptions. One was our U.K. market, where our lab sales in the U.K. doubled virtually 95% year-on-year to just under GBP 1 million, and that's down to a successful partnership with an agency that works in a direct-to-consumer market using a white label product to drive demand, using their skills that we don't have in marketing directly to the consumer. We've seen significant growth in our U.K. lab testing volumes and we're expecting further growth of around about 20% this year in that space as well. And finally, on the right-hand side, doubling in terms of our revenues from China, as Jag referred to earlier, our Chinese partner has commenced reordering after a 2-year gap. And actually, China was our individually largest market during the course of 2022-'23. From a product perspective, again, Food Detective sales on the bottom up that's driven by China, 42% of year-on-year and FoodPrint sales down due to the inability to supply product towards the back end of the year. One point just to highlight in terms of our production and our pricing. We sell 16-pad kits. We sell 4-pad kits, and we sell 1-pad kits. The cost of producing a 16-pad, a 4-pad or a 1-pad is broadly the same. What we used to do was use our byproducts, our failed QC slides for the higher value products as 1-pad kits and sell those to the market. With the improvement in yield we've seen post year-end, we're no longer getting the right quantity of 1-pad kits available. So what we've done is increased our prices significantly to try and drive customers towards buying higher value-added products that are more profitable for us as a business. So as Jag touched on earlier, we've seen much lower-than-expected production yields within -- over the winter really that fell off quite dramatically from October last year but has really been running lower than we would like for quite a long period of time. Chartwell facility has been in. They joined us in February, they left us in June to help set up new processes, new procedures, new KPIs, to train our staff in the troubleshooting methodology within the manufacturing process with a key objective to a, improve yield and b, to improve the QC turnaround times within our manufacturing facility so that we can get product out of the door a lot quicker. Those core skills are now embedded within our manufacturing team. We've made some changes to personnel within our operational structure, and we now have a very good level of expertise and troubleshooting within the FoodPrint technology area of the business. Draw your attention to the graph at the bottom here. This is a 4-year trend in terms of FoodPrint yield. You can see in the peak of the yield previously was April 2020. I don't think it's a coincidence that that's just when we went into lockdown and with fewer people outside, social distancing, et cetera. We certainly suffered, I think, in terms of the yield that we are achieving throughout the lockdown period. Stabilized at a lower level unfortunately during 2022 and really fell off quite dramatically from October '22 to a low in February this year. The green bars on the right-hand side are showing the improvements that we've been able to make as a result of the Chartwell project, some of which are down to Chartwell being on site, some of which are down to our own operational teams taking responsibility going forward. I expect the final bar in July to increase a little bit because we haven't got the results of all the July production through quality control yet, and I would expect to see a higher level of production coming through in that final bar on the right-hand side. But essentially, the objectives of the Chartwell project to recover yield to better levels, to reduce manufacturing QC lead times have significantly been achieved. And actually, our internal team are setting an internal target higher than the original Chartwell project with a view to improving the yield still further. Just trying to illustrate this in terms of current performance levels. I draw your attention to the purple box towards the bottom right-hand side. This is comparing the original Chartwell plan, which is the dotted blue line at the bottom with our solid blue line, which is our actual production. So you can see really since the beginning of middle of April, we've been producing at a higher rate in terms of finished product yield than the original plan. The original plan was set up to enable us to deliver or fulfill the order backlog that we came into this year with and meet demand within the first half of this financial year so -- we no longer have orders that have delayed in terms of delivery by the end of September. And we're on track at the moment to be able to deliver that. In terms of our new sites, so those people who have been following the business for some time will know that we've long been intending to relocate to a new purpose-built facility in the Ely area. We've run -- the landlords run into some issues in terms of financing the project. The build is not complete to the specification that was agreed, there's another GBP 1 million to spend to bring the facility up from scratch and the landlord does not have sufficient cash to be able to do so. With the passage of time as well, the site is larger than we would ideally like, and we are now talking to the landlord about how we extricate ourselves from the lease in exchange for a cash so to provide the property back to the landlord, and we're looking at alternative sites. In the meantime, we have extended the lease on our current Littleport site until June 2025, which gives us time to assess whether we wish to go to a new purpose-built site or convert an existing unit but it's clear that within the next couple of years, we will need to find additional space because we're too crapped in the facility that we're in at the moment. The production flows are not ideal within the layout of the facility but we certainly don't need something as big as the originally intended building that you can see in the picture on the screen. At the same time, we've been reassessing our core slide printing technology. We use currently a kind of contact printing, where we're using silicon pins to print the foods onto microscope slides. That's been part of the challenge in terms of the production yield where machine settings have not been able to cope and of course, quality control issues to be seen in finished slide manufacturing. We've been evaluating some contactless printing, some new technology, which is available, which we think will give us significantly higher production yields, will be on much lower operating cost in terms of labor to run the equipment and will provide additional capacity over and above what we're going to need in the next couple of years. We're currently assessing that technology. We're running a number of feasibility studies to make sure that they can print and replicate the slides for the same standard or better than we're currently doing. We'll be making a decision on that in the next 4 to 6 weeks, but it's likely to be a capital expenditure of around about GBP 1.5 million over the course of this winter, expected to be roughly half -- half of which is expected to happen in February and the balance in the first quarter of next financial year. But this is core to being able to improve our yield, to reduce -- to improve our efficiency and to refresh our aging technology into a much more modern and efficient production system. In relation to Global Health, as you know, we've recorded Global Health as a discontinued operation last financial year. And again, this financial year, as Jag touched on, we sold the business to GBP 6.3 million. So GBP 5.3 million paid up in cash for inventory and for fixed assets and for the intellectual property, all of which was banked last financial year. And we have a trailing royalty on CD4 sales, which continues to 2026 capped at GBP 1 million. It's currently yielding more than GBP 50,000 per annum but we're not privy to the growth plans of AccuBio over the next few years. But to the extent that they are able to improve revenues from the sale of this product, we have an element of participation and a 4% royalty on everything they sell for the next few years. And finally, the DHSC dispute since December 2021, the Department of Health had been asking us to repay the GBP 2.5 million of advanced funding for our Alva-based COVID lateral flow test contract. We've been exchanging a number of letters over the course of the last 18 months, we finally managed to mediate at the end of April where we sat with representatives of the Department of Health to discuss their claim and our counterclaim because we've made a substantial counterclaim for additional losses in relation to the contract. The situation fundamentally is the contract that we signed was to provide manufacturing capacity for the Department of Health and the onus was on the Department of Health to find a test, license test, we would manufacture that and we would achieve a fixed margin on manufacture for the government. Unfortunately, government did not manage to license the test at the outset and do not tell us that they failed to license the test at the outset innings with the cost base that was too high for too long. Through mediation, it became apparent that our position is a lot stronger and the department's position is a lot weaker in terms of the negotiations. And we are increasingly confident that we will not be required to make a payment of any of the GBP 2.5 million to the Department of Health. And in fact, actually, we are now intending to pursue our counterclaim more vigorously against the department to try and recover some of the losses that we incurred throughout 2021.

Great. Thank you, Chris. I'm really looking forward to what our growth strategy looks like. I'm sure many of you have seen it before, we've got a leadership position food sensitivity in many markets. So in a market and a healthcare environment where gut-health, nutrition is increasingly prevalent in people's thought processes. Wherever you go, there are free-from foods, there's increasing levels of article on the role that gut-health and nutrition plays in chronic inflammatory long-term conditions as well as maintaining wellness amongst our consumer healthcare population. We do carry on doing what we're doing. The demand is there for at least and I guess on the back of COVID as well, people are much more used to diagnostic tests and sending off tests to laboratories to get results to manage their health going forward. We want to embrace digital technology to further drive that awareness and connected to the healthcare consumer. So we're going to do more of what we do today. There are specific geographic targets, we wish to address, one of which is the U.S. and the other one is to carry on the upward trajectory of our business in China. And then the third area is adding menu to our existing basket of goods. We have a leadership position in the marketplace. There are demands for additional tests that we're looking to commercialize in this financial year. And the first step in the direction is with our digital platform, MyHealth Tracker, which was launched in the U.K. in March 2023. This is a healthcare profession led app-based system where then the healthcare consumer they're working with is invited to log on and load their own consumer version of the app. And this is so much more than just an ability to share and review test results. Its key components really is to help the healthcare professional manage their patients, becomes essentially the clinics patient management system that connects and binds the healthcare consumer, the patient to the healthcare professional over a much longer period of time to enable better healthcare outcomes. So we launched initially in the U.K., and we're looking then to roll that out into various markets in priority order around the world. The key benefits of the system beyond just a results system is to enable our relationship with the practitioner. We're able to track wellness, we're able to track symptoms, we're able to track the test results and link them to what symptoms we're seeing. And from a scientific point of view, that's incredibly valuable data, but also from a commercial point of view, that's incredibly valuable data, becomes effectively our Tesco Clubcard understanding what tests are done where around the world and on what basis as that consumer decided to order those tests accordingly. That brings a range of commercial benefits to the organization. First of all, it further increases the barrier to retaining our lab partners versus the competition, as we're adding a lot more value into the relationship. And we're really moving beyond a very classical, we're selling a system and kits to laboratories like some of our competitors do. We're adding value and we're driving business to many of our labs and our healthcare professionals around the world. It allows for increase in testing, repeat testing and reflex testing to different tests that are complementary to what we're doing today. And should we want to having a greater understanding of our business in particular markets. It allows us potentially in the future to improve margin and go more direct in key markets in the future. Geographic growth is important and already in the prior year we added to our range of FoodPrint installations and added 11 new laboratories to our laboratory base, and we appointed new business partners in 8 new countries, taking up coverage to over 85 countries. But all within that, we're really targeting business in the U.S. and we want to carry on the growth trajectory in China. In terms of the U.S., we're already planning 2 installations in the U.S., one of which has already happened, both of those installations are laboratories who want to move into the food sensitivity testing arena, which is complementary to the existing customer base and existing test menu, and we are currently in discussions with a further laboratory, which is already a significant player in the food sensitivity testing arena. And then as it's quite typical in the diagnostics industry is once we got a position, a very strong position in the marketplace, how can you add to those basket of goods and provide even greater value to our customers going forward. And clearly, what is being demanded in the marketplace today, the marketplace that we serve is microbiome test results and nutrigenomics test results. So microbiome, for those who don't know, is an analysis of the gut flora that you had, which has a major impact on health in the body and increasingly being linked to a wide range of chronic long-term inflammatory conditions, such as IBS, migraines, skin conditions, et cetera. Nutrigenomics is a study of your DNA. And looking at the DNA and looking at those genes, the direct impact on how you process food and how you metabolize food going forward. We reported last time that we signed heads of terms with 2 separate report providers. And this business model is quite different from what we do today. Today, we manufacture kits in our facility in Littleport in Cambridgeshire, and we export those kits out to all those 85 different countries, which are then used by our lab providers. This is a testing service, so we'll be commissioning a third-party lab, a genetic sequencing lab that will do the testing for us. And then those results will be put into a portal that would generate 2 unique test reports that will then be marketed to our healthcare professionals around the world. So effectively, it becomes a paper reportable business, which is quite different to what we have today but we then move into the arena of being a digital service provider for 2 essential tests that are highly complementary to what we look at today, which is the immune function of food sensitivity at the moment. So in summary, as a business now, having sold CD4 in the prior year, and remove that as a product line, we are now focused exclusively on Health & Nutrition. And what's increasingly being spoken about is personalized nutrition testing. It's a very exciting market to be and very, very prevalent to many long-term conditions that people are wishing to improve on. We're well capitalized. We had a strong balance sheet and cash from the back having divested the CD4 business. But there is work to do. Work not only in terms of embedding those new skills and improving our efficiency and yields in our manufacturing team, but also building a new team of culture in our Littleport and Ely manufacturing sites. We are transferring, creating new teams in finance, HR and regulatory, it's embedded into the new business as a stand-alone business and move out from what was a divisional structure in a group organization. We have a singular focus on Health and Nutrition going forward. And the great thing is we can build on our existing global leadership position in what is a very exciting marketplace. And we do lead that marketplace and differentiate through science and education through our webinars and our papers and our engagement with key opinion leaders all around the world. And once we've got that foundation in place, we are able to target the new geographies, particularly focusing on the U.S. We can build out China where the re-ordering has recommenced, which is great news. And then we're able to add menu to those well-established, well-honed sales channels in terms of microbiome and nutrigenomics. So what links all that together is a digital spine with MyHealth Tracker that will find us to our lab partners around the world, healthcare professionals and ultimately the patients that we serve in this area. So that what's in terms of the summary. I'll hand back the call [indiscernible] take us through some Q&A.

Jag, Chris, thanks indeed for the presentation. As you can see, we've had a number of questions through today's presentation. Thanks to all the investors for submitting those questions. Perhaps I can start with the first one here. Can a director explain why the market values of the business so lowly currently around GBP 6 million, yet when the company has circa GBP 5 million in cash. This means the projects are valued at nearly 0.

I will tell -- in a nutshell, no, not really. I think for those of you who are on the call 12 months ago, I think the same question popped up, and I expressed my view that the business was significantly undervalued at that point and it still remains the same. I think there are a number of factors that are impacting that at the moment. We're in a bear market generally. But we have a couple of specifics, I think, that are impacting the valuation of Omega at this particular point in time. Firstly, we have an overhang of a potential GBP 2.5 million claim from the Department of Health notwithstanding the fact that we, as a Board, don't believe that, that will turn into a genuine liability and a cash flow -- cash outflow. I think there's an element of that overhanging the business. And until we get resolution that will probably continue to be part of it. I think as well, we have a number of warrants, 90 million share warrants outstanding going back to the placing from May, June 2022. Those warrants expire on the 9th of November. And I would expect that, that might have some sort of benefit overall. Fundamentally, I think though, we need to start delivering results that are in line or better than the forecasts that are out in the marketplace. And I think until we have a track record over a period of time of delivering results, I think there will always be an element of discounting and disbelief perhaps in terms of the numbers for this business. What I would say is we are a long way on fixing the issues within the organization, some unexpected books in the road, particularly around the yield for last year, but we're working hard to improve the quality and professionalism within the business as a whole and to deliver results on behalf of our shareholders.

That's great. Thank you very much indeed, Chris. That kind of covers the next question I can see here. Does the Board expect the 4p warrants to be exercised before expiring in November. I know you have touched on that there, don't think there is anything -- or is there anything further to add?

I think the warrants are at 4p, the current share price is around about 2.5p, I would be very surprised if anybody exercises a warrant in the near term. So I think they will probably expire. But ultimately, it's the shareholders' decision as to whether they wish to exercise those or not. But I'd be very surprised.

That's great. Thanks Chris. What we've got here -- there -- given the low value of the company, does the Board of Directors consider takeover approach of possibility?

I mean where our share prices, we are vulnerable. We're a public company. So that's always a possibility. However, where the share price is at the moment, we would certainly not be able to recommend a lowball offer and it's certainly if we did, it wouldn't be voted by the shareholders. So yes, it could be, but that's very unlikely.

That's great. Thanks Jag. What was the -- sorry, what's the rationale behind the name change to CNS?