Earnings Call: Q3 2018

Nov 7, 2018

Good afternoon. This is the call to the conference operator. Welcome to the conference operator. Welcome to the Third Quarter 2018 Results Conference Call. As a reminder, all participants are in a listen only mode. At this time, I would like to turn the conference over to Mr. Carlo Rota, CEO of Toyasauris. Please go ahead, sir. Thank you, operator. Ladies and gentlemen, good afternoon, and welcome to our 9 month Q3 conference call. I will start, as usual, commenting revenues, and I will make my initial remarks at constant exchange rate since, as you know, currency fluctuation had relevant impact on our business in the 1st 9 months of 2018. Moreover, let me remind you that the performance which has been registered this year includes positive contribution from the fact that we had 9 months of revenues coming from the Siemens ELISA business, which was acquired in September 2017. So at the group level, our revenue grew by 9.1% in the 1st 9 months as a result of the solid sales performance of our ClearTest, methot vitamin D and the ELISA business, which has been acquired by Siemens. Now this positive trend of the Kia XD was partially mitigated by some negative trends that we I think we have already discussed in previous calls. One is the vitamin D volume decline, mainly in the U. S. Market as a consequence of the change in reimbursement policies by some of the insurers and slowdown in revenues of the newer XLISA business in certain geographies, mainly in distribution and in Brazil. It is associated to events, delay of certain large standards in one side and the study of Brazil is concerned the fact that some of the distributors are supplying public tenders in Brazil had issues of credit collection. And of course, as a consequence, we have frozen some of the distributors waiting for them to address the problem with the government. And so we have actually stopped shipping of these ELISA to these distributors. Now let's talk about vitamin D. As far as vitamin D is concerned, as I already commented in the last financial conference call in others, starting from Q2 this year, we have seen a change in pace, mainly due to a recent policy change with 1 insurance company in the U. S. Market. Let me remind you that when we experience on the market a change in the reimbursement policy, we also usually see a reduction of prescription from physician, which is then translated in lower volumes in a period of 12 to 18 months, and Australia has experienced something similar 2 years ago. And this is certainly a negative effect like doctors are recommending not to test or to limit testing of life and indeed compared to what they used to when these measures were not in place. We have no visibility at this point on these trends. We are starting to acquire some visibility certainly in the last month or so. And as we have discussed previously, our current what we see currently in the U. S. Market is that we expect that the vitamin D volume may decline up to 18%, 20% over the next 12 to 18 months. But it's a matter of just waiting and seeing what was the reaction in the market. Now let's talk about the other geographies and let's talk about Europe. When it comes to Europe with a solid growth, 14% in the 1st 9 months, Europe proved once again to be a strong contributor to our group revenues, and this is certainly according to the vast installed base, the viability of all the products in the region. As far as the fact that we have initiated the sales of QuantiFERON, essentially not in Q3, but we initiated the commercialization of the product in respect to see a benefit starting in Q4. Now specifically, Italy grew by 9%, Funds grew by 16%. It means that in some very key geographies, the business is certainly moving fast. Germany grew 26%. Certainly, this is related mainly to the fact that a lot of Siemens additional business was added in the geography. We have inherited through Siemens roughly 800 accounts throughout Europe, of which 60% were in German speaking countries. And we are working on the conversion of these accounts from Eliza to Remiason. We have 3 years to accomplish conversion. Roughly 10% of the accounts have been already converted, and we have 50% of the accounts in the pipeline. So we expect roughly 50% conversion by the end of 2019. And so the Eliza business is flat. The Siemens business we inherited net of conversion. Now let's go to North America. Certainly, as we discussed before, more than a few geographies where we are experiencing the vitamin D issue, and I'm not going to talk about this any longer. But by the same token, we had a continuous growth of Clear XD with a growing installed base in the office on the mid sized left of the LIAISON XL. And the net net of the decline of vitamin D, but the increasing the increase of revenues of 3xD pretty much flattens out with the geography. So the growth of the XP is to counterbalance the decline of this. But overall, the U. S. Is flat. We have in the U. S, the good news is that we were able to find an agreement with Meridian. And this we got approval by the FDA of the H. Pylori product. And as a consequence of that, we have launched recently this assay in the U. S. In conjunction with Meridian to go and rapidly convert all the existing customers based on Meridian from aging Eliza to Liaison version of product. As far as Asia Pacific is concerned, this region grew 16% in the 1st 9 months. And certainly, the driver is in China, is Clear XD in China, which is growing strongly. We are talking about 16% growth of Clear XD, so Clear overall because also Vitamin D is growing strongly in China. And this trend is consistent what we have announced in the last conference call. So please consider, as we have discussed before, that by the same token changing business model where we don't sell instruments to distributors any longer, but we try to place the resin and resin to drive placements into the Class II market. We have decreased instrument revenues. This one is typically for Diasora and clearly bears much lower profitability. This is a must for us because it's the only way to control actually the shift of 4 to 12% growth in China from Class III to Class II. But overall business, the underlying business, again, Chile does benefit from it, as I said, growth of 16%. Now let's talk about 2018 guidance. So we confirm revenue growth at 9% at constant exchange rate and EBITDA growth at 12%. However, we would like to underline a couple of aspects of the business, which have to do with the fact that in quarter 4, there are 2 events that may shift revenues from one quarter to the other. First one is Iran, And it has to do with the fact that for us, Iran is a very relevant geography. And recently actually yesterday, a series of measures have been published by the U. S. Government. So we need to understand how to continue to supply this market and through which bank system that we can continue to operate. Since, as you know, a lot of international banks actually stopped operating in Iran. And the second one is a very large tender, some of which have been which entails some chunk of instrumentation, some of which have been shipped in Q3. But there is a large installment of that has to happen, and we forecast to have to get made in Q4. But clearly, since it is lot of instrumentation, we have to understand when that is fully completed in quarter 4. Now before turning the microphone to Mr. Pedro, I would like to conclude my comment with a couple of remarks. First one is to do with new products. We have launched so far 4 clear tests, and we have one additional part in the pipeline, which we believe we're going to launch in Q4 and then 6 new molecular products. So, so far, so good in terms of continuing the efforts of launching delivering new products to the market. And talking about business development, we, as you know, have provided lots of color to different projects. The one that I would like to stress is QIAGEN and the collaboration about we have successfully launched in Europe and that's going to happen at the end of September. So we are today engaged in the initial conversion of customers to better reach out from Eliza to the LIAISON version. I know Pierre Schatz did provide color and comments during his Q3 conference call. So I actually invite you to go and check what he said. Things are going well, and I think the 2 companies are now working together to enlarge the scope of the collaboration and add more content to this line, which we deem as strategic. And we also deem strategic to enlarge menu viability on the Elia zone system with QuantiFERON application. And it has been made public that the next in line for us is a Lyme disease product. We are currently running preclinical testing to verify claims and applicability. But fundamentally, the 2 companies are aligned in terms of getting R and D money and effort to bring forward new application on the LIAISON system. Now I would actually give the microphone to Mr. Pedro, who is going to take you through the numbers, and then we're going to take questions. Thank you. Thank you, Carlos. Good afternoon, everybody. In the next few minutes, I'm going to walk you through the financial performance of Dias Corning during the 1st 9 months of 2018. And we will also make some remarks on the contribution of the Q3. So with that, as usual, I would like to start with what we believe are the main highlights of the period. The strengthening of the euro against all the currencies in which we operate has generated some notable FX headwind on revenues during these 1st 9 months of the year, almost €15,000,000 even if, as expected, the impact has been negligible in quarter 3 compared to half 1. This variance has been mainly driven by 2 currencies: the U. S. Dollar, which decreased by 7% and the Brazilian real minus 22% year to date. Considering the U. S. Trend in 2020 and where we are now, I think it is fair to say that also in Q4, like in Q3, we should not expect a material FX headwind. Moving to the second point, we closed September 2018 with an increase in revenues at constant exchange rate of 91% or almost €43,000,000 whereas the growth in the quarter has been 9.5%. September year to date EBITDA is €187,100,000 recorded an increase at constant exchange rate compared to last year of 7.5 percent, with a margin at comparative exchange rate of 48.3 percent versus 38.9 percent of 2017. Quarter free EBITDA at €58,900,000 increased by 6.8% at the constant exchange rate vis a vis last year. Please note that September 2018 EBITDA margin, net expenses we booked for the legal action in the U. S. Agreement are now settled and net of the pay of the Irish divested Irish site divestiture cost would have been in line with what we recorded last year. Lastly, we closed September with a strong free cash flow of €101,000,000 and a very healthy positive net financial position, just short of €113,000,000 The net financial position has been affected by the payments of the ordinary dividend for €47,000,000 in May and by share buyback program for about €65,000,000 Please remind that the net financial position does not include €98,000,000 of debt to its shareholders for the extraordinary dividends, which will be paid out in December 2018. Let's now go to the main items of the P and L. September year to date revenues at €494,000,000,000 grew by 5.4 percent or about €25,000,000 compared to last year. The result of contract change rate is 9.1 percent or €42,300,000 Eiravo has already covered the business drivers behind this variance. Gross profit of €336,000,000 grew by 5.1% compared to last year, closing the 1st 9 months of 2018 with a ratio of revenues of 68%, which is in line with 2017, in spite of the future effect of the senior sterilizer sales and of the price pressure on vitamin D. This performance, which is slightly better than what we originally expected, is mainly driven by higher manufacturing efficiencies and better geographical and product mix. Q3 'eighteen gross margin of 67.1 percent of revenues is substantially in line with last year. The reduction compared to previous quarters, which we also experienced in quarter 3 of the last couple of years, is mainly driven by the product mix and by the seasonality of our business, which usually sees lower activities in some geographies, especially in Europe, during the summer months. Total operating expenses at €179,800,000 or 36.4 percent of revenues have increased by 5.7% compared to the 1st 9 months of last year. Please remember that about €11,000,000 of September year trade OpEx have been driven by the depreciation of the intangible assets coming from the Siemens, Eliza and Focus business acquisitions. Net of these elements, the year to date percentage of constant exchange rate versus last year would have been 8.5% and the ratio on revenues would have been 34.1% against 34.3% of 2017. September year's date, our operating expense is at €6,900,000 increased by €2,100,000 compared to last year. It's just that the period has been affected by some expenses related to the Brexit in the U. S. Region and the detail of the Irish side divestiture costs. As a result of adjusted slide, September adjusted EBITDA of €149,300,000 or 30.2 percent of revenues has increased compared to 2017 by 3.1 percent or €4,500,000 The growth at constant exchange rate is positive for just short of 8.5%. The tax rate at 22.2 percent is almost 10 percentage points better than September year end year to date 2017, which closed at 32% and is in line with what quarter during 2017 year end call. This variance is mainly driven by the positive impact of the Italian Patent Box and the U. S. Tax reform that which we already discussed about in the previous calls. Yesterday, the results at €168,800,000 or 23.6 percent of revenues is higher than previous year by €21,100,000 or 22%. This increase is the result of what we've said so far and of lower net financial expenses, mainly driven by a reduction in interest and profit losses compared to last year and by the revaluation of the participation in our Indian subsidiary, following the takeover of its full control from the local partner. We also discussed about these elements during last quarter call. Lastly, the September yesterday's EBITDA at €187,500,000 is better than last year by €5,000,000 or 2.7 percent. The variance at constant exchange rate is positive by 7.5%. Divideration revenues is 37.9 percent at current exchange rate and 38.3% at constant exchange rate, thus confirming the strong profitability we've recorded in the last quarters. Quarter 3 EBITDA margin at 36.2% of sales have been affected mainly by 2 elements. The impact of the one off cost, just described, and some seasonality in sales in Europe, mainly Europe and some other mix. Please remind that Q4 'seventeen was materially affected by the Irish side divestiture costs. So the growth of Q4 'eighteen over Q4 'seventeen is going to be more material than what we have recorded year to date. Let me now please move to the net financial position and the free cash flow. We closed the period with a positive net financial position of 128 €8,000,000 and about €141,000,000 in cash. The net financial position has been affected by 2 main elements: the payment of ordinary dividend for €47,000,000 in May and the share buyback program for €65,000,000 As said, the net cash position does not include EUR 98,000,000 debt towards shareholders for the extraordinary dividends, which we will be paying out shortly in December. In the period, the group generated 101 €1,000,000 free cash flow, vis a vis €97,000,000 in 2017. Lastly, in Europe Group's earnings performance, the management confirms 2018 guidance for both revenues and EBITDA, with growth at constant exchange rate of around 9% for revenues and 12% for EBITDA. As just mentioned by Carlo, please note that this guidance might be negatively affected by the delay in 2019 of some tenders originally proceeding for Q4 'eighteen, which should take place in geographies, which are served by our distributors before. Now let me please turn the line to the operator to open the Q and A session. Thank you. Excuse me. This is the conference operator. The first question is from Please go ahead. The first question, I'm sorry if I missed that during the call, is just a clarification of the organic growth component for the group in Q3. The second question is regarding multi term TV. And I was wondering if you would permit, let's say, at least a range of the incremental growth that it could bring to your revenue growth in 2019. And just also clarification regarding the comment you made regarding some potential cost of revenues in Q4. I'm referring to Iran, for example. Does it mean that you could actually have missed this in the current guidance, but this could be an add on to next year? Or it won't be material enough that you have to jeopardize the current guidance? Okay. So I will comment on the second and the third question and then PD will cover the first. On the effect on TV and contribution 2019, you need to wait for the 20 19 guidance and the plan that we the new 3 of them, which we plan to discuss in the first half, and we're certainly going to give more color to the what we expect from TV. As far as the comment on Q4, look, we have a significant interest in Iran. And what we are trying to understand is because the actually, the U. S. Just came up yesterday with a list of banks which have been blacklisted. We need to understand how financially we can continue our business in Iran. So far, we expect that looking at the list of banks, we will be able to continue with some of the current banks, and then we'll be able to make complete shipments in Q4. But we're just warning that in case we need to move to different banks, it may take time, and that means that our regular business and our regular shipments in Q4 will be moved to Q1. That has nothing to do, certainly, with losing business, but it has to do with the fact that there's a significant portion of sales, significant for the quarter, will be moved from 1 quarter to the end. The other one has to do with a very large flat bank tender that where that entails sale of a large quantity of systems, some of which already happened in Q3, but some scheduled to happen in Q4. And again, we are waiting for inspection, and we need to understand whether this is going to happen for 2019 in Q1. So we are saying these are events that should not impact our revenues, but there is a shift to these extraordinary components that need to shift from Q4 to Q1. As far as organic growth? Yes. So organic growth, both in Q3 and year to date was around 4% to 4.5%. And I believe I didn't mention it in my call, that's why you didn't pick it up. Okay. Thank you. Just a short follow-up on Iran. What is the sales exposure of the group to this company? No, we don't it's a sensitive information. We don't share this information. Okay. Thank you. The next question is from Michael Ruzich of Arenberg. Please go ahead. Yes. Hi, guys. Thanks for taking my question. Just a quick one for me. I was wondering how many of the Siemens accounts you have currently converted from Eliza to Clea, I guess, percentage wise? And as well, just on the large system order to better understand if that slips to Q1. I guess in terms of percentage of revenues, can you quantify that or be a bit more clear? Let's talk about the conversion. I think I provided some data. I said that we converted today 10% of the customer base. And we have in the funnel 50% conversion by year end, year end meaning 2019, okay? So we expect to convert up to 50% by end of 2019, which it means that we will have 1.5 year to convert the remaining accounts certainly the weight in terms of revenues is not fifty-fifty because we are converting in Phase I lab their accounts. So you're going to have the revenues is going to outweigh the potential of the number of accounts converted. As far as I think the question was, so can you repeat the second question? Yes. I was just wondering if you could quantify the system order for Q4, how important that was for the revenues, perhaps percentage wise, if that were to slip to Q1? Unfortunately, cannot do it because this is part of a transaction which involves Siemens is part of the Siemens business, the inheritance. So cannot share. Okay. Thanks a lot. The next question comes from Maja Pataki with Kepler Cheuvreux. Please go ahead. Yes. Good afternoon. I have a couple of follow-up questions, and I'm sorry that I'm asking you from the same questions again, Carla. The postponement the potential postponement into Q1 is related to Iran. And to what would be the second reason? I wasn't quite sure whether everything is down to Iran or there's another reason. My second question would be around your Nadexo performance, which came in below what I was expecting and you did discuss at the first half results a bit of a seasonality in molecular. Wondering if you could give us an update on how we should think about it maybe going into Q4. And then the last question would be really relating, since you're giving us an indication that there could be a shipment or like a performance of some revenues moving into Q1. Would you confirm nevertheless the 2019 guidance and then we just have to add Q1 on top of that? Would that be the right way to put it? I said that there are 2 events, very different. First one is to do with Iran, and again, anything we call it that. 2nd one has to do with a very large tender in blood bank in Asia. And this includes this is part of the Siemens business we inherited. And we cannot quantify it's a significant business. It's done through partnership, and therefore, we cannot provide more details. So our the question on the table is whether shipments will happen in Q4 or will happen in Q1. Esther? Perfect. Thank you. Okay. So we're just moving from 1 quarter to the other quarter. As far as, yes, that's clearly the shifted to Q1 is additional business to what we foresee for 2019. And I mean, we have now we're on probably quite crazy. And you talked about issues also in Brazil due to debt collection and stopping from moment with some orders within Iran, we're seeing this large order in Asia. Do you still feel that the 2019 that your guidance that you've provided 3 years ago for 2019, that are you still comfortable with that? Look, Maja, the 2019 guidance, I think if we do it at planned exchange rates, okay, so which is already a complication, entails a growth next year of 10%. Okay? And what are the factors, the add on factors and what are the risks? The add on factor is certainly understanding that we have a base business today net of new initiatives, and the new initiative would be launch of stool in the U. S. And with the Meridian conversion of the Meridian business, launch the ProteFERON and launch some nuclear products. So we have an intrinsic growth rate of the business, which sits around 5%, okay? With that, you need to add the component, the organic growth provided by and the store. So the question in my opinion for 2019 is more to do with how where vitamin D in the U. S. Is going to go. Because today, I'm making up a projection which is based on data that we are seeing today. And I'm also making projection on what we have seen in other geographies. So I'm estimating that within a certain period of time, vitamin D volume may go down between 18% 20%, okay? And then I think as we have discussed already, my from previous experience, I expect that volume will bounce back. And I always refer to what happened in Australia, very similar situation. Measures were put in, Our reimbursement was cut, which is very exactly the same as in the U. S. And then eventually bounced back the volume back in the following 2 years. But there is a hit that you take when it goes down. So the effect of this in 2019, in my opinion, is still to be seen and evaluated, and this is why we are careful. From what we see today, I believe that the 2019 guidance that we have given provided that, again, we have good outcome from TV, which is starting well very well. And the viability in this transaction with Meridian, which pretty much is opening up the U. S. Market to Israel Ori. Working with meridian conversion, it's a little positive feeling about 2019 in the guidance. Right. And on molecular? I'm sorry, yes. Question number 2 was about molecular. You see the problem on molecular is that as you know, as I discussed few times, we built a molecular business which has 2 components. 1 is ASR, famous in famous ASR, the other one you have the kits. As far as we don't break it down, but as far as the kids are concerned, there is a growth which is significant, 20% growth worldwide of this product line. Then you have the ASR, where ASR really has mercy of the end user, which guess what, the very large end users have the very large labs in the U. S. Where they use it for NTT. And there you see dynamics which are difficult on a specific project because NPT means they develop their own test, so you do not difficult to understand the efficiency. So how much of your reagents are actually turned into assays that we report and therefore consumption? So historically, when we bought this business, this ASR the ASR in the U. S. Was growing double digit, okay? What we have seen this year is that this ASR component is not growing. Actually, specifically with one account is declining. And the net net effect is that we are diluting the growth of what is the strategic business, which is the key business. It's still less than 10% of our overall business, so it does not have a great impact, plus or minus, on the growth. It's very positive on the kit side. There is this ASR component, which is difficult, honestly, to make great, great, great cash count, not necessarily so strategic, but diluting sometimes the good results of the future. Thank you very much. And Carla, at the second quarter call, you were kind of expecting that the ASR business would, at some point in time, see an acceleration in this year? Just as you pointed out, the lumpiness and the customers. Do you still believe that at some point, is I'm going to see a turn effect? Or do you think this is something that is going to remain sluggish? I think it will not my expectation in 2019 is that this is not going to be a drag. And the reason being that there is a large contract that was awarded to us in validation, again, some of the big gaps. And this should cover some of the negative impact that we're seeing from reduction of use by other accounts. So in my projection, ASR should not be a drag, should probably continue to grow slow in low single digit. And I see it as a cash cow, and this would allow clearly his performance to be more visible. Keep in mind that we have the influenza syndrome as everybody else. So we are carefully watching what is going to happen with the influenza in here. It was a light season in the Pacific. And I think we're all waiting to see how the influenza will do in this winter. And so it does impact, I think, the business of a lot of companies that's actually playing through the molecular space ex blood banks. The next question is a follow-up from Michael Ruzich of Zetta BNP. Please go ahead. Yes. Hi. Just a quick follow-up for me. I think the market has been kind of spooked by these potential delays in Q4. I think it would be really helpful maybe not putting them out just together if you could quantify in terms of a headwind if both were to go in the negative case and flip to Q1? Do you think there will be a 1% headwind to sales? Does that feel about right? Or would it be more or less? Thanks. More or less 1 percentage point. Okay. Thanks a lot. Very helpful. Welcome.