Earnings Call: H1 2018

Sep 5, 2018

Good day, and welcome to the Baomei Ryu H1 2018 Financial Results Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Sylvain Morjot, Investor Relations. Please go ahead. Hi. Good day, everyone, and welcome to all of you, either on the phone or on the webcast. It's always a great pleasure to have you attending this presentation. Before leaving the floor to Alexandre Marriot, CEO and Guillaume Gour, CFO, I will just make a short introduction to provide you a set of information about this meeting. So first of all, I wanted to inform you that BioMarriott issued its press release this morning at 7 am. The press release can found on the homepage of the website, www.bio Mario finance.com. If you have not received our news release or if you would like to be added to the company's distribution list, please feel free to contact me. The presentation slides can be downloaded on the same web page or directly through the webcast. Promptly after the end of the meeting, the webcast and the call will be available in replay. Now going to the presentation contents, we will review the H1 2018 performance and the 2018 outlook. And then following this formal presentation, we propose you to hold the Q and A session. The question can come from the conference call or from the chat of the webcast, and we will rotate questions from the call and from the webcast. Before starting the presentation, a very last word on the forward looking statements. I will not detail the Slide number 2, but I recommend you to take note of its contents that remind the usual disclaimer about the forward looking statements. I wish you a very nice meeting, and Alexandre, Florezios. Thank you, Sylvain. Good afternoon to all. It's a pleasure to be with you. So I will start by giving you some key takeaway messages regarding H1 performance. So in H1, we displayed quite a nice growth sales dynamic at 10.4%, which is way above the IVD market growth. This growth was fueled by molecular biology and the great success of Finlay, nice growth also of industrial applications and also wrapping up of the Asia Pacific region. So this solid top line dynamics drove also good profitability improvements since the operating income is now at €185,000,000 which is up 7% at current rate compared to H1 of last year. The time constraint remains very solid. We are almost step 3, which allowed us also to do some M and A moves recently, mainly with the acquisition of Astute Medical, which is a high medical value market that's created in the spring. And we also announced in July a minority stake in Haioguem, which is a Chinese company in the field of immunoassay. So based on these solid results, we decided to upgrade slightly our guidance, moving the sales target from 8% to 9% to be now around 9.5%. And the contribution operating income should be a lending between €314,000,000 €350,000,000 If I move now to the sales dynamic by geography. So as mentioned, 10.4% growth in H1 with all the regions growing nicely. The Americas region being number 1 for us now representing 4% of the total revenue of the company. The growth in North America was really driven also by the constant growth of Finloy. While LatAm in Latin America was a bit slower, but mainly with one impact from coming from Brazil, with the fact that we put SAP in place in January and also that there were some very severe strife in which impacted the Brazilian economy also during the spring, while the other countries are growing double digit in the region. Concerning Europe, Middle East Africa, growth grows to 5%, with Europe growing at 3%. It's really important to note that we see a nice growth in Middle East and Africa region. And also we start to see, of course, the impact also of Filare being promoted and sold in the European region. While for Asia Pacific, growing there close to 17%, it was fueled by most of the countries. In fact, China are performing very well. China is a very good strong H1, very strong Q1. India, it is paying its double digit growth. Japan, which is a more mature market, also where we are investing to take back control of the sales dynamic was slightly below being flat. If we look now the split of the sales by application, what is work we're noticing, I would say is the good balance of the BioMarriott portfolio. We're well balanced in terms of geography, but we are well balanced also in terms of technology. Microbiology representing 40% of the revenue, growing at 6% to the market at 5.3%. Immuno SA grew at close to 1% with the impact that we have of pressure on PCT price in the U. S, while the virus reagent sales grew by 3%. Molecular, so impressive growth, which was driven by Filmorhea in the U. S. On a worldwide basis. Molecular now representing 23% of the total revenue of the company. And we also displayed a satisfactory nice growth for industry, which is above 9%. Going to Filorest. We recently have continuously resumed our strategy with Finore. So I'm glad to say that we are still making good progress. We initially growing the number of installed base. So now we are close to 7,000 units worldwide with a customer base of 2,200 customers. And the sales grew by 40% to reach €230,000,000 in H1. We have the widest panel menu panels panel of the new available on the market with several panels. In the beginning, we have the same the most important syndrome. And also, we have announced the filing of the Permian Panel in April of 2018, and we are waiting for an FDA clearance. Also, we mentioned that this year, we also keep on investing in the modularity and the Filmora, working also improve the number of renewals and also to improve the technology working on a reduction of time to results of the test. Going international, an important aspect of the strategy regarding Filmoraics. On the end of H1, 50% of the sales were coming from international, it means outside of the U. S, with onethree of the 2018 integration being done outside of the U. S. And they also recently launched FIMARATE in JATAM. ImmunoSA, so we know we are facing competition in the U. S. With PCT. PCT is still growing activity for biomass. Volume are still growing in the U. S, but we are impacted by some price pressure. At the same time, we keep on investing, I would say, in our positioning, with the positioning of high medical value markers. So recently, what we have done the acquisition of AKI that we should develop to put on the VITAS during for the year 2020. Also, as you might know, also we have this partnership development partnership with Danyan for the development of a test for traumatic brain injury. I will conclude the introduction talking about industry applications. We are quite pleased with the growth was our intent and we bring this journey to high single digit, which we reached last year and also keep on doing this year with a 9% growth. And for this, I would say we are being fueled by the investment we are doing, also with the quality of our product portfolio. And I would say also some good market trends coming both from the consumers and also our customers. So with this, I will leave the floor to Guillaume Bouro to present the financial results for Equine. Thank you, Alexandre. Hello, everyone. So let's review our 3rd half financial and operating performance, starting with the total sales view, total sales growth. So FX was clearly negative as expected. As you can see, we had minus €83,000,000 of foreign exchange impact on sales in the first half, and this is in line with our forecast made early in the year. You can see that most of this negative on sale is coming from the U. S. Dollar, the rest being a lot from emerging currencies like Indian rupee, Brazilian reals, Argentine and peso. We'll come back in this presentation on the total view on the FX exposure for Du Merieux, not only on sales but also on operating income. On sales, the perimeter effect was not significant with only 1 quarter of Astute consolidation. And finally, we had, as Alexandre already detailed, an organic growth of 10.4%. So all in, 3% published growth of the top line. Moving to the next page and looking at our P and L from sales to contributive operating income. Our gross margin improved from 53.3 percent in H1 'seventeen to 54.3% in 'eighteen, with positive mix effect coming from the growth of biophiles film array relative to our gross margin as well as the reduction in the depreciation of our installed base, which we align in terms of duration accounting wise with the actual service life of our equipments. And that's a change in the IB depreciation improved gross margin by €5,000,000,000 for the first half. Below gross profit, SG and A increased by 7.7% on a like for like basis year on year. This is directly resulting from the investment in our sales force, especially for the BioFire, FIMO, let's say, specific sales effort worldwide, U. S. And outside. R and D grew by 10% like for like year on year to 13 0.4% of sales, with the majority of the R and D increase coming from our investment in the BioFire range of panels and instruments as well as some additional investments in our microbiology products. All in contributive operating income reached 15.9 sorry, 15.8 percent of sales, up 7%. And of course, this 7% increase is despite FX impact of €31,000,000 on operating income, €31,000,000 negative, and as well the consolidation of, let's say, expenses from Assurant for 1 quarter of €4,000,000 And in the context of additional investment, as just explained, in R and D for the innovation of the group as well as our sales force. So all in, plus 7% operating income. Coming to the operating income to net income. So we have this BioFire acquisition related costs that are stable, that are mainly the purchase price amortization, now stable at €9,000,000 per semester. Below operating income, net financial expense improved from €13,000,000 last year to €10,000,000 thanks to mainly lower cost of debt and related hedge. Income tax was a major change this year as expected. As you can see, the effective tax rate moved from 32% last year to 19%, and we'll detail that in a minute. So all in, net income stood at €134,000,000 up 33% despite the headwinds that were explained on the foreign exchange. So a few details on the tax rates with this major change. Two major impacts. The first one is, of course, the U. S. Tax reform, which basically drives our recurring effective tax rate from 32% last year H1 to 22.5% this year in the first half. The second effect is more specific to BioMerieux. We BioMerieux decided and executed actually in the first half an extraordinary exceptional contribution to its U. S. Pension plan. We actually, let's say, take to benefit from a tax window offered by the U. S. Administration to basically do this kind of contribution to pension plan deductible at the former U. S. Tax rate of 35%. So this exceptional one off had a tax impact favorable of €5,000,000 3 percent of executive tax rate, making the H1 tax rate at 19%. We confirm that for the full year, we expect the executive tax rate recurring to be at 25% and the pension extraordinary contribution to have a 2% favorable impact on top. Let's now review the cash flow statement. Starting with EBITDA that increased in line with operating income. Operating working capital was up €37,000,000 for the first half, with mainly seasonal effects in our inventory and our social payables. In terms of inventory, we tend to have, let's say, decreasing inventory at the end of the year in December due to the start of the flu season. And actually, we start to build up back the references for the flu as early as June in our inventory. And social payables are due to employee payments, bonus, profit sharing that are actually made in the Q1. So many seasons all over. Income tax paid already benefited from the U. S. Tax reform with a major decrease to €33,000,000 cash out. And CapEx at €104,000,000 was in line with our guidance at almost 9% of sales. Half of it is actually industrial and manufacturing CapEx, and about 25% is into investment in our installed base of instruments with our customers. The free cash flow, excluding the extraordinary one off payments on the pension U. S. Pension plan, stood at €89,000,000 for the first half, which is more than double as compared to €39,000,000 last year for the same period. We actually spent, let's say, this free cash flow with this €56,000,000 of pension contribution €85,000,000 on acquisition, of course, the biggest part of that being Astute acquisition, €40,000,000 on dividend paid in the first half. So overall, an increase in our net debt position from €156,000,000 to 261,000,000 which still remains a very solid balance sheet with a leverage ratio, net debt to EBITDA of 0.5 percent, leaving us, let's say, quite some headroom for potential additional investments. To finish, we'd like to give you some additional visibility for analysts and investors on the foreign exchange exposure of Biomerieux. On this page, you can see for different currencies. On the first column, exposure on revenues, which was already, let's say, disclosed. And as you can see, it's pretty heavily weighted on the U. S. Dollar, of course. On the 2nd column, then this is, I think, a new information we gave you today. The estimated impact of, let's say, 5% FX variation of euro against different currencies on the operating income. So let's say the bottom line. And this calculation are based on 17 actuals. Of course, they might vary with our split of profits and of course with the currencies themselves. So as you can see, and this might be a bit counterintuitive, the U. S. Dollar impact is much smaller as compared to other currencies. The reason for that is that we have a pretty significant cost base in the U. S. With very significant manufacturing and R and D in the U. S. Offsetting the revenue exposure. So we are very much exposed to other currencies such as yuan, Indian rupee, Korean, Japanese and Latin America currencies. We hope this can also explain better for you this €31,000,000 impact from FX on operating income in the first half, of which, for example, the 12% change in U. S. Dollar impacted by €9,000,000 operating income or the 12% change in Indian rupee as compared to euro impacted operating income by €6,000,000 To drive from this on the full year, we update our, let's say, our forecast for the full year to negative €110,000,000 approximately. Of course, this is approximately based on current rates, negative €110,000,000 on the top line sales and for operating income, a negative €40,000,000 to €45,000,000 This is slightly worse than we thought at the beginning of the summer, but we included there the major currency crisis of and some emerging in August such as Turkey and others. And with that, I hand over back to Alexandre. Thank you, Guillaume. So yes, to conclude, I mean, the same messages in fact that we are are based on this strong first H1, we are slightly revising our guidance in terms of sales now to move from 8% to 9%, finally, to be targeting to be around 9.5%, as mentioned by Guillaume, with an estimated impact of €110,000,000 from ForEx. While for the operating income, we now have the target to be between €240,000,000 to 250 €1,000,000 with an price and periodic impact between €40,000,000 45,000,000 And this also will include the cost of the Astute acquisitions. No change on the tax rate impact on the same guidance for the CapEx. So if we can now open the floor to the questions. Thank you. You. And our first question comes from Romain Zana from Exane. Please go ahead. Yes. Good afternoon. Thanks for taking my question and congrats for the results. I have three questions. The first one is on immunoassay. I was wondering if you have seen any accelerating deterioration on VCT so far in Q3? And to what extent the lack of, let's say, worsening trends have driven your higher organic sales target for the full year? The two other questions I have are on the EBIT guidance. The new guidance does not seem to have been raised because of lower ForEx headwind. I'd like to say that it's even worse. So what is driving the better than expected profitability? And the last one is still on the EBIT guidance. So after this strong H1, your guidance implies the margin deterioration in H2, even once adjusted for the stronger dilutive impact of ISTUIT in the 2nd part of the year. So is there any specific reason why you anticipate such inflection? Or is it just to be cautious, I could say as usual? Thank you. Okay. The phone is not perfect. I just want to make sure the first question is, do we see future deceleration of in the U. S. Market. That's my understanding. At this stage, we will say that we will need the year to understand what to see how the market will stabilize in the U. S. We are still impacted by price, but volume is growing for us. And we are also working on the combination of the sales of also with the one of KPI on the acute meter. So maybe I would maybe have a better visibility at the end of the year. Volume are increasing, and I would say this is a significant news and we monitor prices. Your second question was around the first drivers to improve the guidance. Okay. But we did a very nice first semester with a very good organic growth. As you remember, also we had a very good impact from the flu season, which boosted all the ranges, I would say, mainly Filare, which has a nice impact for us. I think we also mentioned that we have changed the method, which is linked to IFRS 15 in the duration of the amortization of our base for 50 BPS impact, 50 bps for the 1st semester. And we're looking at the guidance for the end of the year, no, no, we don't believe this is a conservative guidance. We will have the true impact as we had in Q1 this year. We will have to protect inversion the cost of assets, which was light in the 1st semester, which will be 6 months for the 2nd semester. And I would say also, regarding their spending of R and D, there's a possibility also maybe to decrease the R and D spend compared to the 1st semester. So just to make sure I understood because my point was that even when we adjust for the dilution that you are guiding for the 2nd part of the year, the underlying margin implied by your guidance is declining. So you're saying that it would be mainly due to, let's say, a back end loaded R and D cost? I stood for 6 months security in the cost while it was only 2 months in the 1st semester. The fact that no flu impact, so not a booster as it was in the 1st semester and also potential acceleration of R and D spending. Okay. Thank you. Yes. And our next question comes from Bill Quirk from Piper Jaffray. Please go ahead. Great. Thank you and good afternoon everybody. A couple of questions from me. I guess first off is considering what we're seeing in the Southern Hemisphere regarding flu, I guess how should we think about that for BioFire in the second half of the year? And then secondly, perhaps just a comment on where BioFire is trending from a profitability standpoint. I guess, certainly in the past, you've commented that it was getting close to profitability. Are we there yet? How far are we from the corporate average? Thank you. I don't think we committed around this. We always said that margin wise, product margin wise, it's strong and interesting to grow. And can you repeat your first question, Joon? Certainly. So the first question has to do with your expectations for the respiratory season in the second half the year, just given kind of the strong season last year and what we're seeing thus far in the Southern Hemisphere? Thank you. No, no. We don't have expectations for flu season. In fact, we believe it's going to be in our plan and we consider it's going to be an average flu season. But usually, the flu season starts really by mid December. So you have seen last year, but this year, the impact has maybe on Q1. We believe that customers will still get prepared for the full season. So it's very difficult to predict and we don't have any indication today following the Australian trends or others that it will be stronger. Okay. We will take a question from the webcast, and I have a question on the amortization. The question is we have seen a €5,000,000 recalculation of amortization of the installed base. Should we expect another €5,000,000 on H2? Your guidance imply a decline of operating margin on H2. It is cautiousness or Astute Medical or FX impacts. I think we already answered this question. Where should we spend on corporate tax by the end of 2018? Maybe Guillaume? I can Thank you, Sylvain. So amortization of installed base, yes, the impact is actually linear. So it was €5,400,000 in H1. It's going to be the same amount in H2. On the tax rate, just to re restate what I mentioned is that the recurring effective tax rate, we expect around 25% for the full year 2018, on which you have to add a positive effect of 2% from the exceptional contribution to the U. S. Pension plan. So 25 minuteus 2, we should be around it's not a perfect science around 23% for the full year complete effective tax rate in 2018. And as regards to, let's say, the seen slight lower profitability in H2 as compared to H1, we already answered as the main elements were the absence of strong flu season, the slight ramp up in R and D and the full consolidation I've asked you for 2 quarters in H2 versus 1 quarter only in H1. Thank you. And now we will switch back to the questions from the call. And our next question comes from Maja Pataki from Kepler Sabreux. Please go ahead. Thank you for taking my questions. I have 3 as well. First of all, Alexander, could you give us a bit of the strategic thinking behind the stake in the Chinese company? What is it that the company is offering? Or what are you trying to achieve? The second point is, with regard to your group margin, would it be possible for you to give us a ranking of divisional margin levels, not a number, but kind of say what is highest and what is lowest and if there is a big difference? And then the third question is more of like a clarification. Did you say that the net for check is already being sold on Baidu? Or did I just not hear that well on the call? Okay. Thank you. Yes, so we announced in July that we took a minority stake in a Chinese company called HIVEO. So it's a company where we've developed all these selling also systems in the field of immunoassay. So while doing this, the interest for us and for our customers, I would say, is to better serve also the Chinese market. It's important for us also to invest in R and D and manufacturing in China because it's important also to have a strong, I would say, R and D and marketing base in China. And also immunoassay is a very, very fast growing market in China. We are doing well with Vykas, but the high build platform also is having, I would say, a higher throughput, higher capacity. It's a different technology. It's a chemo defense technology. So we felt by investing in this company, we could also think about strengthening our commercial and R and D presence in China. Your third question around the nephrotect. No, nephrotect is not on the Vygas yet, and the plan is to put it on the Vygas to have it on the Vydas developed by 2020. But today, we sell the astute test on the astute meter, which is a single test platform, which was promoted and developed by the Astute competitor. So it's not on Gaikas, it's another single test platform. Your second question, I don't think I can answer, but the difference of margins between our product, and I'm not sure we communicate around that. And our next question comes from Michael Ruzick from Berenberg. I have 2, please. Firstly, when are you expecting the pneumonia panel to be approved in the U. S? And secondly, can you comment on at all on the profitability of immunoassay, assay, maybe comparatively to historic profitability in that division? Okay. We did the FDA filing in April for pneumonia. It's very tough for me to tell when it's going to be launched, but this isn't the end of the FDA. We have, of course, with them back and forth questions. I would like to see the proof before end of the year, but this is not it's not my call. It's FDA call, depending if you have more questions or not. Okay. The second question is around the profitability of the immunoassay. I'm not sure we comment specifically on this, but I would say immunoassay is a strategic range for Biomir here, and we are quite happy with this performance in general. Okay. So we will continue with the question from the webcast. So have you had any talks with some labs regarding the cast at the X CAG and machine? If yes, they are considering it as a possible replacement. Cajun has a very aggressive communication around the potential success and customers' feedbacks on its machine? Not a lot. In fact, I believe that the KAYASTAT is only sold in Europe because they don't have an FDA approval. So we hear about them, but we are I don't think to my knowledge, we're not being confronted on the face to face, I would say, deal or danger. We know that many people are joining this field of Fingerhut and the goal for us and we are so far leading the race and the goal is to keep on leading this race, putting investments, grabbing on the platforms and through development of new panels. But let's say, it's an attractive field. And so we'll get back to the question from the call with a call from Graham Berg, I guess. And we will take a follow-up from Michael Grunstich. Yes, just one more for me. Yes, thanks. Just one more for me, guys. So actually I've been hearing a few rumors in the market that you guys are considering entering the interferon TB testing market. Could you comment on that at all? Is there any truth to that? No, no. It's just rumors, I think. All right. Thanks. Okay. And now we'll be back we'll get back to the questions from the maybe from the webcast first. Sorry. So is the guidance, okay, we already answered this one. We had a question about the update on Ama Palmetto. Do you expect any CMS decision? We have no news. In fact, no recent news on the front of Pan Metal. We are also expecting things to move, but no news or no signal on that we have from our side. Knowing that it won't exactly change our strategy, we are also focusing on the hEOR studies, promoting the medical value. And as we discussed also, we believe that most of our patients are inpatients, and they shouldn't be under the umbrella of Palmetto weather with wait and see. And so now let's get back to the question from the call. And our next question comes from Philippa Gardner from Jefferies. Hi. I just have one question. I have one question, if I could, please. There were some reports in the media fairly recently about recalling almost 14,000,000 MRSA tests. And I was just wondering if you could perhaps put that into context in terms of what that represents as a total of your MRSA tests and whether there will be any ongoing or longer term implications from this? Thank you. Thank you. Yes, it's important to say that it is not a physical recall, and it's it's not a recall of our product. It seems that there are some questions and uncertainty about the new strength of Amaresa. It's more a call for a software patch that we are already communicating and promoting with our customer. I would say based on the collaboration that we have with the ATA and also the CDC. But this is not a product recall, a physical recall. It's not a physical recall of our card. It's also linked to a new program that we have to bring to the software upgrade that we are putting in place now in the U. S. Market. Okay, let's take the other the next question from the call. And we have another follow-up from Maja Pataki. Please go ahead. Yes, thanks. I was wondering, I believe I had to understand that you have you're increasingly placing the BioFire FilmArray instruments rather than previously selling it. Could you elaborate what has caused this shift? Is it because you're seeing competitors entering? Or is it just a question of your regional expansion and the local habit? And then the second question I have is, Accelerate Diagnostics has actually also changed their replacement strategy. They're now moving to the reagent rental model. Are you seeing Accelerate more in the market now? And are you seeing more interest from a customer side? What is the feedback that you get in the market? Okay. To your first question, it's more about around the commercial policy, sometimes to do placements, sometimes to sell the instruments. But what we see inside that we have quite a good success with the torch that we have launched, which was for a higher capacity. With a higher capacity means higher test. So sometimes it goes with more placements while you have a reagent rental agreement. It's more, let's say, a commercial policy linked to the volume, which are at stake. Regarding Accelerate, no, we fool them, like everybody. We see that sometimes they are being evaluated in some laboratories, but we have not seen them as a potential displacer or disruptor of our IV AST business. I think it's still early days. Thank you. Okay. And now we will get back to the question from the webcast. And so should we expect to see your new Chinese immuno platform recently bought coming, being registered in Europe or U. S. For cost efficient reason or throughput reason? Okay. So we are just a minority shareholder of this company at this stage. And the goal today is to work with them mainly to serve the Chinese market. This is the first instance. Chinese market is growing fast. It's constantly being reshaped between the hospital, grade 3, grade 2 and grade 1. So we felt we would be stronger with the Vydas but also with the clear way, with the clear, clearly, in the sense platform. But Chinese mainly is the first focus. Okay. I think we have no more questions from the call and neither from the webcast. Thank you everyone for your participation and for sharing your questions and discussion during this meeting. And so next investor meeting will be a call for the Q3 performance, which will be in October around mid October. Thank you very much. Thank you. Bye. Bye bye. And this concludes today's conference. Thank you for your participation and you may now disconnect.