Good day, welcome to the bioMérieux H1 2018 financial results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Sylvain Morgeau, investor relations. Please go ahead.
Hi. Good day, everyone, 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 call to Alexandre Mérieux, CEO, and Guillaume Bouhours, CFO, I will just make a short introduction to provide you a set of information about this meeting. First of all, I wanted to inform you that bioMérieux issued its press release this morning at 7:00 A.M. The press release can be found on the homepage of the website, www.biomerieux.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 webpage 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. Following this formal presentation, we propose you to hold the Q&A session. Questions can come from the conference call or from the chat of the webcast. 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 two, 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, Alexandre, floor is yours.
Thank you, Sylvain. Good afternoon to all. A pleasure to be with you. I will start by giving you some key takeaway messages regarding H1 performance. In H1, we displayed quite a nice growth sales dynamic at 10.4%, which is way above IVD market growth. This growth was fueled by molecular biology and the great success of FilmArray. Nice growth also of industrial applications and also a ramping up of the Asia-Pacific region. This solid top line dynamics drove also good profitability improvements since the operating income is now at EUR 185 million, which is up 7% at current rate compared to H1 of last year. The financial position remains very solid. We are almost debt-free, which allowed us also to do some M&A moves recently, mainly with the acquisition of Astute Medical, which is a high medical value market that we did in the spring.
We also announced in July a minority stake in Hybiome, which is a Chinese company in the field of immunoassays. 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 contributed operating income should be landing between EUR 340 million and EUR 350 million. I move now to the sales dynamic by geography. As mentioned, 10.4% growth in H1, with all the regions growing nicely. The Americas region being number one for us now, representing 44% of the total revenue of the company. The growth in North America was really driven also by the constant growth of FilmArray.
Latin America was slower, but mainly with one impact coming from Brazil, with the fact that we put ACP in place in January, and also that there were some very severe strikes, which impacted the Brazilian economy also during the spring, while the other countries are growing double-digits in the region. Concerning Europe, Middle East, Africa, growth close to 5%, with Europe growing at 3%, but important to note that it's a nice growth in the Middle East and Africa region. Also we start to see, of course, the impact also of FilmArray being promoted and sold in the European region. For Asia-Pacific, growing close to 17%, it was fueled by most of the countries. In fact, China are performing very well. China had a very strong H1, a very strong Q1. India is staying with 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. We look now at the split of the sales by application, what is worth noticing, I would say, is the good balance of the bioMérieux 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 the market, at 5.3%. Immunoassays 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 FilmArray in the U.S. on a worldwide basis. Molecular now representing 23% of the total revenue of the company. I will also display the satisfactory, nice growth with industry, which is above 9%.
Going to FilmArray. We've said recently about continuously review on our strategy with FilmArray. I'm glad to say that we are making good progress on growing the number of install base. 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 EUR 230 million in H1. We have the widest menu of panels available on the market with seven available panels, beginning with the most important, Syndromic. Also, we have announced the filing of the Pneumonia Panel, in April of 2018, and we are waiting for an FDA clearance. Also, we mentioned that this year we'll also keep on investing in the microbiology and the FilmArray, working also to improve the number of menus and also to improve the technology, working on a reduction of time to results of the test.
Going international is an important aspect of the strategy regarding FilmArray. On the end of H1, 50% of the sales were coming from international business outside of the U.S., with one-third of the 2018 installation being done outside of the U.S. We also recently launched FilmArray in Japan. Immunoassay. We know we are facing competition in the U.S. with PCT. PCT is still a growing activity for bioMérieux. 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. Recently what we have done with acquisition of Astute, that we should develop to put on the roadmap for the year 2020.
Also, as you might know, we have this development partnership with Banyan for the development of a test for traumatic brain injury. I will conclude introduction talking about industry application, where we are quite pleased with the growth. It was our intent actually to bring this unit to high single digits, which we reached last year, and also we keep on doing this year with a 9% growth. 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. With this, I will leave the floor to Guillaume Bouhours to present the financial results for H1.
Thank you, Alexandre. Hello, everyone. Let's review our first half financial and operating performance, starting with the total sales view, total sales growth. FX was clearly negative as expected. As you can see, we had minus EUR 83 million 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 sales is coming from the US dollar, the rest being a lot from emerging currencies, like Indian rupee, Brazilian reais, Argentine peso. We'll come back in this presentation on the total view on the FX exposure for bioMérieux, not only on sales but also on operating income. On sales, the perimeter effect was not significant, with only one quarter of Astute consolidation. Finally, we had, as Alexandre already detailed, an organic growth of 10.4%.
All in, 3% published growth of the top line. Moving to the next page, and looking at our P&L from sales to contributed operating income. Our gross margin improved from 53.3% in H1 2017 to 54.3% in 2018, with a positive mix effect coming from the growth of BioFire FilmArray relative to our gross margin, as well as the reduction in the depreciation of our install base which we aligned in terms of duration, accounting-wise, with the actual service life of our equipments. That change in the IB depreciation improved gross margin by EUR 5 million for the first half. Below gross profit, SG&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 FilmArray specific sales effort worldwide, U.S. and outside.
R&D grew by 10% like-for-like year-on-year to 13.4% of sales, with the majority of the R&D increase coming from our investment in the BIOFIRE range of panels and instruments, as well as some additional investment in our microbiology products. All-in contributed operating income reached 15.8% of sales, up 7%. Of course, this 7% increase is despite FX impact of EUR 31 million on operating income, EUR 31 million negative, as well as the consolidation of, let's say, expenses from Astute for one quarter of EUR 4 million. In a context of additional investment, as just explained, in R&D for the innovation of the group as well as our sales force. All in, plus 7% operating income. Coming to the operating income to net income. We have this BIOFIRE acquisition-related costs that are stable, that are mainly the purchase price amortization, now stable at EUR 9 million per semester.
Below operating income, net financial expense improved from EUR 13 million last year to EUR 10 million, 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 will detail that in a minute. All in, net income stood at EUR 134 million, up 33%, despite the headwinds that were explained on the foreign exchange. A few details on the tax rate 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 bioMérieux.
bioMérieux decided and executed, actually, in the first half, an extraordinary exceptional contribution to its U.S. pensions plan. We actually 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%. This exceptional one-off had a tax impact favorable of EUR 5 million and 3% of effective tax rate, making the H1 tax rate at 19%. We confirm that for the full year, we expect the effective 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 EUR 37 million 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, actually, we start to build up back the references for the flu as early as June in our inventory. Social payables are due to employee payments, bonus, profit sharing, that are actually made in the first quarter. Mainly seasonal overall. Income tax paid already benefited from the U.S. tax reform with a major decrease to EUR 33 million cash out. CapEx at EUR 104 million 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 install base of instruments with our customers.
The free cash flow, excluding the extraordinary one-off payments on the U.S. pension plan, stood at EUR 89 million for the first half, which is more than double as compared to EUR 39 million last year for the same period. We actually spent, let's say, this free cash flow with this EUR 56 million of pension contribution, EUR 85 million on acquisition, of course, the biggest part of that being Astute acquisition, EUR 40 million on dividends paid in the first half. Overall, an increase in our net debt position from EUR 156 million to EUR 261 million, which still remains a very solid balance sheet with a leverage ratio net debt to EBITDA of 0.5, 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 bioMérieux.
On this page, you can see for different currencies on the first column, exposure on revenues, which was already, let's say, disclosed. As you can see, it's pretty heavily weighted on the U.S. dollar, of course. On the second column, this is, I think, a new information we give you today, the estimated impact of, let's say, 5% FX valuation of EUR against different currencies on the operating income, so let's say the bottom line. This calculation is based on 2017 actuals. Of course, they might vary with our split of profits and, of course, with the currencies themselves. 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&D in the U.S. offsetting the revenue exposure. We are very much exposed to other currencies such as Yuan, Indian Rupee, Korean, Japanese, and Latin American currencies. We hope this can also explain better for you this EUR 31 million impact from FX on operating income in the first half, of which, for example, the 12% change in U.S. dollar impacted by EUR 9 million operating income, or the 12% change in Indian Rupee as compared to EUR impacted operating income by EUR 6 million. To drive from this on the full year, we update our, let's say, our forecast for the full year, to negative EUR 110 million approximately. Of course, this is approximately based on current rates.
Negative EUR 110 million on the top line sales. For operating income, a negative EUR 40 million to EUR 45 million. This is slightly worse than we thought at the beginning of the summer, we included there the major currency crisis of, and some emerging in August, such as Turkey and others. With that, I hand over back to Alexandre.
Thank you, Guillaume. Yes, to conclude, I will mainly send messages in fact that will, based on this strong first H1, we are slightly revising our guidance in terms of sales, to move from 8%-9%, finally to be targeting to be around 9.5%. As mentioned by Guillaume, with an estimated impact of EUR 110 million from Forex. While for the operating income, we now have the target to be between EUR 340 million and EUR 350 million within price and negative impact being between EUR 40 million and EUR 45 million. This also will include the cost of the Astute acquisitions. No change on the tax rate impact and the same guidance for the CapEx. This is final review. We can now open the floor to the questions. Thank you.
If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one to ask a question, and we will pause for a moment to allow everyone an opportunity to signal. 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 PCT so far in Q3, and to what extent the lack of, let's say, worsening trend could have driven your higher organic sales targets 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 would actually say that it's even worse. What is driving the better-than-expected profitability? The last one, still on the EBIT guidance. After this strong H1, your guidance implies a margin deterioration in H2, even once adjusted for the stronger dilutive impact of Astute in the second part of the year.
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 was not perfect. I just want to make sure the first question is, do we see a future deterioration of the immunoassay 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. We are also working on the combination of the sales of PCT also with the one of AKI on the Astute meter. Maybe I will have a better visibility at the end of the year. Volume are increasing, and I would say this is good news, and we monitor prices. Your second question was the one.
What are your drivers to improve the guidance?
Okay. We did a very nice first semester, with 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 February, which has a nice impact for us. I think we also mentioned that we have changed the method thanks to IFRS 15 in the duration of the amortization of our base for 50 basis points impact.
EUR 5 million
For the first semester. We're looking at the guidance for the end of the year. Although we don't believe it is a conservative guidance. We will have the full impact as we had in Q1 this year. We will have to take into consideration the cost of Astute, which were light in the first semester, which will be six months for the second semester. I would say also regarding the spending of our R&D, there's a possibility also maybe to increase the R&D spend compared to the first semester.
Just to make sure I understood, because my point was that even when we adjust for the Astute dilution that you are guiding for the second part of the year, the underlying margin implied by your guidance is declining. You're saying that it would be mainly due to, let's say, a backend loaded R&D cost?
Astute for six months introducing the cost, while it was only two months in the first semester. The fact that no flu impact, so not a booster as it was in the first semester, and also a potential acceleration of R&D spending.
Okay. Thank you.
Yep.
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? Secondly, perhaps just to 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.
It wasn't very clear. Sorry. The second question is on the BioFire profitability.
Yes. I don't think we communicate around this. We always said that margin-wise, profit margin-wise, it's strong and interesting to grow.
Okay. Can you repeat your first question, Bill?
Certainly. The first question has to do with your expectations for the respiratory season in the second half of 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, we don't have an expectation for flu season. In fact, in our plan, we consider it's going to be an average flu season. Usually the flu season starts really by mid-December. You have seen last year, for this year, the impact has mainly been on Q1. We believe that customers will still get prepared for the flu season. 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 or lower.
Okay, got it. Thank you.
Okay, we will take a question from the webcast. I have a question on the amortization. The question is: We have seen a EUR 5 million recalculation of amortization of the installed base. Should we expect another EUR 5 million on H2? Your guidance implies 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 stand on corporate tax by the end of 2018? Maybe Guillaume?
I can repeat this. Thank you, Sylvain. Amortization of installed base, yes, the impact is actually linear. It was EUR 5.4 million in H1. It's going to be the same amount in H2. On the tax rate, just to restate what I mentioned, 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. 25 minus 2, which would be around, it's not a perfect science, around 23% for the full year complete effective tax rate in 2018.
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 a strong flu season, the slight ramp-up in R&D, and the full consolidation of Astute for two quarters in H2 versus one quarter only in H1.
Thank you. Now we will switch back to the questions from the call.
Our next question comes from Maja Pataki from Kepler Cheuvreux. Please go ahead.
Yes. Thank you for taking my questions. I have three as well. First of all, Alexandre, 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? With regards 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's a big difference. The third question is more of a clarification. Did you say that the NEPHROCHECK is already being sold on VIDAS, or did I just not hear that well on the call? Thank you.
Okay. Thank you. Yes. We announced in July that we took a minority stake in a Chinese company called Hybiome. It's a company where we developed all the scanning, also systems in the field of immunoassay. Why doing this? The interest for us and for our customers, I would say it's to better serve also the Chinese market. It's important for us also to invest in R&D and manufacturing in China, because it's important also to have a strong, I would say, R&D and manufacturing base in China. Immunoassays are a very fast-growing market in China. We are going well with VIDAS. The Hybiome platform also is having, I would say, a higher throughput, higher capacity. It's a different technology. It's a chemiluminescent technology.
We felt by investing in this company, we could also think about strengthening our commercial and R&D presence in China. Your third question around the NEPHROCHECK. No, NEPHROCHECK is not on the VIDAS yet. The plan is to put it on the VIDAS product by 2020. Today we sell the Astute test on the Astute meter, which is a single test platform, which was promoted and developed by the Astute company. It's not on VIDAS, it's on another single test platform. Your second question, I don't think I can answer about the different margins between our products, and I'm not sure we communicate around that.
Thank you.
Thank you.
Our next question comes from Michael Ruzicka from Berenberg. Please go ahead.
Yeah. Hi, guys. Thanks for taking my questions. I have two, please. Firstly, when are you expecting the Pneumonia Panel to be approved in the U.S.? Secondly, can you comment at all on the profitability of immunoassay, maybe comparatively to historic profitability in that division? Thanks.
Okay. We did the FDA filing in April for pneumonia. It is tough for me to tell when it is going to be launched. This is in the hands of the FDA. We have, of course, with them back and forth questions. I would like to see the approval before end of the year, but it is not my call. It is FDA call, depending if they have more questions or not. Okay. The second question is around the profitability of the immunoassay. I am not sure we comment specifically on this, but I would say immunoassay is a strategic range for bioMérieux, and we are quite happy with its performance in general.
All right. Thanks.
Yep.
Okay, we will continue with a question from the webcast. Have you had any talks with some labs regarding the QIAstat-Dx QIAGEN machine? If yes, are they considering it as a possible replacement? QIAGEN has a very aggressive communication around the potential success and customer feedbacks on its machine.
Not a lot. In fact, I believe that the QIAstat-Dx is only sold in Europe, because they do not have an FDA approval. We hear about them, but I do not think, to my knowledge, we are not being confronted on a face-to-face, I would say, deal or tender. We know that many people are joining this field of syndromic. On the goal for us, we are so far leading the race, and the goal is to keep on leading this race with investments. We are building on the platforms and through development of new panels. Let us say it is an attractive field.
We'll get back to the question from the call, with a call from Berenberg, I guess.
We will take a follow-up from Michael Ruzicka.
Yeah, just one more from me. Yeah, thanks. Just one more from me, guys. 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. It's just rumors, I think.
All right. Thanks.
Sure.
Okay, now we'll get back to the questions, maybe from the webcast first. Sorry. Maybe guidance. Okay, we already answered this one. We had a question about the update on Palmetto. Do you expect any CMS decision?
We have no news. In fact, no recent news on the front of Palmetto. We are also expecting things to move, no news or no signal that we hear from our side. Knowing that it won't exactly change our strategy. We are also focusing on the HEOR studies promoting the medical value. As we discussed also, we believe that most of our patients are in-patients, they shouldn't be under the umbrella of Palmetto. Wait and see. Now let's get back to the questions from the call.
Our next question comes from Philippa Gardner from Jefferies.
Oh, hi.
Please go ahead.
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 million MRSA tests. 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. It's not a recall of our product. It's since there are some questions and uncertainty about the new strains of MRSA. 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 FDA and also the CDC. 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 next question from the call.
We have another follow-up from Maja Pataki. Please go ahead.
Yes. Thanks. I was wondering, I believe I heard you understand that you're increasingly placing the BIOFIRE FILMARRAY instrument 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? The second question I have is, Accelerate Diagnostics has actually also changed their placement 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? Thank you.
Okay. To your first question, it's more around the commercial policy. Sometimes to do placements, sometimes to sell the instruments. What we see, in fact, that we have quite a good success with the Torch that we have launched, which is for a higher capacity. With a higher capacity means higher test. Sometimes it goes with more placements while you have a reagent rental agreement. It's more of a commercial policy linked to the volume which are at stake. Regarding Accelerate, no, we follow 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 IVD business. I think it's still early days.
Thank you.
Now we will get back to the question from the webcast. Should we expect to see your new Chinese immuno platform recently bought, being registered in Europe or U.S. for cost-efficient reason or throughput reason?
We are just a minority shareholder of this company at this stage. The goal today is to work with them mainly to serve the Chinese market. This is the first intent. Chinese market is growing fast. It's constantly being reshaped between hospital grade 3, grade 2, and grade 1. We felt we would be stronger with the [inaudible] but also with a clear immuno-based platform. Chinese mainly is the first focus.
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. 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.
This concludes today's conference. Thank you for your participation, and you may now disconnect.