Earnings Call: Q2 2021

Aug 6, 2021

Ladies and gentlemen, thank you for standing by. I'm Stuart, your Chorus Call operator. Welcome and thank you for joining the Stratec conference call regarding today's announcement for the First Half twenty twenty one Financial Results Conference Call. Throughout today's recorded presentation, all participants will be in a listen only mode. I I'd now like to turn the conference over to Marcus Wolfinger, CEO of Stratec. Please go ahead. Thank you, Stuart, and Good morning in the United States and good afternoon in Europe, ladies and gentlemen. Welcome to our H1 financial disclosure presentation. Before we start, allow me for some housekeeping statements. You can download this presentation either from our website and during the webcast, certainly from the webcast website. And I think I don't need to walk you through the Safe Harbor statement. That's why I'm diving right away into the presentation. I think it's no surprise that we have split this presentation into 4 major segments and the appendix, obviously. First, I would like to get you an overview of what happened during those 1st 6 months of 2021. And certainly discussing the financial details. And then certainly, I would like to Get you an outlook, which is difficult these days as I think I already mentioned that a couple of times when we talked during the last month. It's Super difficult that the labs don't know what's really happening during those next year. Therefore, our customers don't know and that's why it's definitely super difficult for us to try to derive reliable data from the data we have at this point. In the 1st 6 months, we showed a top line growth of 36% at constant exchange rates, And the growth actually was throughout all the segments, So including smart consumables, which was a little bit in the last year After the acquisition in 2016, it was actually that even during the acquisition, we said that it will take a while until this segment picks up. Now we are showing nice developments here And particularly for 2022 and 2023, we are expecting A lot from this segment as we already had some market launches here, some new market launches and are about to see new market launches of new products. Adjusted EBIT margin improved by 6 170 basis points to an adjusted EBIT margin of 22.1%, very much driven by the product mix. And again, this is not just the product mix within instruments like selling instruments with a higher gross margin. It's actually the mix of the contributing product mix coming from instrument. Instrument comparison, certainly instrument maintenance parts, service parts, consumables comparison, But certainly, as a matter of fact, in the 1st 6 months, the revenue contribution from margin Weak development revenue recognition contributed positively to the margin mix. Certainly scaling effects, We have built the capacities over the last years and this is now showing nice scaling effects. And again, I already mentioned the positive in our Smart Consumer segment. Operating cash flow really boosted by Matter of fact, some of the recognized revenues in development is coming along cash flow free and then certainly the nice Development, particularly top line, is showing nice cash flows as well. Our number of employees grew by About 5%, 1400 in the group in the meantime, we have a very solid Development pipeline, a very solid yield pipeline. So assuming that we can actually materialize On those things in the pipeline, we think one could assume this as a steady headcount growth rate for the periods to come. Again, if we might execute In the order of magnitude like we have with our 3rd molecular program, currently at the end of The development pipeline, probably the headcount growth in percent might be higher. But I think it's a good point To assume about a 5% growth rate here, we after we launched Our CLIA product a couple of months ago. In the meantime, our first customers Brought the product to the market in Q2. This was is a nice market launch. And actually, I think we discussed that in the past a lot that we are expecting a lot from one of the very few, if not today, the only Semi open immunoassay platform where customers Find this as an open immunoassay platform, but can close it with their assays towards the end customers, but can keep it open and share the platform amongst different customers. I think this is actually unique in this space and will LIFT immunoassay, instrumentation, in terms of availability, not only for the Elide Group within the diagnostics, but even for smaller companies, which more or less, their esoteric menu and allowing them to move away from ELISA platforms and get more and more into those immunoassay platforms, from particularly chemiluminescent immunoassays with all those advantages in terms of sensitivity, random access and so on. I think this is actually The beginning of a lineup of customers for this instrument. And I think I mentioned this that several customers are actually in different phases of contracts like evaluation agreements and other agreements leading to such market launch we have seen now in quarter 2 of 2021 for the CLIA instrument. Now moving to the financial review, as you can see all those KPIs and this is actually a comparison of H 1 with quarter 2 of 2020 and 2021. I think with the exception of top line growth, all other Performance indicators and key performance indicator actually further accelerated in quarter 2, which was a little bit Surprising to us, EBITDA up by 71%, EBITDA margin by 6 20 basis points, Certainly, adjusted EBIT by up almost 87%, 6 70 basis points again, leading to growth of the EPS of 105%. So I think, and I'll get to that details When we are talking about our outlook, certainly in quarter 2 sorry, in quarter 3 We will definitely not show this kind of growth rate, although We think it is reasonable to expect some growth even in Q3. And today, the cautious we have put into our guidance is mainly related to quarter 4 of this year. Now talking about sales. As you can see that IH1 sales up by 35% on a constant currency basis, actually on 36% basis, Still very high demand coming from the product groups, which are not exclusively relevant to COVID-nineteen testing, But where COVID-nineteen tests are running on those instruments among others certainly And today, this is certainly the point where we are looking into the assay mix coming from our customers and running on those instruments and actually some of our customers are actually already reporting very solid growth rates Of the test in their menu ex COVID, which is actually A very nice development because this means for us that our customers are utilizing the capacities built during those last 18 months, which is helping us certainly in terms of maintenance parts that those instruments and the capacities are utilized. Therefore, Certainly, the instruments are seeing maintenance service and are utilized in terms of that consumables are running over those instruments. And secondly, Certainly, that we don't have to expect high warehousing I think those instruments we are shipping these sites are actually right away ending up in the relevant laboratories. We see a very healthy recovery in routine testing applications and therefore even our instruments, Which haven't seen those tailwinds during COVID-nineteen are actually seeing nice developments like in hematology or like in immune hematology. But certainly, other instruments like in chemiluminesis immunoassays or like in our Other businesses are seeing nice developments. So this is actually something where we are not complaining at all about That predominant development of instruments, which Where the actual run rates are linked to COVID-nineteen test is showing that. And as you certainly are aware of the fact That in the meantime, in certain countries, COVID-nineteen testing is going up again because of higher incidences and governmental measures, Well, we actually should see some additional demand coming from that angle as well. And then certainly, We have a growth contribution from our newly launched products. Certainly, at this point, not super meaningful, but we are actually expecting a lot and We discussed that a lot in the past. Do we have to expect a dip? And we actually believe that although we grew faster than expected in H1 and at the end of last year that driven by the growth with the new instruments and the recovery that if we did, such dip might actually be a minor one. Now discussing the sales by operational divisions, as you can see on the system level, We grew by almost 44% service parts and consumables and here we had a Meaningful back order situation at the end of Q2. So I think if we look into the breakdown after 9 months or on a full year We believe that the contribution will come from that angle. Development underrepresented in H1, But as we have mentioned in our report, in our press release and in the H1 report, we are actually expecting that Development revenues recognition will pick up in the second half of the year. As you can see on the right hand side of that slide that systems are actually slightly overrepresented, but very much driven by the Weaker development and service activities, and I think it's worth mentioning that this has nothing to do with the actual performance of our development department. This is all about IFRS 15 and revenue recognition. Service parts and consumables, we would expect a nice pickup here towards The end of this year, which is partly real and partly nominal from a weaker contribution as we will not show those high growth rates we saw in H1 coming from instrument. Adjusted EBIT margin and EBIT margin Task discussion, H1 EBIT is up by about EBIT margin now coming to 22.1%. This represents a margin expansion of about 6 70 basis points. All the effects discussed are actually providing some nice tailwinds. We don't have a headwind effect here, which makes it certainly unique. So I think nobody would actually expect us that we can continue with this high EBIT margin because other elements will kick in. We have certainly economies of scale, certain instruments with super high outputs are definitely helping us to combine manufacturing and procurement activities, although it's getting more and more difficulties with The shortening of certain commodities, this is becoming a real challenge for us. Actually, today, we perceive this as a higher challenge than What we perceived at the beginning of the COVID crisis, where certain commodities have no longer been available, we are seeing similar situation, but even worse than it used to be the case. Positive product mix contribution, super positive coming from our efficiency enhancements, particularly High volumes of complex modules to be assembled in our own manufacturing side and other measures we have introduced back in 2018. And then certainly, the lower burden from stock appreciation rights contributing positively to the EBIT and EBIT margin as well. Coming to second performance, Certainly, our instrumentation performance in line with the group's performance, sales 36%, whereas in smart consumables sales up by 65% and in diatron by 27%. So I think All the segments way higher than budget and actually same performance Across all the segments, it's actually showing a nice trend and the work which has been done by the relevant responsible people within the group. Adjusted EBIT within instruments higher Then within diatron, adjusted EBIT margin can be compared as it was negative after 6 months in 2020. Cash flow, I mentioned that at the beginning, super strong cash flows from operating dynamics, Despite the fact that we have to invest a lot of money into inventory just to make sure that we are able to supply our customers with product. So we were actually almost 4th, I would say, to bunker certain commodities and very, very reliable suppliers where we are working now for years Actually are showing the same difficulties than everybody. It's not only talking about electronics and steel. It's even commodities Like wood, probably you know that we are creating our instruments in wooden crate and so on. So it's really Throughout all our commodities, we are seeing difficulties and it didn't only happen once in H1 that we couldn't ship instruments For a certain period of time and certain kinds of instruments because certain subcomponents haven't been available at the time. And when they were available. Our manufacturing department did a terrific job allowing the company to pick up and to catch up in terms of revenues and in terms of demand coming from our customers. Long story short, nice development and cash position. That's what we actually expect from such a nice top line development. Now the outlook, and I think here we have to talk about The basis of that outlook, we said, and this is actually and we have to really I reiterate ourselves when we say this is an at least top line outlook. On a constant currency sales basis, we are expecting growth of at least 12% adjusted EBIT margin should be between 17.5% An 18.5 percent investment as you saw, way lower than in the previous year. And I think it's really important to understand that this guidance is actually based on a number of Planning set ups and the scenario, which assumes that the vaccines available at this point We'll remain highly effective against the current virus mutations and newer virus mutations and that we don't see any further big waves in North America and Europe. I think it's obvious that there is it's not only a discussion actually, Some scientists already derived from the data available today that there is and there are new waves at the horizon. But like I mentioned, Our planning scenario have to place to be based on something and the current planning scenario are based on the fact of no new wave. Further, what we did is to be on the safe side, And it's actually important to understand as well. Particularly for quarter 4, we actually which is actually based on very volatile information coming from our customers. In terms of forecast and updated forecast and orders and updated orders and higher orders and even increased orders, that certain orders, Particularly for quarter 4 are still not incorporated in the financial guidance. Normally, at this point, we wouldn't do that. But like what I said before, higher volatilities and we want to act on the safe side. That's why certain orders haven't been put in the guidance. And I mentioned that A couple of times, I think it is important to understand. David, some of our customers requesting us, although they have placed orders for Q4, if they are requesting us To move orders into Q1, we would certainly be in a position to discuss that. We want to be a reliable and predictable partners with our customers and certainly wouldn't ship anything just filling the warehouses of our customers and actually Cheaperdizing as a consequence of that quarter 1 sales because certainly our customers would either buy instruments and warehouse them in Q4 or in Q1. And that's why we want to keep the flexibility towards our customers and certainly As a derivative of that, we want to keep this flexibility in our guidance as well. And That's why we put the guidance as it stands today. Certainly, as a focus, there are 2 things which are super important for us. We are, I think, from a demand perspective, at the very tail end of the actual demand driven by patients and then in the first derivatives driven by the laboratory, second derivatives driven by our customers, with the diagnostic suppliers. And then as a third derivative driven by us, and we need to manage that transition to post pandemic priorities, not let me say all available resources to be put From a manufacturing perspective, but even from a development perspective to be put into COVID-nineteen activities, but certainly getting The people within this company are getting reprioritized to the priorities In order to make the market launches, we have guarantee to our customers in order to get the customers on board. And certainly, this means that the Efficiency drain we saw during COVID very much driven by home office and a lack of communication and other things we need to restore pre pandemic efficiencies, particularly in terms of communication and particularly In terms of finding that nice lineup of projects and the future projects is super important for us. Certainly, the focus on potential M and A activities, which is not only in light of and the upcoming opportunities. So we have a couple of ideas. And I think it's again worth mentioning that even Based on the fact that we didn't do any M and A during the last 4 years, it doesn't necessarily mean that we were sitting idle. We looked into opportunities and we continue to look into opportunities. Last but not least, Certainly, one of the biggest development programs we saw over the past years, which Actually has the chance to pick up and to catch up in terms of sales into the area where our 2 big manufacturing and supply partnerships From a revenue perspective, and we have to see that design freeze happened, Validation began and so on. So this is actually in its last step towards market launch, and That's why we are expecting a nice manufacturing ramp up at the beginning of 'twenty two and certainly then more towards the end of 'twenty two placement through the customer of those instruments. This gets me To the end of the presentation, ladies and gentlemen, and I would like to hand back the word to Stuart, who will explain us How we could start with the question and answer session. Thank you so far. Ladies and gentlemen, at this time, we'll begin the question and answer session. First question is from the line of Oliver Metzger from ODDO BHF. Please go ahead. Hi, good afternoon. This is Oliver speaking. I have three questions, if I may. The first one is on your guidance, and I don't want to annoy you with this question about the second half. But I just tried to get even a higher understanding. So given your achieved 36% increase in the first half and now with your increased guidance of a minimum of 12%. Basically, I want to understand how you derive this number. So currently, if I just do the math, the guidance would direct to H2 decline of around 10% at the minimum level. Now basically, we are in the beginning of August, so roughly 1.6% of the second half is already done. And you also mentioned in your prepared remarks The expected pickup of development revenue recognition. So the question is, how did you arrive to the number of at least 12%. For me, it looks like that basically you have not factored in Any revenues for the last quarter that you still are able to reach the lower end of the guidance? That's the first question. The second question is on your smart consumable business, where you basically reached Pretty high growth of 65% in the first half. So within this strong growth, is there any positive One off effect related to the growth or do you regard this positive development as basically the sustainable Improvement of the underlying growth potential of the business for which you have targeted already over the last quarters or basically Yes. And the last one is, I think, a quite quick one. It's for the CLIA platform. You mentioned it can be shared to other customers. Could Can you explain to us how this sharing model works in reality, please? Yes. Thanks, Oliver. Let me talk about the guidance first. I think it is super important for me To make the point again that we have given an at least guidance, but you are absolutely right. The bottom end suggests revenue decline in the high single, low double digit percentage range for the second half of the year. The reason I have already mentioned is that we are still observing super high Volatility is in regards to the pandemic development and as a result in the order behavior of our customers as well. While the visibility for the 3rd quarter It's improving as we speak. We have decided to Take a super cautious stance, particularly as the Q4 let me say, when the Q4 is concerned. At this stage And assuming the points I've just mentioned like No big additional waste in North America, efficient vaccination and so on. So assuming all those points, We currently can and do not rule out that some customers might Want to take, like I said before, lower volumes of systems than they have currently ordered or indicated or forecast Or anything alike in this Q4. In addition, we do not No, exactly the inventory levels of our customers. For some of those customers at least, Particularly for service parts and spare parts because this is always super difficult because typically those parts are actually warehouse Decentralized, whereas instruments, it's a bit easier because they are typically warehouse centralized. So We also cannot rule out that we might see some, let me say, temporary dip, as mentioned before. In this business line, few potential destocking effects, if we would really transition into a significantly lower COVID-nineteen environment. And if you ask for my personal opinion, I would say we are not actually facing that scenario, but it's factored in as a matter of fact. That's we decided to choose a super cautious approach as we also certainly Want to grade our I would actually say it's better to say that we want to allow our customers A flexible a more flexible than usual environment where they can Shift some orders back and forth. And on top of that, the demand It's certainly we shouldn't expect the uncertainties coming from the global supply chains, which are Obviously affecting us all. Margin wise, I think long story short, We could actually say that if we have a better than expected Top line performance. It is certainly reasonable to assume a way better Bottom line performance as well and actually the same thing applies. I think it is reasonable to at this point and as far as we can see to assume a certain growth rate even in quarter 3. So we have to definitely revisit the situation after Q3. Now getting to the question, How sustainable is the growth in our smart consumables segment? As mentioned, the team in Austria and the management in Australia did a terrific job Moving away from the high volatilities provided by early stage customers with smaller revenues Maruhu moving the company and the consumables provided into the, let me say, blue chip segment, where the revenues generated per customer is certainly higher. Therefore, the upfront investments and The way how demanding those customers are is certainly way higher than vice versa. That's why I'm far away from promising that the current development is super, super sustainable, But we are getting away from a highly volatile environment into a more sustainable environment. And we believe and I mentioned that a couple of times and I want to reiterate myself here that if we look into the refuel Miro, in a couple of years from now, we'll definitely see that the activities we undertook in the smart consumables Segment are paying dividend. We have this bigger order where we are transferring Everything into a serious manufacturing environment for our next generation molecular program with 1 of the market leaders. We brought mass spec applications to the market, even our existing clients in the blue chip segments are outperforming the So all in all, I would say it's getting more and more sustainable and more and more reliable in terms of That in year 1, customer 1 is strong and in year 2, customer 1 is weak and the other way around for customer 2. I think The long term trends are getting sustainable. Clear instrument, getting to your third question, is actually designed to run on a number of different kinds of chemistry in terms of labeling, which is something which is needed in immunoassays, which means theoretically such an instrument could be Bought by customer A and they put parts of the menu on the instrument, But in parallel, if validated by the second customer, customer 1 could through Software measures on the instrument allowing another partner probably supplementing the menu to run the 2nd partner chemistry on the very same instrument, helping, 1st of all, certainly financing of the instrument utilization and definitely helping in the sales of such an instrument is from an end customer perspective, The overall perception of the menu on such an instrument might look more comprehensive. We don't have that set up yet, But it's definitely a feasible one. I hope that answers the question, even taking or pulling up an example. And actually, I think we can now take further questions. Yes, absolutely. Thank you very much. Next question is from the line of Jan Koch from Deutsche Bank. Please go ahead. Hi, Markus. Thanks for taking my questions. I would like to start by coming back to your comments on 2022. You mentioned that we shouldn't expect significant dip next year, but this only applies to the top line, I assume. What are your expectations for earnings given most likely a less favorable product mix? I know it's quite early, But any color here would be appreciated. And then secondly, on your pipeline, You mentioned that you expect to launch numerous significant projects over the coming months. Can you elaborate on this and maybe speak a bit about the potential of these systems. And then finally, in relation to this, I noticed that you slightly changed your wording and I now expect the large molecular project to launch in the first half of twenty twenty two. And I believe on the last conference Call, you actually mentioned early 2022. Are there specific reasons which are delaying the launch? Or are you just cautious? Thanks. Yes, Jan, thanks very much for your questions. Actually, it is indeed early, Very early to discuss, 2022, particularly in the light of the comp effect We will definitely see. I'm not only talking about the comp effect for Q1 and Q2, Assuming a better than expected performance in Q3 and Q4 would automatically move the comp for 2022 as well. Then certainly, it is super difficult For us to split between the revenues coming from COVID-nineteen and those ones not coming from COVID-nineteen. I know you are used to get that number from some of our customers that they distinguish or that they are actually able to distinguish between COVID-nineteen related and non COVID-nineteen related products. For us, this is a difficult story. As you know, some of our systems Actually, all our systems do not only perform COVID-nineteen test, But can perform several and a variety of tests, in some cases, actually, about 150 or more tests from HIV, TB, vitamin D and we don't know the performance of those other tests on the instrument. That's why it is so super difficult for us. And actually, again, I'm getting back to a statement I already made in the course of that call, Certainly, our customers are reprioritizing Their resources as well, and we don't know how fast this is going to happen, which is again certainly The outcome of the COVID-nineteen testing demand of the next month and of the next quarter. So, it's all a statement being based on assumptions, being based on assumptions, being based on assumptions. Like at this point, I'm in a position, So and I think that's important to understand. We will certainly not get the 20 something percent EBIT margin throughout the year 2020. But as mentioned before, in 2018 2019, we built the resources. And definitely today, Part of the positive margin development is based upon the utilization of those higher resources, which haven't been fully utilized in 'eighteen and 'nineteen and led to margin weaknesses During those years, so I think it's fair to assume, I wouldn't say margin progression, But nice margins compared to the data we have shown in 2018 2019. Particularly in terms of the change of wording is that certainly I said our customers are typically working on those plans. So when do we see those relevant milestones that an initial milestone plan says, milestone X might happen in quarter 1. And then certainly as we are getting more data and are getting closer to that Q1, it's obvious that the project teams We are discussing does this mean in February or does this mean in March 31. And I think it's just A statement which is based upon more precise data we have in the meantime and better reference points rather than any Further delays. And I think it's only fair to say that the date of market launch has been moved several times in the course of the development program. And we were transparent enough towards the financial markets to move the expectations and manage the expectations coming from that product along with The delayed market launch. I'm always I'm typically saying we don't do rocket science, but we are doing fairly complex interactive things where Physics and Technology and Techniques are meeting biochemistry, where often iterations are concerned and I'm certainly doing everything to keep track as far as the milestone planning is concerned, but it is not always possible. I hope that answers your question. It does. Thanks. Very welcome. Next question is from the line of Priya Patel from Berenberg. Please go ahead. Hi. This is Priya dialing in for Scott. Just have two questions. So firstly, can you give some sense on how your standard instrument install base will translate into spare parts and consumables. And secondly, profitability is currently running at good levels. How much of this is sustainable? Thank you. Priya, can you kindly repeat your second question? So profitability is running at good levels Currently, I'm just wondering how much of this is sustainable? Okay, got it. So If I understood it correctly, the question 1 was about How is the growth of the installed base transferring into the growth with maintenance parts and spare parts and consumables. I was trying to answer that in the course Of my speech and in some of the questions is that it is actually super hard to tackle it. We saw Super nice development in the relevant quarters 1 of 2020 2021. Then we had a super high back order situation, unsatisfying actually. At the end of Q2 of 2021. So one should expect that if The utilization of the equipment, which has been sold in the course of the pandemic crisis, is leading to a higher degree of utilization of the equipment in the future and in so far leading to higher demand regarding maintenance parts, service parts, to a certain degree consumables and certainly repairs. Additionally, we have to see that certainly some of our customers focused with the activities of their field service engineers more into new instrument placements rather than and maintenance, which means maintenance has been pushed out to the edge. Last but not least, It's certainly important to understand that we have very low transparency and visibility regarding The inventories for service part, maintenance part and consumables within our customers, as mentioned, they are Warehouse decentralized, so very few of those parts handled through a centralized warehouse, a global centralized warehouse, A lot of things actually warehoused in the relevant countries where our customers are working in. So to tackle that It's super complicated. My gut feeling says to me that towards the end of this year And particularly in 2021, we have the good chance that, let me say, if the growth of revenues is slightly smaller And our customers are more moving back into more like degrees of utilization, which are perceived as healthy, Like between 50% 70% and not 100%, that we may see a nice pickup for spares, for maintenance parts and certainly to a certain degree of consumables as well. But this is not underlied By reliable available data, this is just a result of the outcome of the discussions we have with our customers today. We would perceive the overall development, particularly derived from our pipeline and from our new instrument that's a very sustainable one. So I'm not actually really worried about a high degree of lumpiness here. Thank you. You're very welcome. There are no further questions at this time. And I would like to hand Back to Marcus Wolfinger for closing comments. Please go ahead. Super Stuart, thanks very much. Ladies and gentlemen, this gets us to the end of our H1 financial presentation. I actually hope to We'll be able to meet you all in person very soon. By then, please stay safe and stay healthy. Have a good day and thanks again. Bye bye. Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.