Good morning, ladies and gentlemen, thank you for standing by, welcome to the Vitrolife Report on Operations 2017 call. At this time, all participants are in a listen-only mode. There will be a presentation, followed by the question-and-answer session, at which time, if you have questions, you will need to press star and one on your telephone keypad. I must advise you that this conference is being recorded today, Thursday, February 8, 2018. I would now like to hand the conference over to your speaker today, Mr. Thomas Axelsson. Please go ahead, sir.
Welcome to Vitrolife, the Report on Operations 2017. Today, the speaker is going to be Mikael Engblom, the CFO, and myself, Thomas Axelsson, the CEO of Vitrolife. Please go to page number two, we will look on the summary for quarter four and also for the full year 2017. It was a strong year, 2017, there are a lot of similarities between the last quarter and what happened during the full year. We had a good growth. The sales growth was 22% in local currency for the full year, the sales growth for the last quarter was 11% in local currency. We are continuing our growth also in profitability, the EBITDA and the margin for that was 38% for both the quarter and the full year.
The sales for the last quarter was SEK 271 million, and it is equals to 7%-8% in Swedish krona. During the full year and also during the quarter, we have had good demand of the EmbryoScope and EmbryoScope+. If we go into what has happened more in detail, it come in the next coming pages, but I would like to say that two things that I would like to report upon after the closing date is that one thing is that we have done acquisition of the license rights to Embryo Cath. We have done that since we have communicated that we are doing product development and also acquisitions for filling up our product portfolio. One thing that we've been missing in our product offering is an EmbryoCath.
There is still a couple of years before we are coming to a full launch of the product. It is CE marked, and we also have an FDA approval on it. Our ambition is to transform this into an upscaling activity, so we can get good COGS and also have a worldwide introduction of this product within the next coming years. What can be shown quicker within our sales the next coming quarter and years is the positive news that we have got the market approval for EmbryoScope in China. We will come back to EmbryoScope later on and what has happened. Please turn to page number three. Let's start about the business units, and we can continue with Time-lapse, since EmbryoScope is within that business unit.
The Time-lapse, this quarter, they had a growth of 43% and was selling for SEK 79 million. We can see that the same trend that has been going on for, let's say, the last four or five quarters are continuing, and that is that EmbryoScope and EmbryoScope+ is starting to be in some markets, the standard product. It is at larger clinics, mainly, where they are purchasing the EmbryoScope+. The reason that we can see in the good growth that is coming in mature and larger clinics is that EmbryoScope+ is for sure helping the clinic in their workflow. The clinics, if they look upon their expenses, around 40% of the total cost in running an IVF clinic is about labor.
EmbryoScope+ can, due to the workflow, help the clinics to be more efficient in setting up the workflow, and of course, also that it does better culturing condition. We have not seen anything regarding Time-lapse sales in this quarter to, or from EmbryoScope to China, due to that the approval was coming first this year. Another area is our ART equipment. When we bought the German OCTAX, it was a mix between their own products, laser equipment mainly, and also distributor products. We are continuing our work in focusing on our own product line. What we're doing there is that we have an efficiency program. We are working with the regulatory activities for China and for U.S., the FDA approval.
The sales went down with 15%, and it was SEK 17 million. When we are dealing with capital goods, it can be a fluctuation between the different quarters. The disposable devices was also a business unit with a decline compared to last year. It was declined with 1%, and the sales number was SEK 35 million. I want to explain a little bit why that has happened. As discussed before, or that we informed the market about, is that we have launched a new product line of needles. In our effort to introduce the new product line that has been very well accepted by the market, we are running two production line within one facility, where our ambition is only to have one product line within this year.
Two lines has put some constraints on the production, and we have two lines due to that we are waiting on some regulatory approvals, and therefore, we need to continue with our older version on our oocyte needles. As I said, our delivery plan, and due to the regulatory approvals and our launches, we will have only one line running after this summer. On the pipettes, we have also done some investments, and that is to increase the capacity. We have continued to do the automation line and with more robots, and the reason is that we want to increase the output and get some scalability from the disposable devices. That is in line with our ambition and what we have done for the Time-lapse and for the need.
It is with more sales, we are going to increase the profitability. Due to that, unfortunately, we have had some delivery problem, delivery issues in quarter four. Media, it is growing 6%. It is still our main business, and it is the sales of SEK 135 million. It is continue growing, and it is within the market growth. Please go to page four, and we can see, and I would like to discuss about some of the market regions. It is a quarter where the mature markets has been going well, and mature markets, if we then are saying that that is the Japanese market, it is the Pacific, it is United States, it is some parts of Europe. In all those markets, the growth has been quite good.
It's been a strong quarter in the EMEA market, Europe then especially. It's been a growth of 12%, and the sales is 128 million SEK. It is Spain, Turkey, UK, Germany, Scandinavia, Russia, all of those markets has gone well. We are not seeing that kind of growth in Middle East, and part of Africa. Those numbers are in some markets negative, but it is still very good growth in our mature markets. The Asian Pacific market, it's growth of 13%. It is Japan that are continuing showing a very good growth, where it is a combination of time-lapse and of our media line. In China, we saw a decrease in sales.
The major reason for that decrease is that a year ago, five quarters ago, we started to do clinical trials in China for getting the approvals. Currently, when we have informed the customers that we are waiting on approval on the EmbryoScope, customers are, they don't need to go into clinical trials together with us, so they are waiting on the approvals. Quarter four has been a quarter in China with hardly not any sales on time-lapse, that is impacting the Chinese numbers. Americas growth is 6%. It is in line with the market, there is the same kind of trend that we have discussed about before, that is that the U.S. is growing a little bit more, South America is having less growth.
By that, I would like to hand over, page number five to Mikael.
Yes, some comments on the fourth quarter and full year numbers. Gross margin was 64% compared to 67% in the fourth quarter last year, and the drop in gross margins was due to negative currencies, as well as a lower proportion of media sales, which then becomes negative in terms of product mix for Vitrolife. Looking at the adjusted gross margin, if we exclude the amortization of acquisition-related intangible assets, we were down from 71% to 68%. If we then look on the EBITDA margin, it was flat compared to last year. The drop in gross margins was compensated by less OpEx in relation to sales. That is primarily due to economies of scale in the OpEx.
Net debt in relation to EBITDA was - 1. We have a substantial cash balance at the end of the year, and the goal is to invest the available cash into value-adding acquisitions. Looking at the full year numbers, the gross margin was 65% compared to 66% last year. If we adjust for the amortizations, it was 69%, flat compared to last year. What has happened this year is that we've seen positive effects of economies of scale and the fact that we've improved our profitability within the time-lapse and within the business unit ART because of product mix and increased sales. On the other hand, we have a negative effect of that we have had relative less sales on media.
The media proportion of sales has declined as being the most profitable business unit. We've also added the acquisition of OCTAX and MTG, which has deteriorated the gross margin. Overall, the margin is then flat from a gross margin perspective. EBITDA margin increased from 35% to 39%, the reason for that is the operating expenses, economies of scale, together with the fact that we had some one-time expenses during 2016 related to the Time-lapse consolidation. We had a negative effect of currencies in the fourth quarter of SEK 5 million, after the closing day, the board proposed a dividend of 3.70 SEK per share, compared to 2.60 SEK last year. With that, turn to page six, about the outlook.
We will, as previously, forecast a market growth long term of 5%-10% if we look in monetary terms. As before, the market is growing due to the growing middle class, that parents are waiting longer to have children, and there is an increased social acceptance with for IVF, and there is an increased use of technology in the IVF markets. Vitrolife, we target to expand the sales. We do see opportunities in all our market regions and business units. For example, as Thomas mentioned before on the Time-lapse opportunity in China, following the approval of EmbryoScope. We also target to continue to broaden our product offering, for example, through product development. We have programs working with improved media system and selection tools for Time-lapse.
We have also, as Thomas mentioned, product development projects, now with, EmbryoCath. We look to expand our product offering through acquisitions, we are searching the market for that. With that, operator, we are ready to take questions.
Thank you, ladies and gentlemen. We will now begin the question-and-answer session. As a reminder, if you have questions, please press star one on your telephone keypad and wait for your name to be announced. Once again, if you have questions, just press star one on your telephone keypad, if you wish to cancel your request, just press the hask key. Thank you. First question comes from the line of Patrick Ling. Your line is open. Please go ahead.
Yes, good morning, guys. A few questions for me, please, if I may. First of all, could you address a little bit more in detail, the divestments that you're doing within ART equipment and third-party products, how much that actually affected this quarter and what we should be looking for going forward into 2018?
Yes. I mean, what we have done is that we have reviewed the product portfolio and looked into what kind of products that we believe can generate growth for the future. Our target products are the products that our OCTAX have developed internally, which is also the products that have the largest gross margin. During the year, sales for the OCTAX product range, as that is the laser primarily, has increased, and we have reduced sales for products that were distributed for other manufacturers at a low gross margin. There has been an internal shift within the business unit ART. Going forward, we continue to target to grow the OCTAX product range, which is the more profitable range.
Just remind me, I mean, if I remember correctly, I mean, you have talked about this before, and the way you explain it now, it sounds like this has been a process that's been going on for a large part of the year. I can't really remember that we've seen such large swings, negative swings in sales for ART equipment during the first three quarters of the year. Is there anything special that has happened this quarter, or is it that you just firmly terminated a few product lines?
No, I mean, this, as you mentioned, it has been going on for the whole year, this revision of the product portfolio. As also as Thomas mentioned in his presentation, the sale of the capital goods, they vary also between quarters, so that is also an effect.
It's - 15% in ART. Is that more of a volatility issue, or is it something that we should expect going forward as well? That's really what I want to find out.
Yes. I mean, it is a combination of decreased sales for some products that was distributed and a volatility effect. We don't do any detailed forecasts on the business unit ART going forward.
Okay. If we switch to media sales, I mean, you had 6% growth in local currencies in this quarter, if I remember correctly, this is the lowest growth you've had in local currency since first quarter 2015, where it was only 3%. Can you give us some more flavor of what is happening within media? Because just as you said, that is one of the higher margin areas for you. Is there anything structural going on? Do you see increased competition, or what is driving this fluctuation in?
It isn't anything particularly. It is still growth in cycles in China. It is going down, so I, we still do believe that we are taking some market shares in China. There has been some price erosions on, in centers where are more cost-oriented. That is in the Middle East, for instance. It's been some centers in Europe. Overall, it is a good growth, 6%, and we don't see any trend shifts, Patrick.
Okay. I mean, you have been guiding for an underlying market growth of 5%-10% in monetary terms, for quite some time, and at the same time, you have talked about the company, Vitrolife, should be growing 20% per year, and you definitely did that for the full year, 2017. Is that something that you would stand behind going forward as well, that you will grow 20%?
Yes. I mean, if you look upon the numbers historically and what we are doing, we have always said it is a combination of organic growth and acquisitions. In full year, you know, was 22% in local currency and 19% in organic growth. Part of the organic growth, you know, is coming from you acquire something, and then you do changes, and then after five quarters, it is becoming, it's beginning to be organic growth, and also through product development. We are continuing that race, and what Mikael said in his explanation on what we believe, what we can do on the product development side, and also on a couple of acquisitions, that is for sure our ambition. We are not doing any different guiding.
Okay, great. Last question about this, the rights that you acquired to EmbryoCath. You said that this product is both CE marked and FDA approved already, but still, it's gonna be a gradual ramp-up, and you're gonna do some additional development here. Could you elaborate a little bit on, first of all, what you're gonna do, and secondly, how much you expect to invest in a product like this? If you could have this as some sort of role model for maybe future acquisitions?
Yeah. It's a very good question, Patrick, because it is in line with what we have said before, is that our ambition is to invest in products or in areas where we believe that with new therapies or with new products, there can be some changes. The catheter business itself has been a very stable business for many years, and it hasn't been so many improvement or changes. We have been looking around for many years in trying to find something that we believe can improve the clinical outcome. What we have done is that, and it is an unusual situation, that the product has a CE mark and FDA, and it is not fully, let's say, ready for a complete launch.
What's good with this, is that, in this case, we can go out, and we can do, go through the work on doing, clinical trials without needing an official clinical trial protocol. We can work with customers in Europe, we can work with customers in the U.S., in finding out, a couple of small changes that hopefully will give us a more competitive product. In ramping up, the current production is done partly in the U.S. and partly in China.
We are looking into that, and with some of the changes that we do believe that we will put into this product due to new customer feedback, our ambition is to put the production of this product into a facility that can be ramping up with very decent costs.
Okay. Great. Good. Thank you very much, guys. Thank you.
You bet.
Thank you. Your next question comes from the line of Christian Rehnberg from Danske Bank. Your line is open. Please go ahead.
Yes, good morning. I also like to focus a bit on the declining growth rates in Q4. Should we see this as the growth rate in the, in your company is going down, or is it more or less, just something, in this quarter here?
I am trying to listen into what you are saying and understand your question. We are having a growth rate currently, as we're saying, about 11% in local currency. We are having a growth rate on Time-lapse with 43%, and we are growing the media with 6%, the full year more than our guiding. Yes, we will see quarters that are better. We will see quarters that are good as this quarter. We have been guiding about that we will do more than 10%, hopefully, in organic growth. The rest will come in acquisitions and also product development. We are talking about this always in a period of over three years.
This is in line with, what we believe that we will continue to actually perform.
It's just when I look at over the quarters, this for 2017, that you have a decline in all growth rates, more or less, in the fourth quarter. Of course, that's something that you can't avoid to have a look at. You had very strong growth, and now it's going down in all the areas or in all segments.
Yes, yes.
You are saying that it's more or less, yeah, it can happen in a quarter. It's not a trend.
I'm trying to understand your question. You are concerned about that this quarter is a little bit less than the earlier quarters this year.
Yes.
They are in line if you look upon the quarterly growth over a couple of years.
Mm-hmm.
I'm trying to look upon this as an long-term business, where we do some introductions. We are having a local growth, local currency growth that is more than 10%. I do think it is still a good quarter.
Yeah, it's a good quarter, but it's, you know, as an investor, you also look at the momentum in the business, and it seems like
I can understand that.
Yeah, it seems like it's slowing down. That's more or less my question, if that's a correct observation.
Yeah, I mean, one comment that is worth noting is that, we are having a year now with great Time-lapse sales, and that has impacted the organic sales growth to large extension.
Mm-hmm.
We have also launched the EmbryoScope+ during 2017. Of course, that, when we launched the EmbryoScope+ in the fourth quarter 2016, we're now comparing to a quarter where we have launched the sales of the Time-lapse. Of course, that's the Time-lapse sales has been very important to the overall high growth rate, the organic growth rate during 2017.
Okay, let's continue with that then, because you said that you had no sales in China, in the fourth quarter, and now you have a approval of time-lapse. When will we see sales from China kicking in your sales here?
Well, since it is approved this quarter, we are expecting sales already in this quarter.
Okay. I expect the Chinese market will also be one of the biggest in some time as for your business in general.
There, China market is divided up, as you know, in quite a few enormous clinics if we compare with other clinics. You have a couple of mid-sized clinics. There, I do expect that it's going to be a good market. Our EmbryoScope+, that Mikael just said, has been part of the big growth in mature clinics in Western Europe and in Japan. We believe that that product will be approved in 2019. Christian, yes, of course, we have some expectations on the Time-lapse growth in China, yes, for sure.
Okay, thank you. On your CapEx, it has been extremely low, now you are investing in new capacity. What should we expect on this for 2018? Will it be substantially higher or...?
Well, it is. We've had a couple of years with lower investments, it is correct. We, when we did the EmbryoScope+, we capitalized that development cost. A couple of years ago, we had some higher investments in capitalized development costs. We have not done that to any large extent this year. Going forward, we do expect more investments in product development, as we have announced before, and some of those will be done as capitalized development costs, and there will also be some tangible investments. We are expecting investments to increase, but we don't expect it to be any dramatic or huge increases in the investments.
Is it from SEK 10 million-SEK 30 million or whatever in tangible assets, or what number could we expect?
Yes, I mean, we typically do not guide any specific numbers, so I cannot do that. Over a long period, I would say that we have typically been investing around 2% of our sales in CapEx.
Yeah. Okay. You have had a very good improvement in your margins, also because of leverage in the business model. I have asked you about this question before, but still, do you think there's more to come here, or can you still.
Yeah, we have been, I mean, we have been saying that we do not see any huge improvements in margin development going forward. We have seen a small deterioration in the gross margins as I mentioned before, mostly related to product mix. We have, on the other hand, seen some improvements on the operating expenses, as you allude to. I do not think we should have any expectations on, you know, further improvement in overall EBITDA margin. I mean, of course, we work with different initiatives to improve margins all the time, but I don't think there should be any big expectations in that direction.
Okay. Lastly, you have a lot of money on your balance sheet, and you're also saying you want to do more M&As. Should we expect some substantials here in the near term or in 2018?
Christian, it's, yes, you've asked it before, and I will give the same kind of answer. My answer is a little bit boring, that just because we have some money in the bank, we don't want to use it foolishly. It.
Hopefully not.
The board's direction to the management and how we're working together with the board is that we are continuous looking on opportunities, and we still think there is opportunities. Otherwise, I do think that the board should have recommended a more dividends. Hopefully that is an answer.
Okay. Thank you. That's all for me. Thank you.
Thank you.
Thank you. Would you like to take another question? We still have questions on the line.
Yes, please.
Your next question comes from the line of Magnus Råman. Your line is from Nyhetsbyrån Direkt. Your line is open. Please go ahead.
Thanks. My questions were partly answered, but I will try to put them in a little bit different directions. About the cash you have now, and you want to do acquisitions. Let's say you don't find any major acquisition during 2018, would you then consider to, like, put on, like, extra dividend in that case? How much cash can you have in your in the bank without, like, doing anything? Secondly, I wanted to talk about product capacity and investments you're doing there. For the business of disposable devices, should we expect continued pressure then until this is solved?
You're saying that it will be resolved during spring. Is it fair to assume that you would have a pressure on the disposable devices until second quarter this year?
To be divide up the two questions then, in production and back orders in disposable devices, and then how will we use some of the cash that we currently have inside the bank. If I will start with the disposable devices, I don't expect that we will have any major constraints on the production side. We had some back orders in Q4. That was definitely not good. We have been discussing with customers and some of the distributors, and Let's say, the biggest constraint has been to change from some manual work to an automatic work on the pipettes.
On the pipette side, we are investing, we have investing, machines are up running, and it is to get them into, let's say, a trustful situation where the capacity for sure will increase. And by that, we also believe that with a better cost structure, that we will be more competitive on the pipettes long term. On the needle side, we expected some of the quicker regulatory approvals on for some markets, and since we have customers on those markets, we will, of course, to continue to provide the products that we see as the ones that we will phase out. That has put some constraints.
With a situation that we don't need to continue with having two product lines, for instance, for the launch in, in China, that will ease up the complexity in running two production lines. Both of these things is temporary, I would like to say.
Yes. I mean, in terms of the other question on dividends, yes, I mean, it is a question for the board, of course. Right now, the ambition is to do dividends and to do acquisitions. If there will be another plan later on, that is something we will have to come back to, at another report.
Okay. Thank you.
Thank you. There are no further questions at this time. Thank you. Please continue.
Okay. Thank you very much for listening in to a report on operations 2017. Thank you very much, and goodbye.
Thank you. That does conclude our conference for today. Thank you all for participating. You may all now disconnect. Speakers, please stand by.