Earnings Call: Q4 2020

Feb 10, 2021

Ladies and gentlemen, thank you for standing by, and welcome to the Report on Operations 2020 Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. I must advise you that this conference is being recorded today on Wednesday, 10th February 2021. I would now like to turn the conference over to your first speaker today, Thomas Axelsson, please go ahead, sir. Thank you very much, and welcome to VitriLife report on operations 2020. The speakers of today will be Mikael Engblom, the CFO of VitroLife and myself, Thomas Exoson, that is the CEO. Please, then let's go into the presentation then in Page number 2. As you are well aware, it's been a turbulent year for VitroLife, But we ended very strong. So let's go through first the Q4. It was sales of SEK 382 million, And that's a decline of 7% in Swedish currency. Sales were unchanged in local currency. Our EBITDA was SEK 164,000,000 corresponding to a margin of 43%. If we are then looking into the complete year of 2020, the sales was SEK 1,246,000,000, And that is equal to minus 16 in Swedish currency. Sales decreased by 13% in local currency. EBITDA was corresponding to a margin of 36%. More about the financial numbers will Mikael Englom go through at the end of this After the end of the period, the Board proposes a dividend of SEK 87,000,000. It is correspondent to SEK 0.80 per share. I would also like to say that after closing day, Vitor Life Has received information that a civil lawsuit has been filed against VitroLife in Germany by Ares Trading, a Swiss company, Regarding claimed infringements of 3 patents in the time lapse area, VitruLife will dispute the lawsuit. Also for your information that VitroLife has not included any provision for the lawsuit in the annual accounts. As in the assessment that we have done, There has been no infringement of any patent. By that, please go to Page number 3. What I will try to do right now is to explain and see what's this Your situation we have inside the company within our customer market, the IVF clinics. And I will then also, when I go through this on Page number 3, make some comments on the Covida situation. And the COVIDA situation and the short term outlook is on Page number 4. So I will then, During Page number 3, view some comments that are then comments on Page number 4. So sales and growth per market region. Let's start with the region Japan Pacific. Total sales in that region was SEK 64,000,000. It was a decline of minus 3% in local currencies. That market has been going quite Well, what I mean with that is that it is almost normal numbers in the Pacific area and in Japan. What we can see is that with a decline of minus 3%, we have had good sales in our consumer business. So by looking at the consumer business and in contact with our end users, the clinics, We are having a good feeling about what kind of pent up demand that's happening on some markets And also in comparison to 2019, what the clinics are doing. So it looks like both of those markets are back, And they are they've also dealt with the pent up demand that by partly closing the clinics in Q2 last year, Len. Vennelic market, and that is the China, Asia, and China is our biggest market. And there we have a slightly different situation where China more or less is back to normal cycles. We can see that Southeast Asia unfortunately are not back. We can and we also know that India is currently the number of cycles are increasing, But they are not in any way back to 2019 numbers. Why, for instance, we see some Klein in Thailand that is a good IVF market is that everywhere where you have IVF curies, There is still they are still not back to normal numbers. And the reason is, as you know, difficulty to travel and all of those kind of obstacles that Are currently around us within the IVF market. I am very pleased to say That our growth compared to last year in local currency was 0, which is quite good under those circumstances. The growth, same here, we can see is coming from China, and it is all our consumable business And especially well has the media gone during the quarter. Sales in that region was EUR 82,000,000 Then going to the EMEA region, where we have quite a big differences between some countries and some, let's say, geographical areas. We had a good growth of 6% and taking into consideration that globally, but Going into the EMEA market, I would our best guess is that if we are comparing to correspondent Comparing to last year, we do believe that the clinics are not doing more than around 90% Of the earlier cycles. So having a growth of 6% in that territory, we are quite pleased with that. Regarding sales also, I would like to mention that in a situation where we had 0% growth in local currencies, This quarter was our 2nd best ever. Some extra Sales, we do believe, has come from, for instance, U. K. Due to that there are a couple of times that they have prepared for Brexit and Some inventory buildup has happened in U. K. Still behind normal numbers Our IVF tourists do exist, and that is, for instance, Spain and Turkey within the EMEA region. Russia is not really back to normal numbers. I will also Like to mention that what we see right now also is that it's difficult to project where Q1 this year will go. But due to the restrictions and especially travel restrictions, we can see that the IVF insurance will not come back in Q1, Not in Europe and probably not even in Asia. That has An impact on how we can travel and do in services. And in services is especially something we need to do For the technology side, and that's the time lapse. We can more or less address that that's the time lapse. If you then are leaving EMEA and we go to Americas, there is a huge difference between U. S, Canada and South America. Still, there is They're quite far behind in Brazil, Chile, Peru, and we see that it's a rebound, but it takes time. U. S. Goes Very well. Our best guess is that the pent up demand has been dealt with during Q3 and Q4 in U. S. And totally, if we're looking on that region compared to last year, It was minus 10%. Even in that region and in comparison to the consumables, We can see a good growth in those product areas. In all of those market regions, We had a good market contribution. And I would like to mention that the sales and I mean the complete organization has been under a lot of stress During this COVID time, but with savings and also working with customers differently, I do think that we can see a large potential in how we can work together with the customer and keep up the service level and all support. By that, I am directly into Page number 4 regarding the current situation and short term outlook for the Covira. As mentioned, we do believe that if 4th quarter Corresponding to earlier year, around 90% of the cycles globally is being done. As mentioned also, it's a large, large, large difference in the recovery between some regions. Also, private clinics in Europe, we can see that. And also in some other places where you have a mix Between private and somehow public is that it is the private clinics that has had really good growth and some of them Has been in the pent up demand coming come up to levels about 20% more than a Comparison number 2019. As mentioned, we do believe that we are going to be affected even in Q1 in Q1 this year, I mean, the current quarter, and that it is Especially within the technology, due to what I said, training and installations Of time lapse equipment is difficult when we can't travel, for instance, out from Denmark By saying that, let's go into Page number 5 and a short summary on our sales per division. Consumable sales, Plus 7. Under these conditions, where we believe that it is 90% IVF cycles and we are growing there with 7%, It is taking market share. It is some inventory buildup. And we are also knowing that from customers that The situation and how we dealt with Q2 and Q3, especially for having a Clear goal to always support our customers with product. As you know back then, we took some scrap, and we can see that the customers Are very satisfied with that kind of service level. On technology, a decline with minus 10%. It is partly recovered, and it will recover, but it's going to be 1 or 2 quarters behind the consumer business. Genomics plus 2, it is more or less in line with what we see that laboratories are doing and what the Clinics are sending to those laboratories. By that, please go to Page number 6, and Mikael will take over. Yes. I will take you through some of the key financials during the Q4. So first, we had a fluctuation in exchange rate that negatively impacted the EBITDA of SEK 21,000,000 in the quarter. That corresponds to about 1 percentage point of Negative effect on the EBITDA margin. Besides the currency effect, we were positively impacted by the combination of High sales, as Thomas mentioned, we also had a favorable product mix with selling more consumables than we did with equipment in the quarter, And we also had low expenses, for example, lower selling expenses, traveling and lower personnel costs. The cash flow cash in the end of the period amounted to SEK 974,000,000. And as before, we don't have any financial loans. Looking at the gross margin improved from 62% in the quarter Q4 2019 to 66% in the Q4 2020. And out of these improvements, about 2 percentage points comes from reduced amortization of acquisition related intangible assets due to that these assets Have been finally depreciated. We also had about 1 percentage points of Positive mix effects, as I mentioned before. On the EBITDA margin, besides the variances on the gross margin, We have had then reduced operating expenses in relation to sales due to the same reasons, as I mentioned before, with traveling, exhibitions and low personnel costs. The net debt in relation to EBITDA at the end of the period was minus EUR 2,100,000,000. And as before, we plan to use the cash for value Adding acquisition. Please change to Page number 7 for the long term outlook. We expect the market growth to be 5% to 10% long term in monetary terms. And as before, We believe this will be driven by the growing middle class, increased social acceptance for IVF and the trend for parents to be with waiting longer before they have children. We are planning to expand sales and broaden the product offering. And to that, we're investing in the marketing and sales organization, And we are also doing development projects. This year, we are planning to launch an AI based software that we call Itascon, And we are also planning to launch a new test for genetic testing. With that, operator, we are ready to take questions. Thank you. Our first question comes from the line of Ulrich Ratner. Please ask your question. Good morning, Thomas and Michael, and congratulations on a strong quarter. I have a few questions. So could we please start off with the market share gains in China and where you believe to be the main explanation For this, is there any part of this that is a rebound of the lost market shares last Due to the delivery issues or was that fully sort of resolved in Q3 as well as EMEA, August, a very strong development and with the clinics back to approximately 9%. It seems like you're gaining market share here as well. And if you could please shed some light on that. That is my first question. Okay. Hi, Ulrik. Thank you for those questions. Let's start with China. I would like to say it is three things. Yes, you are right that When we had some production problems 2019 during the summer then, Then some of the customers that had to go to a competitor, most of them has changed back. So that is, of course, something. There is also another thing when we see that we are not only getting our old customers back. We are also getting partly new customers. And that is due to that China right now is going to a situation where we have been quite successful, and that is within the regulatory approval side. And we can see that other companies are having some challenges with getting their All the regulations updated and approved. So there can be a slightly change there that Customers are then since they are today asked to only buy regulatory approved products. So some is regulatory considered. And thirdly, that our Expansion also and that China is starting to use more and more time lapse our interaction with the customers Through that kind of communication, time lapse, how you could do morphology, the importance of having a good Media system, all those combined are helping us in getting customer satisfaction, which is the same as growth. Then EMEA, there, since it's a huge territory, there are also Huge differences. There are what we for sure can say that the IVF tourism do not exist, More or less. And that is impacting Spain, as I said. It's impacting Turkey. We also see some decline in Russia. And in Q4, it was a difficult situation in Middle East In some places. So we have been able to take market shares in our, let's say, strong markets That are Western Europe, U. K. And we have done it I would like to say 2 things. First is that we had, during this period, Focused a lot on service level. And due to the situation that customers That were not before buying from V2LAK has in some circumstances Come to us and ask for products since another supplier were not able to do it. So our ambition to have a high Service level and unfortunately, we then back in Q1 and Q2 last year had some scrap that has Paid off. So I think that in EMEA region, it is customer service level that has helped us. Great. Thank you. And that sort of leads me to my second question. If you're looking at EMEA or just we can start off with EMEA and on the service. Do you believe that this market share that has been gained is Sustainable or are we to expect a gradual shift back to normalized levels? And the second question is, I note that you mentioned that there has been more virtual interactions with your customers, Which then translated into quite some significant cost savings. And you also mentioned that time lapse will require more hands on time. But how much Would you consider to be sustainable out of this technology or virtual customer interaction works that you have done that could actually translate into Savings for comparable periods? Yes. That's a very good question. We have had Good outcome of our digitalization and the way we're working together with customers. But we have only started that, Jonny. What I see is that going forward and the acceptance to do training and to do support And have interactions through what we are calling VITROLIFE Academy and also by individual meetings. That will be a long term saving. We will continue to invest because what we see also is that we can Even gain more from web based shopping, for instance, and that are our and currently, we have Good part of our business, but it can be a lot larger. So there are a trend that we need to invest. We will continue to invest. We can see an acceptance rate and that will, of course, be savings in all levels, even at the end user side, even at our customers' side. What was the other question? The only question was on the sustainability of the gained market share in the EMEA region. Our market share gain is coming from media, of course, But it's also coming from labware and our needles. So within our consumables, it is pipette, media, labwear and media. When customers are changing from Not Vitulight, labware and going into Vitulight labware, It is a big change for them. I mean, they're going from labware products that are A lot cheaper than the VitroLite. But when they buy into this situation with quality controlled plastic products And they change. It is by buying into that and see a difference, they will not go back and buy the traditional Labware. And with regulations also changing where in some markets, I'm just mentioning one of them, for instance, the UK, It is a demand that they will only use regulatory approved product, IDF approved So there, it is a matter of when competition will come into this area. So I mean, that's something that you don't change very easily. And the same with the needle side. With the improvements that we have done the last couple of years and introduced and or upgraded our needles, We've been able to take customer after customer. So those are the main reasons for it. And I do think that's going to be a sustainable business Great. Thank you very much, Thomas. And one last question before I get back to the queue and let someone else ask the question as well. You're talking about this AI based technology you're going to launch as well as a new test for genomics. Could you shed some more light on when you're expecting to launch those? And on the genomics side, is that invasive or non invasive tests? We will launch it during this year. I can't really give you exactly what quarter it will be, but it's going to be launched during this year. The IDA score, the AI system is going to be launched before most likely the genetic testing in selling to end users. And the test that we will come out with is going to be an invasive one. But correct me if I'm wrong, but this should enable you to sell this genetic test On a wider geography than previous collaboration with alumina, right? Correct, correct, correct. Great. Thank you. And I'll get back to the queue and jump back with additional questions. Thank you. Your next question comes from the line of Bjorn Orlando. Please ask your question. Yes. Thank you for taking my questions. I'll start with that end question regarding The new test and so on, is that the one that's going to be in China and sort of the Expansion of the Illumina agreement. For the genomics, the agreement is that we, Bjorn and We'll get access to Asia Pacific. Yes. And did you have a Dates on that or time, Jared? No. We are going to introduce the Vitro Life PDTA test during this year. Yes. Okay. Then going on to the technology part, and it seems like you indicate that the recovery is probably going to be Slower for the technology compared to consumables and so on. What is the reason for that? Is it financial constraints At the clinics? Or is it just that I mean, you mentioned that time lapse Installations and training and so on could sort of be limited during this difficult period of time with less traveling and so on. So Is this just a way of an accounting? I mean, for you to book sales, you have to complete Installations and training? Or is the interest in those types of technologies lower right now at the customer level? I would like to mention 2 main reasons. One is that the Clinics themselves, in Q2 and Q3, they came into Situation more or less a shock that the customers just went away. So some of them has delayed. Those clinics then that has a good growth and good pent up demand, they we are in contact with them and Some are with purpose and in negotiation with us, delaying the installment Due to that when you install, you often close part of the laboratory for some time when you're doing a new piping in those. And If you have, let's say, a demand situation and you're trying to cover up what you lost and you also have the regulations where you can't Worked the normal way. So for some clinics to do, let's say, normally 100%, they need to work differently, and that's Taking more time and then closing down some parts of the laboratory is something that you want to delay 1 or 2 So they feel that they can deal with the pent up demand. It's more about those things. Then There is a situation where the public on the public side in Western Europe, we have Good clinics. And a lot of those public IVF clinics are under A tough situation where, for instance, in Benelux in Belgium, they're more or less closing them and they're prioritizing Other activities, the same in U. K. So there is a situation also that Publix are delaying For stopping their purchase of time lapse, but they are still under the traditional bid process. Okay. Then a quick one. The lawsuit related to time lapse, I suppose you don't You're not prepared to give any very much details on those. But do you have a time line for that? When you expect More news from that. And also expenses, I suppose there are patent lawyers and so on going to be involved. And if so, are there Material expenses expected for that? Yes, I can answer that, Bjorn. I mean, the process will continue, and It has several steps, and we'll just have to follow that. So it's difficult to predict the time line for when this will be Closed. We will have costs for lawyers in representing us in this case. They will be accounted for as running costs throughout the year as the cost incur. Yes. Okay. And then when I have you on the line, I've had also a question regarding the bad debt loss So you mentioned that, that's affected the reduced bad I mean, reduced provision for bad debt losses. Was that only the SEK 3,000,000 from North and South America or something else? Yes. That was the Basically, the amount, yes. Yes. And the split side of that coin, if I look in the P and L, I mean, that was basically the other operating revenues. But then you have the SEK 6,900,000 in operating expenses. Are there any particular reason for that being unusually high? If we talk about the bad debt that was recorded as Reduced marketing and sales expenses. So it's in that line item in the P and L. When it comes to other operating expenses, Those are primarily related to currency. Okay. And then finally, I mean, we usually talk about the M and A and so on. It seems a bit conservative to distribute €8,000,000 to €7,000,000 in dividend when you have almost €1,000,000,000 in cash. What Types of acquisitions do you expect? I mean, these are quite substantial amounts. And I mean, in the past, you have sort of bought some distributor or some complementary technology or something like that. But how is this Has the scope changed in any way to any more detail I mean larger acquisitions Or something. And how is the market for that right now? We have not changed any strategy. We are looking into this. What I Could mention that then is that Covira has had an impact even on that Sorry, you know that our companies that during the Covida have had some stress, so they are maybe changing strategy. And by that, they Are looking for maybe some other kind of ownership or situation. There are also companies, I mentioned before, that with all the different kind of Changes within the MDD, MDR regulatory sites that they are also So considering maybe a different ownership. And as usual, we are looking on Things that can help us in our distribution channels and in our technical development. Okay. Very good. That's all for me. Thank you. And we've got another one more question, and it's from the line of Daniel Albin. Please ask your question. Thank you, Thomas and Michael. Many of my questions have already been answered, but I have 2 short ones for Michael, if I may. The first one is, are there any positive government grants received in Q4 2020? And secondly, on the D and A sum, Which is lower? Is the sort of the Q4 level the new run rate used going forward? Thank you. Yes. I believe the we had a small amount of government grants that we recorded in the 4th quarter, Around SEK 1,000,000. So When it comes to the D and A, yes, we are seeing low D and A, and that will Continue to be shown next year. It's due to that some of the intangible assets That we recorded as part of the Fertilitec acquisition have been fully depreciated now or fully amortized. And next year, we will also see the effect from the acquisition of MTG OctAct in 2016 where some of those assets will be fully amortized by the summer of next year. So we will see lower depreciations Our amortizations in the P and L next year. Okay. Understood. Perfect. Okay. And we have another question from the line of Ulrich Ratner. Hi. Thank you for taking my questions again. I have a few. So what I've been seeing talking to OTIVF clinics in Europe seems to be volume shift from public to private clinics. Is that something you would agree with? And how does that impact you guys? Is that beneficial in any way? Yes, you are right. For example, if you take the U. K. Market where they have had restrictions and where they have Allocated resources differently on the public side. There has been a good, good growth within the private in UK. In my contact with the clinics in UK, they are right now at the end of Q4 last year, let's say, in December And beginning right now, seeing that the extra restrictions are impacting Even the private in the London area. So I mean, you're right. Private has taken over some of the public. Where there are good alternatives for it? And how does that impact you? Mostly positively. If we are making an example on markets Well, you have a mix between them. Public clinics are often buying on price. And if it is price, we are not the best supplier. Great. Three more questions, if I may. Could you specify or at least Give some more information on which markets you're currently seeing pent up demand. We all know the markets where The recovery is still in progress, but is there any specific markets where you clearly see a pent up demand? Yes. These markets where they have huge challenges. I mean, So America, it is a I mean, it's a small market globally, but there we do believe there's a pent up demand in, for instance, Brazil, there is also a challenge there also with the currency exchange for them, but there is a pent up demand. We see a kind of demand when we are talking with clinic change that are focusing on IVF turence Partly in Thailand or in Spain that believe that when borders are opening up that they will have a Come back to normal business. We are also seeing similar thing in Russia, Where there's a pent up demand situation. In some of the Western Europe like Belgium, Germany, there is a pent up demand, but I can't quantify it. Great. That's fine. And you mentioned during the presentation that one specific market had 20% more Cycles compared to 2019. Could you help me remind me which market that was? And would you call that A good number to look at the pent up demand. That is U. S, And they have dealt with the pent up demand. I mean, in comparison, some of the clinics in U. S, numbers 2019, 2020, Q3, Q4, they have had a lot to do, and they've been quite successful. So that's why I mentioned that I don't think we will have a pent up demand situation in the U. S. I think they have dealt with it quite well. Clinics are opened. They are bypassing and doing it very, very well on this kind of situation where initial discussions are held by Zoom or something similar. And then they can there is a process when they are calling into the clinic. And usually, it is about 25% that are Only continuing with the treatment. And by having this done a more efficient way, they have been able to, let's say, sort those out quite quickly During Q3 and Q4, and that has helped them to get them quickly into the clinic. Great. Thank you. And just one last question. As you mentioned, there is Not only an ongoing pandemic, but also ongoing regulatory restraints On companies in the IBS Industry, so what's currently holding you back from doing M and A? Pricing, the right company too. There are companies out right now for Cell. The question is just is that kind of business we would like To invest in, so maybe we are too picky. But I think we should focus on things that we know that we can handle and have good growth And that also give value to our both shareholders and customers. Great. Well, thank you very much. And once again, congratulations on a great quarter. Thank you. We have no further questions. Please continue. Okay. If that's the case, thank you very much For listening in on this extremely cold winter day in Sweden. Thank you, and bye. That does conclude our conference for today. Thank you for participating. You may all disconnect. Please remain on the line.