Earnings Call: Q2 2020

Jul 13, 2020

Ladies and gentlemen, thank you for standing by, and welcome to the VitroLive Interim Report January to June 2020 Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer I must advise you that this conference is being recorded today on Monday, July 13, 2020. 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 VitroLife Interim Report January to June 2020. The speakers of today will be Mikael Englum, the CFO of the company and myself, Thomas Axel Sander, the CEO. Please change Page to number 2. Our headline today of the report is an extensive impact of COVID-nineteen. So our vision today is to try to explain more in details the development during quarter 2 and maybe some projections going forward. But let's see then of quarter 2 first. It was a sales of SEK 209,000,000 and it was to minus 45% then. And that's the same as local currency. So today, when we are talking about SEK, it's the same as local currency in all places. The EBITDA was SEK 40,000,000 corresponding to a margin of 19%. So let's go over then and look into Q2 and change Page to number 3. It is sales and growth per market region. The ambition today with the sales and growth per market region and later also regarding the product is to try to explain what happened during Q2 and also what are the current status. And what I then will do is that if we are looking into Page number 3 then and we are starting in China where the flu started COVID-nineteen. So we can see that it is a decline in that territory of minus 46%. What has happened then? Because China was first into this and they're also first out of this situation. As earlier, from the market, we saw within the first month that it was a decline about 1 with 2 thirds. So sales was around 1 third. And we are currently up to around 2 third of normal sales. So in China, we can see that the best guess from our side is that the clinic is up running and are doing around 70% of normal procedures and they have a good intake on new customers. We can see that it's a variation between the regions, the provinces, where the South provinces are almost up to 100%. In Wuhan, the Bay Area, it's a little more than 50%. And Beijing has gone back and forth because they open up and then we're closing down a little bit of some centers. So they're maybe between 30% to 50%. But it is a trend going up, which means for us also more sales. In the rest of that territory, that we are calling Asia, we can see a good recovery in Korea and Taiwan, Hong Kong, while they're still quite behind in India, for instance then. The recovery in India, Pakistan and those territories are between 30% to 50% of normal intake of customers. The belief, at least right now from talking to the clinics, is that the cycle rate will be normal at the end of the year then. I will then jump into Japan Pacific. And that region was minus 10%. So that's our best region so far in quarter 2. And then why is that? Why have they been able to still keep up the clinics and do the procedures? Mainly due to that it's not been the lockdown in Japan and the decline in Japan maybe is around -ten percent, so it's similar to these numbers. And talking to the clinics, they feel that it is almost recovery at this time. Down in Australia, they had a lockdown, so they had been opening up. And what they've been doing is that they had supported the patients with telemedicine. So when they are now opening up the clinics, it is a full speed of recovery for the IVF clinics. So far, we have not seen any changes regarding the situation in Victoria, where part of Melbourne is also closed. But it is a good pickup of cycles in Japan Pacific. Going then from Japan Pacific over China Asia into the EMEA region, we can see a dramatic drop with minus 52%. And that's due to that we all know that COVID-nineteen has moved west. So it's impacting the territories 1 by 1 when we go west. So what's the recovery then? The best recovery is in the northern part of Europe, where maybe currently it's up to 80% to 90% of normal cycle rates. Russia, it's around 50%. But we can see, for instance, in U. K, where it's a big difference between the private clinics and the public NIH clinics because the NIH clinics are not opening up in the same rate as the public as the private, I mean, excuse me. The private clinics in U. K. Are indicating and they are currently having opened within 6, 7 days a week by so they can pick up and take care of both the customers that they were not able to do the transfers or have the treatment in April, May then. Spain, maybe around 75% to 80% pickup right now. Turkey is a little bit below 65% to 70%. So overall, we can see that it is a recovery. And the recovery in the EMEA region as well as in the U. S, I'd like to say, has a couple of considerations. One, it is that where the IVF clinics do belong to hospitals, there is some fear for the couples to go to the hospital. There has also been, as you know, different regional lock downs and that has impacted, of course, the cycle numbers. What we can see in meeting customers and also talking to customers is that the restrictions that they are doing around each patient means that they are working 100%, but they're not able to see as many customers, patients as you should be called because of the restrictions mainly in the waiting room. So going over to U. S, while they still have had a lot of problems within the clinics, I would like to say that they are even if they had the increase of the COVID-nineteen, almost 100% of all the clinics are opened. And we can see that they are dealing very professionally with the customers and the increase of telehealth appointments are helping the customers and the clinics to provide the cycles that are needed. If you go further down in the region of Americas to, for instance, to Brazil, there it is more there's a situation that is more troubled. Currently, maybe 30% of the clinics are open and they're only doing special cases or for instance that patients are only being seen certain days of the week. So try to do then a summary of the situation. We go to Page number 4 then because of short term outlook is that we can see from a situation more or less where the IVF clearance was locked down in April. We can see it's picking up. And as mentioned before, around 2 third at the end of June. Also see huge differences, large differences in the recovery between, for instance, Japan and U. S. A huge difference. We can also see a difference between the northern part of Europe and southern part. The recovery, to some extent, are also being delayed due to the restrictions. We are also saying that we believe that it's going to be a recovery, but the recovery will take place during quarter 3 quarter 4 this year. What the clinics are talking about is also the situation that there are customers, there are patients that are in need of IVF treatments. So there are potential pent up need for more treatments when this crisis is slowly, hopefully, going away. By that, go into Page number 5. And Page number 5 is about the Growth Per And the Growth Curve Division is also following the trend what currently is happening on the market. The first thing that the customers are doing is that they need to replace and start to have a fresh inventory of consumables and then especially the media, our Nutrition Solutions. Our Nutrition Solutions had limited lifetime and shelf life, and that means that we can see when clinics are starting up, they're starting to order media so they can do the for the wholesale pickup and also the culturing. Interesting also is the quick and extra demand that we have seen in June on vitrification products. And that is due to that they have vitrified, frozen down a lot of ore sites that we could not transfer during the period. So consumables are the first one to pick up in sales. And the situation there is for us to have a balance between our inventory and difficulty to predict exact demand on each product. The other large division that we have is the technology and that's mainly the time lapse products. And that's a decline there with minus 50% then. Customers, as we see, they are first trying to get back and get an efficient clinic, and then they will later on continue to further invest into capital goods as time that. So what we first believe is what we can see on this slide, consumables declined minus 40% technology minus 50% and genomics is minus 60% and why is minus 60% on genomics even if it is small numbers is due to the situation that we are only selling genomics in Americas and in EMEA. And the biggest market there is Americas. And since the Americas are down and has not yet started up, even if they're reaching about 100% openness of the clinic, it's going to be a little bit delay on that side. So from sales and growth in different territories and the divisions, I'm handing over to Mikael, please, Page number 6. Thank you. So I'll take you through the key financials during the Q2. So the gross margin during the Q2 was 53% compared to 64% in the same quarter last year. And the drop in margins was due to high scrapping costs of SEK 7,000,000 related to media primarily, and that's due to the variations in sales and the shelf life that Thomas mentioned earlier. The other major factor behind the drop in margin is negative economies of scale. As sales declined with 45% during the quarter, we had the fixed cost to be shared with fewer products and thereby reducing the average margin. The EBITDA margin was 19% compared to 38% last year. So the variation is due to the declining gross margin that I just mentioned. And then the other major reason is negative effect of economies of scale in the operating expenses. So even though operating expenses in absolute terms declined, in percentage of sales they increased due to the drop in sales. Net debt in relation to EBITDA was minus SEK 1,600,000,000, and we had positive cash flow adding on to the cash in the end of the quarter. And of course, the decline in EBITDA makes this metric to increase. With that, move to Page number 7 for the long term outlook. So the long term outlook after the corona crisis, we believe, is unchanged, and we believe the market will grow with 5% to 10% in the foreseeable future. As before, we believe this will be driven by the demographics that people wait a longer time with having children, the growth in income and then increased social acceptance for IVF. When it comes to VicroLife, we will continue to focus on sales expansions and expanding the product offerings. And that will be done both through in house development and through acquisitions. With that, operator, we are ready to take questions. Your first question comes from the line of Ulrik Ratner. Please ask your question. Hi, Thomas and Nico. Good morning. And first off, I have a few questions. But if you can just start off with, obviously, the demand is down due to COVID-nineteen for all specific regions. And it seems like you're talking about a little bit soft recovery in each respective markets with this year being heavily affected. But if we were to look into 20 21, do you see any limitation in capacity through these IVF clinics that could limit your growth even if there is a significant pent up demand next year? Morning, it was a good question. That's what it's difficult to say what's going to happen. But if you're asking about the demand inside the clinics and if they have the capacity in the same situation, if we have the capacity. If we are then looking on consumable products, yes, I don't think that will be any major challenge for us on our biggest product assortment, the Nutrition Solutions, the media. The challenge there would be for us, as Mikael also said, to be able to cope with the variances on the demand. And we can see the situation right now where it was where it is picking up quickly that we had to react and do some extra lots. And the same situation when it was going down in March, April, it took some time to coordinate the production. If we're then going into the clinics, it is an interesting situation right now that many of the clinics are having their own old demand and there are couples patients that are a little bit frustrated, let's put it that way, that they have frozen embryos that they want to transfer. Clinics in many territories in the clinics in many territories in the EMEA region that are private, not public, private, are opening up and having the clings open 6, 7 days a week so they can deal with the demand. So if your question is, if we see that there is any restrictions within the clinics, if it gets back to normal situation. No, not really, not really. If there is any problem for VitroLife, it could be if it is exploding the demand, but I think we are following this quite closely, so we will be able to manage it. Okay. That's great. Perfect. And as you mentioned, you're selling to private clinics, and you obviously made some provisions on bad debt during the quarter. Do you see any sort of major change closing down IUS clinics? And obviously, since especially for the private ones, one would assume that they were to wait buying into your technology equipment until sort of the turnaround has already the patients have already come back. Is that something that you're seeing right now or expecting to see some sort of the pent up demand being initially the consumables, but especially for the private clinics? For the private clinics, yes, there are some clinics that has a cash flow problem. I don't think it's going to be any major problem if what's going on will continue. It's going to be a new lockdown, then I don't know. But the route that we are on right now, I don't see any major challenges. The concern that private clinics has is how quickly to invest, how quickly will the demand come back. And they will, of course, as every other private industry owner are doing, manage their cash and being on the safe side before they go into any investments. So the technology will be behind the consumable growth initially, yes. Okay, good. And Jan, well, just one last question before I get back into the queue. You have a very strong balance sheet and obviously there is M and A opportunities out there. Do you see any limitation from COVID-nineteen of you finding suitable targets to acquire? Or have these become more approachable based on this pandemic? I would like to say there are 2 sides on this cone. One is that companies that has considered, especially family companies, are in a situation that should they continue with all the regulatory changes going forward, etcetera, etcetera. So I do feel and I can say that there are a flow on some potential opportunities with companies that are considering if they would continue themselves. Another thing that is a challenge and that is to do the due diligence process. So I do think it's going to be similar to what's going on within the clinics. There is going to be a lot to do when we are finally being able to travel. That's perfect. Thank you very much, Thomas. And I will just get back into the queue. Thank you. Your next question comes from the line of Patrick Just a clarification. I think it was when you talked about China or Asia that you said that you expected or that the clinics expected the cycle rate to be back at normal by the end of the year. Was that the correct interpretation that it was only for China and Asia? Or was it for everything? I could say almost for all countries, where it's going to be quickest back to normal are Japan, Australia, as we do believe. China is picking up, but they're quite careful also, as you know, within the Beijing area, for instance. And if we see on the Beijing clinics, and they have a couple of big ones there, around 60% of all patients going to the Beijing clinics are from outside the city center, which means that when they're locking down, they're also doing some restrictions. But you are asking for a long term, let's say long term, but 2 quarters. We the only thing we can foresee and what we believe in is that the pickup will take place during Q3 and Q4. And we can see how quickly it's getting back in some territories like in the Nordic and Germany, etcetera. Okay. But you do not expect to have positive growth numbers until we come into Q1. Is that the right way to say it? Yes. I mean we are guiding that we believe that the 3rd and the 4th quarter will have a negative impact of COVID-nineteen. So that is the guidance that we have done. And we cannot make assessments that is a longer period than that at the moment given the uncertainty. But we believe there are gradual increase in sales, and therefore, we will have a gradual growth from the level that we had in the Q2. Okay. Can I also ask you about the gross margin? I mean, you said that you had $7,000,000 in scrapping costs. And if we adjust for that, you would have had the gross margin of 56 0.5%, I think. Is the rest of the decline, is that completely due to negative economies schemes? Or are there any other items in the gross margin that we should be aware of? No. That is the big factor in the gross margin variation. If you look on the scrapping cost, we had SEK 7,000,000 in scrapping cost. Even in a normal situation, we have some scrapping costs. So in a normal situation, we probably have between SEK 1,000,000 SEK 2,000,000 in scrapping costs in a quarter. So the scrapping costs that's out of the ordinary is probably in the range of SEK 5,000,000 to SEK 6,000,000. Okay. And what level of sales would you say that you need to reach to be able to start to see positive economies of scale? Because when I look at your numbers and go back maybe 4 years or something like that, I mean, you had sales at the same level as you saw this quarter but significantly higher gross margin even if you adjust for the genomics operation and the dilution that you get there? Yes. But we have also, of course, invested in our operations since those years and added products and then changed the product mix. So there has been a lot of variations. But of course, as we increase our sales, we will get closer and closer to the previous gross margin. And then it's just a matter of how big decline compared to the previous situation that will be the fact that will be the fact that will be the fact that will be the fact that. Okay. You also took SEK 6,000,000 in bad debt reserves this quarter. Is that what you think will be needed? I mean because when I listen to you, it sounds very much like we have a recovery situation in almost all markets. So have you in that number, have you made an assessment for the second half as well? Or is that only for the Q2? No. But that is the added provisions that we added during the Q2. And that is based on an individual assessment clinic by clinic. And of course, that's on a base of close to SEK 200,000,000 of total accounts receivables. So if you look in that context, it's not a huge provision, but it's our best estimate in terms of potential bad debt. Okay. And do you have had any clients that have gone out of business due to the pandemic? Yes. We had one client in the U. S. Yes. Okay. They didn't go to business really, but it was a bankruptcy of a clinic chain and then the clinic has popped up in a new identity. Okay. Okay. Okay. Great. Good. Thank you. I'll jump back into the queue. Thank you, guys. Thank you. Your next question comes from the line of Bjorn Olander. Please ask your Olander. Bjorn Lunder, Magna Picot Research. Of course, the recovery is the most important thing here. And I think you have been as clear as you can be. So I will continue along Patrick's questions on the expenses and so on. You participated in the support programs that generated SEK 5,000,000 in the quarter. Where has that been booked in the P and L? It's booked under other operating revenues. Okay. So it's almost the entire other operating revenues then. How is that right now? What is the situation with those programs and participations? And also, more importantly, your own organization, are you doing any sort of long term changes there or long term, but some changes that I mean, not only related to these programs? I can ask the first one on the first question. And so we use these programs during the second quarter. And then as we saw demand increasing in the end of the quarter, we closed these safe support programs and then staff returning them to normal working hours. When it comes to the long term effects, Thomas, do you want to say anything about that? Yes. We are not doing any changes because we believe that it's going to come back. And also that the things that we are working with on, for instance, the development, all the activities that we are doing, we have been able to do those from to a large extent through the digitalized world that we're working in. And all this with new software programs, the development within the genomics, for instance, is something that now that's about the future. So we still believe in the future. And also the regulatory thing, there are opportunities with this too. We have been able to focus and for instance, on the regulatory side, when you are not having as much people inside office, it's an interesting thing that with the digitalization and this kind of work, it can also be more effective. So there isn't always bad things with this life. Yes. That sounds very good. I noticed that there are exactly 418 employees at the end of this quarter, and it was expected the same number after Q1. So that's sort of encouraging for the organization, I think. Are they speaking about this sort of this new world and with digitalization and so on, do you expect any sort of changes in that in the way you work? Or I mean, Esheriff was remote this year and so on. Would it be a change in your sort of sales process? Or I've also heard some companies in other medtech industries have been sort of this period has been a period of sort of education and the clinics are thinking more about how they will change their way of working and so on. So they could be sort of more open to new ways of thinking in terms of that. So any thoughts on that? Yes. The speed that the legalization, especially the sales and marketing and the education and training side that you're mentioning are incredible. This when our customers have not been able to run the clinics as they usually do, they have been on different kinds of sessions. So the situation that you are able to have 300, 400 people on a training session, That was impossible before. We could have 30, 40 on that side. And also situation, you mentioned the big exhibition Congress, Esheraj, that was last week. The situation that you can be and you can be at 6, 7 sessions at the same time instead of just going into one conference room and listen to one session. This will for sure change the market. And my projection then is that within some time, we are going to have more digitalized support for our own sales rep and also for our customers and maybe changing also the profile on the ones that are meeting our end users. And finally, I know Ulrik touched upon this and I was interrupted by the operator. So apologies if you already answered the question. But this I mean, this financial constraints and so on among both the clinics and also your competitors, especially the smaller ones, do you expect some kind of change in dynamics there? I mean, are smaller clinics being bought by larger clinics? Obviously, some financial challenges and go bankrupt perhaps. And also, the smaller competitors are, I suppose, struggling more than you in this environment with the strong balance sheet and so on. So any thoughts on that would be very interesting. Okay. I can do a quick one. Regarding the industry itself, we are a couple of larger players, I mean, largely in this field. And all of us has good financial situation. So there is I don't think there's going to be any major change between us. There will be opportunities, however, in companies that might will consider how they will be owned and managed going forward. Regarding the clinic exam, the only thing that I have seen is that some of the ones that were going around very interested in buying clinics are maybe a little bit more careful right now. So the larger PE situation, they are maybe slowing down a little bit regarding the acquisitions, but that's just my guess. Yes. That sounds fair. I mean buying a sales that doesn't exist is or where it's just sort of questionable, it's probably a challenge right now. Thank you very much. Thank you. Thank you, Your next question comes from the line of Charlie Morris. Please ask your question. Hi, good morning, Michael and Thomas. I've just got a few questions. So the first question is on the recovery of Asia. So I'm just looking at the Q1 growth rate for Asia, which is minus 22% from Q1. And then this year sorry, this quarter, it is minus 46. So obviously, that's the recovery has maybe basically my understanding, the recovery has worsened in Q2. Now just thinking back, obviously, in this quarter, China has started to recover in March. So yes, so this is my first question. Could you give us a bit more color on the recovery dates, especially on the minus 20 2 and the minus 46 in Q2? Okay. Would you like to just Yes. I can start with a comment. Yes. So it's correct. I mean China was first to enter into the lockdown situation. So we had a negative impact in the Q1 from China. However, it wasn't the full Q1 that was impacted in China, but rather the last 2 months of the Q1. Then when it comes to markets outside China, there was not a big impact in other markets such as India, for example, in the Q1. When it comes to the Q2, we also had a very strong Q2 in Asia last year. We had a big sales of time lapse to a single clinic in the end of Q2 going through China, which had difficult comparison numbers in the Q2 of this year. So those factors have importance to these percentages. Okay. That's clear. Yes, I was thinking maybe that something happened last year. Right. Just on the U. S, also the recovery, I think Thomas has mentioned that U. S. Is opening up, 100% open up. Just wanted to know about the volume recovery, how much of the volume has come back in the U. S? The volume recovery are slower. I mean, they're opening up, but I have a lot of restrictions regarding how to see the customers. And what's first happening there is that they are taking in the patients that has not been able to have the transfer done. So I do not really I'm not really sure because it's a little bit more difficult to actually get a clear understanding about what kind of rate that they are doing full cycles. What we can see is they have started the hormone cycles, which is good because that's the first step on it and then that they're doing more transfers. So there is this kind of in between. So that means that I do think that they will pick up. The concern regarding Americas is more about South America and what's going on there, where as I said, I think I said it at least that it is around 30% of the clinics are open in Brazil. Argentina are just they're hardly doing anything at all. But the most interesting thing is about U. S. And they have also changed. I have spoken to some of the clinics where they are putting more and more emphasis on the telehealth appointments. And it's one of the changes that I do think we will see going forward that it's going to be more of this kind of pre discussion with couples before they're coming into the clinic and actually starting their procedure. Okay. And third question is on the for example, on telehealth and on what you have mentioned in terms of virtual training. I'm just thinking out loud, does this actually make NutriLife a stronger player across the world? Obviously, previously, we know it could be constrained by geography. But now do you think NutriLife will be in a better position compared to competitors who digitally or virtually reach out to customers all across the world? As we can see, we are I guess, we are 2 companies that has reacted. And I do think I can my best guess is that and it's a qualified guess. It's that we can see that Cooper Companies and VitroLife, the largest and the second one in this field, has been quick in arranging seminars and trainings, which, of course, not the smaller companies has been able to do. So I do think that's going to be a long term advantage of size. Sure. And just one more. On the capital side, maybe could you shed some light on so the decline in technology is minus 50%, on consumers, minus 40%. So in fact, relatively, the decline in technology is not that bad. Could you give us a bit more to see why is it because there are back orders, so you're still delivering this quarter? Does that mean that in the future quarters, the technology will take a more hit as the consumables come back? Now the situation when you sell technology is that when we are selling it, we need to get into the clinics. We need to install it and do those things. And the restrictions for us to get into clinics and to travel, as you're well aware of, has been quite limited. So there it is what I expect is that clinics that we had in our there's a pipeline for buying within quarter 2. They have come back and they are delaying that. We don't know for what time. But I don't think it is out of the picture that they will come back and ask for those products. And I can also maybe add a comment that a portion of the revenue in our Technology division comes from recurring revenue in the terms of service agreements and the slides, the consumables that you use for in connection with the equipment. So there is a portion of revenue there that is not linked to new sale of equipment. Okay. So just last question on China. I think you have mentioned this before. Could you just give us the overall China recovery rate so far or at the end of June or currently you see? Once again, I was missing a little bit of your question, excuse me. Sorry, I just wanted to you now have mentioned this before. Just double checking on the China recovery volume, you have mentioned it varies across the regions. I just wanted to get an overall feel for how much volume has come back? Yes. That would be by Yes. What I said, I will repeat what I've is that in the south provinces of China, we can see that recovery is almost full. It's almost 100% of the normal cycles. And then just mentioned, since everyone knows about Wuhan today, there it is a little bit more than 50% then. And in Beijing, it was opening up and then it was closing down a little bit. So Beijing is maybe between 30% to 50% then. Totally, where are the recovery right now? Around 70%. Okay. No problem. Thank you very much. That's all from me. Thank you. Thank you. And we have another question from the line of Bjorn Olender. Please ask your question. Yes. I just have a minor question more out of curiosity. You booked SEK 9,000,000 for BIOLAMINA this quarter due to revaluation and so on. What is the reason for the revaluation right now that's more common to see in Q4 that would be interesting to hear? Yes, I can answer that. There was a new issue of shares in alumina that was done at a different Sorry. The alumina, sorry. That was the reason for us to be evaluating our shares. Okay. So that's sort of price so you could have to adjust it. Did you participate in that, Persio? No, we did not. Okay. Could you comment your long term ambitions with that in Austin? In the alumina, we went into that as we are doing in some small businesses to get a more insight into different feeds that are quite close to VitroLife. And back then, we were having business development thoughts within the embryonic stem cells. So it's been a good area of interest for, let's say, know how development inside Future Life. Okay. Thank you very much. There are no further questions. Please continue. Okay. If there isn't any further questions, Thank you very much for listening in and goodbye for today.