Earnings Call: Q1 2020

Apr 23, 2020

Ladies and gentlemen, thank you for standing by and welcome to the Victor Life Interim Report January to March 2020 Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I also must advise you that this conference is being recorded today. I would now like to hand the conference over to your first speaker today, Thomas Axelsson. Thank you. Please go ahead, sir. Thank you very much, John. And good morning all to you, and welcome to Vitra Life Interim Report January, March 2020. The speakers on today is Mikael Englum, the CFO of the company and myself, Thomas Exoson, the CEO. Please change page and go to number 2 and have a quick introduction of the quarter. We have good growth within the quarter, but uncertainty came at the end of the quarter due to the COVID-nineteen. I will try during this presentation together with Mikael to explain the situation and also what we could maybe expect during quarter 2. Sales in Q1 was SEK 334 1,000,000, and that's a growth of 7%. In local currency, and also that's the same as our organic growth, was 5%. Our EBITDA was a margin of 30 5%, and it was €116,000,000 We will also, as I said, will cover at after the end of the period, after closing day, we could see that we have a larger impact from the COVID-nineteen. So we will go through that and see about the Q2. We have also or the Board of Directors has decided to postpone the Annual General Meeting and a new date will be later announced. So by that very, very quick summary, let's go to Page number 3 and see what happened during the quarter. As I mentioned, I'm quite satisfied with Q1. It was a quarter of good growth, if I take away China. Why say like that is that it was a good growth in all regions. We have growth except then the China, Asia region. To explain more about the region and what happened, I would like to start from Americas. It was a growth of 7%, and the growth in that region is showing the kind of pattern we have had for about a little more than a year, and that is growth within time lapse and also the last year for the genomic business. The business in that territory did go very well and had good growth up until the time when American Society for Reproduction Medicine, ASRM, came out with some, let's say, guidelines coming back to that later on. The same for the next region, EMEA region. We were selling for SEK156 1,000,000, and we had growth in all divisions, which is very, very good. The total growth was 17%. So definitely more than the market growth. We saw some impact at the end of the quarter that we also went out and told the market about. And I will also later on explain what's going on within that region from the guidelines from Eshera. Then the region that we knew in the middle or, let's say, late January from beginning of February that they were closing down China. And that meant that the growth in China was negative or in Asia was minus 22%. What it was not only an impact on the Chinese, it was also an impact on the region itself, Southeast Asia, means Thailand, Vietnam and those territory because part of their, let's say, IVF industry industry is by Chinese that is also going there for doing their treatment. So Korea, Taiwan, China and Thailand, those had a very it's a tough quarter where more or less, at least in China, all of the businesses end there was stopped from the end of January. We are seeing some light in the tunnel, and I will come back to that later too when I explain about the guidelines. And then finally, the region Japan Pacific, it is a mix there. It is a good growth. It's 14% and its growth within By that, let's go over to Page number 4. By that, let's go over to Page number 4 and see about the divisions. When we are talking about the business in the way that we are measuring and following the business, it is within 3 divisions. It is within genomics, technology and consumables. We changed that last year internally, and we are also right now changing that in our reporting systems. So consumables, you know, that's been followed the company are the business media and also disposal devices and technology our time lapse and business unit are. Genomics is embryo testing with the genomic field. So let's start from the bottom. We had a sales of NOK193 1,000,000 for the consumables. And that negative growth of minus 5% can all be the decline is coming from this Asia China situation there. Technology, good growth, plus 19%. And on that side, it is a continued good growth of time lapse. The genomics, the growth there was 52%. And it is a little unfair to just say 52%. But the reason was that so good growth due to that we started up the business 2019 Q1. So it was a slow start, but still good, good number. And sales was SEK 32,000,000. And what I would like to do right now is that you change the page and you go to Page number 5 because all of this when I'm talking about the territories and what goes on, I do think it can be good for all of us to know a little bit about what are the regional guidelines and regulations currently under the COVID-nineteen pandemic. So after the closing date, we've seen clear trend on negative sales. And for the 1st week in April, the sales is around 1 3rd compared to previous year. Is it going to continue or not? That's something that Mikael and I will try to explain how it looks like. So what I will do is to see what are the restrictions, and we can start from the ASRM. ASRM or the American Society For Reproductive Medicine, they were coming out with guidelines March 13 and then also April 13. So what are they saying? The current recommendations that they are having then for U. S. Is that they should suspend all the initiations of new treatment cycles. And that including retrievals, and frozen embryo transfers. They are also strongly recommending that the clinics should consider cancellation of all embryo transfers and that they should have minimized the in person interactions. So by that kind of guideline, there are uncertainties right now regarding the business. If we then will continue from U. S. Going to Europe, and I can say directly then that the Canadian Fertility and Endrology Association are very similar to the one in U. S. So let's go to Europe then, Eshera. The last update from Eshera was in April. And Eshera are advising the clinics that they should not start any new cycles. And for those patients that already have started the system reproduction treatment, their suggestion is that they should not do transfer. They should then just do vitrification of the oocytes or embryos for when they open up the market. Within Europe, there is also, of course, the British, the Human Fertility and Ambulatory Authority. They came up with recommendations from April 15 that no new treatments should be started with immediate effect then. And continue then towards the East. It is the Australian organization that on March 25 and also on April 2, did some guidance that they should not initiate new cycles. So that was a lot of negative things. What's positive right now is that we can see that they are opening up in some of the markets. The Australian government made a decision yesterday to lift the suspension on IVF. So clinics yesterday or actually today then has gone out with information that they are opening up the clinics. And they will, of course, and following the normal pattern and be extra careful regarding the risk of having an infection. The positive then is that China was the first one, as you know, to close down. They're also the first one to open up the business. We can see that clinics after clinics are opening up. And a good qualified estimate is that China IVF market is currently up running at around 50% of normal business. But it takes time to open up the business. And from VitriLife side, that we are not selling hormones. We are within the laboratory business. There is a delay from the time when you start to do hormones stimulation up until the time when you do the oocyte pickup and you start embroculturing, that is around 4 weeks. So there are some light within the tunnel. And by that, I would like to hand over to Mikael. So please change page. And Mikael? Thank you. I will take you through the key financials during the Q1. And if we start with the gross margin, it was 62% compared to 63% during the Q1 last year. And the variance then is that the margin was positively impacted by currency and by reduced amortizations. However, the margin was negatively impacted by scrapping costs, both related to the quarter and then some provisions for the 2nd quarter following expectations of those sales. And the margin was also negatively impacted by product mix. Basically, that we were selling less share of media and higher share of genomics. Looking at the EBITDA margin then, it was 35% compared to 40% in the same quarter last year. And the variance was both due to the gross margin variance that I just mentioned and also that we had higher operating cost in relation to sales during the Q1 this year. The reason for that was that we have been strengthening the sales and marketing organization during the year. And due to that, the sales growth was not as high this quarter as the increase cost, you get the effect that the marketing and sales cost as a percentage of sales increase. We have also strengthened the R and D department, amongst others, through more research collaborations, and you get the same effect there as with the marketing and sales. In addition to this, we recorded a SEK 3,000,000 provision for bad debt in relation to a potential customer loss. So all in all, declined from 40% to 35%. Net debt in relation to EBITDA was minus SEK 1.2 billion. So we end the Q1 with about SEK 715,000,000 from us in the bank with no financial loans. So with that, move to Page number 7 then for the long term outlook. So we continue to see a long term growth of 5% to 10% in monetary terms. As before, we will continue to focus on sales expansion. So for example, through the strengthening of the marketing and support organization. And we will continue to focus on broadening the product offering, both through development, which we are continuing at full pace at the moment, and through acquisitions, which we have financial resources to complete. So with that, operator, we are ready for questions. Yes, sir. Thank you. Ladies and gentlemen, we will now begin the question and answer And we now have our first question and this comes from the line of John Olander. Your line is now open. Please go ahead and ask your question. Yes. Thank you for taking my question. Jan Olander, Mjalfica Research. Good with the overview of the sort of recovery and all the different measures taken in different regions. Very encouraging that China opens up and it's at 50%. That's quite impressive, I would say. Japan seemed to be not very affected at all. What is the reason for that? And do you think that they sort of will be I mean, not affected at all? Or do they sort of considering shutting down? What is your view on that? Hi, Bjorn. Yes, Japan, good question because Japan is a tricky one. What we can see is that the Japanese clinics are still up and running, and they are their ambition to continue to do it. The kind of restrictions that are on the Japanese market right now is not impacting at all the IVF business. But you know that I have to be very careful because it can change. So what we are seeing is that they are running at the clinics as usually. There may be few, few less visits by couples. But otherwise, we see a very normal business in Japan. If you compare then the Japan Pacific, that is one of our regions that we are communicating about. And in Australia, as I said, there has been a lockdown where they currently is opening up to the market again. So I mean, who knows what will happen with the COVID-nineteen and when everything will return to normal. I guess it will take some time. But it seems like the sort of shutdowns that we have seen from SREF and also in the U. S, I mean, it can't be that much worse. So the question is more when it will become better. And it seems like there's some signs of sort of improvements during Q2, I think, opening up clinics, as you mentioned, and so on. What is your sort of best guess? Is it would it bottom out during the Q2 or perhaps the Q3 or I mean on a general scale or if you like on a regional basis? I mean, there's a way out from this current situation. Bjorn, best guess today is very difficult. What I can inform about is just the current situation where you started with a question regarding Japan, and that's as normal as it can be. There has been reactions on the Australian market, and that's why they have decided to open it up then. If we can see in U. S. Then the ASRM. When ASRM was going out with this kind of guidelines, there was a reaction. There was a very reaction within the clinics. They thought it was too tough. So the clinics in the U. S. Has not completely shut down. I mean, there is some clinics that are still doing it. And it seems like they are opening it up a little bit slow. So there is more regarding, let's say, a carefulness within Europe right now. I mean, we all know what's going on in Germany, Spain, etcetera. So you asked for a best guess from someone that is within the business. Yes, U. S. Will hopefully open up slowly, but in a positive trend. Europe is going to be market by market, more or less. And we can see that some of the markets in Europe are opening up, Czechia, for instance. But there's still, as you're aware of, the situation in Spain where there's a lockdown more or less. But this can't be forever. It can't be forever, Jan. Yes. I mean, in a way, it's the clinic's own organization that recommends them to shut down. So it's a bit of a tricky situation. And that leads me to the next question. The many of the clinics are suffering, especially the I mean, many are private privately held and so on. And I assume there are major financial distress on many of those. What would you think will happen to I mean, would this change the market structure in terms of, I mean, fewer, small clinics and more larger chains? Or would it in any way sort of change that dynamic you think? And also, is there something you can do to sort of help your best customers in this situation? First, what's going to happen long term, no one can say. We are not seeing currently that it is has started to be any kind of consolidation due to that clinic or some kind of financial difficulty. The situation currently is that most clinics are then doing internal trainings and are preparing for the time when they can go into, let's say, normal business again. We are Vitrais. We have a good financial situation. And we are, of course, trying to use this unfortunately situation for customer, but to help them. So strengthen up our relationship and help them to get through the worst time if we have a possibility to do it. One thing that we are doing and what the clinics are doing is that a lot of web based training and sessions are going on. So there is a mix between training, education, support in that way. And not so many, but there are a few discussions regarding delayed payments. Yes. I assume so. And that leads me to my final question. I mean, you mentioned that you have a strong cash position and there may be consolidations. You mentioned that you might considering acquisitions and so on in this environment if that's if opportunities arise. Could you comment anything on what would be particularly interesting right now or what will be more sort of open for those kinds of discussions right now? It's only gone a couple of weeks, a month more or less. So there is not really anyone of our competitors that is coming to a situation where they're saying, please come out and buy us. However, I can say that some discussions are already if you have had a discussion for a long, long time, there is an opportunity to maybe reconsider those discussions. That's a normal thing during the M and A. You start to know each other and you don't realize it will be taken. But we are ready for it and our business development department are working quite heavily with looking into some prospects. And that's going to be both new technology and also distributors and things like that? Whatever makes sense from us and we can use our strength right now, we are going to use that strength. Sounds good. Okay. Thank you very much. Thank you, Ben. Thank you. And your next question comes from the line of Patrick Ling. Your line is now open. Please go ahead. Okay. We have no response. We'll move to our next hello, Patrick Linge. Your line is now open. Please go ahead. Hi, me. Hello. I can hear you, Patrick. Yes, you can hear me. Good, good. If we start with consumables, sales were down 5%. And maybe if you could reporting structure, if you can just give us some flavor for how that would have been between media and disposable devices. Yes. I can answer that, Patrick. And we've seen a larger decline in the media side than in the disposable devices. And it's really due to that. We have a higher portion of sales from media than disposable devices in the region that was impacted earlier by the COVID-nineteen, so China. So it's a larger decline in China than it was sorry, in the media than it was in the disposable devices. Is there a decline at all in Disposable Devices? There is a small decline. Okay. Great. Because if I remember correctly from Q4, you had some challenges, especially in China in the Q4 to win back sales that you had or customers that you had lost during your delivery disturbances. Maybe you can update us a little bit on how that process has developed or if that is sort of an irrelevant question given what's going on in China? Okay. Hi, Patrick. Thomas here. Since it's more like a sales oriented question. Yes, as you said, we had a challenge to convince the customers that we should do a short term switch back to our products before we got the new registration. The new registrations, I think we have communicated those are in place. The situation right now is, as you know, that China are in Q1, they've hardly done any cycles, and they are starting to pick up those cycles. And I am positive that we have an assumption shared. It's too early to say because the numbers are not big enough. But I am quite positive, and we can see that from our interactions that it is a good way for them when they are starting up that they are also starting up with a media that they prefer to use, if I put it that way. But in the current situation, I mean, do your sales guys even have a possibility to go out and meet clients in the lockdown that you're especially No. They can't go out and meet them the traditional way being there. But we can send products and you know that they've been using similar products. So there isn't any larger problem for them to actually transform to the products. And since Anyhow is starting up and they need to order new products for the inventory, etcetera, it is a restart within the Chinese market right now. And if they have had any media on the shelf, it going to be scrapped for that because it's too old. Could I also ask when you said that sort of the 1st weeks here in April that when you compare what is happening right now in the beginning of the second quarter that you see sales at a level of approximately a third of what it was last year. The same period last year, could you just remind me if there were anything special happening? Was sales extra good or extra bad? I mean, how is the comparison really when you No, I mean Was it a normal period? Yes. It's normal period. It's yes, the situation where no procedure more or less is being done in Europe. They said in U. S, be careful. Don't do anything if you don't need to do it. The business has been running more or less normally in Japan. We can see slowly pick up in China. Thailand in those markets doesn't exist yet because they are behind the China market. So there is just no demand. Could I also ask maybe this is a question for Mikael. I mean you talked about that you had taken some scrapping costs in the gross margin here in Q1. Could you quantify that? Maybe I missed that on the presentation. Yes. It was in the region of SEK 7,000,000, SEK 8,000,000 in total in the first quarter and whereof some of that was provisions for scrapping that we expect in the second quarter. Okay. Okay. And when it comes to the bad debt that you talked about, around SEK 3,000,000, was that only for Q1? Or did you do as you did with the scrapping costs that maybe you took some provisions for things that you see might be coming in the Q2? No. That was just for Q1, and it was not corona related. No. Okay. Okay. So have you seen any signs that there might be bad debts that are corona related going forward? I mean, you talked about that, that you were in discussions about maybe extending payment period and stuff like that. Yes. I mean, we have not seen any signs of customers not being able to pay us. We are seeing some discussions about temporarily longer payment terms with some customers. But we have not concluded that we believe that they will not be able to pay us eventually. So no indications of write downs even though there are some discussions on prolonged payment times. Could you just I mean, when we look at the situation in Europe, where some countries like Italy and France and Spain is virtually in complete lockdown right now. Do you have a feeling for what type of staying power the clinics have actually if they basically stopped all their operations? I mean, how long can this situation go on without smaller clinics going bankrupt? No. I mean, a difference from clinic to clinic. If you talk about Europe, some of the clinics in Europe are, as you know, public, I mean, related to public health care. Those clinics has been forced to stop. So the people that are working there should work within them, within the demand that they have in other specialties within the hospitals. Otherwise, the private clinics there, we have not seen any of those signs right now. If it would take a long, long time to get out of this, then of course, we will see it. But the situation is that most clinics are profitable. And I don't think they will be in any bankruptcy. At least we have not heard anything of in that kind of direction. It's only what Mikael said that a couple of brands that has bought technology would like to delay the payment amount or so. Okay. And I suppose that, I mean, publicly funded clinics are in a significantly better. So do you have a feeling for, if you look at Europe, for example, a large proportion of the clinics or the cycles that are done in publicly funded clinics versus privately funded clinics? In Europe, around 25 20, 20, 20, 20, it depends upon how wide you do Europe. But let's call it Western Europe then, around 20%. Of cycles are done in publicly funded. Yes. 20, 20, 25, depending upon where you cut the cake. Okay. That's all for me. Thank you very much guys. Thank you. Thank you, Patrick. Thank you. And we have another question, sir. The last question, this comes from the line of Daniel Albin. Your line is now open. Please go ahead and ask your question. Yes. Thank you, guys. So I just have a question on time lapse. And I know that you earlier have spoken a bit about that you are planning to launch a software in this field, the IV software. And I'm just wondering if you could update us on that timeline. Yes. We if you go on our web page, we have already informed that on Saturday this week, we will do a prelaunch and explanation regarding that IDA score. IDA score is one of our artificial intelligence software to improve the outcome of time lapse. So you're more than welcome. You can go up on our web page. You can see a link and you can click there. And you can also attend one of the first web meetings, larger congresses that's going to be web based from this weekend. Okay. Thank you. That was all. Thank you. No further questions have came through. Sir, you may continue. If that's the situation, thank you very much for the question and thank you very much for listening in. And by that, this meeting is then ended for today. Thank you. Thank you. That concludes our conference for today. Thank you all for participating. You may now disconnect. Speakers, please stand by.