Earnings Call: Q4 2019

Feb 6, 2020

Ladies and gentlemen, thank you for standing by, and welcome to the Britra Live Reports and Operations 2019 Conference Call. At this time, all participants are in a listen only mode. After the speakers' meeting, there will be a question and answer session. Would now like to hand the conference over to your first speaker today, Thomas Axelsson. Thank you. Please go ahead. Thank you very much, and good morning to Vitro Life report on operations 2019. And the speakers today is Nico Hinman, the CFO and myself, Thomas Exoson, the CEO of Vintra Life. So let's start right now, and we will go into Page 2 and have a quick summary on Q4 and also year to date numbers. I'd like to say and start with that the Q4 and the full year is almost the same in key figures. The sale growth in Q4 was 28% compared to 29% for the full year. If we are looking on local currency growth, it was 21% for the quarter and 22% for the full year. What I'd like to say then is the organic growth was 11 percent for the quarter versus 12% for the full year. The EBITDA margin follow the same kind of pattern. It was 39% this quarter compared to 40% for the full year. In summary, I would like to say that it was a year of high growth, and it was especially good year for the time lapse and also for some of our market regions. To explain that more in details, let's go to Page number 3 and see where the sales was coming from and also some comments on it. When we're looking into Page 3 then, I would like to go from the left side and start with Americas. Americas has shown numbers this quarter and during the year that they have not been showing before. It has been a very, very good growth for our overall business, organic growth. It has been growth within all product assortment. But especially, I would like to mention that the time lapse is the most remarkable thing during the year. It seems like time lapse is also stopping to be accepted in U. S, and we had good growth within that line. Of course, also that the genomics is a business that is well accepted in U. S. And there are more PTKAs there than in other regions. If I then are continuing to the EMEA region, where the sales there was SEK167 7,000,000, it was a good growth of 11%. When comparing that 11% growth compared to the 50%, 55% earlier in Americas. I would like to say that both of those regions has some unorganic growth through genomics, but both the region has good growth in all areas. And a good thing with EMEA, what I would like to say is it was growth within the media and especially with verification. And verification is something that I've talked about before. It's a growing segment within the EMEA field. Also, in the EMEA market, it is a situation where the direct markets, where we have our own sales force, has grown more than the distributor business. And with the distributor business, we have some fluctuations between some quarters. If they are, for instance, buying a little bit more at the end of the quarter or not. So that's a normal pattern for having a mix between direct and distributor market. The 3rd market going into that one, and I would like to mention a couple of things with regard in Asia. And in Asia, in this case, is Asia, Japan. So it is, in our case, China, of course, India, Thailand, etcetera. China is our biggest and most important market in that region. And the time lapse, as you know, has been approved there for some while, and we are starting to see good sales within time lapse even in that territory. What we are seeing and the second thing is that our expectations that we had that we should in Q4 be able to transform customers back to our product assortment when our supply problem was solved has not been so successful as we expected. The positive thing and the discussions with the customer is that we will and are able from the end of Q4, but actually Q1, depending upon the inventory level, to be able to sell our global saw demand. So the situation where we are having a special sourcing and also inventory for the China media markets is out of the picture. And some of the delay regarding the customer switching back to Vitro Lite has come from that situation. The customer knew that we were having regulatory approvals and that we were going to introduce the demand during Q1 this year. And therefore, they don't want to switch back for a month or a couple of weeks and then switch back to something that they were waiting for. In Thailand, Vietnam, India, it is slow growth. And we do see that the upgrading of the clinics there and the growth that is there are regarding providing more and more quality treatment for the entire year. And that fits quite well with our strategy and our work of getting with those customers. The growth then, as you can see, was 1% in that region, and it was good growth with time that it was then a decline in media that is also you see when you're looking upon the different kind of product groups. And then Japan Pacific. I will start then with the Pacific. The Pacific region, Australia and New Zealand is following more or less around 0 or maybe a little bit growth. And we are seeing the same type of situation here. The outstanding performance then for that region, we have a growth of 50%. I would like to mention a couple of things. One has been mentioned before and that is that our media is growing due to our new products that can be that has been introduced, the antioxidants in time. Together with that, the clinics has accepted and is presented for quite a while time lapse. And with the introduction of especially the endoscope flex, where in Japan, they are doing more low stimulation, The timeless product, Ambrosmanflex has very has been very well accepted in larger clinics. And also that Irvine, our traditional already introduced products due to that we see efficiency and clinical advantages of it. If I then are looking on the reporting per segment, it is Japan and Americas, of course, due to their increase that has increased the market contribution then. It is the sales effects that we are getting. And as discussed before, genomics has some negative impact on the gross margin, especially also within the EMEA since we had built up our structure and support structure for the Genomex is mainly based in Europe. By that, please change to Page number 4, and we will look on the business units. And I will go from the top and down on that picture. Start with Genomics. I don't think it is anything special to mention during that quarter. The Genomics sales was €34,000,000 if you compare to the €43,000,000 is €37,000,000 So we can see that we have made it to transform the business to VitroLife, and we are keeping up that kind of pace then. As mentioned then, we are continuing with building the support within the field. And during the year, we have full support and also we are continuing with the development of our own products for the GVTA. So stable situation. We've been able to transform the customers, and we are working with productive equipment. Our equipment is a negative growth of 14%. It is our smallest business unit. The sales are €13,000,000 What we can see is the same trend, and we've been working with it. And it is a situation where we are focusing on our own products, and we are we have during the year more or less stopped with most of the distributor products. There are some distributor products left, but otherwise, most of that space is coming from our own products, lasers and Log and Guard. We are continuing with our market approvals for U. S. And China, and we are not seeing any differences within those processes where we do believe and it's always difficult to judge, but we do believe that it's going to be an approval in U. S. 2020 this year and unfortunately not this year in China. Time lapse. As mentioned before, when I talk about the regions, it is a significant quarter. It is 41% in growth. It is SEK143 1,000,000 in sales. I'd like to mention that this good growth in every region. And by saying that, I should not even mention anything specifically, but I would like to repeat that this U. S, China, Japan that is really continuing a good trend and those are the biggest market too in billing cycles and also in revenue for the clinic. So that's good that they are getting acceptance for this product line there. Our product offering has also been strengthened during the year and also during the quarter. And after closing day, we have introduced even a new product for a different segment. We are doing differentiation on what kind of hormone treatment, what kind of performance they do inside the clinic, and that's mainly based upon size of the clinic then. So Endoscope 8 is the one that is suited for most midsized clinics. By that, we don't have disposable devices. It is minus 5% during the quarter and is plus 2% during the year. We see that there is some fluctuations also there between the quarters, depending upon the delivery of especially containers to some of the distributors. We are right now out of all back order situations. So during the coming year 2020, this year, we can concentrate more about sales. Okay. Let's go down to Mika. I've mentioned before, the only challenge we had on Media is the growth in China. The total growth in Media is plus 1%. Sales is SEK 164,000,000. The limited sales growth of 1% is only due to the negative situation in China with our transformation back to interactive some customers. But it's good that our global product assortment is more or less the same right now. And that's positive for our culture media and transfer media that we have working with our customers. What I would like to mention when we are on the media and the same situation on China, since China is an important business for our media and of course for time lapse, I would like to mention that within the report today, we are saying that we can't foresee what's going to happen with the Chinese market short term regarding to the corona. What we can say is that the patient inflow is usually was closed before the New Year And still, the same kind of segment where larger clinics and labs were kept working during the New Year to handle the culturing and the transfer that already was started. And with the coronavirus and what our authorities have done in China, the expected recovery of inflow of patients that was expected from February 3 is now delayed to the 10th February. And that will mean that we are at least seeing a slow start of the new year. And that's why we are saying that we believe that Q1 in seismic being done in China will push you on hold on. Information from this morning have been updated in just a few, few minutes before this meeting. According to the IVF lab group, where they have more than 500 members of ambulologists and doctors this morning, They are saying there's a very, very few patients coming in this week as expected due to authorities' warnings regarding, as you well know, that they are not supposed to travel. Major clinics are saying that they expect to open up next week, but we don't know what's going to happen. No one knows that. For our product line, the time lapse, the hardware equipment, we are not seeing any changes except delay in installations. Regarding the consumers' media, that will pick up when the cycles will pick up. Thank you very much. And by that, I will ask Mikael to go through the financial and other things on Page number 5. Thank you. So when it comes to the 4th quarter financials, the gross margin was 62% compared to 60 67% in the same quarter last year. And the negative variation is primarily related to the product mix, as we've seen earlier this year, with the genomics business unit having a lower gross margin than the average full growth. The other key variance is related to Sretin, amongst others related to media as a consequence of difficulties in planning the right production volume for China. Looking at the EBITDA margin, it's down from 22% to last year to 39%. And despite the gross margin variances that I mentioned above, also the IFRS 16 had an effect here, a positive variation of about 1 percentage point. And we are also seeing in the EBITDA result a positive effect of currency of about SEK 7,000,000. After the end of the period, the Board proposed a dividend to the shareholders of SEK 140,000,000 compared to SEK 92,000,000 last year. So that equals SEK1.05 per share compared to SEK0.85 last year, And that's equivalent to a 24% increase. Then we move to Page number 6 on the outlook. So we continue to see a long term market growth of 5% to 10% in monetary terms as before. And we expect it to be driven by the parents to be continued to wait longer to have children. And there's a higher average income in the society, enabling paying for IVF and also increased social acceptance of IVF. In each of us, we will have the core continue to expand sales. And to support this, we have during the year invested in, for example, a broadened product portfolio, and we have also invested in a strong sales and support organization. We will continue to broaden the product offering, and we are working with our development projects in all our business units, and we are also exploring M and A opportunities as they arise. And finally, as Thomas mentioned, we expect the Q1 sales to be negatively impacted by the China virus outbreak. With that operator, we are ready for questions. Thank you. Ladies and gentlemen, we will now begin the question and answer session. We have questions coming in. We're just waiting for your names to be entered. Your question comes from the line of Bjorn Start with the typical CFO question on the gross margin. You mentioned there's a one off impact on the gross margin due to the media situation in China. Could you quantify that? Yes. Normally, we have certain costs in our running business as a consequence of short shelf life on the media. So this quarter, the like abnormal scrapping costs constituted about 2 percentage points negative variation of the on the cost margin. Okay. That's very helpful. Moving on to prime assets. I mean, it has been an extraordinary development over the last couple of quarters or perhaps years, growing 41% in the quarter. Obviously, the acceptance of the technology is a little bit more sort of established. What proportion of procedures are performed with time lapse in the different regions? I suppose the U. S. Is the leading one. And how's the situation in other markets? Hi Bjorn, Thomas. We are not going to go through the regions exactly that will take forever. I'm trying to answer your question. I do think that what you are asking is where is it accepted and where will the growth be more or less. It is well accepted in U. K. It's well accepted in the Canadian area. It is well accepted in the Pacific, well accepted in Japan and some other few markets will in the direct market. I mean, those have been from the beginning and we had a constant growth in those markets. The markets that then are starting to pick up are China due to regulations that the products approved and also due to their own, let's say, research where they are finding clinical advantages from it and also efficiency, the going out to run the clinics. In U. S, where we have had honestly, a lot of resistance regarding China for many, many years. I would like to say that, that has slowly changed and that's why we see a change there. But it's coming from a low level on how many cycles is being done with time lapse. It's also there, the mid sized larger clinics to see advantages, and that is regarding efficiency and also from good clinical situation where they can perform the genomics, if they would like, to do the genomics differently. They are then only doing genomics on the embryos that has more followed the development. So that's hopefully I can give you that's what I can guide you with. And as I said before, we were expecting that around 15% of the market is using TimeBabs. So we are looking into this, and it is higher currently with the growth. But we can see then with the disposables that they are using that there are growth within the field for sure. Of course, most of the sales is equipment. How much is the disposables for the Time Lapse segment? Yes. We calculate with that over a 5 year period, the recurring revenue for disposables and service contracts that constitutes about onethree of the total revenue for time lapse. So the consumables and service constantly keep together about onethree and equipment to the onethree. Yes. But since you're growing, it's supposed to be in store basis is growing. So most of the I mean, a very large proportion of the current sales is related to equipment sales rather than on disposal side? Yes. You're right. As we are in a growth phase, of course, equipment will constitute a little bit higher share in relation to that. My final question, I'm not sure if we get better answers for that, but the situation in China. Right now, it seems like we have sort of around less than a week of, obviously, of lost performance in China due to this. What is your expectation? I mean, eventually, this will be figured out. It's difficult to assume that, yes, this will affect Q1, but those couples who are sort of impacted in the treatment will come back later on. So on a full year basis, there will not be that large impact on this? Or what is your thoughts about that? What we believe and it is from discussing with the customers because we since people can't see us walking, we have discussions on chat sites and also by calling and having different team meetings during the region. We can see that I mean, we can just follow one thing, and that is that all clinics, and some of them are already closed. This is saying that the treatment cycles, it's always starting with a hormone treatment. And the information that we have got is that the hormone treatment has been started has drastically been reduced the last one and a half weeks. And that will, of course, impact the oversight picked up and the culturing and the treatment then. And all IVF clinics, I mean, they want to resume their operations as soon as possible. And their goals to reach. And when the situation is solved or when other information will come, they sure believe that it's going to be a pickup on and back to the normal situation. We can't judge that. I don't think that anyone can judge it. But of course, it's going to be a situation where the consumer products still goes on for a couple of weeks. And that could impact in Q1. Okay. Thank you very much. Your next question comes from the line of Patrick Quinn. Please ask your question. Hi, good morning guys. Sorry if some of these questions have already been answered, but I missed the call. When it comes to time lapse, Thomas and Michael, could you elaborate a little bit if you had any larger single orders like you had before in that number that we saw this quarter? Yes. In Timex, it is hardware. And as I said before, there is clinics that is buying hardware, and that is looked upon as a single larger order. But the last 5 quarters, with the pickup of time that it is different clinics that are buying and since the value is quite high on each order, we are depending upon sales of hardware. In Japan, it is in the endoscope flex. In the U. S, for instance, the clinics are not as big as there. So there is more clinics. In China, it is the same. It is more clinics. So overall, the space in this quarter is not based on just a few larger order. It is based on many orders. Okay. Great. Good to hear. Could I also follow-up on media sales where you said that you had a challenging time in China and overall growth is just 1%. If you break out China, how much did media sales in China fall in this quarter? We don't report the media growth per region, Patrick. But the growth rate in excluding China was at a satisfactory level. Just remind me what you think is satisfactory for media since it's a mature product? Is that Yes. The market growth rate is 5% to 10%. So in that level, we are talking about. Okay. Great. Good. And could I also ask, when it comes to China, I know that it's difficult to answer this, but in this scenario where a couple have started hormone treatment and for some reason now they are unable to go to the clinic and continue. What happens? Can you just continue hormone treatment for another month and then just wait? Do you have to restart the process all over? So the impact on more consumable parts might be something that lingers on a little bit longer. While for example, you mentioned that for hardware and time lapse that it will just be delayed in installation, that might recover quicker. Could you elaborate on how we should see this? Yes. Quickly, it is an event New Year. And during the New Year, they are planning for normally for less hormone cycles and also less treatment. If we are looking from the hormone treatment, it takes some time when we start it up. The ones that they were doing hormone treatment with and they had started to plan for a pickup, those have been done if there's a possibility for the patient to come to the hospital. I mean, €100,000,000 has been impossible then. So the few ones that have already started, they have done it. Where they have started the capturing and they've not been able to be transferred, they have done a trial on those embryos, which means then that they have neutrify them or they have done slow freezing on them. The situation that they are not starting up any new treatments. So if I understand you correctly, the patients that have started hormone treatment and were planned for doing egg extractions, they are really the ones that might be having to start the process all over. But if they were already in sort of, yes, growing the embers, they could just freeze them and wait until and do the translators and that part of the sales might come back to you quite rapidly? Hopefully. Hopefully. I mean, we I mean, it's a difficult situation. And the ones that are so lucky, so they've been able to hit supply, let's say, prior to the end of the semester, I mean, the transfer. But in China, they are still mostly fresh transfers. So this is also a situation where I don't have any projections. I mean, there is limited information that we can get from all clinics right now. Okay, good. Thank you very much guys. Your next question is from the line of Andrea Ruiaud. Please ask your question. Hello. Thank you very much for the call. I would like to ask what percentage of revenues come from China? Yes. Between 15% and 100%. Okay. And also, do you search the clinics that are in the cities that are closed with both of the Yes. I mean, we have a distributor network there. And our it's a system built is we're trying to cover all China, of course, our major distribution points are Beijing, Wuhan, Shanghai, Changsha and Guangzhou. So of course, that in the Wuhan province, there has been a completely stop in all deliveries of products whatsoever into the region. For Beijing, Shanghai and Guangzhou, there is still possibilities to get products into those areas. But it is not functional as well as before, of course. Next question comes from the line of Victor Forssell. Please ask your question. Good morning. Thank you for taking my question. I'll start with one on genomics. Could you tell us anything about the demand, how that has developed since the 1st quarters? And if you could say anything about the underlying growth in that segment plus what you expect for next year? First, I'd say that we took over the distribution rights in Americas and in EMEA from quarter 1. And the quarter 1 was a transaction phase between Illumina and VitroLite. From, let's say, Q2 then, we have been dealing with all customers with support and order logistics. And we are then running the business. And you can see that in the sales in Q4 was almost the same as in Q3. And that is, let's say, the current normal safe pattern within that line. The growth, as we believe, is within the genomics overall than mostly right now taking place in Asia. We are doing product development. I can't tell you when it is ready. But when it is ready, we will then also have the distribution rights and start to deal with the Asia market. So current growth in genomics from Spain, U. K, U. S. A. Is maybe 5%, 6%, 7%, roughly difficult to say. Asia is coming from a very, very low number and the growth is there in India, Thailand, Japan, for instance. Okay. That's great. Thank you very much. And two minor questions for Mikael. The pickup or the sequential pickup that we see here in terms of R and D costs as well as D and A, is that something extraordinary or is it more of the new levels we see from here? Yes. When it comes to the R and D costs, they have picked up over the year. For example, we have invested more into time lapse development and through the development of the AI technology. So but of course, they also vary a little bit between the quarters depending on the activity level of different projects between quarters. But we have closed off during the year to expect R and D cost in relation to sales to increase somewhat, and we have seen it. When it comes to the D and A, yes, when we did the alumina transaction in the end of 2018, we also had some amortization as a consequence of that transaction. We also did the Parallax acquisition even though it was a little bit smaller. So we have seen more amortizations coming into the P and L during the year. Was it something extraordinary in this quarter? This quarter was not there was not anything extraordinary in this quarter when it comes to D and A. Your next question comes from the line of Daniel Aldrin. Please ask your question. Thank you. So I have 3 questions. First one is regarding China. Let me just rephrase this. I mean, with discussions with the distributors in year to date 2020, how much are the number of IVF cycles down? That's my first question. The second question relates to time lapse and what we should expect going into 2020 in terms of growth rates. And the third question is really on genomics. And I wonder if you could maybe elaborate a bit on the noninvasive genomics test that you are developing and how that is progressing? Thank you. Okay. A couple of quick answers then, Daniel. China, we have no numbers on it. I don't think there is anyone that knows the numbers right now. So unfortunately, that would be good to have. Growth rate regarding then time lapse, What do you mean there really? I mean, so I'm trying to understand you because there is a couple of things. It is clinics using it or cycles being done by the time lapse. Well, your assessment of how you believe time lapse sales growth would be in 2020, obviously, market growing with 5% to 10%. Are you closer to 10% to 20%? Or should we expect a similar scenario as in 2020? And I don't know if you could elaborate a bit on penetration rates regarding larger clinics versus smaller ones. Okay. I'm not going to go into those details. I can say it is what I have said before is that all information in doing projections regarding time lapse cycles being done. Let's say, cycles being done with culturing during time lapse has been around 15%. And we thought that we had maybe 12%, 13% of those, which means around 85% market share. And we see that the timeless market has been growing a lot in the last year, and it is we do believe it's also to continue to grow. Looking on the consumer side, there are I don't want to say any real numbers right now because we are looking into this in our market assessments regarding 2020. But of course, there are plus 15 easily that are currently doing cycles with the culture in this time lapse. And the trend, as we see, it is not a changing trend. We have said that we believe it's complete kind of a care. It always takes a long time within the medical field to change behavior is and also do an excellent in hardware. And we believe it's going to grow, of course. The genomics, all of the, let's say, current thoughts regarding future ways of doing genomics will be regarding is it going to be a biopsy on the embryos or not. And on invasive, taking it directly from the media, is one of the tracks that we are looking into and also other competition that is doing it. And when it will be ready, there are different kind of different products out in the market that I would like to say is maybe not not again, I should say, if there are there are different attempts to come up with those. There is not any significant pay currently on those things from anyone, right? We as well as cutters are looking into Okay. Yes, good. Thank you. There are no further questions at this time. Please continue. Okay. Thank you very much for the questions and also for listening in. Bybit, thank you very much for listening in on the support on operations 2019 for Vitro Life. Thank you.