Earnings Call: Q3 2019

Nov 6, 2019

Ladies and gentlemen, thank you for standing by, and welcome to the VitraLive Interim Report January to September 2019 Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. I must advise you that this conference is being recorded today, Wednesday, November 6, 2019. I would now like to hand the conference over to your first speaker today, Thomas Axlofsen. Thank you. Please go ahead. Good morning, and thank you for listening in on Vitra Live's interim report January to September 2019. The speakers today will be Mikael Englom. He is the CFO of the company and myself, Thomas Exos, I'm the CEO. So let's start to go through the quarter then with Page number 2. In summary, the quarter was a good quarter with continued profitability. The sales of SEK378 1,000,000 and it was a growth of 33%. Sales increased by 27% in local currency and after that, it was 15% it was an organic growth. EBITDA margin was 41% and in numbers 165% in EBITDA. Please change to Page number 3 and Mitra and I will start to go over the reasons behind this growth, profit growth. Okay. So let's then look on sales and growth per market region. The growth, as I said before, was 27% in local currency and 15% was the organic growth. If we start then from the left of the page from Americas and then go through the regions. It was a sales of €75,000,000 €71,000,000 in Americas. It was good profitability. And we are quite successful right now with the genomics and also with the media in that region. We are still and I could say that for all regions, not for all regions, but for Americas and EMEA, we are distributing the alumina products within the genomic side for this field and for the IVF field. The growth was 35% in the Americas. If we go then to the region EMEA, it was a growth of 26% In the numbers, it was SEK147 1,000,000. It was growth in every business unit, and it was also growth in almost all geographical areas. And part of the growth there is, of course, due to the Genomics too. But as I said, good, good growth in every business unit. If you're calling then Asia, that is Asia without Japan. It is mainly China, India and Thailand more or less is then the growth there. And I would say only 4% and I will explain a little bit more later when we're coming through the business units. The growth there was within time lapse, and it was a negative situation for the sales of Media. The sales was SEK89 1,000,000. Then for the Japan Pacific, it was a fantastic quarter. The growth was 69%. The sales in that region is increasing due to more sales of all products. But I would like to mention that during this quarter, we have had good sales of TimeLapse. And one product that we introduced, for instance, was the Endoscope Flex. And that's our largest product within the TimeLapse family. It takes 24 patients. So overall, it was a good growth of total 27%. Let's then change to number 4 and look into the business units. So let's start from the top. The Genomic business sales of SEK 37,000,000 and that is, as I mentioned before, only for the regions, Americas and EMEA. Within that field, we are keeping up with the customer demand and we are also continuing with building more and more support. And since it's a phase, but I will comment also that we are continuing with the product development in this field. And then move to the Art Equipment. Art Equipment, as mentioned at earlier telephone conference, we have changed the product mix and are only more or less producing our own products with better profitability. The growth is 35%, and the main product there is lasers, sales of 19,000,000 SEK. I would like to say that we have not yet got approvals for the last version of CornebulaZE in USA and China, and those are the biggest market for lasers. TimeNestan, a growth of 45 percent and sales of SEK 108,000,000. It is growth in all product lines more or less. We have new products that is driving the growth. And it is Ambersco Plus, as we talked about before, we have introduced Flex 2. And I will say that it is a great interest for Time Lapse. It's coming from the last 2 larger conferences. It was the one at ASHRAE for Europe this summer. And then also during this season, it's in the ASRM in U. S. We are in that range continuing the product development, both for hardware and for software and are continuing our work with artificial intelligence to make the products more accessible for the users, means easier to use. Of course, the devices, growth of 11%, CHF 46,000,000 in sales. And we are coming out of the situation where we have had some problem in the Vibulin products. We are still increasing the production and that is a trend and we are increasing our capacity. So we can see that it is growing trend there and it's 11%. Media then, it is a growth of only 1%. It has been growing good in all regions except for China then. There is good growth within the cryo products. And I mentioned in China and cryo products and product development, I would like to change to Page number 5 and look into the media. During the quarter, a couple of things has happened that I would like to describe regarding MediaPad is for V2Vec good news. 1st is news regarding our development and what has happened there. During the quarter, we or let's say, customers were presenting data at the U. S. ASRN Conference. The data there was from a multicenter randomized control trial and it was an fiddling all size multicenter study. And what we have done is that we have done some changes within our media for better performance. The biggest breakthrough and changes are the right combination. And I would like to say the right combination of antioxidants. Antioxidants is something that is well known with this field, but it is just a question about getting the right combination. And it is for 3 different antioxidants that is acetyl alkyl and acetyl alkyl and also alpha lipoic acid. And all of them are used in sequential culture media system. What's good is that the Japanese study that we've done is showing very good results. It is an increase definitely for those over the age of 35. It is an increase in clinical results in infantation rate, fetal heart rate and also on ongoing pregnancy. We are waiting on more data on baby born then. The reason behind this success, the product development is that it is all about the reduction of oxidative stress. Okay. And then during quarter also, we did the launch of the Pore Site Electrification Media in U. S. We got it approved, the FDA approval during the quarter, and we did a launch at ASRM. So now we are able to go out on the U. S. Market and have both media and also the handling consumables, the straws that you're using when you're handling the ore sites. And this is a good thing for Vitroix because it is a situation and it is a field where we do believe it's going to continue the good growth And it is growing due to the growth of social freezing, but also that you can take action before medical treatments that can cause some kind of fertility related problems. And with the usage of each vacation and also pickup and you have a good survival rate, that's a very good way of reducing the, let's say, the problem of some kind of medical treatment. Look upon the upgrade of media range in China. I said before that growth in media of only 1%. And China media market is very important for Vitro Life. And we have had, as explained before, some problem with the sourcing of raw material. We have overcome that problem during the quarter, and we are now building up the production and inventory for reintroducing them on the China market. And all of the products are for the culturing field. We are also doing we've been doing that for many, many years, but I would like to address that the registration process for our products, so we can have a global harmonization of all media is going well and we expect that some of the products that we are selling in other countries will also be regulatory approved within the near period. If that's going to be Q4 or Q1 or Q2, you can never say because it's difficult to actually know when we are getting the registrations paper, but it goes quite well. So overall, it has been a good quarter in all product groups, in all territories and advancement within our product development and time lapse and also within media. I would like to hand over to Mikael in case number 6. Yes. Thank you. And I will take you through the key financials during the quarter. So we recorded sales of SEK 378,000,000, as Thomas mentioned. About SEK 20,000,000 of that increase was due to currency effects, primarily the weakening of the Swedish Groupon. Gross margin was 64%, down 2 percentage points compared to the same quarter last year. That is primarily due to the genomics product mix. So the genomics products have a lower margin than the average of the group. So it impacts the product mix negatively with about 2 percentage points. EBITDA was SEK 165,000,000, up compared to SEK121,000,000 same period last year. Also this increase, about SEK9 1,000,000 due to currency then. The margin of EBITDA was 41%, so down 2 percentage points compared to last year. And it is the genomics product mix that is impacting this compared to last year as well as that will have a positive effect on the new accounting standard IFRS 16, which contributes with about 1 percentage point compared to last year. Net debt in relation to EBITDA is minus 1.1. So we have a net cash position of close to CHF 600,000,000 at the end of the quarter. And as before, our ambitions are to use this for value generation generating acquisitions. With that, please change to Page number 7 for the outlook. So as before, we expect a long term market growth of 5% to 10% in monetary terms, and that's breaking down to a cycle growth rate in treatment of 3% to 5%, and that you're using more and more treatment and technology for each treatment, which then adds the value for the industry to what we expect 5% to 10%. As before, we will continue to focus on sales expansion, and that is both. We are adding the resources and sales and support and also work more closely with the large and growing clinic chains of the world. We will also continue to building the product offering, and this could be done both by product development, as Thomas mentioned before, with the media development, but also through acquisitions. With that, operator, we are ready to take questions. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of John Ollendorf. Ollendorf. Three quick questions. First of all, very good quarter. I always try to focus on the uncertainties. So starting with the media business and the situation in China. Has that been fully resolved now? And how it's I mean, what was the result during the Q3? Or has it also affected the Q1 versus the Q1? The Q1? Yes. I can respond to that, Jan. Yes, the sourcing production issues have been solved during the Q3, so we expect to do the Q3. And during the Q4 now, we are introducing the products again that we have not been able to supply to the Chinese markets. And then we are working with the clinics to change from the competitive products that they have had to use during the time that we have not been able to supply the market. So we will work with the clinics now to change to try to convince them to change back to our products through the Q4. Okay. You mentioned in the report that I mean, it seems like the many clinics have switched to 18 products and now you're trying to switch them back to your product, I would say. How easy is that? And if there is a sort of long term excess, it will stay on the product? Good question, Bjorn. You know that it is not all products that we have a problem with. So it is just part of the products, mainly the calcium products. So of course, there have been a lot of disappointed customers as well as disappointed within VitraLex that we've not been able to support the customers within Q3 then. That has been a struggle for the customers. They have been working with it and they have had some concerns. Since they are familiar with our products and they have had excellent results with them. It is not that we are introducing new products. It is that they are able then to get them back into their normal routine. So I wouldn't say that it is a huge challenge, but of course, it seems to be some disturbance during Q4 too because they have some inventory currently because they didn't knew when we were going to be able to support them with the new products. But it's not a long term issue. Okay. Moving on to Genomics, obviously, a very good start for that DTC area, so that's DTC. I'm just curious about Asian market. You are developing new generation products. Could you give some more color on those new products and the polypropylene maybe when you think they will be launched? Okay. I don't know if you know comment exactly what we are doing. I can give you some hints, but it's not any secrets. When you mentioned the Asia and Pacific market, that is not included in our agreement with Illumina. We will get the rights to sell to those markets when we are ready with the new product. The product development in this field is considering the changes that we have seen and that those changes are that it is to have a product that is stable and good at the current very sick product, but also at the same time being a little bit more cost effective because it's been a cost situation within this market. The second thing is also to be able to respond and see how we since we are focusing on the IVF facility market, how we can make this genomics a little bit more easier and a lot, lot more cheaper for the end user, the patient. And the situation there is that when you do, for instance, a PDGA, it is a process of monitoring the embryo. You are using lasers, you do the biopsy, you are then there's a lot of moments there. So what we can foresee is that one day is going to be a market of easy to use products, both from a software situation and also from an ability to maybe get a couple of those steps that is labor intensive and add cost. That would, for instance, be that you can do genomics directly from taking a small sample of the medium. So it's going to be a non invasive situation. So it to improve the current traditional one where you do biopsy and have good results and then also try to see that you are getting a non invasive product line that are as stable and have good performance as if you do it with the biopsy. So that's, let's say, the trends that we are working on. Okay. And those new products or concepts are not limited to Asia? You are No, no, no. I mean, this market is for sure a global market. Of course, it is starting always as it's been in this field in U. S. But I would like to say that it is a growth potential. A lot of the growth potential is regarding cost for the end user and the accuracy of the test. Okay. Last short question, just hang up. Had another impressive quarter. Are there any one off effects in Q3, some major orders or sales, you had recently introduced new products, if it's sort of launch volumes or something like that, just to sort of calibrate the expectation of telecomical I would like to say that I've asked before is that when you go into a business like hardware and where it is where the current penetration on the market maybe is around 15%. It is still 85% of the market that is not using TimeNet. What we will see then is that it's going to be some variation between the quarter that, okay, 1 quarter you are selling a little bit more hardware, another quarter you're selling a little bit more or a little bit less. What I would like to say that we believe in this. And by us saying that just because we are selling to 1 center, we shouldn't be able to sell to another center in the next quarter. I don't think that is correct because it is a long trend and when we are getting customers that is how we are working with hardware. It gives locations between the quarter, but we believe it is a for sure growing segment. Your next question comes from the line of Doug Killeen. Your line is open. You may ask your question. Yes. Thank you very much. A few questions. First, if we start with media, you said that you are in discussions in China regarding introducing new products. Could you elaborate a little bit about, is it the full portfolio of products that you sell on other markets that you're trying to get approved in China? Or is it just a part of it? Can you give us some color on how you can on this? Okay, okay. Let's explain. We are not introducing any new products. We are getting back with the products that we have some sourcing products with. So that's the first thing regarding the market and the sourcing problem that we have had in Q3. And then what I tried to explain and I didn't do that successfully is that what we have been working with for a long, long time is with the Chinese FDA, that's the National Medical Product Administration, to get the same kind of product that we have approved in other territories. The approval process in China, unfortunately, is quite tricky and it can take more time than what is expected. So, what we are doing is that we are waiting on those registrations. That has nothing to do with the current market, the market the products that they are used to work with. It's just that those products that we then will be able to sell also in China are the same products that we are delivering to the rest of the global market. So that's the harmonization of our media range. Yes. But that was the way I had understood this. I mean, the products that you sell in China today are not exactly the same as you have approved in other markets. So when if you look at what you sell in other markets, are you trying to get all your products approved in China? Or is it just part of it? Because at some point, just listening to you, it sounds a little bit like you're expecting the first approval for the newer products in China or the products sell in other markets to come relatively soon? And then you will probably end up in or you could potentially end up in a situation where you are both reintroducing products that you have sold and have had sourcing issues with at the same time as you might want to introduce completely new products. Is that an issue or is that a potential issue? I don't see it as a potential issue because the market in China is when you do a registration process, you are also doing clinical studies to get local data so you can prove the reasons behind the registration and also get user, let's say, feedback. So the products are they know about the products. It is a global world and it isn't so big. You go to different conference, you know what's happening. We have had free discussions with the opinion leaders regarding the product range. So I don't think that's going to be any major problems. So you will not need to change your procedure. You will not need to change any step, any timings in how you're dealing with the media. It's just that media that is performing, the better. Okay. But my thinking was that, is there a risk that a client that has not been able to buy products from you, comes due to the supply issues and are therefore using competitor products. Instead of buying them old products that they get back from solving the sourcing issues, is there a risk that they might wait to change back to instead change to when you get new products approved on the Chinese market? Or is that just not a risk at all? It's a risk in all business, of course. The risk that I see, if you would like to take into consideration of short term financial, let's say, situation is that the risk is that time it will take to for the customers as we view it to end their own inventory of other products. And that's the major risk, how quickly will they then be able to transform back. And maybe if you take the risk assessment that there is a few customers that will not change back. This is always a risk. Okay. Okay, great. Could I also ask about the genomics development? I mean, you're developing your own development or your own genomics products. And could you give us some info on how you're proceeding there and what's the time line and if anything has changed from what you've communicated before when it comes to when you can introduce your own proprietary products? I don't think it's any more news than what I said. We are working on it. That's our ambition. We have a team and we have partners in this field and it is a development and we try to have them as ready as possible, not any time line. Okay. Then last question. Could you update me on pricing for the embryo scope flex product compared to Embryoscope Plus and the ordinary Embryoscope? We don't disclose any specifics on pricing of products. But I mean, obviously, the Amyrscope Flex is our most expensive machine as it has the highest capacity. And you also have some scale effects as a customer when you buy a large machine compared to a small machine. Okay. But we also closed specific prices for the different products. Okay. And you could run 26 embryos at the same time in that one? 24. Not 24 embryos, you can run 24 dishes for a couple of them or for an altering. And What it is, it is based on a situation where you do more of mild stimulation. So you are not having so many oocytes to do a fertilization on. And it is the number of wells that you have with innovation. So it is for markets where you do mild stimulation. So for instance, they do that a lot more in Japan. So compare that with U. S. Where they're doing let's put it that way and where there are cases where they take the dose of 25 eggs or even more, than this product would not be suitable for the U. S. Market. So this is a market this is a product for clinics that have larger sizes that do mild stimulation in most cases. So it is a product for mainly the Asian market and some larger clinics within EMEA. Okay, great. Okay. Thank you, guys. Thank you. Your next question comes from the line of Dieter Forcell. Your line is open. You may ask your question. Hi. Thank you very much. I think most of my questions were answered already. But I have one last one on the Time Lapse segment. Is it possible for you to dissect the growth a bit more in the quarter? I mean, last quarter, we had the last order from Eberoscope Plus to China. If you could sort of bridge out the growth in different regions, but also in rough figures by the different systems, that would be great. Thank you. We are not going to disclose that regarding our product. I can guide you like this then. We made an announcement last quarter regarding the China order because it was a product that we have been doing development on. That was especially also done for the Chinese market. It fits very well with the Chinese market and we got it approved. So this guidance to the market and saying that, okay, this is approved and we are starting to sell it in China, that's good guidance to you and the market. We are now starting also to sell Amber's Globe Flex and the information then to you is that it is and you can see that it is a product that fits well into the Japanese market And the same kind of answer on as Patrick was asking about. So you can see that the product range having everything from single product, just one country like the Primo and that is hardly being sold anymore to the traditional endoscope, endoscope and plus and endoscope flex. It's taking into consideration that culturing therapy that what you do. So, the bigger clinics go for larger products depending upon mild stimulation or not and that's then, let's say, the guidance for and what kind of regions is it that they will use, what kind of product and then size of the clinic depending upon if they will go for the Enbroscope or Enbroscope Plus. So expansion and product development that we are continuing doing is to try to fit a product into the right customer segment depending upon if they are doing time lapse as it is or if they do time lapse together with genomics or if they do genomics with just some kind of selection due to time lapse to reduce the number of embryos that they would do biopsy on. So that's the kind of segmentation for different kind of therapies that we are working on. Right. Yes. Thank you very much. And just a quick one on your current OpEx base. I mean, how lean do you see would you say that it is currently? And type of investments do you see for next year in terms of SG and A or R and D? I know you've been talking about R and D picking up a bit compared to your sales. Yes. So we have been expanding our OpEx compared to last year, as you see in the numbers. And we've been adding resources in basically all functions. So in sales and marketing, we've added resources, we've done acquisitions, We are strengthening administration, such as quality assurance and IT, and we have also strengthened product development, the media development and the acquisition of AI technology and subsequent product development related to that. So we are strengthening in order to support future growth in all areas, and we expect that to continue. So we are building the company to match the increased expected demand. Right. But you see you would expect some leverage to shine through in next year as well, some operating leverage from here? Well, we haven't guided to have any like improved EBITDA margin due to sale effects in OpEx. We have actually said that we expect R and D cost to increase somewhat in relation to sales over the coming years due to the different opportunities we see in product development, especially in research and development. So we are not expecting EBITDA margins to improve due to scale effect on the OpEx OpEx. Your next question comes from the line of Richard Macomber. Your line is open. You may ask your question. Yes. Okay. Thank you for taking my question and congratulations on a great quarter. I was just wondering if you could dig down a little bit deeper into the launch of Rapid Vit, given that interpretation is perhaps one of the fastest growing segments of the media market. Do you expect this to have more impact in upcoming quarters? Or it's not big enough of a product for you guys yet? Yes, just if you can provide some more color on that. Good morning, Arvind. The vitrification market, as you say, is, as we also believe, growing market within the media range. And the vitrification, the traditional vitrification products that we have for blastocyst, etcetera, and embryos, it is something that we have in most markets. In U. S, we have had some struggle to get the right clinical data through FDA, and we have been waiting on this. The situation regarding then outside certification and how the market looks like is, We have to take into consideration is that this market in all site utilization, as we predict and the business predicts and the clinics predict is that it's going to be a growing market. And one aspect in U. S. Is the social freezing and the social freezing is coming from U. S. As most of these trends. Another thing is also an awareness from, for instance, the oncology side that when start treatment is if there is any kind of risk for some kind of fertility treatment fertility problem as a negative outcome of the treatment than they first do if it is a possibility due to timing that they do and also pick up so they can save the eggs for future and hopefully fertility processes. So there are 2 trends behind it. It is not going to be an explosion, but if we compare with the growth between different kind of segments, and the electrification market, especially the oil side electrification market are double digit growth. Okay. All right. And then just a last quick question. Do you still given the results you've seen so far in the Genomics business unit and taking into account the growth you've seen in the other business units as well, it still stands behind the guidance of genomics having the impact of about 10% on the full year sales or if you see recent updates that guidance? Yes. I believe that we are on the 1st 9 months contributing with about 11% compared to the last year and for the same period. So we are a little bit ahead of that guidance of 10% for the last for the 1st 9 months, but it's not a big variation. So we don't really see any need to change that guidance. So but for the 1st 9 months, we are a little bit ahead of that guidance. There are no further questions at this time. Please continue. Okay. If that's the case, thank you very much for listening in to our Q3 report. And by then, thank you from Ingrid and myself.