Earnings Call: Q2 2019

Jul 12, 2019

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Vitra Life Interim Report January June 2019 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 must advise that this conference is being recorded today, Friday, 12 July 2019. I would now like to hand the conference over to your speaker today, Thomas Alexson. You can go ahead. Thank you very much and good morning. And today, we will do the interim report January, June 2019, and we will focus on the Q2. The speakers of today will be Mikael Englum, the CFO of the company and myself, Thomas Neksos, I'm the CEO. By that, please go to Page 12 and we will go through the presentation. A quick summary on quarter 2. It was a, for sure, a quarter with high growth and profitability. And in the figures, we can mention that by a sales of SEK381 1,000,000, which is an increase of 34%. If we see the local currency growth there, it was 29%, and out of that, it was 18% in organic growth. Our EBITDA for the period was SEK146 1,000,000 and that is a margin of 38%. For December also, I would like to mention that there's 2 acquisitions done, a acquisition of the artificial intelligence system for Henry Assessment and also an acquisition of a company in U. K. Parallapse Ltd. Please go into Page number 3 then as we will go into more details regarding the quarter. Page number 3 is about sales and growth and market region. As mentioned before, we are I'm only going to talk about local currency and also regarding organic growth. As mentioned, it was a good quarter. All the regions, all 4 regions had good growth. All product areas within the regions had growth. We were able to secure some good orders that we have been working with for a while. And also within the quarter, we can see that our attention, our ambition to build more about sales and marketing strength and supporting regions are paying off. Let's start from the left with North and South America. I'm very pleased with the development that we have had in North and South America over the last couple of quarters. The increase this quarter with 65% is a combination of double digit growth for all areas, but of course also due to that the acquisition and the starting on distribution within the genomics has pushed the numbers up to 65%. But I would like to mention that one of the things that we have had a struggle about in earlier years, mentioned that in Q4 'eighteen, Q1 'nineteen and also in this quarter, That interest for time lapse is for sure being larger from the customers and it's also going to it's also been turning into sales. So the growth in North and South America is a combination of good growth in all product area, more acceptance for TimeBets and also, of course, the distribution of the genomic side. If we then go into the EMEA region, the sales there was SEK 151,000,000. It is a local growth of 15%. The growth there is a combination of growth within, as I said, all product areas in all regions, Graham, but also on the disposal devices in genomics. For those two areas that we just mentioned, in those two areas, we are then dealing with distribution rights for the alumina products for this artificial reproduction technology field for the IVF Kinetics. The 2 regions where we don't have those rights are the region Asia and then Japan Pacific. So both of their, let's say, growth numbers, 48% in Asia and 19% in Japan Pacific is coming from only organic growth. We inside the company are very pleased with those numbers. The growth, 38% in Asia, is mainly coming from Timex. I would like to mention there that we got the Endrioscope Plus approved a couple of quarters ago, and we have said that it takes time to get the products out to market due to budget process and that kind of circumstances. As you know, we are dealing with hardware. We are very pleased that we have got Ambrosco Plus right now moving and some larger clinics has placed orders and we are looking forward to this market. For the Japanese and the Pacific markets, as mentioned, it is 19% growth. These things are SEK52 1,000,000 and it's everything is done in our traditional product areas, nothing of the genomics. So if you then are going from the sales in different territories and looking into the business units, what we are doing there and what we have performed, please go to Page 4. Let's start from the genomics. Genomics, they have done we have been only dealing with them for 2 quarters. For the first half year, we have sold for SEK 54,000,000 out of this quarter SEK 33,000,000. What I'd like to mention there is that taking over something and building up a new structure, new competence and also partially dealing with new customer segments within this field. There have been a couple of challenges. For those challenges, I do feel that we have done quite good, and we are now ready for a continuous growth and also for some of the new plant activities. Structure are now in place. It is the sales and distribution structure. It is the development and also a support structure. So by that, we go into the art equipment, our smallest area, but we have changed the business and we are continuing changing the business and only focusing on our own products. No distribution of other products and also distribution and also production, I mean, production and sales of high margin products where we had some kind of uniqueness. So the growth was 24% and the sales of SEK 15,000,000 is mostly related to what we are calling the laser systems. China China's is a combination of hardware and also disposables for using inside our China's equipment and also partly partless service and software. The timelapse unit had a growth of 56% and the sales was SEK109 1,000,000. In this quarter, the difference that's consumed in the number is more hardware sales. And I would like to mention here is that the hardware sales can fluctuate between the quarters. And I'm just saying that we can be a little bit conscious regarding the growth of 56%. However, we are looking forward to also more sales within the time that's going to explain that later on, on some new products. Disposable devices, all product areas within disposable devices are showing growth. And this the growth are of 11 percent and in absolute numbers, it's SEK47 1,000,000. If you go to media, it's a mixed picture. I am very pleased with the 4% growth, even if it's a little bit lower than last quarter. What has happened is that during this quarter, some of the media growth that is only is middle strain only is 4%, is due to a bit negatively impacted by some delivery problems. And those delivery problems are only for a few unique products for the Chinese market. As you are well aware of, the Chinese registration process and regulatory process means that we're able to have good growth and legally improve the right products for the Chinese market, we are doing products only for the Chinese market. And currently, we've had some supply issues based on a raw material situation. Our projection is that, that will be sold during Q3. With that, please go to Page number 5. Within this quarterly report, Mitra will later on explain that and also show the figures that we are doing in investments and those investments can be clearly shown in a decrease in our marketing and sales cost, also an increase in absolute numbers in regulatory. So why have we told the growth left for a couple of quarters and why are we continuing talking about if we are doing investments in future growth. Yes, we are doing it because that we want to continue to have growth within the company. So let's look upon a couple of things that has happened this quarter. I would like to first mention our acquisition that we did from Vertex Health and Harrison AI, that is an technology for being able to use deep learning artificial intelligence for embryo assessment. We will continue then to have a collaboration with those two partners and that's very important for continuing with the regulatory path or continuing with doing clinical studies, setting up an RCT. And we are internally, of course, also working with the integration and development of further improved artificial intelligence system. All of that is for increasing the outcome and at the same time an easiness of use. Another investment area mentioned is the genomics. We have got the organization in place and development is still starting in this field. And it is for being able to have our own products, our own chemicals, means our own kits that we run on alumina machines. When that development is ready and improved for sales from our side, we will then get the opportunity to also do the sales in Asia Pacific, we currently are not doing. Parallates, a very small acquisition that we are mentioning that even if it is only from SEK24 1,000,000, but it is a typical thing that we are going forward and trying to do our best for our customers and the selling from customers and have the kind of market presence. We are we have bought in this figure has a great, great network in U. K. And Ireland. Why do I mention this? Because clinic chains are growing, and they are also growing over the borders. And due to that, we need to follow the clinic change on a non domestic approach. If we then look on Page number 5 and right side, I would like to then go to sales and marketing and also in a situation where product development has reached an end and we are introducing products. At the ASHRI Conference, which is towards Largo's Fertility Congress, it was at the end of June. We have shown a couple of new products and I would like to mention 3 of them. 1st is Endoscope Flex. It's a typical example of our ambition to grow and have different product options for the different customer needs. So, Endoscope Flex is made of so you can have 20 4 patients with 6 embryos. So you can see there's a difference here in this product and it is based upon the need to have a larger capacity for clinics that are running mid stimulation. And that's, for instance, taking place in Janssen more and more and in some of the markets where you have larger, or let's say, huge clinics. So it's a specific niche product for wheel stimulation and larger clinics. Another launch, the prelaunch, is that we are expanding and we are using our competence within the individual field. So we are launching something that we have named Culture Prune, which is an incubator with a superior emboliculture environment. The reason for introducing this is that it is an high capacity incubator with a good opportunity for the customers to use a diffusive system, traceability and also that is economically wise for the clinics due to low gas consumptions. To give you a hint about the size and how you can use it, you can use it for 15 culture basis, which means for 15 patients. And also a short one regarding the differentiation of our media. There is a growing demand from the end users from the patients regarding the kind of treatment that they would like to have. And in some countries, the patients are coming in and discussing with the clinics and they are asking for more or less specific oriented therapies and services from the clinics. By that, we are introducing a specific patient pack for the AndrewBlue. By that, I would like to hand over to Mikael and please then go to Page 6. Thank you. So some short comments on the provisions during the Q2. We had a positive currency effect in the EBITDA result of SEK7 1,000,000 primarily coming from the euro and the U. S. Dollar strengthening against the Swedish kroner compared to the same quarter last year. We had about 1 percentage point improvement in EBITDA margin as a result of the introduction of IFRS 16. So that is the leasing cost being such as the rental agreement being recorded outside the EBITDA metric. Looking at the gross margin, it was 64% in the Q2 compared to 66% in the same quarter last year. And the decline is primarily due to that genomics business unit has a lower margin than the average of the group. The EBITDA result was SEK 146,000,000 compared to SEK 116,000,000 million last year. So it's an increase of 26%. The increase then from increased sales together with the currency effect that I mentioned earlier. EBITDA margin was 38% compared to 41% last year. And the decline is primarily due to the Solomics low having lower margin than average of the group, together with investments in marketing and sales, as Thomas mentioned earlier. The net cash in relation to EBITDA was minus 0.8. So we have a net cash position even if it's a little bit lower than the same period last year. During this quarter, we have had the cash flow being impacted by short paying dividends of about NOK 92,000,000 and we've done the 2 acquisitions that Thomas mentioned earlier of the AI technology of 56,000,000 and the balance of 24,000,000. With that, please take clarification on the 7 for the outlook. So as before, we forecast long term market growth of 5% to 10% in monetary terms. And we, as before, expect that this will be driven by the growth of the middle class and the trend that tends to gain weight before they have children and the increased social acceptance of IVF. We will focus on expanding sales, and this will be, for example, by strengthening our sales and support channels, which the acquisition of products is an example of. And we will also focus on broadening the product offering, and this will be done both by development projects and by acquisitions. With that, operator, we are ready to take your questions. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of Arvind Necker. Please ask your question. Yes. Thank you for taking my question. Just two quick questions here. When you first announced the Illumina partnership, the guidance was that revenue would be accretive of about 10% to the total revenue. So I was wondering if you still stand behind this guidance. And also, I was curious about your expectations for the LRT business unit. What do you think that we'll continue to see growth here in the coming quarters in 2019? What's your outlook there? Yes. Hi, Alwyn. I can start with answering the first question then on the alumina. Yes, we estimated that the growth would be 10% in relation to the sales of 2018. And we still believe that, that estimate is valid. When it comes to the question of the hard equipment, we are as we mentioned in the Q1, we had some parts were delayed due to the IT incident from the Q1 to the Q2. So if you look on the second quarter, you have an effect of that. We had about SEK 3,000,000 that were delayed from the first quarter in shipments and sales for the Q2. So if you would look on large equipment, I would recommend you look on the 1st 6 months as a total. Based on that, you will see that we are down somewhat in revenue in relation to last year. But we are working on exciting sales. We are working with regulatory approvals to different markets, and we're working with marketing to expand sales of the laser products. Your next question comes from the line of Victor Forssello. Please ask your question. Good morning, everyone, and thank you for taking my questions. A few ones from my side. Is it possible for you to quantify somehow the split between the embryo scope sales from the single order in China compared to sort of the underlying growth? That would be helpful. Yes. We have not disclosed the specific number of that transaction. But we have stated before that we are having a list price of the Enbros Group Plus, which is in the region of €100,000 to €150,000 So that is an indication, but we don't disclose any specific numbers for each shareholders. Okay. But is it fair to assume that it was a double digit growth then excluding this order as well for the segment as a whole? Yes. I don't want to comment on any specific numbers besides what I just mentioned in terms of list prices. Okay. And on media, the delivery issues in the Asian region, if you could add some more color on your statement there, how much would you assess that the negative impact was in this single quarter? And if you see any risk of delivering issues going forward as well just in these specific private media products? Okay. It's Thomas here. I'm not going to give any regarding the financial numbers. It has impacted our numbers a little bit. We are working with the supply issue, and we do production as we're working with, but we see that this will be solved during the Q3, somewhere during somewhere under the Q3. Okay, fair enough. And just the last one from my side. Can you quantify that the positive currency effect on the gross margin as well? Yes. It is not a huge impact. It's less than 1 percentage point of positive impact from a margin perspective. Your next question comes from the line of Daniel Albin. Please ask your question. Thank you for taking the questions. So I have a couple of them. I think if you can first elaborate on why we are seeing cash flow from operating activities, the forward impact of the negative in the quarter? Yes. During the quarter, we have had very strong we have had strong sales, which is, of course, tying up working capital. We've also had the big order to China of time lapse at the end of the quarter, which made the endpoints of working capital high in the quarter. Okay. So looking at, for example, account receivables and days outstanding, we have seen quite an uptick the last, I would say, 2, 3 quarters. Is it something that is due to this change in segment mix? Or are you being more generous with credit times? Well, we have taken on the genomic business from the 1st January. And when we took on that business, we had to take on the working capital of setting that business up. So there is an effect of a new business segment in here that is tying up more working capital. On the same time, we have this order in the end of the quarter related to China, which impacted the numbers. And of course, credit times is also something that we are looking into in terms of business transactions, etcetera. And on the 20mbres scope delivered to China this quarter, can you say something about how committed you are in buying aftermarket products? Or have you bundled the deal giving away free media products, for example? We don't comment any details regarding our specific deals with customers. Okay. And on the genomics business, I wonder if you can elaborate on the organic growth momentum year on year in that business. In the Nomics business, I don't really understand the question. We have it's only for 2 quarters. What do you mean the year on year? I mean before, if you know the full year alumina had in Q2? Or are you seeing you taking market share, etcetera? Yes. We don't want to comment against the numbers that Illumina were reporting last year. So we're not able to do that comment on it. Okay. No worries. That was all from me. Thank you. There are no further questions at this time. Please continue. Okay. If there isn't any further questions, I would like to thank you all for listening in on the future I think, to rein report January to June 2019. And I wish you all a nice summer if you are in this new team. So thank you and bye. This concludes our conference for today. Thank you for participating. You may all disconnect.