Ladies and gentlemen, thank you for standing by, welcome to today's Vitrolife Interim Report, January to June 2018 conference call. At this time, all participants are in listen-only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you will need to press star and one on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today, Friday, 13th of July, 2018. I would now like to hand the conference over to your first speaker today, Mr. Thomas Axelsson. Thank you. Please go ahead, sir.
Thank you very much, welcome all to Vitrolife Interim Report, January, June 2018. Speakers today will be Mikael Engblom, the CFO of Vitrolife, myself, Thomas Axelsson, the CEO. By that, please go to page number 2, we will go through the quarterly and half year report. The sales in Q2 was SEK 283 million, it is the second highest so far in a single quarter. Unfortunately, with such a great quarter, we are comparing this quarter to the last quarter last year, that was a fantastic quarter. This year, the SEK 283 million is equal to a decline of 1% in SEK. Sales decreased by 5% in local currency.
The operating income before depreciations and amortization amounted to SEK 116 million, which is 41% margin. That is the highest margin ever. It was a very good profitability for this quarter. During this quarter, we also got the market approval for EmbryoScope+ in the U.S. We have also done a share split 5 to 1. I will also in this report, together with Mika, go through the collaboration agreement with GE HealthCare for disposable devices. By that, please go to page number three. By looking into the business units and what has happened during this quarter, we will start from the bottom on page number three and look on the segment, business unit that we are describing as Media, the different type of nutrition solutions.
That's the base business of Vitrolife, and the sales for this quarter was 162 million SEK. The quarter showed a good growth, 9%. I would like to mention that what was commented on Q1 regarding China and some decline in the media business for Q1 was, as we believe, just due to some lower cycle numbers being down, and we talked about that before. The growth is picking back in China quite good, and we are also having good sales of media in all other regions. Totally, +6%, +9% in local currency. Going into disposable devices. Disposable devices had a decline of 10%, -10%. The total sales was 40 million SEK. Disposable devices is for us aspiration needles. It is pipettes, and it's also labware.
We have had, as I described before, that we have changed our line, and we have upgraded and are coming out with new product on the aspiration needles. In the change, we have had some production capacity problems, and that has also been reflected in our sales, that we have not been able to fulfill all customer orders. We have now stopped to have two second lines. The only line that we are producing is the new upgraded pipette line with better CE marking and also better functions. That's good looking forward. However, the delivery problem has caused some of the concern at a few customers, and we have not been able to supply them to the extent that we have been hoping.
On the labware side, we are continuing their growth, and there is not any supply problem there. On the pipette, we are increasing sales, and we are not losing any sales due to that we can't, let's say, to produce. However, it is a bigger demand than the output for most of the players within the pipette field. A decline of -10%, and what is positive and why we are moving forward also with a positive attitude regarding disposable devices, is that the collaboration agreement with GE HealthCare that we announced just before ESHRE. ESHRE is the big fertility congress, conference that are taking place always in the end of June and in the beginning of July.
We presented a few days before that meeting that we were going to have a collaboration with GE HealthCare. The reason is that Vitrolife, when we are now launching new products within the disposable line and the aspiration side, and that GE HealthCare has decided to focus more on the IVF field, on the human IVF field, and have we done a cooperation in especially sales and marketing and also the education to the end users. The GE HealthCare ultrasound system Evolution will be in sales co-coordination, will be to like for a key account customers and also larger conferences. We can show the benefits of having good needles and also good ultrasound equipment.
We do believe that that kind of combination will create a better understanding and also improve the optimal time for doing oocyte retrievals, and also for being able to stimulate the follicles by following the follicle development. time-lapse during this quarter, we got an approval in U.S. We have not yet seen because it was quite late in this quarter, so we have not yet seen any sales that we can put on to quarter two. It is the kind with -9%, and the total sales was not SEK 65 million. If we are taking into consideration the hardware business, time-lapse and ART equipment, those can go up and down a little bit between the quarters, depending upon if we have any large orders.
For both of them, last year, we had good orders in Japan and especially in Asia, China, that is also reflecting on the sales later on in Asia distributor market. The time-lapse business is getting more companies, we can see that also from the meeting down in Barcelona, the ESHRE meeting, that the competition is increasing. As we see it, that's good, because that is also impacting the, let's say, the awareness of the advantages of using time-lapse. The advantages is, as before mentioned, workflow, unstressed country and environment, but also that the morphokinetics, together with the genetics, is two different kind of diagnostic tools, or let's say, support systems that will increase the outcome of an IVF cycle.
The ART equipment is something that we, in this quarter, and also in the first quarter, are not satisfied with. It is selling for SEK 11 million. What we have done in this quarter is that we have strengthened the sales and support system within the business unit. I do believe that we have lost some of the opportunities to our competitors in this quarter. By that, let's go to page number 4. On page number 4 goes to the market regions, the 4 different market regions that we have. As mentioned before, we believe that the underlying market growth is between 3%-5% in cycles, and it is a little bit higher in monetary terms.
In the U.S., where we have finally got the ESD+ , EmbryoScope+ approved, we have not yet seen, as I said, any sales increase in that area. Without that, we were able to grow around with the market size with 3%. The total sales was SEK 38 million. India, a good growth, and overall good growth in most territories. It is a mature market, we grown with 7%. Asia. Asia, down with 26%. It was good growth, as I said before, regarding the media, the big decline in -26% is coming from the comparison last year with ART equipment, huge order to China on ART equipment and also time-lapse sales to China. I would like to tell you a little more about the time-lapse sales in China.
The time-lapse sales in China, we are working with approved EmbryoScope. There's a tender process, and it takes some time, always when there's a tender processes. It is not any negative forecasting that I can do on that size. Time-lapse is something that are viewed in many clinics as a tool that they most likely will invest in. The cycle growth is back in China, however, that we were able to sell some time-lapse for the clinical trials that was needed to have the time-lapse approved last year. The comparison with time-lapse is then negative for China, Asia. Japan Pacific.
Japan Pacific, the competition between the clinics in the Pacific area is quite big, and we are working with the clinics there, and we are, as I see, keeping up our market shares by supporting those clinics. We are growing with 6% in Japan Pacific totally, and it is a good mix between growth in all product areas. What I would like to mention is that it is SEK 42 million during this quarter, and there is still a huge interest for time-lapse and also our ability for media combined with time-lapse. By that, please go to page number 5, and I will hand over to Mikael.
Thank you. I will take you through the key financials during the second quarter. During the second quarter, we did pay dividends to shareholders of about SEK 81 million. Despite that, we had a positive cash flow in total during the quarter, and that was due to a very strong cash flow from operating activities. The gross margin was 66% during the second quarter, up 1% versus last year. To look into that variance, we can see we have a negative effect of the reduced sales compared to second quarter last year. We have a positive effect due to product mix, due to the fact that we sell more media as being our most profitable business unit. We also had a positive currency effect.
Looking at the EBITDA, as Thomas mentioned, it was the highest profit in a single quarter with under SEK 16 million. We did have an SEK 8 million positive currency effect in the second quarter in comparison to the same quarter last year. The EBITDA margin was 41%, up versus 39% second quarter last year. If we would exclude this positive currency effect, we would have about 38% margin, the decline with 1% compared to the same quarter last year, if we look in constant currency, it's primarily due to that we have higher operating expenses in relation to sales. The operating expenses in absolute terms have only increased slightly, primarily in R&D, but of course, as the sales are declining, the percentage of sales will then increase.
Looking at the net debt, we have net debt in relation to EBITDA of -1. We continue to have a very strong financial position, and as before, our ambition is to use this cash for valuating acquisitions. With that, move to page number 6, please. The outlook. We continue to see a long-term market growth rate of 5%-10% in monetary terms. This is, as before, driven by the trend that people wait before they have children, and we see a growing middle class and an increased social acceptance for IVF. We target to expand sales as before, and we do see this business opportunities in all business units and market regions. One important factor to achieve this is, of course, to have market approval for the products in the different markets around the world.
Therefore, we were very pleased of achieving the EmbryoScope+ approval in the U.S., as Thomas mentioned. Lastly, we target to broadening our product offering. We do have product development initiatives in all our business units. We are looking for external collaboration opportunities, such as, for example, the collaboration that we announced with GE HealthCare, but we also look for acquisition opportunities. With that, operator, we are ready to take questions.
Okay, ladies and gentlemen, we will now begin the question and answer session. As a reminder, if you wish to ask a question, you will need to press star and one on your telephone and wait for your name to be announced. Okay, sir, we have one question here. Hold on a moment while the operator is just getting the name of the participant. Okay, sir, your first question comes from the line of Patrik Ling. Thank you. Please ask your question.
Thank you. Good morning, everyone. Thomas and Mikael, could you elaborate a little bit on what is happening in China? My first question is really, when you look at the Asian market, which is 25% of your total sales in the quarter, could you just remind us about how large China is of that part?
Yes, Patrik. I don't have the exact number right now, but it is between 15% and 20% total of the sales for Vitrolife, depending upon the quarter.
Okay. Since Asia, which includes China, is down quite significantly, but at the same time, media is up there, could you elaborate a little bit on what is happening on the rest of the sales in China for this quarter and sort of the magnitude of the decline?
Yes. It is coming from ART equipment, lasers, and it's coming from time-lapse, and it's also coming from disposal devices. It's three things. One thing is that we are changing and introducing the new needle. That means then that it is a transaction period, you know, where distributors are selling out the last equipment of their older needle before they are being able to get the new needle. That's a little bit on disposable devices. The large drop then is in Time-lapse and in ART equipment. Last year, it was an exceptionally good year with installations of lasers to some larger, major key opinion leaders.
As you know, Patrik, China is so big, so just a clinic there, is larger than the total, cycles being done in Scandinavia. If you are getting those kind of customers, you are having an very good quarter. What we also did last year, was we were in the processes of, filing and preparing everything for the EmbryoScope approval that came in Q1 this year. That was to, sell, initial, time-lapse equipment for the final, clinical, testing, particularly the Chinese market. There, there were two exceptional things last year, and we have not got, let's say, the time-lapse, into the business, where the tender process outside the earlier registration process, can be seen within our numbers.
Mm.
This quarter.
what are the
This quarter.
What are the time frames for those tender processes? Is this something that you expect to become visible in the third quarter, or is it a much longer process before you-
No, I mean, it's more or less the same in most countries. There is a process on going out and creating the tenders, and then it is to have it through the system. Between, let's say, 6 and 15 months, from when they started. By saying that, and we got it approved in Q1, I do expect that we will see same thing in Q3 and Q4, especially, you know, when.
Mm
when you take the process going forward. We are also mentioning that we are working with the EmbryoScope+ Incubator, too. The EmbryoScope+ Incubator process for the next approval, those papers are more or less filed, and then it is the process on get it from CFDA to get back with maybe more questions, and then we have to answer those. For the EmbryoScope that is approved, the pros with clinics that can't use products for clinical testing, I mean, that's the base business. That's the most customers. They are right now within the process of. If they would like to, they can order products within time-lapse from us, yes.
Okay. Could we have discussed this sometime before, and now, because there's been at least one clinical trial from China on time-lapse that reached a little bit strange conclusions, compared to what basically every other clinical trial has reached. That trial was, among others, written by some of the key opinion leaders in China. Have you seen a negative impact from that, and how's the discussion among key opinion leaders in China going regarding time-lapse right now?
We have not seen any impact on that publication. It is very sensitive also for us to go out and criticize key opinion leaders, so we have been having a low profile regarding that publication in China. What I do believe and what we are dealing with in the marketing is that the workflow aspects and getting better quality out of a standardized incubation process is something that many clinics do believe. There can be questions regarding the clinical outcome, because what are you comparing with? Are you comparing with the same kind of conditions? Are you comparing with the day three, day five?
If I take the same kind of trend currently within time-lapse, is that it is standardization, it is an undisturbed environment, it is to get more information that they can communicate both internally and externally, and of course, the workflow aspect regarding cost for labor inside the IVF clinic, and that's quite considerable in many countries. Also in China, where there are still growth, there are still some new rooms being built at larger places, you know. Then it is also a matter of space in cities like Beijing, Shanghai, et cetera.
Just last question on time-lapse and China. When you're doing the clinical trials in China, both the ones that you did for EmbryoScope and the ones that you're gonna do for EmbryoScope+, are any of the key opinion leaders that were behind that, I should say, questionable publication on time-lapse utility? Are they involved in the trials that you are doing?
They are involved, you know, they are more or less, you know, it is a situation that if you file in U.S., they want to have some U.S. data. If you file in Europe, you know, the CE system with medical devices, and then in, for instance, China, they want to have some data from the Chinese market. It is often, and in this case, to more or less do a replica on a just a user. It's more of a user study and, some of the concerns that they could have regarding small details. I wouldn't like to say that it is a traditional clinical study. It's more like user study to get the acceptance and thoughts from Chinese market.
Okay. My last question: when it comes to disposable devices, you mentioned that there were still some clients that had concern regarding your ability to supply them. On what markets do you see this type of concern? Is this also China, or is it other markets where you see concern among-
It is-
Among...
It is not China, because, you know, we have not introduced so many of those products. We are in the process of increasing the activities there. It has been old good customers, mature customers, that are disappointed on our ability to give them needles, and they've been waiting then on the new needle, and they have tried the new needle, and then, of course, they've been disappointed. Also, if there are mature markets, it's been Turkey, U.K., and it's also been a few customers in the U.S., so just mature customers.
Okay, great. Thank you, guys.
Thank you. Thank you, Patrik.
Okay, once again, if you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. There are no further questions at this time. Please continue, sir.
Okay, if there isn't any further questions, Mikael and myself would like to thank you very much for listening in to the Q2 report, and thank you for today. Bye.
Okay, that does conclude our conference for today. Thank Thank you for participating. We all disconnect. Speakers, please stand by.
Yes, we are here, operator.
I'm so sorry, sir. We are still here in the main conference room, and I can't... I'm having issue here on the system, so I can't transfer you back to the main conference room.
Okay. Okay. Okay. In that case, could you give an email as you usually do, regarding the attendance to Mikael Engblom? Do you have his email?
I'm so sorry, sir.
If that's the case, that you're still in the main room, we could end this dialogue right now. Please, as you usually do, could you send to Mikael Engblom, the attendance list for this call?
Yes, sir.
Thank you very much, and have a good day.
Have a good day, sir. Bye-bye.
Thank you.
Thank you. Bye.