Earnings Call: Q1 2021

Apr 22, 2021

Thank you very much and welcome to Vitru Life Interim Report January to March 2021. And as mentioned today, it is the 22nd April. The speakers of today will be Mikael Ingram, the CFO of Vitra Life and myself, Thomas Exesonder is the CEO of Vitra Life. Please change page Number 2 and let's get into the presentation. For Mikael, I would like to go through today is First, I would like to go through the recovery, the global recovery within the IVF market and that could be expressed easily. So summary of Q1 But our sales was SEK 379,000,000 and that is a growth of 14%. If we're looking local currency, then the sales increased by 20%. After that, When I've gone through the sales for the regions and also for the divisions, Mikael will go into the key financials. And I can just mention one thing and that is The EBITDA was SEK163 1,000,000 and that was a margin of 43%. Let's go into the situation then in different markets and on Page number 3. As you can see, the growth in local currencies was 20% and that is organic growth, non acquisition. If we are starting from the right side and look on the region Japan Pacific, It was an extremely good quarter. It was a growth of 42%. That sales is coming from A good situation in Japan and also in Australia for the time lapse equipment. And there has also been a good pickup on our introduced for a year ago our media in Japan. But overall, as mentioned, 42% growth in the region is something that we are quite satisfied with. When we are then going into the region Asia, then it is a little bit more different to compare to last year because it was in the region of Asia and especially in China where the Covida First was impacting Vitro Life. The growth for the region in this quarter compared to last year is 50%. The total sales was SEK 85,000,000. I would like to mention that when looking into this region, China and China is our biggest market and it was also in China where we could see the first decline last year that China is back to more or less 100 percent of pre COVID procedures. The last weekend, it was the RM, which is the Chinese Society For Reproduction Medicine. And discussions at that meeting. And their view was that the Chinese market is back to 100% and that's going to be the situation most likely for the next coming quarters. So there is not any large pent up demand in the China region. There are still a challenge for the IDF tourists and we still see consequences of the Covida In Thailand, we see those consequences in India. And the last information and also that was impacting Q1 is that the number of cycles being done in, for instance, India is maybe 2 third of a normal year. It has been a great development of both time lapse and media within the region and then especially in China. As mentioned also at the last presentation that was Q4 last year that we see that our media is well accepted And we are taking market shares in that region. Going into the 100 segment or actual region, which is the EMEA region. There the growth was 6%. It is a mixed picture within the EMEA region. It is more or less back to normal situation in, for instance, the Nordic countries. We see the same in the DACH region. It is a mixed picture between those territories that has some private and also public clinics, where the private clinics are performing more than what they did in 2019 or even in 2020. The publics are still behind. The territories or regions and clinics that are depending upon IVF tourists are also within this region behind normal numbers and that is for Spain and Turkey and especially for Middle East. But overall, good growth within the region, 6% and the time and the growth were coming from time lapse and dispose of devices as well as media. Then the last region For today, to go through is the Americas. There we see a growth of 7%. So every region did grow organically and in local currency this quarter. We believe and we do see with our contacts with the U. S. Clinics that they have a higher demand than normal. There is some pent up demand, but it's also a situation where they see growth currently that is not due to the pent up demand. One of the explanations that we have got is that the remote work has helped the clinics to get new business. It's easier for them to communicate and get in contact and do the consultation and also start the treatment. Americas, as I mentioned, there is good growth in U. S. While there's still a situation with challenges in South America. Okay. If we go to then Page number 4, I will go through a little bit more about the current situation about Covida and see how that is impacting and how it could impact Vitrelac in the next coming quarters. As I said, We believe that globally, if we are considering all the IVF cycles being done, it is An over performance, let's say that to normal situation in some territories like in U. S. And there are some territories that are still behind. So overall, in total, we believe that the market is almost back to normal in cycle numbers. We see that uncertainty for the clinics to plan for the cycles and especially for those that are traveling into their clinics is still a challenge. And before all of the markets has opened up, we will see some challenges for those markets and that especially the IVF tourist markets. Talking about the pent up demand, yes, There can be a pent up demand and we probably will see that for the market I mentioned that currently has some problems, which is Thailand, Turkey, Spain, for instance, and also for the Middle East. What we see also within our production is that there can be a situation where there's some suppliers will have a problem in supplying us with the products that we need for the production. It is not yet the reality, but I would like to take the opportunity or let's say the opportunity to inform you that it could be a risk for the next coming quarters regarding the supply of products. The reason for that challenge is that the pharma companies that are involved or medic companies that are involved in vaccine production, The demand from them has, of course, increased and there is a priority from the suppliers to supply those companies first. But just once again, it is not the reality, but I would like to mention the risk. During the last couple of quarters, we've seen an increased profitability and we also see that Due to the Covid-nineteen, we have changed some working processes and that's one of the reasons for our very good profitability. When the business is coming back to this enormous situation with ability for us to travel, we expect, of course, that the expenses will Increased because we are a little bit behind in meeting customers. We are a little bit behind in some product development where we will need to do clinical trials. However, the consequence of this situation is that we most likely will come into a situation where Some processes will be more cost effective, for instance, through virtual meeting with customers. If we are then leaving that situation and go Page number 5 and are looking into divisions. We start with our largest division, which is the consumables, that is media, disposal devices and the sales that was SEK 193 1,000,000. Between the different product lines, it is a good mix and uneven growth. So A situation that the consumers are growing with 15% shows that the market are back where we have a good market share. Technology, which is more or less only time lapse, we see a good, good growth there with 36% and the sales was SEK 136,000,000. The growth there is a combination of that some clinics was holding their orders and know when they see that the market is coming back, they are willing to invest in hardware. Another situation is that we are launching and we have launched in April our Software that is supporting the time lapse and called AIDA scores, which is then making the Usage of time lapse and how to use morphology as a selection tool a lot easier. So we can see that the introduction of that has increased the trend and also motivated some customers to go into the use of time lapse. Genomics, it is a decline with minus 7% and that is, As we said before, due to that we have lost customer and that was done at the end of Q1 last year. So that's why we are still seeing that decline. The sales there in this, our smallest division was SEK 27,000,000. If we are then going into more about the key financials, I would like to hand over to Mikael in Page number 6. Thank you. So looking into the gross margin, it was 65% in the 1st quarter compared to 2% in the Q1 last year. And the reason for the improvement is the high sales that brings economies of scale. We have also seen a positive development in the product mix as more sales are done for media and time lapse in relation to genomics. And we have also reduced our scrapping costs, which we took some scrapping costs in the Q1 Last year that impacted the margin negatively. Looking at the EBITDA margin, it was 43% compared to 35% Last year. And besides the improved gross margin that I just mentioned, we have lower operating expenses in relation to sales, So about 28% compared to 33% last year. And that's primarily related to marketing and sales. What Thomas mentioned, we are seeing less cost of traveling, exhibitions, marketing activities and also reduced cost for staffs. So all in all, that brings the increase from last year to this year. Looking at the net debt. We have net debt in relation to EBITDA of minus SEK 2.2. We had a strong cash flow during the Q1 of SEK 129,000,000, so adding to the Money in the bank. So at the end of the Q1, we have SEK 1,118,000,000 In the bank and no financial loans. And as before, our ambition is to use this money for Value adding acquisitions. Please change to number 7 for long term outlook. We continue to see the long term market growth of 5% to 10% in monetary terms. And as before, we expect that to be driven by the Growing middle class and the trend of parents to be wait longer with having children, including the increased social acceptance of IVF. When it comes to VitroLife's ambitions, we are targeting sales expansion and broadening the product offering. And that will be done both through Organic development and sales expansion as well as through acquisitions. With that, operator, we are ready to take questions. Thank you. The first question comes from the line of Ulrik Trappner. Please ask your question. Great. Thank you very much and good morning, Thomas and Michael. If we can just start off with The development in North America, you guys seeing that it's growing 7% organically. And we have talked previously about pent up demand effects abating, but it seems like they're rather being quite Stable. But if you can just help deciphering the strong development in the quarter in the North American market As well as if you could provide some more granularity on the split between your exposure in North America between U. S, Canada as well as to South America? That would be very helpful. That's the first question. Okay. Good morning. Good morning. Let's look into the Americas. For us, the main business in Americas is U. S. And we have not I don't think we have gone out with exactly how the split is, but the main business for us is in U. S. The pent up demand there is what we believe we see the numbers in North of America. It is difficult to do an exact estimate. But if I would say like this that we believe that the Cycle numbers in Q1 compared to last year in U. S. And this is confirmed from some other places is 10%, 15%. But that's just a guess. With then the growth that we have in North America and let's say in Americas. And we are comparing them the growth for the region. We are in line. I wouldn't say that we are talking taking any market share in U. S. We're not losing any market share. We are just within the market in U. S. While we are not then growing 10% to 15% in Americas East due to that, There is less sales. They are behind in South America. That's for you. Yes. Thank you very much, Thomas. But if we were to turn on to China and you're talking about media and consumables gaining market share, I would guess it's mainly within media. How much do you would you call that to be sustainable? Is it due to the fact that Your media products are favored? Or is it due to the fact that competitors have a hard time supplying the market right now? I don't see that there is any major problem with the supply. There are always small problems with supply from all companies. But that is not changing the market shares. If we are then Looking into the Chinese market, what the growth there is coming from all product lines. What I mentioned regarding the growth in media specifically is that we Do you feel and I don't feel I can say that we know that just from the conference this weekend that customers are We are very satisfied with our products and that's why we are still gaining small market share even if we are the biggest supplier in that If I would go do a long term perspective, we will get more domestic competition. But I don't see that around the corner. That is more of a projection within a couple of years on the media side, and that is for all product ranges. The growth also in China is coming from the time lapse situation where The investments and what we have done in TimeLabs and working together with key opinion leaders has Right now, shown that, that will probably pay off. Great. And if we were to stay on the topic of time lapse and technology development, because obviously it was really strong this quarter, At least quite a quicker recovery than I anticipated. Just your thoughts on how important it has been that you're now launching Or finished developing the AIDA score since it was finalized in April. But how much impact have that sort of launch or development Had on time lapse in the specific quarter of Q1? There Q1 and then looking into the Technology business and you mentioned then time lapse. There is always ups and downs between the quarters. So The projections regarding time lapse and sales of time lapse is can go up and down. And we had a good, good quarter Q1. Going into the situation regarding AIDA score, yes, I do think that it has an impact that customers know that Something is coming. They've seen presentations on it. And there's also been clinics that has been involved in our Validation and clinical testing and it is a small market. So some of those clinics, Of course, we'll then directly start to buy some extra. And our projections is that AIDA score will be of a huge help for their growth of time lapse overall. And especially in Clinics where they will buy Timeless due to workflow and maybe not so much due to the selection tool itself. And do you have any targets or projections or ambition in terms of Where do you believe time lapse will go penetration wise if we were to look long term, long, long term? Yes, we are not changing our ambition and what we believe that time lapse slowly will get into and be a standard product. Today, probably around 20% of all the cycles are being done with the time lapse. And the challenge here has been the cost and also the situation regarding the easiness of use and with more software so it gets easier and with more precision wise Software and also with larger, let's say, purchase orders and IVF clinics. When IVF clinics are expanding and they go into clinic chain, they one of the reasons for doing it is to standardize the business. And the growth are coming from those clinic chains and those that are interested in doing standardized professional IVF Laboratories. So I definitely believe that it is going to continue to grow. The question is How quick? And what's going to happen with the smaller clinics? Because there is a difficulty to sell Hardware is valid software to clinics that is performing, let's say, less than 2 50 cycles. Great. Thank you. I have 2 more questions, if I may, and this might be directed to Michael. Margins are very high in the quarter and has been so over the last few quarters. Just looking specifically to SG and A being 13% of Sales might not be sustainable long term. However, with current traveling restrictions, Are we to expect any near term changes? Are there any trade shows that will take place in person for 2021, for example? And when are you to expect it to filling up vacancies from last year? Yes. So we have initiated a number of recruitments in the company. So we're looking to Fill up vacancies will strengthen the organization in the selected areas as well. So we are expecting Personnel costs to gradually increase over the year. When it comes to the kind of external activities such as exhibitions and customer events and traveling, We are still in a situation with travel restrictions like everyone knows. So that is limited. And of course, So we can only guess when those activities can become physical again. But most likely in the Q2, we will have relatively Few customer events, physical customer events, which should impact the cost in a positive way. But then during the second half of the year, we Could probably expect more of physical meetings to occur, but that's still depending on what happens with the COVID situation, of course. Great. Thank you very much, Mikael. And last question. You highlighted a potential problem in the supply chain. Is there any specific products that Would be affected more than other or and is it the same for the entire industry or more related to VitroLife As well as when would you sort of really know if these effects will come into play? It will impact the industry. I mean, it's not only Bittrai because Some of them more or less all of us are supplying is having supply from the Companies that are also supplying it to the pharma industry. And so that is an overall concern. We don't know if it is Going to be a problem. We are having contacts and we are working with those suppliers and they are doing their best. But we don't know if it's going to happen. And if it's going to happen, the main reason or say the main area in that case would be the media because that's closest to the biotech industry. And do you know when you will get a more clear picture on the supply chain? We are working on it and we don't see any immediate risk. But there is a concern that would probably then be if nothing is not going to change within the next coming 2 quarters, something like that. But they are also increasing the production and the supply and But there's always a risk in times like this. Great. Well, thank you very much, Both, Thomas and Michael, and congratulations on a stellar report. Thank you. Thank you very much. Thank you. Thank you. The next question comes from the line of Patrick Linge. Please ask your question. Thank you. Yes, I have a few additional questions. First of all, just one more question on the AI systems for time lapse. If you could elaborate a little bit on pricing per system, if it's one software license per machine And can all already installed systems be upgraded without any hardware reconfigurations? Okay. I can start first. Every machine that are working or we are calling the plastic System, Embroscope Plus, they can use the IDA score. So the old Embroscope can't use the new software. The business model is that the ones that are buying new equipment is having a Special offer on the software the 1st year. And but our business model is that we are Having a subscription on the software is going to be annual based. And then of course, it's always also a Gosh, depending upon number of products that they're buying, new ambroscopes, but the idea is to have hardware sales and combine that with, of course, then the consumable products that are the dishes and then the software. Can you say anything about what you would expect a normal user to pay annually for those type of software licenses? It is currently the initial price will be if They are only buying the software around $10,000 a year. Okay. So clients already has an Amberscope Plus system without the IDA score, they can just Pay $10,000 per year to get the license to use that? Depending upon the number of ambroscopes that they have because it's also a situation about that we want customers to have the system so they can get used to it And they can see the advantages of changing the clinic to only a TimeNips clinic. Okay, great, Great. Then I had a follow-up question on the sales and marketing expenses. I mean, going back and looking at your history, I mean, you've been On a quarterly basis, a little bit north of SEK 60,000,000 per quarter. But given what you said about also trying to Retain some of the savings from the change in working practice that we've seen across Basically all industries. Would you say it's fair that it will still take Quite a long time before you reach sort of historical peaks on sales and marketing? Or is there even if you change your working practices To some extent, such a large pent up demand that we will actually rather quickly see costs coming up to old highs Despite having an underlying change in the way you operate? Yes. I mean, we expect cost to increase In the same marketing, both through personnel cost and as well as the external activities. At the moment, there is a kind of pent up demand to organize customer meetings and The visions and to get in contact with customers. So we can expect cost to increase in those areas When we are able to travel again. And the long term effects of savings of conducting some meetings through digital Channels instead of physical is something we'll have to evaluate over time the exact effect of that. I think it's difficult to assess that today. Okay. Could I also ask about administrative costs this quarter, which jumped up a little bit more than what I had expected? Are there any particular items in that? I saw in the report that you mentioned that you had some legal processes going on and that you We're taking the legal costs directly. So is that something that impacts administration? Yes, that's correct. So we have the patent litigation ongoing, and we have charged Legal costs for the support of that process against the administration. So that's correct. And approximately how much was it in this quarter? It was a little bit less than SEK 2,000,000. Okay. So it's not the majority of the uptick that we saw from Q4 then? And going forward, is SEK 2,000,000 per quarter, is that the reasonable assumption for the legal costs? I think it's difficult to assess that. It depends on how the process will develop. Okay. Then last question. Genomics, So what can you say there regarding that operation, which was weaker than what I had hoped for, for the quarter? Is it What's your outlook and take on when genomics will start to come back? Is that Sort of second half of this year event or is it even longer term? It will come back with, as I believe 2 things. One is what we are trying to do is always to convert customers to the alumina equipment if they have gone to another platform. Another situation is So our development that we will launch this year, we are calling it Ambrumap, which is our own then product. And I do hope that those two things will benefit the Unomic business. Okay. And when during this year will you launch EmbryoMAb? It will depend upon one of the things that you have partly a question about How can we go out and do all the kind of validation and clinical studies? Some of the things is Tricky to do when you are restricted to travel. And the situation is that we are doing the development of this team this situation, mainly with the team in U. K. And the situation right now for those to travel to U. S. Or to travel to other places has been tricky. Hopefully, it's going to open up quite soon. Okay, great. Thank you very much guys. Thank you. Thank you. Thank you. The next question comes from the line of Bjorn Olanda. Please ask your question. Yes. Thank you. And great presentation as always and many questions. But I have some follow-up and starting with the last one actually with Genomics. That seems to be I mean, we have seen declining sales for some 6 quarters in that area right now. I suppose it's primarily U. S. Could you shed some more details on what has happened except For the pandemic, of course. Is it sort of a saturated market or Losing market share or pricing? Anything that would shed some light on that dynamic would be helpful. It's It's mainly 2 things that U. S. Are currently the biggest market us, we don't have the Asian market. And in U. S, there has been a centralization within the laboratories. And that will mean that they are going to that they're using other solutions. And another thing is that we have since we are distributing the products, we are working with our own kits, is that It has been a price erosion out on the market. Okay. Is this sort of in line with your Teitian, when you acquired this or when you entered into the agreement with Illumina or That's a bit in the is it a disappointment? No, I wouldn't say a disappointment. What I am disappointed about is the time to get the new product out to the market. We And then a development team and we have been more or less standing ready for a long, long time to do the final things. So we want to have a very, very good validated product. And it's been very tricky the last year to continue with all those processes. So it is just a delay within our ability to do our own launch. That is one of that's my biggest disappointment. Could you mention some more about what that kit is going to sort of Add to the current offering in your current markets? It's going to be it's going to open up for the customers to increase their production. It is and it's also going to have improved Software, so it's 2 things. It is the capacity and also user friendliness. Okay. And the other thing that product will enable is the launch in Asia, excluding China, right? Correct. So do you have any expectations from that? Is it going to be sort of fifty-fifty between Asia and North America or any indication? No, I mean, we can look on the global market on the genomics overall. And it is U. S. That is the biggest market for sure. And It is the market is growing in other regions. I mean, we have a it's a very, very good market in Spain, for instance, there's good market in U. K. And some Middle East. But overall, if we are comparing different markets, There are very few cycles being done with genomics in some markets. So there is some growth potential for sure in Asia, but they're coming from a lower level. Yes. Okay. So and you don't know When you will launch that? No. Our aim is to do this year. Yes. Okay. Finally, a bit more about the Supply and Logistics, you mentioned the more of a pharma type of supply could be at risk, Which is media then. Are there any risks for the others? I mean, there have been a lot of talk about semiconductors and so on. And you have, I mean, it's more technology oriented products as well. Do you see any cost strain? There is I would guide you wrong if I said that there is not any risk in any other products, but they are Not yet seen. I can just mention a thing that what we have done is that we have taken scrap due to that You know that we have media on cold chain. And currently, so much vaccine is being distributed. The coal chain from the I mean, on the global market are under a lot of, let's say, challenges. So that's just an example where there can be on different level. It can be on their supply on raw material. It can be on electronic companies. That's very, very little for us because we have a huge Inventory on it, because we have been taking action on it, but also a situation that if A vaccine shipment will be done from U. S. We can be that shipment can our shipment can be stopped for a day or 2. And if that is stopped for a day and 2, The coal chain is under a lot of stress. So I mean, it could be in different areas that you could never imagine. Yes. It's a challenging environment, of course. I've heard some companies talking about much higher transportation costs and so on. And I suppose that could potentially affect your gross margin, but I mean, you have high gross margin, so I guess the impact will be quite low. But any views on that? I mean, no, you are correct. The cost per price has for sure gone up and especially on the coal chains. And the cost on other products are increasing. But as you say, our gross margin is quite good. So it's not really going to impact the margin so much. But at the end, we will need to put it on to the consumer. Exactly. Just one Final observation in terms of the inventory. I mean, you have lower inventory now than before the COVID crisis. And it seems like the market is recovering quite fast now. And We have these challenges when with the supply chains and so on. How confident are you that your The situation will I mean, not be a problem from that point? Or are you increasing your inventory as we speak? We if we see a risk, of course, we are increasing the inventory. What you are seeing with the decreased inventory is that we are we have been selling quite good. And the biggest challenge for us on inventory is finished on the hardware products. If it's It's going to be a delay with a quarter or 2 for a customer. So part of it is that we have a good safe situation, of course, And the disposal of devices is something that is also growing. So it's the biggest Items on the warehousing side are finished goods And also some of the disposal devices and finished good for hardware. Okay. Thank you. That's all for me and congratulations to another great support. Thank you. Thank you. The next question comes from the line of Daniel Alban. Please ask your question. Hi, Thomas and hi, Michael. I have two questions And maybe we can take them 1 by 1. So the first question being, if you could maybe give us some color regarding the lawsuit Taking place in Germany, when is it expected to be settled? Or have there been any arguments that have been processed there in Q1? If you Could you just update me on that one, please? Yes. I can give a short update. Yes. We did receive that lawsuit in the beginning of the quarter. And according to the time plan stipulated in Germany, we were Supposed to do our defense filing by the beginning of April, and that was done. So during this quarter, we have Gather some evidence and documentation that we believe supports our view on the situation. And as noted, we haven't included any provisions for the lawsuit In the accounts except for the running cost of the legal advisers. When it comes to the next steps, There will be some exchanges of information further. And based on our knowledge, there will be an oral hearing Happening thereafter, most likely next year. So that's based on how we understand the situation. Okay. Thank you. And my second question is on the technology time lapse sales and especially APAC. I wonder since Acquiring a FertileTech back in 2014, you have sold quite some embrscope. Is it possible To sort of break down if new sales are coming from new IVF labs or you're sort of replacing earlier ones? And if you talk about APAC, that's mainly new products. Okay. Okay. Thank you. That was all for me. Thank you. Thank you. Dear speakers, there are no further questions at this time. Please continue. Okay. If that's the case, thank you very much for listening in to the interim report January March 2021. And thank you and bye.