Revenio Group Oyj (REG1V) Earnings Call Transcript & Summary

A very warm welcome to the Revenio 2019 Financial Report Webcast. 2019 was a very eventful year for Revenio; and strategically important, probably the most strategically important, year in its history. The company has made a significant transition during the last 5 years from 5 completely independent businesses to becoming an important player in the ophthalmology medical device industry. The background to the Centervue acquisition, which was completed in April of 2019, lies really in the strategic work that was conducted many, many years ago. At this stage, Revenio was basically a one-technology company focusing on tonometers and had become a -- the supplier of tonometers of choice in all the major markets. One of the strategic targets that was set at that time was to identify potential acquisitions that would expand the addressable market and the product offering to new unique technologies and having a wider diagnostic coverage. After screening over 100 companies, we came across Centervue, which to us answered most of the requirements that we were looking for, giving us a major expansion to the addressable market, unique patented technology, good-quality and well-known products and a company with a global reach. Before I actually go into the main topic today, I'll set the stand or the stand for some basic background information which I think is really important for us as we understand why we entered into this acquisition. The big picture shows that the global elderly population is growing at a significant pace at the moment. You can see that basically we here are at about 1 billion elderly people that is over 60 years old people at the moment. And in the next 30 years, that amount will basically double, meaning that there will be 1 billion more elderly people in the world. Why is this significant for us? It is significant for us because most of the diseases linked with the human eye are all linked with the aging population. As you know, iCare is the leader in tonometers in the world. And the device is usually the entry-level measurement that is conducted when there is a glaucoma suspect, but in order to conduct a full -- or actually come to a complete diagnosis of glaucoma, one requires 3 measurements. IOP is basically the easiest one, and then that is followed usually by an image of the retina and a visual field or perimeter measurement. Here you can see again the same thing I mentioned in the earlier slide, that after the age of 60, basically in all ethnic groups we see a significant increase in the glaucoma amounts. And here you can also see that the expected amount of glaucoma patients to come to the market, so to say, will increase by about 45 million during the coming decades. All these technologies that are required in the diagnosis of glaucoma are now available with the new product range we have at Revenio. One of the fastest-growing medical conditions today is diabetes. And with diabetes we also have a link to eye diseases, and that is retinopathy. You can see that there will be more than 200 million new patients, diabetics, in the market during the next 25 years. Now here in this slide I'm saying that about 35% of diabetics will basically have retinopathy during their lifetime. Actually you can find studies showing that it can be over 60%, so we are talking of tens of millions of retinopathy patients coming during the coming years. And basically the challenge with this is that every diabetic will, over their life span, have to have their checked -- eyes checked for potential retinopathy. And once they're basically diagnosed, they have to have follow-ups on a regular schedule. I will talk a little bit later on about our new introduction to the market that is the DRSplus product, which is specifically intended for the screening of diabetics, but obviously because it's an imager, it can be also used in diagnoses of other retina diseases. And then the third disease is AMD, which is like the other disease increasing quite rapidly. We can see that close to 100 million new patients will enter the market during the following 20 years. This is a disease which limits quite significantly the quality of life. There are 2 types of this disease. One is the dry, and a wet version. The challenge with all of these diseases I'm talking about here is that they are not curable. What one can basically do is prevent the progression of these diseases, but as we have so many different significantly growing disease families at the moment, that -- really the big challenge that health care providers have is to provide fast, easy and accurate instruments; and basically instruments that can also in the future be incorporated with artificial intelligence. And the reason for that is to create productivity so that these huge amounts of patients can be monitored over time. This is an overlook of the total market. The total market in ophthalmology is about $3.3 billion at this time. And from that, the retina or fundus imaging market is about 29%, which is roughly about $1 billion. And from that part, we address approximately half in the -- it's basically a screening and diagnostic portion, and that basically means about $500 million of business. Then when we add to this the tonometer and the visual field markets which are also available to us, we come very close to a number of $1 billion of addressable market. So basically it creates a huge opportunity for us to grow, obviously provided that we have very competitive products to offer. Let's have a look at our product offering at this time. I've divided it basically into 2 categories. One is looking at it from a disease point of view. Obviously, like I said earlier, these are the 4 main diseases that are linked in the growth opportunity. In addition to this, there are dozens and dozens of diseases of the retina which can be also diagnosed and detected with the equipment we have today. Here you can actually see still the old DRS. I'll talk about the DRSplus in a moment, but basically what one can see is that we can now cover all the main categories with a full range of equipment in glaucoma, obviously having the IOP monitoring, but also we could add the tonometers to the cataract area. Basically, whenever we have cataract surgery, we need to have also our IOP checked during and after the operation, so it could be easily linked there, but from a diagnostic point of view, it doesn't belong there. In the beginning of this year, we launched also the EIDON -- sorry. In the beginning of last year, we also launched the EIDON FA, which is a fluorescein angiography device, a complicated name. Basically there a patient is injected with a contrast media, and that contrast media slowly flows into the arteries of the eye. And basically the EIDON FA has both video and still image capabilities, meaning that it gives a good opportunity for the doctor to see how the arteries work in the patient's retina. And this is extremely important, especially when you are looking at diabetic patients and doing follow-up with them. The EIDON AF again is a product. It's an autofluorescence product. Basically there, using different light modes, especially blue, one can make the detection of the different layers in the eye more -- easier. And at the same time, it gives us the possibility to analyze the metabolism in the eye. Now the metabolism is, from a future point of view, a really interesting area because many, many diseases can be detected from the eye very early on. We are currently working with an American organization that is developing software that basically uses our instruments to detect amyloid plaque in the eye, which is obviously linked with Alzheimer's disease. And so basically we can in the future also move away from pure ophthalmology, to other disease detections. There are other metabolism diseases which are also being currently detected from the eye, and then we come to look at our product offering, where our products really offer capabilities which most other competitive products do not offer. The compass was the first fundus-based perimeter in the market. Basically, what it does, it combines a perimeter and a fundus image. The traditional way of doing perimeter is basically having basically an X-Y coordinate. And basically there you have on that coordinate the locations where you have black spots. Now in our devices you can actually locate these in the actual fundus image, and basically that gives both structural and functional properties of the eye when the doctor examines it. The other way of looking at this is from the value chain in the diagnostic area. So patient screening, of course, is a big future potential for us. We are already doing it very heavily with optical chains and medical centers, and we have a very capable product range to offer into that. The DRSplus is, in our mind, going to be the winning formula in the screening world in the future because it is really an entry-level product. And why is an entry-level product important? It's really important because it's the first instrument that a clinic acquires, and if they have good experience with that product, they will move on -- later on with the more advanced units we have. Then a quick look at the DRSplus. Now this was launched late last year, basically late November. We introduced it to our distribution network. And then early this year, we've started launching it in the U.S. Now this is the first confocal imaging system used in this price range. It basically gives TrueColor. Now you might ask, what does TrueColor mean? We have actually studies that have been published very recently which show that with our confocal technology a typical image gives about 300,000 colors in that image. Now if we compare that with one of our main competitors like Topcon, for instance, they will produce about 90,000 colors in their images, so there's more than 3x more colors available in our imaging. Now why is that important? It's important especially if you start talking about using artificial intelligence. In artificial intelligence the studies now show that, when our devices are used, we get over 90% sensitivity, which quite often many other competitors do as well, but the specificity is the more important number. Now that basically detects how many percentage of the patients you are measuring are not carrying the disease. Now obviously you don't want to diagnose people that don't have diseases. In that area, a typical competitor gives a result of about 75%, so basically 25% of patients are healthy, but still they are diagnosed as not being healthy. And with our new devices, we get results that are over 90%. Now this is really important when we'll think of the future and the importance of using artificial intelligence in our devices. After the launch of the DRSplus, what we've really seen is that all the major artificial intelligence software manufacturers have contacted us because they know that our instrument delivers a better-quality image. And it's more suited for their needs as well, so basically what they will do is they will recommend to customers that they use instruments like ours in their everyday work. This product's price range is around EUR 15,000, so it's significantly lower than the higher-end instruments we have. And basically one can say that this is in the same entry-level measurement level as a very recent Finnish public company called Optomed, but the quality of the picture is obviously -- or the image is of completely different level. This is also a very accurate and fast device. If I would have one here, I could measure your -- both of your eyes in less than 1 minute. So it really brings productivity into the clinic when doing measurements. What we've seen also is a lot of key opinion leaders and optical chains have started contacting us after the launch of this product. Obviously a lot of optical chains have been in the market for quite a long time already with fundus imagers, and now they are going and looking at replacement units. And this is a great opportunity for us to offer a replacement unit and also new units to new optical chains that are entering into the screening markets. Then finally, the summary of last year. I'll start by looking at the full year numbers. Obviously due to the acquisition, we had very strong net sales growth and over 60%, and also our EBIT was extremely strong. Now Robin will talk to these numbers more closely when he comes to present the financial details, but here the reason why we've shown really the EBIT number is the fact that we had nonrecurring acquisition costs amounting to EUR 2.8 million last year and so that we have comparable and understandable numbers we're showing here, the EBIT number. From a territorial point of view, we had excellent performance in all our main markets. That is U.S.A., Japan, Australia, Germany and China. And the nice thing that we saw already last year through the acquisition and the consolidation of our sales force is the fact that we started seeing growth in markets which have in the past been slow growing or we haven't had too much focus in them. One is obviously Middle East, and the other one we saw good growth in is in the smaller markets in Asia. The integration of the 2 entities has progressed extremely well. I was involved in those late last year. And I have to tell you that I've been involved in many integrations, and this has by far been the smoothest I've ever been involved with. Basically the only major integration work we still have ongoing is related to the merger of our ERP systems. And the reason why that is still ongoing is really because we are using Microsoft vision (sic) [ Visio]; and basically there is a new version, 15, coming out. And because we didn't want to first go into version 14 and then 15, we've deliberately waited until the version 15 is on the market so that both units in Finland and Italy will start with the same foundation. We are already using other software jointly, QlikView for management reporting and Jira for quality and manufacturing issues. Customers and channel partners took this change or integration or the merger of 2 companies extremely well. Our -- obviously our channel partners in -- for the most part, received a completely new product range to sell, but also in the U.S. we gained a direct sales force which Centervue has had there. And that has been important for us in our progress with the home product. We have decided that in the future our direct sales force will also be directly involved in selling the iCare HOME, which will bring, of course, much more pressure and power to the sale of that very important product. We introduced last year also the IC200 in European, Australian, Canadian and the Japanese markets. And then early this year, we've received the FDA approval and launched the product to the -- or are launching the product to the U.S. market. Then our fourth quarter numbers: strong net sales growth, 72%; and also very strong EBIT numbers. There were no further acquisition costs related for our Q4 reporting. Now during Q4, obviously, we had some nonrecurring costs. One was related to the change of the CEO. And the other ones were really linked to the long-term incentive schemes that we have for the management, and those obviously were linked to the fact that the share price increased quite significantly during H2 of last year. And that resulted in about EUR 0.6 million in additional costs. On the other side of the coin, we had about EUR 1 million recognized other income which was due to the adjustment of the final purchase price. Robin will talk to this a little bit later on. So all in all there we had a little bit of a overall positive gain. We had very strong cash flow. Robin will talk to that. I think it also surprised us how strong the cash flow has been. So we are basically net debt free at this time, which is great when you consider that, half a year ago, the situation was completely different. The DRSplus, I've already talked about. We have -- or I have very big expectations for that product for the coming future. I think the only challenge we really have there is to have enough availability of the product from manufacturing. There are a couple of issues ongoing from regulation and requirement point of view from the outside. One is the medical device regulation, MDR, decree which will take into effect May of this year. There is a transition period, but nevertheless we are fully prepared already now to fulfill those regulations. And then the other one is the so-called Medical Device Single Audit Program, which in a way brings us savings, but it's also been a huge focal point for us during the last year. It means basically that in the future, 5 countries, that is U.S.A., Canada, Japan, Australia and Brazil, will all be under one audit. In the past, they have been separate audits, which have of course taken a lot of resources from our organization. And now they can be conducted in one. And both units in Finland and Italy have successfully been audited and approved to this new system. At this stage, I'll give the floor to Robin, our -- Robin Pulkkinen, our CFO, and he will talk to you about our financials from last year.

Thank you, Timo. So going through a few of the key numbers. I'm not trying to repeat too much, but the top line sales, EUR 49.5 million, up by 61.4%; and the operating profit, EUR 12.6 million, up 23.4%. As Timo mentioned, there's about EUR 2.8 million of acquisition-related onetime costs, and if you look at the following couple lines here, we basically adjusted those costs out. The adjusted EBIT, EUR 15.4 million, compared to EUR 10.2 million, so up over 50%. And if you consider, go back: When we bought Centervue, it was clear that we are buying a company that had a lower profitability historically than Revenio used to have, so in a way, it kind of makes sense that, when your top line grows over 60%, the operating profit may not be growing as fast because we've kind of added a lower-profitability piece to the group. But I'd still say that this line is not really comparing apples to apples. So historically Centervue has never capitalized any of its R&D spending. That still remains the same today, so basically, the financial point of view, the business is looking at a very similar way it used to before. The difference is that the -- through the purchase price allocation, we allocated over 15 million into the intangible assets, which all went into depreciation starting May 1 last year. And this is hitting the P&L EBIT line. And basically, if you look at the EBITDA line, this is kind of eliminating those additional costs that really doesn't have anything to do with the underlying business. And we were actually able to maintain the profitability level year-over-year even after adding the lower profitability into group, which I think is pretty remarkable. EPS, EUR 0.365. And this is also, if you take out the nonrecurring costs, it would have been EUR 0.473 for the full year. And last quarter, EUR 0.143. Equity ratio also, I'll go through the balance sheet on the next slide a bit more, still very healthy. And like Timo mentioned, the net debt -- we're almost net debt free. Still at the end of Q3, our net gearing was over 15%, so there's been a big change over the last 3 months. Quickly over the balance sheet. This looks quite different than it used to before. So the bottom line has gone up almost 5x, the biggest changes being the goodwill we booked for the Centervue acquisition, almost EUR 50 million; as well as the intangible assets, which I just mentioned. Also the net cash or the cash is up significantly due to the strong cash flow. We did fund -- for funding the acquisition, we did accelerated book building just before we announced the deal -- or after we announced the deal. And basically it shows us also the shareholders' equity going up very substantially, which also has to do with the kind of the equity ratio. And some of the financing was done with typical debt, and that, we are also paying down just over EUR 1 million per quarter. Some of the key figures on graphs also. We can see the equity ratio coming down a bit, so like you just saw, the balance sheet looks very different. You can't really compare that to the past, but what I want to tell here is that we still have a very strong balance sheet which gives us room to maneuver also in the future. If we want to do acquisitions, we're still in a very strong position to do that in the future. Profitability, no significant change here. Like I mentioned, the major difference here is really the PPA-related depreciations. The share price developed very positively last year. You can see a couple jumps here. This is around the announcement of the deal; and also after Q3, the financials. So there's -- other than those, it's been pretty stable but a couple of bigger jumps. Largest shareholders, on this list. There's no major differences. There's -- Gerako actually is not visible here anymore. They did a bigger deal last year, but also there's 2 companies who flagged their ownership who also don't show on this list but they're in nominee register. The one big change is that we have -- had 1/3 of new shareholders. So the number of shareholders went up from just over 9,000 to 3,000 more, up to 12,400 almost. And it's a very big change for a company that -- we've been listed almost 20 years now. So having that many new shareholders in 1 year is not very typical. And also now that the Finnish government announced the share savings account (sic) [ equity savings account ], if that's the right term in English, you can see that in January we had another 10% of new shareholders, [ joined with pride ]. Ownership structure. In general the nominee register has continued to grow like it has been over the last years. Even last year, it still went up 30% compared to 2018. And yes -- so 40% of the shares are still hold by -- held by households. And the nominee register is now about 34%. The guidance. The net sales are estimated to grow very strongly from the previous year, and the profitability is to remain at a good level without nonrecurring items. And the Board proposes to the AGM that a dividend of EUR 0.30 is to be paid, which is up EUR 0.02 from last year. And that was it for my part. I think there are some -- maybe some questions.

No questions at this stage.

Okay.

Any questions from the room? Yes.

[indiscernible] Mikael Rautanen, Inderes. So first, the -- at the time of the Centervue acquisition, you announced a target of 5% synergies on revenues from the material expenses, but now that 5% is missing from your communication. Is that a valid target still?

It is a valid target, but if you will also remember what we said at that time, it's over the coming years. It's not during the first year. And like I already said here, there are big items that will gradually start bringing savings. One is, for instance, the consolidation of the ERP system. The other one is, for instance, this year the consolidation of our U.S. entities, which will definitely bring some administrative savings especially in our finance and HR area.

Okay. Then on the DRSplus, you seem quite optimistic about it, [ but well, obviously ] it's a next-generation product. And you still have the old-generation product, so how much is that going to bring growth? Or how much is it going to be just offsetting an old, declining product line?

Well, actually the old DRS was not declining. And actually we are still seeing significant demand for the product. Big optical chains are still asking specifically quotes for the older DRS as well, but at the same time we're bringing new features and benefits with this product. So it's offering a completely new technology. We're moving into confocal imaging in the entry-level measurements, and that is a huge step for us and the market at the same time. And I think that alone will be -- will bring increase in the demand of the product; as well as the fact which I showed, that there is a growing and -- interest in the market where optical chains and other providers are only now starting to provide imaging services. I think the fact that when artificial intelligence starts growing faster in our area -- and we know there are dozens of companies in our area providing already artificial intelligence. When they start really installing their units, we have a great opportunity, compared to our -- many of our competitors, to offer a very competitive product to that specific market.

Yes. What about the optic chains, which is the one attractive group? Do you have sales channels to reach them? Because I've understood that your primary target, the addressable market, is the doctors...

That is a very good question. Actually, during the restructuring of our sales and marketing department, one of the key issues there was that both in North America and then Europe and basically Asia we have now specific people that only focus on selling business to business or -- to businesses like optical chains, pharmaceutical companies and so on. So we've changed our approach specifically to those kind of accounts. Not to say that we already in the past have had all the major optical chains in one way or the other as our customers, but I think the real change is that we have go-to persons clearly in our organization now and they have their own internal goals to build that part of the business.

Okay. Then iCare portfolio. So you have now IC100, IC200. You have the home, so it seems a pretty impressive product portfolio, but what's up next in the iCare product portfolio?

We certainly have ongoing product development projects, which one might think that the product range is ready now, but certainly we have new ideas that we are going to incorporate. And you'll see some already this year actually. And so it's a never-ending exercise to keep the product offering fresh but also bringing new features that will be beneficial for our sales growth.

Then maybe final question, you -- the additional purchase price, the earnout for Centervue. So that came down by EUR 1 million, so what's behind that? And maybe related to this question is did Centervue have any significant deals they booked in the second half of last year.

Well, I can answer the latter part of your question. There were no significant one-off sales as of H2 of last year that one could say that resulted in the significantly good performance for the whole group. Now it was basically all standard business. I'm hoping to see some of those what you mentioned, hopefully, this year.

For the purchase price, the EUR 1 million, there's also still -- until the end of this year, there's EUR 1 million additional purchase price related item which still remains. That's not gone. So this EUR 1 million is more related to the initial purchase price we paid that is based on certain estimations, which are then later on adjusted by certain changes in the net working capital, for example. So it was part of the negotiation and it was part of the deal, and the money is also in the escrow account. So there's multiple items that it's related to, but it's kind of now final and closed. So -- and the only open item in the purchase price [ is anymore the ] EUR 1 million potentially due at the end of this year.

It's Panu Laitinmäki from Danske Bank. I have a few questions. Firstly, to continue with the one-offs: Why was the EUR 1 million item not excluded from the adjusted EBITDA?

Well, we didn't do -- we only -- we've been taking out only the acquisition-related costs, and that's kind of where we [ would have changed ] that kind of what we include and what we don't include. We discussed that also with the auditors and this is what we thought is the right way, but we did highlight it separately. So it's kind of it's not in the adjusted numbers, but it's, yes, mentioned.

Okay, yes. And then on the kind of exceptional personnel costs, how much was related to the CEO change?