Revenio Group Oyj (REG1V) Earnings Call Transcript & Summary

Welcome to Revenio Group First Half '23 Earnings Call. My name is Jouni Toijala, and with me, we have here also our CFO, Robin Pulkkinen. Today, we are actually going to run this call in a totally different order. And we are planning to start the call by going through the background for the last week, a negative profit warning, then moving to the first half results, then highlights from the quarter, then Robin is going to go in more detail through the financials plus the shareholder structure, and then we are also going to have, of course, Q&A at the end. And the reason for this change in order is that we got a huge -- I mean, really huge number of calls. We got a lot of e-mails and the contacts from private investors, institutional investors and analysts. And unfortunately, during the stock exchange rules, we were not able to have one-on-one interaction last week and earlier this week as we were in the silent period. So this is really the reason why we are a bit changing the order of the normal call today. So let's start with the new guidance, which we issued last week, August 1. So the new guidance is following: So Revenio Group's’ exchange rate-adjusted net sales is -- growth is estimated to be between 1% to 5% compared to the previous year. And profitability, excluding nonrecurring items, is estimated to remain a good level. So what we changed? So we wanted to give a clear guidance on the net sales growth so that we are not using the objectives. So the guidance is 1% to 5% growth for the full year, and then we didn't touch the profitability part of the guidance at all. And then if we jump to the reason behind. So it's twofold. So the first thing is that we started to see slightly, but not too dramatic, weakening demand between the quarter 1 and quarter 2. So we slightly flagged it during our Q1 earnings call if you recall. But then when we went further down to the Q2, so we started to have more hesitation, especially on the optometric side of the business. And there, if I need to kind of pinpoint one, especially among the private equity-funded optometry sector point of view. Then secondly, we had a pretty big one-off deal, which we closed last year during the Q3. So part of the deliveries were out the end of Q3. And then part of the deliveries were out early Q4 last year. So it's a one of EUR 5 million deal for the micro perimetry side for the clinical trials. And we actually sold the kind of end-of-life product, which we were thinking that we have a kind of a stock still for 2 to 3 years. So we actually sold the stock in kind of a bit more than 2 years stock in one go. And that's now out from the kind of a sales portfolio, so we have a EUR 5 million gap. And when we started the year, so we had a clear visibility that in the normal market conditions, we would be able to catch it up by selling the tonometry and fundus imaging. Then we received a lot of questions that, is this going to be permanent? Is this going to be temporary? So our current understanding and the view is that the challenging time is going to be roughly 6 to 9 months. So we based this one with the discussion what we have had with our clients and with our distributors. And then just to remind everybody that even if we saw a quite significant slowdown in demand during the Q2. So we have been able to grow during the first half. So we have been able to grow faster in the unit level and our -- the emphasis on the unit level. So we have been able to grow faster than the tonometer market and faster than the fundus imaging market. So I think that's good to remind. So really wanting to emphasize that on a bigger picture point of view, the macro trends and the long-term outlook is unchanged. So the people are getting older. There's more people having a lifestyle-related diseases like diabetes, myopia is increasing. So we are going to have a way, way bigger amount of people with eye diseases also in the long run. So that's not changed. Let's move to the first half highlights in terms of the numbers. Robin is going to go in detail, the Q2. So net sales, EUR 45.5 million, so it's slightly up from EUR 44.6 million, so 2%. Then if we go back the last year first half. So we got a pretty big tailwind from the USD. Now it's actually in a different way. Robin is going to go through the details in his part. And then the operating profit was then EUR 10.8 million, which was actually down from EUR 12.7 million. And this is, of course, linking to the -- we had EUR 800,000 one-off, but then also links to the scalable business model when the business is top line is scaling up. So it really scales up really well, up from the profit perspective and then in a way on the other side as well. Then Robin is going to go through the cash flow in detail, but a couple of highlights there. So it was EUR 0.1 million compared to EUR 4.4 million last year. So significantly down and that was true to the Italy site taxes and also kind of pre-taxes and then also the increased inventory. But Robin is going to go this one through in more detail, as I said many times. So a couple of highlights for the quarter. So first half results, I went already through. So that was two-folded. So started positively during the Q1, then down on Q2. Then we went through the kind of forecast on the demand side and so forth. But a couple of other highlights. So during the review period, we added a couple of new disease detections for the iCare ILLUME. The iCare ILLUME package includes the DRSplus, then it includes ILLUME, then it includes the AI. So the first expansion on the ILLUME product portfolio was that we added the AMD and glaucoma. So from the user perspective, experience is exactly the same as before. So end user just presses a button, DRSplus 2 images per eye, and then the images are sent wirelessly to ILLUME cloud and then the AI is going to return a report back. And we can do out from these same 2 images per eye, we can now detect the AMD plus the glaucoma as well. Then, in addition to that one, we also disclosed the AI cooperation with OphtAI so that they are going to integrate their AI algorithm part of the ILLUME platform. They are extremely strong in France, also in Canada. So that's a plan for us for the OphtAI. Then also, we added the Quick Measure for the iCare IC200, so improving the kind of fastness in the workflow there. And then we have been working a bit more longer time related to iCare HOME2 in the U.S.A. So we have had earlier the reimbursement policy for remote monitoring codes and remote measuring codes. But now we are working as well in order to get the reimbursement for the device. So based on the discussions with the experts and the KOL, that is looking pretty good so that there's a need for that one. But of course, in order to get the reimbursement, it's a bit same as we getting the approval from the FDA. So it might take longer time. So for this one, we are not expecting to have any progress during this year, and we come back to this one than early next year. Then, we have also decided that we are going to keep the Capital Markets Day, November '23. So invitations are going to be sent out shortly. So that's decided internally. And then I want to emphasize that we have currently up-to-date growth strategy in place, and then we have good and strong global team who is capable of implementing it. And then we also renewed the organization, and that seems to be working well, and we are still fine-tuning that one and in the final steps of hiring the new head of the R&D. So that's also moving forward. So no worries in that sense. So there the house is in order and really looking forward to then see and hopefully also meet people then in the November CMD. With these words, I would like to give a speech to Robin Pulkkinen.

Thanks, Jouni. So a bit more details on the numbers. Net sales for the second quarter, EUR 22.3 million, down 8.7% year-over-year. FX adjusted decline 6%. In the opening, Jouni mentioned first half sales EUR 45.5 million, up 2%, FX adjusted 4.3%. So on the top line, it's important to keep in mind, last year was quite exceptional from the FX. So the whole year FX tailwind was almost EUR 6 million and also for the first half, the FX impact was almost EUR 3 million. Last year and this year, it's just over EUR 100,000. In the second quarter last year, the FX alone was roughly EUR 2 million tailwind. The gross margin remained healthy throughout the quarter and throughout the beginning of the year. So even though we discussed about the growing faster than the market on the units, but also it hasn't been kind of cannibalizing our margin or we haven't been doing tricks there. So we've been constantly keeping our margin levels healthy throughout the quarter and the year. The profitability side has come down. We did have incurred in the second quarter EUR 827,000 of nonrecurring one-time project costs, which have had a negative impact on the EBITDA and the profit and the EBIT. So the adjusted operating profit line is probably more comparable if you want to compare apples-to-apples. So first -- second quarter, EUR 5.5 million, down from EUR 7.1 million. It's roughly 22.9% decline. Almost 25% EBIT percent compared to 29.2% last year. And for the first half, we're down 8.1%. And the profitability 25.6% this year out of Revenio compared to 28.4% last year. Our EPS, EUR 0.122 this year. Last year, Q2 at EUR 0.203. For the first half, EUR 0.281 and last year at EUR 0.379. On the next slide, you can see a bit more trend on the top line. The second quarter, like we've covered was exceptionally weak in terms of demand. You can see it also clearly here, falling below the trend line. But kind of looking back in history, the Q1 typically has been below Q2, was below in 2020, roughly on the line '21. Last year, where we are now comparing against, the Q2 was actually clearly above the trend line. So we are comparing against a very strong Q2 last year. Last year, Q2 grew 30% profitability grew over 60%. So we were not kind of going out with -- against easy numbers or ease comparables. Of course, it doesn't explain why the numbers are what they are, but the comparables were really, really tough. On the right side, you can see the profitability trends. You can see the EBIT percent also on the line. If we look at the Q2 is a bit further out. So you can see Q2 2020, Q2 '21. The EBIT percent is roughly around the same area where we are now this quarter. So actually, last year also here, stands out on the profitability as a quite exceptionally high year also in the euros, but also on the profitability percent. On the cash flow side, on the left half graph here, you can see Jouni mentioned the Italian taxes. So the Italian tax system works as that you're taxed on the profitability of the prior year. So if you look at last year in Q2, we didn't pay much tax in Italy. The reason was that the '21 result in Italy wasn't very good. So there wasn't much tax payments in the '22 last year. And '22 as a whole year last year in Italy was quite profitable. So the taxation, what we paid now in Q2 this year is the kind of the taxes for the last year, which is a big part of it. And also the taxation for this year is based on last year's profitability, which are also higher. So we paid -- the Italian taxes are paid twice a year in kind of Q2 and then Q4 in November. So we pay like 40% of the pretax for this year and all the taxes that we didn't pay last year are also paid in Q2, which was the kind of the one biggest item running down the operating cash flow or the cash flow from operations. There is a chance to split that -- those payments out to make this look nicer, but there's extra costs and interest related, so we haven't gone that way. The working capital was also impacted slightly by the increased levels in the inventory. Some of the components have long lead times. And of course, the sales wasn't quite at the level where we expected, but there's kind of no risk of any kind of write-downs or anything in the inventory. So it's good devices and materials and components that we have in there. The equity ratio is the highest level to what we have seen since the acquisition of CenterVue, so it went over 70%. The increase in the net gearing is due to the fact that the dividends for last year went out in early Q2. So the equity ratio actually increased by 11% from just under EUR 80 million to almost EUR 90 million. The shareholders, there has been some changes here. So the Finnish ownership actually has bounced back slightly, had been going down for a long time. The U.S. investors have been selling some of their shares. Then all the 4 other countries on the right, here you can see, have been increasing their share. So France, Sweden, Denmark, Finland have gone up and the U.S. has gone down in the ownership. And then the guidance, which Jouni already went through. I'll just read it once again. So Revenio Group's’ exchange rate-adjusted net sales growth is estimated to be between 1% and 5% compared to the previous year. and profitability, excluding nonrecurring items, is estimated to remain at a good level. And I think we have, probably, a few questions also.

Yes. And that's it. Thank you, Robin. So let's open the floor for the questions. So please.

[Operator Instructions] The next question comes from Nikko Ruokangas from SEB.

This is Nikko Ruokangas from SEB. I have a couple of questions. So first of all, your competitors' reports do not indicate a strong weakening as your guidance upgrade. So I know that the portfolio is doing it completely much. But for example, one of your competitors said that the CapEx demand seems solid from major optical sales in U.S. and Europe. So could you help us how should we interpret this compared to your comments on dramatic weakness in the market? And then continuing on that. So you told that you grow stronger than the market in H1, both in fundus imaging and tonometers. So how do you believe your growth was in Q2 compared to the market?

Thanks, Nikko, for the question. So are you able to give an insight on the competitor name, so then we are able to understand that this portfolio matching or not?

Well, for example, Topcon says that their optical chain demand seems a rather solid.

Yes. So they have slightly different and wider portfolio. So I think that's the first thing to know. Then we have been extremely strong, especially in the UA, the private equity-driven optometric markets. So I think that's the second. So we were really strong last year on that one. And then just a kind of a reminder that we compete on, if you think, optometry. So we have fundus imaging and tonometry going on in that one. And then if you look at the overall portfolio perspective, so Topcon is having a wider. But this is the current thing on that front. And you have the second question, Robin want to give insight on that one, which was related to the growing faster than the market.

Yes. So we haven't opened the second quarter, but probably there are devices that did grow, but there are also ones that didn't. So it's hard to -- I don't have that data right in front of me right now, but there's positives and negatives and they're red and black.

And perhaps building top of that one, so we usually see the market growth rates as a full year basis because then we know the quarterly fluctuations, but now we look and put it so that we looked at the first half. But I think we are wiser towards the end of the year when we understand the overall demand.

And we don't have any market data for this year yet. So all the historical references or the references we have in the slides are for last year.

Yes. I understand. Then, you told that the intraocular pressure sales have returned to pre-COVID levels. So does this mean that the weakening is especially in that side? And do you expect them to continue to grow from now the lower levels at this couple of percentage level going forward? And thus, this indicates further downside risk. And does it indicate also that funds imaging has been growing in Q2?

So if we go back in history, so when we look -- earlier this month, we look the market data, we look at the market report, so even during the COVID time, the overall tonometer market has been in average growing roughly 2% to 3%. And if we go as an example and remind the growth numbers Q2 '21, so the top line grew 38% for us, bottom line 29%. Last Q2, top line grew 29% and bottom line 60%. So that sentence is referring that we grew in the certain quarters on the tonometry side, 15 to 20x than the market, roughly. So giving kind of a highlight. And now only the comment is that we are going perhaps back more modest growth and not kind of a 10 to 15x faster than the market on the tonometer side. So that's the reason behind the comment. So do you want to, Robin, comment or add more flavor on this one, on the earlier growth rate point?

Yes, yes. It's definitely, totally exceptional growth and the market share went from 27-ish or something to close to 40% during this time. So the market share has been really fast growing over the last years.

All right. So then you'll continue with this earlier growth -- not earlier, but more normal growth rate, but also from lower levels going forward, I guess. Then one last from me at this point. So your guidance indicates that your FX -- that you expect FX-adjusted sales growth to improve in H2 compared to Q2. So despite uncertainty on this and of course, this one-off item you mentioned, so could you open where does this assumption of improvement in growth rate is based on and what risks do you see in it?

Yes. It's, of course, our backlog is not very far, far lasting, so we haven't sold like anything for Q4 yet, basically. So it's based on our kind of internal discussions with the forecast what we do. We do talk quite frequently weekly with the sales team and have an up-to-date forecast how they see the deals coming in. There is a quite healthy pipeline, like Jouni mentioned, there are very, very interesting cases in there. So we are kind of quite optimistic that we're able to remain within the guidance for the second half. But of course, there's quite a few uncertainties also in the air. But the biggest challenge is, of course, the micro perimeter, which we now don't have a device to sell. There would be a lot of demand for it. But unfortunately, we won't have a device to sell until sometime next year.

The next question comes from Daniel Lepistö from Danske Bank.

It's Daniel Lepistö from Danske Bank, and I have a couple of questions. So maybe starting up with the growth guidance and the expectations you discussed earlier. If we treat this EUR 5 million micro perimeter deal you've got last year as true one-off and eliminated it. Looking at this new guidance, sort of a comparable basis, it looks to me like that you're still expecting like clearly above market growth for H2. So can you confirm this thinking? And is this sort of reasonable listening to your quite cautious views on the market conditions right now?

Yes. Yes, you've read it right. And yes, we've had quite a few calls with the sales team over the last couple of weeks and the customers. So we are kind of standing behind the guidance and think that it's in the -- pretty much in the ballpark where we think we should be landing.

Maybe continuing on the topic on the sort of more difficult customer groups like the optometry sector you mentioned. So can you remind us on the sort of your exposure to these customers, both in the U.S. market and globally?

So I would start that -- answering that one to kind of divide and perhaps start from the U.S.A. So if you look at the exposure, so we could say that roughly kind of 50% to 55% in the U.S.A. come from optometry, from ophthalmology. So we talk OD and MD. So roughly 40% to 35% is then on ophthalmology side and then the remaining then is others. Then we don't have so detailed split if we go for the other regions because we are working behind the distributors. But I think the U.S. part is more or less exactly as I explained.

Although it is PE driven, but a big part there becoming larger and larger. So there has been kind of a clear trend of consolidation in the optometry side.

That's very helpful. Maybe going toward next question on the profitability guidance. Can you give us some indication how wide is this guidance in terms of sort of maybe underlying margin expectations? Looking, for example, this adjusted EBIT margin you did during Q2, is this sort of a good profitability for you, how you verbal guided?

I think I can't really say exactly what the spread is, but kind of typically, our second half has been more profitable than the first half, at least in history, not promising anything this year yet, but kind of -- if the history repeats itself, it hopefully would be higher than the first half.

Okay. So we should be expecting sort of a gradual margin improvement for the rest of the year. So -- and also, are there any initiatives that could help you to sort of protect your margins with now sort of a lower growth expectations for the rest of the year?

Yes, I think the profitability is very much kind of dependent on the top line. So any extra million we sell -- if we sold EUR 1 million more last quarter, we would have made EUR 700,000 more EBIT. It's quite straightforward. So it's very much driven by the top line.

How have you sort of prepared for any sort of initiatives that could be helping if things remain [ slower ] maybe during Q3 and so on, but where you could adjust maybe to protect the margins and so on to the downside?

Yes, of course, we have been looking. So of course, everything starts from the gross margin. So we see that, that remains good level. Then, of course, if we go big bucket items, if we go for personnel costs and so forth, so money that goes to the R&D, money that goes to the sales. So current kind of feeling and the guidance and decisions. Of course, we are looking the costs, but we -- there's no plan at this stage to start thinking that should we reduce the investment, which is going to R&D. So we have a good portfolio of new things coming from tonometers, fundus imaging, new software for perimeters, new micro perimeter in preparation for '24. So we play the long game. So there's no plan to cut from the R&D. Then if we look the personnel costs. So of course, we are more careful with the hiring. So we hire the replacement hires if somebody departs. And then we do selected hires in selected areas, which are then essential for the forthcoming growth. Of course, we look travel perhaps a bit more carefully and so forth. But in a way, there's no cost-cutting program in place. We, of course, monitor the situation clearly. But this is a long-term game and we are a product company. So we have to keep the products in good shape and the product portfolio in good shape. So I think that's what I want to emphasize. Anything, Robin, to add on the cost side?

No. Then the -- if you look at the salary cost, for example, they didn't go up as much as you maybe could have thought of one big driver, of course, is the variable payments, which are probably going to be lower this year. So those are the kind of parts in the OpEx that kind of also kind of live a little bit with the performance of the company.

The next question comes from Joni Sandvall from Nordea.

It's Joni from Nordea. Maybe still a follow-up on the guidance. I'm just thinking how long visibility your sales team has on the demand and maybe also how confident you are currently with this forecast after this first demand lump seen during the Q2?

I may perhaps pick up that one, Joni. So we are -- as Robin said, so we are -- as of today, we are confident to keep the 1% to 5% net sales growth. And how it in practice goes? So we have constant dialogue -- or the sales is having constant dialogue with the clients, especially, of course, in the U.S.A. because we work directly. And then our sales works with the distributors and also even we work through the distributors in Europe, Middle East, Africa, LatAm, Canada, and APAC. So all these bigger deals, which we have in a pipeline, we work together. So the current view is based on that one.

Okay. I think we went a bit through on product categories. But could you give any additional color on geographical sales performance now, at least U.K. was down, but what about U.S.?

So I think Q2 was kind of soft in all regions pretty much. So there wasn't really any one country, U.S., for example, alone that was totally underperforming. I think the Q2 was kind of surprisingly weak in all areas. So it wasn't just one area or region.

Okay. Then maybe have you seen any changes on the competitive environment or in the pricing environment now with I would think that the component prices are at least coming down.

So on -- if looking at the Q2, so the players who have been there last year during the Q1, so no changes on that front on the product kind of competitiveness from the computer -- competition point of view, no changes on that one. We have heard a couple of cases from certain fundus imaging players that they have quite aggressively, they have cut prices. So even ballpark of 20%, 30%. But we -- so far, we have been -- made a decision that we want to keep the healthy gross margin because it feeds the overall engine. And if kind of giving a flavor on the profitability side, so if we take this one nonrecurring cost item out and we look the EBIT performance. So according to my understanding, if we go and look the competitors what we have, so their EBIT numbers might be double-digit, but they don't start with 2. We might have competitors that are operating on single-digit operating profit. So we have been trying to safeguard the gross margin. And still I want to remind that even though that kind of the top line was likely weaken out from last year, but there's -- we need to sell quite a lot of devices in order to meet over 20 million quarterly sales. So...