Stratec SE (SBS) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, in the United States, and good afternoon in Europe. Welcome to our -- the presentation regarding our 9 months disclosures. Before I dive into the details, I would like to mention some housekeeping things. First of all, you can download the following presentation either through the portal you're currently viewing it or you can actually download it from our website. And certainly, I don't need to walk you through our safe harbor statement. As always, I would like to split this presentation into 4 major segments, the first 3 being presentation and then Q&A. I would like to start with an overview and then certainly the financial review. And then I would like to update our outlook. As you probably saw about 3 weeks ago, we have disclosed the German mandatory stock exchange announcement called Ad-hoc announcement where we have, first of all, disclosed our 9-month figures as well as amended our financial guidance. And the actual data is actually fully in line with our preview at the time. So nothing materially new. First of all, sales up by about 30% at constant currency to EUR 225 million. The organic year-on-year growth in Q3 is at 16.7%, which is actually way higher than expected. On the other side, certainly, we see that performance in Q3 on a stand-alone basis is not as high as it has been in the first 2 quarters, an expected situation and still very satisfying, and like I already said, still way north of our expectations at the beginning of the year and actually at the end of the first 6 months of 2021. The adjusted EBIT margin has improved by almost 600 basis points to an EBIT margin of 21.6%. Operating cash flow, super satisfying, representing 267% of last year's comparable of the 9-month figures of 2021 and amounting to EUR 50 million. We had a couple of new market launches, nice achievements of development milestones, nice additional agreements and a very, very strong pipeline in both actually contracted projects as well as projects which are not yet contracted, but with good prospects that this is going to happen soon. We clearly see a catch-up effect. So we probably talked about that already that like at the beginning of 2020, we had some nice contract execution. But then the pipeline became slightly thinner. Obviously, our customers focused a lot on their corona business and literally through everybody within those companies on the side of the business, which had or has corona exposure, which made it a bit difficult for us. We clearly see that focus shifted. The people are getting back to their regular work. We see nice progress of those projects, which are seeing ongoing development activities, and the same thing applies for new things, which have obviously been pushed out during corona. We had a nice launch of our Smart Consumables business. Very attractive in one of the fastest-growing market segments of clinical diagnostics for a leading North American partner. And we got another partner to our proprietary immunoassay platform called KleeYa, but that's actually no surprise. I already mentioned it in a couple of occasions that partners are really lining up here. It's a novel business approach and actually helps a lot of midsized companies to maneuver themselves into a situation where they can cooperate nicely. And like I said before, we have a number of players lining up in different stages of the contractor situation, some of them only performing feasibilities only by means of -- on their path towards contract execution and some actually already selling -- initially selling analyzer systems together with their proprietary chemistry. Second part of the presentation, financial review. I already talked about some of the figures. On a 9-month basis, 25% up in sales. 60 -- north of 60% up in EBITDA. EBITDA margin about 560 basis points up. Adjusted EBIT margin, same progression here. We clearly see that this goes down until the very bottom line, adjusted EBIT about -- which is based on the fact that our adjustments, particularly PPAs running out, for the -- is declining for the acquisitions being made in 2016. Adjusted EBIT, up 73% in linear progression here, with adjusted EBIT margin up by 590 basis points, leading to net income of EUR 40 million, representing a growth of about 70%. Basic EPS, up by 93%, amounting to EUR 3 coming from EUR 1.55 last year, which was already a very strong -- yes, I just want to make that point. So a nice progression. Overall, yes, if you see the chart, certainly, we would like to discuss the contributors. 9 months, up by -- and already mentioned about 26% to EUR 225 million, which represents about 30% on a constant [ currently ] basis, driven by a couple of factors. I think it's still worth mentioning that our molecular systems still see nice demand, and we see a nice recovery of the routine test applications in literally throughout the field, hematology, immune hematology. And certainly, the -- even the dose immunoassay analyzer systems, which have or had no corona exposure are showing nice growth. On the same side, we clearly see that we had a very strong growth of our installed base started already in 2019, but certainly making nice progressions in 2020 and 2021. So we -- this high degree of utilization as well as still growing -- installed base of instruments is leading to strong service parts and consumable sales. And I think we put that on this slide, it's still mentioning that -- it's worth mentioning that we saw some further growth acceleration in Q3. And that's actually with this very little data we have and with that high degree of uncertainty, that's actually something we expect to continue for the remainder of the year and certainly for the next several quarters that we see acceleration here. Very much based on that strong growth rate we saw over the past, let me say, 8 quarters in installed base. And certainly, the newly launched instruments, and when I'm saying newly, it's really difficult to say that doesn't mean the last quarter. Here, I'm really addressing those analyzer systems, which have been launched over the past 3 years where our customers are not yet selling the instruments at full pace. Not yet at full pace because they are not yet approved in all the relevant geographies and our customers do not yet have their full menu on the instrument, which only allows them then to work to cooperate with some customers using the menu, which is not yet comprehensive. And that's why we see nice growth here that our customers are going into new territories or bringing new panels and new assays on those instruments, which is then typically leading to acceleration on the growth with that new instrument. So when I'm referring here to a newly launched products, and I don't want to address those which have been launched a quarter or 2 ago, I'm really talking about those instruments which have been launched right before corona or during corona. Adjusted EBIT margin and adjusted EBIT 9 months, the adjusted EBIT up by 73% to about EUR 49 million and adjusted EBIT margin on a level of 21.6%. A lot of effect actually generating some nice tailwinds here. Obviously, economies of scale and the product mix we have already discussed that -- product mix by means of not only instruments of higher complexity, certainly, instruments -- like breaking down instruments versus other business. And that's actually something where we are expecting some slight headwinds in the fourth quarter that the contribution of revenue recognition coming from development, typically coming along with a lower margin will generate some of the headwinds we will -- we are expecting in Q4. Then certainly, the product mix is important to understand. Again, it's not just instruments, it's within instruments and then certainly instruments versus development. I just mentioned that an instrument versus consumables and service parts, all in all, a favorable development for the company's margin progression. Then certainly, the efficiency enhancement program continues to pay dividends here, which have been initiated back in 2018, which was 4 to 5 years program. So still ongoing measures, which have been implemented back then are actually, like I said before, still paying dividends. And then certainly, we have a lower burden from stock appreciation rights as compared to the previous year where this was actually a very strong position of headwinds. And here, we see some nice positive effects coming from the source as well. Cash flow overall, very, very satisfying position. Literally, we have almost tripled our operating cash flow investing activities on the same level. Financing activities reduced the debt of the company, generating a nice free cash flow after 9 months of about EUR 35 million, which certainly allows the company for some room to maneuver here. Then cash and cash equivalents, again, nice development, 20% higher than last year. Equity ratio, literally no changes here. And as mentioned before, we reduced the net debt of the company by about EUR 20 million, which is, let me say, something which has nothing to do with the actual operating cash flow. It's just a means of those debt positions, which are easier to be touched during those times and where it makes technical sense to not touch them. Allow me to get to the outlook now. Financial guidance. Allow me to reiterate what we only amended 2 or 3 weeks ago. Constant currency sales is expected to grow at least by 16%. The adjusted EBIT margin should be around 19% to 20%. The EBIT margin in 2020 was on a level, again, with a very strong year, was on a level of 16.7% -- 16.7% in investment. Intangible assets should be between 6% and 8%, again, strongly coming back from the last years where we had a lot of real estate activities. I think it's again worth mentioning that we still see very, very high volatilities in the demand of our customers regarding analyzer systems and consumables and actual service parts. And we still see -- and I have actually the impression, if I'm talking to my people, that the situation continues to get worse with global supply chains. It's unbelievable what kind of additional activities are required to really fill the supply chain and make sure that we don't have supply interruptions, which is not unavoidable. But certainly, so far, we managed it nicely that if we were down with a certain production line that our supply chain management people managed to get the part in that we were only down like for a week or 2. But it's like what I said before, if I -- when I'm talking to my people here, I have the impression that the situation gets actually worse from week to week rather than what the actual people working in global supply chains are trying to tell us that the situation starts to improve. We don't see that yet. We see a situation which gets -- which gets actually worse. We have still some -- or have made some risk offsets here, particularly as far as supply chain costs are concerned, which is already incorporated in our guidance for the remainder of this year. Focus for the next quarters is definitely to execute on the current development pipeline and launch pipeline. I mentioned that a couple of times before. Certainly, we have to distinguish between things, which are already contracted and things which -- where we have already started development of feasibility and to get those contracts executed. Actually, we are expecting product launches over the next 12 months for a minimum of 2 of our molecular solutions and other solutions. Then certainly, M&A remains an important part of the company's growth and diversification strategy. I mentioned last time that we have ongoing activities here. I definitely want to manage expectations. We are not applying high pressure or on the other side, we are super demanding. So I think it's worth mentioning that we, from our side, stopped the process at a certain point in the last quarter. So like I said before, we are very, very selective here. We have high prerequisites, and we want to stick to our standards in order to if we do M&A that we really buy quality and certainly trying to avoid to pay [ moon ] prices. Then on our deal pipeline regarding new development and manufacturing agreement, we -- like I said initially, that we definitely see a catch-up effect of things which were -- activities were very calm and quiet over the last, let me say, 5 or 6 quarters. And we definitely see a recovery effect. One of the core focus is definitely to manage that transition from the pandemic mode into the post-pandemic mode and to really set the priorities where we definitely see that. This is a process where the majority of our partners being slightly ahead of the market already started that process like 6 months ago and are already talking about their activities, which are non-COVID related, then we definitely are in a similar situation that we started that process like 6 to 9 months ago. But it's definitely like a mode change where we have to manage expectations amongst our partners, amongst our employees, amongst our suppliers, have to reset priorities, have to be very cautious regarding cost and so on. So it's definitely a meaningful change in the mindset we have to support here within the relevant stakeholders, as mentioned before. And then certainly, we have to restore pre-pandemic efficiency. And I'm sure you are learning that from some of our customers and partners as well, that certainly in times where, let me say, speed and pace was a priority above costs and above efficiencies. We definitely have to get back into a mode where we are considering efficiencies, cost cautiousness and so on and can no longer afford to just say timing goes over everything, inventory doesn't care and so on. And that's certainly something we are trying to address very carefully and step by step. But it is a process, and we have to go down that path. That gets me to the end of the presentation, and I would like to hand back to Stuart, who will explain us how we could start the Q&A session.

[Operator Instructions] First question is from the line of Oliver Reinberg from Kepler Cheuvreux.

Oliver Reinberg from Kepler Cheuvreux. Marcus, 3 questions, if I may. The first one on COVID. So there's basically 1 client who obviously has seen a kind of major support from that. I was just trying to get a feeling how to think about the mix of this client next year. So basically, instrument sales may decline. So there may be kind of replacements for highly utilized systems, but obviously, probably less new installed base building. While obviously, the kind of high installed base is driving the kind of demand for consumables from this kind of specific client. Can you just talk about to what extent you have already seen this kind of mix shift towards consumables? Or is this only to come? And can you probably just comment this quarter what the percentage sales contribution from spare parts and disposable was? Second question, can you just -- I mean we obviously had the kind of new impressive data from the new antiviral pills, PAXLOVID, but also from [ Merck ]. Any thoughts in terms of how this could influence demand for COVID testing? And then the last question, just on inflation. You touched on it partly, but can you provide a bit of more color like what kind of incremental costs do you currently see in terms of material logistics, probably also personnel expenses and how this will affect margin next year?

Yes. Thanks, Oliver. Thanks for that variety of questions, super interesting questions. It is super difficult for us to assess the potential behavior of our customer. During COVID, just getting you some -- or compiling some data, which is actually public data, is that some of our customers are actually disclosing data by means of how much revenue do they generate per instrument in a common year, and we definitely saw some customers which have tripled or quadrupled revenues per instrument during 2020. And here it comes that, like, if you are in a situation where the actual value of the overall business relationship between a customer of STRATEC and the actual end customer, the laboratory, shrinks from like 15% down to 5%, where you really can say is how do I actually use the instrument? Do I service the instrument? Or do I just place a new instrument next to the existing instrument in order to make sure that those capacities are always available? And that's why it's super hard for us to say if our -- how many instruments, of those instruments, which were used on a 24/7 basis by our customers during those super high demands like between November and March, November last year till March this year, where all capacities have been used by 100%. Are they replacing those instruments because they are already -- although they are fairly young, do they replace those instruments, although they are aged and life cycled already? Or are they applying service activities in order to use those -- to continue to use those instruments. And that's why it's super difficult for us. I think I mentioned that in the course of the presentation that we are actually expecting that certainly instrument revenues will come down. And probably, we see some product lines with declining numbers on the other side, is that our customers are switching back into a more cost cautious mode where it makes perfect sense to focus activities into field servicing activities to refurbish or recondition instruments in the field or send them back to us in order to recondition those instruments, and that's what we are all expecting. So I would actually, from a gut-feeling perspective, I would say that we are facing nicely growing effects in our spare parts and maintenance parts and service parts business -- in any parallel see some slightly -- some product lines, which have the risk that they might slightly decline in the course of 2022. I'm afraid I cannot get you the data by breakdown between consumables, disposables, spare parts and actual instruments revenues as we don't report that on a quarterly basis. I think it's worth mentioning, and I think I did that already, that compared to last year's full year, we see some nice tailwinds from that. So I would expect growth rates coming from that business on a full year basis. Regarding the new corona treatments or new abilities to treat corona patients, expecting that if we talk to our customers, they -- certainly, it's tough for them -- and I already mentioned that as well to distinguish between the actual demands and catch-up effects and so on. But what everybody expects is that if the corona levels are high, like what we are currently seeing in the German-speaking world of Europe and in Eastern Europe, with super high rates of new cases, like if such treatment happens then obviously it comes along with new testing activities and confirmatory testing on a molecular basis and so and so. So from a -- from an overall perspective, I would actually see this as more on a tailwind basis rather than a headwind basis. I hope I answered all your questions, Oliver.

The last one also on inflation, any kind of color headwinds for material logistics.

Yes. Sorry. At this point, we think we have our cost of goods, based upon long-term agreements, fairly well under control. So we have some suppliers coming back to us, that their cost base is actually exploded. We are trying to keep this away from our customers but cannot entirely keep it away from our customers. At this point, I think it's more like on a logistical cost basis where we see that we are spending a lot of money and certainly in human resources allocation that, let me say, some that we had to reallocate people that our procurement and logistics people are doing way, way, way more on that end of what they actually should do and are actually not focusing on activities they should do, which is all unfruitful. So at this point, tackling the overall cost increase is literally impossible as the basis changes every week. But what I would really like to say is that it is really meaningful. And in some cases, you cannot actually apply that to our entire input. But in some cases, we see some price increases here and there. We have very little of those cases. You read in the newspaper that some input costs have been like on a 10,000% level of where they used to be last year. We don't have those situations. But what we definitely see is that some of our suppliers are actually coming back with 10%, 15%, 20% price increases. We are trying to keep that under control for the time being. We manage that. We have those long-term agreements with our suppliers. And again, it's really worth mentioning that this is not the end of the cost base, which really is causing headaches this time, it's actually availability and additional logistic costs and additional efforts internally, which are really causing problems. So far, we managed to keep the situation under control that if we were lacking parts or subassemblies or modules, that this was only like for a week or 2, we did premanufacturing and couldn't ship the instruments up until we got those parts we were lacking for those subassemblies and modules then finalize the activities, which is -- and like I mentioned that already, which is, at this point, causing a lot of headaches in terms of punctual availability, but not overall availability.

Next question is from the line of Jan Koch from Deutsche Bank.

I have got three. Starting with your new 2021 guidance, could you help us to better understand the moving part, which will impact your performance in Q4, especially on the margin. The midpoint of your new guidance implies an adjusted EBIT margin of around 11% in the coming quarter. What needs to happen that you actually reach this level? And in relation to this, what are your expectations for Q4 in terms of product mix. So if I look at the current PCR COVID testing volumes in Europe and the U.S., it looks like that they are largely in line with Q3 or even a bit higher. And combined with the rising COVID incident rates, which you just mentioned, and the upcoming winter months, your customers must feel the need to increase their inventories? Or did that already happen in Q3? And then lastly, I noticed that you slightly changed your wording and now expect a large molecular project to be launched in 2022. I think last time you said, you expect the project to be launched in the first half of 2022. Any update here would be helpful.

So Jan, thanks very much for your question. I was just making notes. 2021 Q4 performance is actually a difficult thing. I think we were trying to get across that we were still fairly cautious. Reason is that mainly with the supply chain situation, but certainly with our -- with the activities of our customers, we definitely see some customers which have increased the frequency, where they are collecting internal forecasts from their relevant geographical regions, and they are certainly discussing this forecast with us. And we definitely see like an up and down in the forecast, which is provided by our partners. And I actually -- and I think I mentioned that already. I want to avoid a situation where our partners are ordering something and we are producing those things, which -- over hours probably cannibalizing other things. And our partners on it actually selling those instruments and other partners are actually waiting for some things and we are not shipping that. That's why it's a clear [ math ] for us to keep a balanced situation. And to make sure that we are not just trying to sell something because our partners ordered it, where we keep the flexibility to say, okay, if you don't need it, we are actually willing to transfer orders from Q4 into Q1 or Q2 of next year in order to kind of balance and flatten the overall manufacturing activities of STRATEC, which is certainly, particularly from a margin perspective, a solution, which is beneficial to not only our partners but certainly to us as well. On the other side, we are still considering increasing and growing activities as far as supply chain activities are concerned where we definitely would have -- will have to pay extra things. And I'm sure you know all those horror stories that like air transportation for cargo tripled or quadrupled within 12 months and so on and so forth. We definitely have to be super cautious. And then certainly, we have given a minimum guidance. So we kept some flexibility even in that wording. So you're right, we did the same math, Q4 has to come out on an EBIT margin of 11% that we only meet our -- the lower edge of our guidance, which is unlikely to happen on the other side. We want to be super careful and we want to leave enough flexibility. Product mix comes back to the same situation. We know that some of our customers were starting to regain inventory levels, particularly on the immunoassay side and on the molecular side and that we definitely see that they have a nice outflow of those products, which makes us believe that the demand will continue to grow. Talking to our customers, we definitely see that their projection over the past quarters have always been too conservative and that the actual demand then later on was higher than initially expected. And it's, again, it's like between a rock and a hard place to say, will this continue in Q4 and Q1. What we definitely see is that the initial outlook given for -- from our partners for Q1 and Q2 next year, have been positively amended in the meantime and again, particularly in favor of the more centralized solutions rather than compared to the more decentralized solutions, which makes us believe that the situation and the product mix contributing positively to the margin will continue to be the same for the next quarters as compared to the, let me say, last 5 to 6 quarters. You're right that we changed the wording in regard to the market launch of an important molecular instrument through one of our customers, which has nothing to do with the actual launch planning. This -- the product launch has always been at this narrow bandwidth between H1 and H2, and we just want to be on the safe side in order to manage expectation. Launch will take place in '22. That's what we are convinced of. Question is just in what kind of countries with what kind of menu. This -- what we expect coming from the expected behavior of that customer is that we will always -- already see some significant sales contribution already in 2022. But I think it is important to understand that -- and please bear with me that certainly, the years like 2023, but particularly 2024, will be more exposed and more earnings and revenue contribution of the overall STRATEC revenues coming from that instrument will only happen then, which is the nature of such new instrument placements. I already mentioned that in the course of the call that our customers typically though are not in a position to launch instruments in parallel in all their geographical regions and with a comprehensive menu. So both things have to happen, follow-up launches in certain regions and follow-up launches of further parts of the menu being available on an instrument. And that then contributes typically in the years 3, 4, 5, 6 to those disproportionately high growth rates with new instruments. I hope that answers your question, Jan.

[Operator Instructions] Next question is from the line of Odysseas Manesiotis from Berenberg.

So first of all, taking into account your ongoing negotiations and new launches in the near term, do you expect that these will entirely mitigate any normalization in COVID demand going into 2022? And second part of this question, from a profitability perspective, how did this compare to your coverage-related revenues? And a small second one. Following from Jan's question, on the fourth quarter potential supply chain disruptions, could you please quantify your impact expectations on both the sales and profitability level embedded in your Q4 guidance?

Yes, thanks very much. Like I said, ongoing negotiations, it's actually something which although we have a pet development pipeline, we have some new products in a phase where we already commenced, let me say, development work at the very beginning, certainly a lot of feasibility work, which is in such a phase typically generating slightly occurring headwinds for the margin, as in such a phase, it only means costs and nothing else. But I would say this is like an ongoing activity. And certainly, this is something where we are not in a situation to balance activities. We definitely have to allocate our resources in phases where our customers are actually requesting such activities. And we are certainly following their processes here. For the next couple of quarters, I would actually from those, let me say, feasibility work and initial development work, I would actually see no margin contribution rather the exact opposite that we see some margin headwinds coming from that angle. But like I said, from an overall perspective, that is not really meaningful. Then the profitability during COVID has nothing to do with like what happened in the relationship between our customers and their customers like between the diagnostics companies and those Quests and LabCorps of the world, where it was more a question that the relevant government actually secured the volume of testing and have guaranteed prices. This is something where everybody should expect this erodes away over time, and we are getting more to a normalized situation, even taking into consideration that some of the actual testing volume is still based upon emergency approvals. And certainly, if we are getting more in those market situations where some of our customers have testing procedures, which went through regular approval features, like with CE Mark or FDA clearance on a regular path, that certainly, if the end customer has the choice of taking a test which has only emergency approval rather compared to regulatory approval that this is an obvious choice, and we have to consider all those activities. But talking to our customers, we clearly see that the majority of our customers are actually doing the right things in order to get those things into a more calm situation. From a profitability perspective, we were actually -- we had a clear policy to not try to take advantage of the situation. And we are trying to keep price and cost increases on the supplier side under control and the same thing in the relationship towards our customers. We could not entirely avoid it. We are trying to avoid it. That's why the profitability we are currently seeing is definitely based upon 2 major factors, certainly, economies of scale. Although, we have a huge growth rate on a cost basis in terms of efforts, personnel costs, logistics costs and so on, still the positive contribution from economies of scale offset those costs increases by a factor of 2 to 3 to 4 in some situations. So I would like to make the point that the current profitability we see has nothing to do with trying to take advantage of the COVID situation. It's a volume thing on the one hand side and certainly a product mix thing on the other hand side. We actually are not able to quantify the additional cost because some of the logistics costs are actually rolled into the product. So it's super difficult to say if we are paying higher logistics costs because of smaller lot size is shipped more often through channels, which is typically coming through sea freight from China and has now to be like air cargo, it is super tough to say, this is a price increase of the cost of goods of the product? Or is this price increase through logistical costs. At this point, I would say we are living like between 5% and 15% per our product line, but we have those long-term agreements. We are only covering price increases as long as our suppliers are able to prove that their input side is increased as well, and they will drop to back to established prices as soon as their pre-products are available on a normalized pricing level. That's what we are expecting, like even being pessimistic on that. That's what we are expecting for the next 12 months to happen. I hope that answers your question.

Yes, Marcus. That's very clear. Just a small follow-up on your point on economies of scale. I mean, given that you hired several temporary employees this year, given the abnormal demand. How easy will it be for you to scale headcount down in case overall demand is softer in 2022? I'm trying to get a sense of would it be sensible to assume that your personnel costs here would decrease at the same rate as sales?

Yes. I wouldn't expect that to happen. So we actually generated a lot of over hours like we were working on 2 shifts with COVID and social separation and social distancing. So at this point, I think we paid a lot of -- we had a lot of additional costs on the same headcount basis. If you see our growth in headcount, it has not been disproportionately -- as disproportionately high as we see it is on a revenue basis. I think it's more a question of normalizing the activities of existing headcount. So the thing we actually want to avoid -- and we haven't had so many temporaries. I just want to make the point. I think we can really be super happy with what happened in our supply chain and in our production. And I'm super grateful to those people who really did a lot of over hours and skipped holidays and so on and so forth. And that's how we actually covered those additional demands.

There are no further questions at this time, and I would like to hand back to Marcus Wolfinger for closing comments. Please go ahead.

Again, thanks very much, Stuart. And thanks, everybody, for your interest, and thanks for your questions. This gets us to the end of the presentation after our 9-month disclosures. Allow me to wish you a good remainder of the week and a good afternoon. Please continue to stay safe and stay healthy. Thanks very much. Bye-bye.