Stratec SE (SBS) Earnings Call Transcript & Summary

Good morning in the United States, and good afternoon in Europe. Ladies and gentlemen, welcome to our H1 conference call based upon the financial disclosure of the results of the H1 of fiscal year 2022. Before we start, I would like to mention some housekeeping stuff. Actually, you can download that presentation either from the webcast. There should be a download button, or you can download it from our website. I think I don't need to walk you through our safe harbor statement. And today's presentation will be -- as always, will be split into 3 major presentation sections. First of all, I would like to get you an overview, then I would like to discuss the financial results, and certainly, I would like to touch on an outlook and forecast and everything. And then at the end of the presentation, we'll have the chance for a discussion in form of a Q&A session. H1, actually, like from when we finalized our budget and when we got our forecast for the first 6 months, we were actually very excited because we saw uninterruptedly high demand from our customers, which is actually still the case. Certainly, we -- and this actually happens in a planned format. We see some declining demands, like some of our customers on the molecular end on the tail end of the COVID-19 pandemic, lower demand here and there. But on the other side, very much based upon the nicely grown installed base. The fleet of instruments out there. We see high demand on the spare parts side, nice demand on newly launched instruments. We are facing a variety of product launches where our customers are performing initial stockkeeping measures and so on. So all in all, very nice progress, but it really hit it us hard, particularly, let me say, in the last 6 weeks of Q2 regarding supply chain issues. Unfortunately, this led to a sales decline in [indiscernible] leading to 6-month revenues of about EUR 137 million, which is mainly driven by this super high base of comparison in last year. And as already mentioned, severe delivery backlogs and a back order situation very much based upon this tenant supply chain. And to be honest, and I described that in several individual communications amongst our investors that I had the impression that the situation, particularly towards the end of the second quarter, got rather worse than actually better. This led to a decline in EBIT margin after 22.1% in H1 of 2021. We are now showing "of only 15.4%" which is, at least from my perspective to a certain degree, satisfying, particularly if we see those 2 effects. One is the product mix, which was really in our favor last year, not only from a high contribution of molecular instruments, but even from a very low contribution back then of recognized development revenues and other factors, which actually caused an extraordinary high EBIT margin last year. That's why we are actually satisfied but will certainly only partly explainable by the product mix and then certainly the negative scaling effects. So the majority of our costs, except on the input side, are actually fairly firm. So you see high investments in development activities. Our development pipeline is still very high and continues to grow. We've got several new things in not only new in terms of development activities, but feasibility studies and other things where we are in a precontractual stage, but still spending a lot of money in activities in order to get the contracts over the finish line in order to start with the actual development, which is then capitalized in the majority of the events. We have this full development pipeline, a variety of promising negotiations and additional growth in the pipeline and actually got like wearable approval for certain new projects. Then certainly, what took us a while, and we have often enough referred to that, we are actually about to launch a new MDx system, and the second system is actually good on track that the launch [indiscernible] towards the end of the year, the second molecular system towards the end of the year or early next year. It's actually still on [indiscernible] nothing inside which might actually jeopardize the launch design freezes a while ago. We are in the last task of manufacturing validation. And our partners are actually in the final steps of the documentation. So nothing inside which might jeopardize that second launch. Our business unit, Diatron, has launched a new system, addressing the needs of this highly decentralized environment. You probably know that in hematology, we have our own brand name Diatron, no longer offering exclusively hematological systems, but other analyzer systems like in immunoassay, our [indiscernible] is launched through the Diatron or it's actually sold through the Diatron brand. In this highly centralized market, in the hematological space, mainly companies like Sysmex or Beckman Coulter are present and there are only a handful of other companies to include our business unit, Diatron, addressing the decentralized market for smaller instruments. And actually, the proof that we continue to grow mainly on the development and very much driven by new development activities, new development projects, new feasibility studies, ETC that we continue to grow on that end as well. This gets me to the financial overview. Sales, as already mentioned, in H1, a change of 11%. On a Q-to-Q basis, it looks actually even worse. Here, we are down by about 26% already mentioned, certainly taking into consideration the super high comparison we have. And please bear with me, I just want to mention that in H1 in 2021, we generated about EUR 24 million more in sales than in the second half of the year. And this is actually mainly reflected in this comp we see here in Q2 2021 as compared to Q2 2022. EBITDA already very much driven by the decline in revenues and again, very much driven by the back order situation. The actual margin rate like EBITDA margin or EBIT margin or even the margins on EPS are actually going through in percent. So nothing special. We are very positive that we can catch up. Things are actually normalizing. The end of H1 came actually unexpectedly early -- sorry for kidding around. But I think the situation would have looked way better if the quarter or H1 would have lasted like 2 to 3 weeks longer. We see this year in the financial performance comparing the first 6 months of an individual year over the past years, a similar situation as in '18. But again, we are very positive, we can catch up. Certainly, we have that pandemic-related demand for molecular instrument is causing a little bit headwind. Secondly, the delivery backlog very much driven by then supply chain. And actually, the thing which shouldn't surprise us a lot is that this is actually throughout our entire product portfolio. This is not that [indiscernible] has been affected this week. It's that instrument and the other week it's the other instrument family. In the meantime, the situation in our industry is really that the majority of the second and third tier suppliers, so by means of our suppliers, are kind of trying to avoid to confirm supply dates, which makes us tough or brings us into a place between a rock and a hard place where it is literally impossible to confirm supply date towards our customers, which doesn't help the situation in terms of actually tackling the real back order situation. Because currently, we only take the required supply dates of our customers into consideration and not actually the confirmed supply date. And then a very other important point is actually that on the end of recognized development sales that we have this postponed milestone, which is actually the finalization of the molecular instrument. The beauty here is that this is actually not margin dilutive. We are expecting that this milestone, the last milestone comes along with kind of regular or even slightly extended margin, which will help us in the fulfillment of our guidance given which requires a certain margin pickup, but we'll discuss that later on. On a constant currency exchange rate -- constant exchange rates, you see that decline [indiscernible] as expected. Service part in consumables haven't been affected actually. If we see the actual demand and order situation, consumables would have been way higher after 6 months then compared to H1 2021, which again would have related to an acceleration on the margin, which again makes us positive that we can deliver not only top line, but bottom line as well if we are talking about margin. On the development side, we see that development and recognized development revenues are already picking up. And again, I was already trying to bring that across. 2021 was really exceptional from a product mix perspective, which helped us on the margin side. But now it actually shows that the majority of the development revenues recognized in H1 2021 are actually margin light. That particular milestone, which would have led to a further growth on the development side is margin heavy. And therefore, the picture we are showing after 6 months is really not representative for the remainder of the year on a basis how we compare year-to-year. I don't need to reiterate myself when discussing the actual percentages. I think today, we can believe that service parts in consumables on a full year basis will continue to show higher traction even percent-wise, which typically means that we will stay somehow in this 50% to 55% bandwidth as far as contribution from analyzer sales is concerned and from the days perspective, development -- recognized development revenues, and service activities will stay on that level on a full year basis or will show some continuous growth. But please don't expect us to bring this in a 15% revenue -- 15% of revenue basis. This would certainly mean a higher dilution rate that we should expect. So I think it's a good assumption to act on the basis of 12% to -- let's say, 13% to 15% level. This gets me to an adjusted EBIT and EBIT margin. Again, we already discussed that, a decline of -- on an EBIT basis of almost 30% year-over-year, down to EUR 20 million, pickup effect and recovery effect actually expected, leading to an EBIT margin of 15.4%. Again, we stick to the guidance. I don't need to read myself continuously. The headwinds we saw actually very negative economies of scale that will pick up as soon as we normalize the actual back order situation, which was -- and I already mentioned that way higher than we would see in a common year. Normalization of the product mix, which means lighter contribution from margin-heavy molecular instruments that happened as expected. Then certainly, headwinds from higher input costs. We are in the process and actually towards the end of H1. We showed some nice progress here in trying to transfer those higher input costs into higher costs of our final products. In some cases, we have been successful. In some cases, the process is actually ongoing. And then certainly, we see measurement -- our measures in order to perform currency hedge. We had some actual headwinds in H1 of about EUR 2 million, shouldn't be uncommon in this area after the dollar currency rate exchange changes we saw in H1. We don't expect any further effects for the remainder of the year. Segment performance. I would say, the entire picture throughout the entire base. Diatron, let's discuss this first, mainly affected by smaller molecular instruments, but still healthy EBIT and EBITDA margin. Sales on the instrument side, again, same thing, nice progression in immune hematology and in the immunoassays. Lighter revenues coming from the molecular instruments leading to a decline. Very healthy development actually on the smart consumables side, and still, we are expecting a lot towards the end of the year. We see nice progress here, not only in customer wins, but even the business unit working as a door opener for both the segments Diatron and instruments, a nice progression with that slight change to the business model, which has been executed over the past 3, 4 years to focus more on the blue chips. And we have a lot of things to come, not only in the development pipeline, but even in the pipeline of new projects. Cash flow. I think, compared to the revenue activities and acceptable situation, here you can see H1 as compared to H1 '22. Situation is, I would say, under control. Investment ratio of 5.8% of sales versus 6.7% in H1, which is slightly below the full year target. But actually, it's just an outcome of this equation we already discussed in terms of back order situation, and the same thing applies on the investment side in terms of money spending as well. Net debt down by 1% versus final year 2021, which leads to a net debt ratio to LTM EBITDA of a factor of 1, so very healthy development here as well. Let me now get us to the outlook and the focus. So definitely, we would like to confirm our guidance for fiscal year 2022, which is that we are expecting the sales of this year to match the previous year level on a constant currency basis. Momentum is expected to improve significantly in the second half of the year, which is actually a result of the lower overall comparison basis and the catch-up in delivering on the back order situation. Some postponed revenues on the development side and new product launches. So all in all, a variety of factors we can already see coming up. That's why we are not super worried about that. And then an adjusted EBIT margin of around 16% to 18.5%. We have to admit that when we have laid out that guidance, we put some reserves in so it is unlikely that we will get to this upper edge of the EBIT margin guidance, but still with all those factors we have already discussed, low to mid should actually be possible. Investments in intangible and intangible assets combined of around 6% to 8%. So here, if we see the activities ongoing, and particularly the investments required, we should again expect this to be more at the lower edge and therefore, showing nice cash flow progress as well. Focus for the remainder of the year and getting us into 2023. So we have a variety of development activities and launch pipeline, new MDx products, launch of several other instruments to include our CLIA systems -- CLIA system for new partners and some others then certainly super strong deal pipeline regarding new development and manufacturing agreements here. Again, we are very positive. We have several agreements in final stages of negotiations, and we are positive to push this over the finish line within the next weeks or months. Then certainly, we need to address the supply chain activities. And again, we are not -- it's easy to say just put the material on stock and delever from there. If we would be in that positive situation that we can put materials on stock really with our super deep supply chain like Tier 6, Tier 7 suppliers are adding the consequence -- the subsequent suppliers tend down, which makes the situation even harder from a situation that we can assess the situation and tackle the situation and we're against it. It's a real challenge. Then certainly, we are implementing measures to limit the input cost inflation. We have certain measures ongoing, mainly through long-term agreements. And the same thing is that we need to conclude additional negotiations. Some of them already concluded, some of them ongoing to implement price adjustments across our portfolio in terms of sales price increases. M&A definitely remains a super important part of the company's growth and diversification strategy. We have several things ongoing. Again, we are super selective. I think the M&A market is a little bit turning towards our favor. So price expectations are becoming a little bit more reasonable. There are new targets coming up at the horizon fitting nicely into our strategy to go 2 directions. So one is to find a company as we found Diatron like a small Stratec 2 or certain technologies, which are helping us to make our product offering towards our OEM customers more comprehensive, so mainly addressing the needs of things causing headaches to our customers where through bundling activities for more than one customer, we could actually achieve economies of scale and therefore, making a business out of the debt. These are the 2 directions besides technology, obviously, where we keep our eyes open as well. Then certainly, manage additional personnel requirements in line with the well-filled project pipeline, again, existing product as well as new products coming on top are certainly requiring new hirings, and we all know that this is a real challenge, not only in Germany, but in the meantime, even in Eastern Europe and all other areas where Stratec is active, which certainly includes North America as well. This gets me to the end of the presentation. I would like to hand back the word to Franzi, who will explain us how to go through Q&A.

[Operator Instructions] The first question is from Oliver Metzger from ODDO BHF.

First question is on your guidance, and I will ask a second later. So it's a little bit more bigger. So Q1 was potentially weak as expected. Q2 results were apparently weaker than expected as basically the results triggered even a preliminary announcement. So two questions on the guidance. So first, can you give us an indication to which extent revenues have been shifted from the second quarter and potentially into the third quarter? And the second -- sub-question is your wording on the guidance was in the past that you factored in all risk factors, while you basically left out all potential revenues that appeared uncertain. So over the last years, we have seen a couple of times that you've increased your guidance over the course of the year or basically overachieved your guidance. Would you describe the underlying base of your guidance still as unchanged? So do you continue to factor in only the revenues, which are 100% certain and leave all -- out all your risk factors, just what I want to understand the underlying assumptions regarding your guidance. My next question, I will wait to answer, please.

No, Oliver, you can go ahead, actually with the second question. I will answer both of them.

The second is, you commented that -- basically, you said indirectly that the start into Q3 was very good. So you also mentioned that the supply situation has become even worse over the last weeks rather than better. So how does this fit together? And should we regard you come on a strong start. For me, it appears with all these macro headwinds and deteriorating situation, is this like more a debt cap bouncing? Or do you think really that even this strong start overcompensates with supply issues?

Yes, let me put it that way. I think answering the second question first is always makes life a little bit easier for me. I was trying to get across that towards the end of Q2, I said the last 6 weeks of the second quarter, actually, we had the impression that things got worse. In the meantime, it's really tough to say because certainly, we were trying to get in things, we have increased our activities, we put more people on it. We have certainly as a kind of countermeasure for the weak performance of some of our suppliers in the second half of the second quarter, we have certainly implemented measures, which are now leading to that we managed to reduce the back order situation. On the other side, certainly, we see new things coming up. It is super tough -- like I said, because these are weekly events. This is not that one supplier is telling you that he will be 3 months later, and you can just factor that in. Like I said, this week, it's this supplier, that week, it's that commodity. Then we have a supplier performing very well for that project, but not for the other product and so on. So it's really tough to tackle. From an overall perspective, I would say that the situation in the third week of the third quarter is at least from a subjective impression and from a perspective of the actual performance in manufacturing and like turnover times and so on, it shows improvement. And I wanted to get that across that I think although like the car industry was trying to make us believe that, from their perspective, Q2 was better than Q1, we started -- had the impression that Q2 was actually the worst over the past, let's say, 6 or 8 quarters. I would actually say that when the market was really severely hit like in Q2 or Q1 of 2021, we performed very well. And now at the tail end of the pandemic and at the tail end of supply chain interruptions, we are really hit. And I wanted to get that across. So it looks better now in Q3. I cannot make any promises, obviously, for materials, which are not yet in our inventory. However, the perception of Stratec is that it starts getting better, although we have those weekly events I just mentioned. Now talking about guidance and risk factors, Oliver, thanks for bringing that up. Actually, as we said, we are confident that we are able to catch up on our delivery backlogs in the second half. So it's literally impossible to say whether this is going to happen in Q3 or Q4. We are working on that. Certainly, we have additional orders. So we have to set priorities like think about supplying spare parts for certain products and consumables is more important than shipping new instruments from a customer perspective because they need to keep their fleet working. So that's important. So taking the postponed development revenues into account, which are going to book in the third quarter, we are talking about a combined number of close to EUR 10 million in delivery backlogs and postponed revenue recognition, which will the majority hopefully will be recognized in Q3, but I would like to say that certainly, there will be a leftover, which will -- can only be handled in -- or dealt within Q4. On the risk factors -- and again, I think I need to get the contributors across, which is certainly that we don't know how diagnostic testing will perform with coronavirus towards the end of the year. So certainly, what we factored in our guidance and what we definitely see our customers factoring those things into their forecast is that they are not expecting any additional instrument demand in Q4 or Q1 2023, respectively. This means that from that perspective, our guidance is conservative as we do not expect any additional tailwinds coming from corona. So all which has been factored in is regular demand, regular new customer wins through our customers, regular replacement business. So you know that just as an example, one of our biggest molecular customers is currently turnover his biggest customer with new instruments, so getting the predecessor instrument, which hasn't been manufactured by Stratec out of the labs and bringing instruments manufactured by Stratec. So we have a bunch of nice tailwinds here. So I'm still perceiving -- I'm assuming unchanged forecast, unchanged demand and again, no corona-related demand into consideration and declining supply chain challenges. If we factor all those things in, I would still say that the risk factors we have factored into our guidance are comparable to the risk factors we have factored in over the past years. I hope that answers your question. It was a little bit of a comprehensive answer, but I think I needed to get some background.

No, it was an excellent answer, and thank you very much for bringing clarity to this.

The next question is from Jan Koch from Deutsche Bank.

I have also 3 similar to Oliver's. So my first question is on your general visibility on sales and earnings. To be honest, I was a bit surprised by the magnitude of the declines in the recent quarter, especially in view of your comments on the last earnings call back in May. I understand that there were some unforeseen onetime effects that affected your performance in the recent quarter, but it would be great if you could explain the drivers for the negative surprise a bit more in detail and also especially in terms of your visibility? And if you could quantify that, that would be great. And then secondly, on your 2022 guidance again. So following the Q2 results, the full year targets look obviously a bit more stretched now. How confident that are you that you can still achieve the midpoint of your margin guidance? And how much does your guidance rely on the digital PCR product to be launched this year? Or to phrase it differently, are you convinced that what happened in 2018 does not happen again this year? And then finally, a more positive question on your smart consumables business. So it was quite encouraging to see that you were able to keep a double-digit margin again in the first half of the year. Do you expect to be able to keep the double-digit margin in the second half of the year? Or should we expect a dip again similar to last year? And following on this a quick housekeeping question, the consumables, you expected to deliver for the digital PCR instrument, will they be recognized in the smart consumables segment or in the instrumentation segment? That's all.

Yes. Jan, thanks very much. Excellent questions. Allow me to answer the easy one first. So yes, the PCR consumables will be invoiced through our smart consumables business unit, so yes. The dip in the second half of the year 2021 for smart consumable was actually mainly related to a pricing mechanism for one very important customer. So he actually ordered a full year demand in the second -- in the first half of the year in order to get a better pricing and then accordingly, didn't order a lot of the consumable in the second half of the year, which actually then led to the dip. We have actually corrected that mechanics, so that shouldn't happen again. So under a regular demand perspective, we should actually show or continue with that nice margin progression in our smart consumables segment. Getting now to your first question. So I think this is complex technical mechanics we have to address here. So assuming that -- let me just get you a real-world example. We are ordering like subassembly, let's say, a centrifuge from a certain supplier, which includes electronics, which means that supplier has an order confirmation from an electronic supplier that the electronics might come in, in a certain week, so -- which would allow our supplier with a centrifuge to supply us in a certain other week, right? And now the PCBA manufacturer is let down by the distributor of the electronic components and the entire chain then collapses. What happens is that we are trying to get those -- are trying to help our suppliers to get those electronic components from like secondary markets, which often don't show the required quality, which means then we get the materials in, believe it works. And in final testing here in our factory, we find out that the products don't achieve the required quality. And then everything starts from scratch. This is kind of a chaos theory that one brick actually falls after the other, which makes actually planning super complicated. So under regular terms, I would have described our forecasting and planning model as fairly predictable with a high degree of visibility. But here, particularly in this tough supply or rough supply chain situation, making predictions is actually super hard. And I was trying to get this across in my speech and in the replies to Oliver's question that we are fairly confident mainly driven by the fact that the tailwinds we are expecting in Q3 are not only caused by one factor. As mentioned, a variety of factors, like recognized revenues coming from development, picking up on back order, lower comps and so on and so forth. That makes us very confident. And that's why, as mentioned, we are positive that we can get to that midpoint EBITDA margin under kind of expected product mix scenario. And again, this takes into consideration that over the past years, our installed base grew significantly and now with lower tailwinds on the contribution of sales from new instruments, certainly in percent, the contribution to revenues coming from consumables and maintenance parts should increase, which should actually cause some nice tailwinds on the margin end as well. Regarding the importance of the contribution to our guidance for dPCR, I hope I managed to get that growth over the past years that the years of the launches are not so super important to us. It's actually the 2 or 3 years following the product launches where we are really going through that holistic effect that our partners are selling the instruments with a comprehensive menu to all applicable customers in all applicable markets and so on. Certainly, dPCRs is important for us. The customers only is currently initiating initial warehousing activities for instruments and consumables. So activities are picking up. And I just want to bring that up again compared to the initial launch plan. We are certainly a couple of quarters behind which makes the importance for us and our customers, even more important and the likelihood that the launch is now happening within the foreseen time frame makes it very likely. I think all prelaunch activities like initial stock keeping for consumables and for instruments is ongoing, slightly affected by the rough supply chain still. But again, I would say, in a controlled manner, we shouldn't expect any surprises here. I hope that answers your question.

The next question is from Alexander Galitsa from HAIB.

Marcus, could you discuss your Q2 2022 sales and gross profit performance relative to second quarter in 2020? It looks like the sales were pretty much the same, SG&A was the same, but the gross margin was 3.4 percentage points higher in 2020. So what are the key sort of moving parts in there? And specifically, how much could you attribute to higher input costs this year?

Yes. Alexander, I think you need to repeat your question. I think you partly confuse the year, so I don't know the reference point. Can you please repeat?

Yes. So I'm basically looking at Q2 2022 relative to Q2 2020.

2020?

Yes.

I see. You are trying to develop an ex-corona perspective? Or what do you...