Vitrolife AB (publ) (VITR) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Vitrolife Report on Operations 2019 Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, 6th of February 2020. I would now like to hand the conference over to your first speaker today, Thomas Axelsson. Thank you. Please go ahead.

Thank you very much, and good morning to Vitrolife report on operations 2019. And the speakers today is Mikael Engblom, the CFO; and myself, Thomas Axelsson, the CEO of Vitrolife. So let's start right now. And we do that with going to Page #2, and have a quick summary on Q4 and also year-to-date numbers. I would like to say to start with that the Q4 and the full year is almost the same in key figures. The sales growth in Q4 was 28% compared to 29% for the full year. If we are looking on local currency growth, it was 21% for the quarter and 22% for the full year. What I'd like to say then is the organic growth was 11% for the quarter versus 12% for the full year. And the EBITDA margin followed the same kind of pattern, it was 39% this quarter compared to 40% for the full year. In summary, I would like to say that it was a year of high growth, and it was an especially good year for the Time-lapse, and also for some of our market regions. To explain that more in detail, so let's go to Page #3, and see where the sales was coming from and also some comments on it. When we're looking into Page #3 then, I would like to go from the left side and start with Americas. And Americas has shown numbers this quarter and during the year that they had not been showing before. It has been a very, very good growth for our own business, organic growth. It has been growth within all product assortment. But especially I would like to mention that the Time-lapse is the most remarkable thing during the year. It seems like Time-lapse is also starting to be accepted in the U.S., and we had good growth within that line. Of course also that the Genomics is a business that is well accepted in the U.S., since they're doing more PdtAs there than in other regions. And if I then -- or continuing to the EMEA region, where the sales there was SEK 167 million, it was a good growth of 11%. When I compare that 11% growth compared to the 55% earlier in the Americas, I would like to say that both of those region has some organic growth through Genomics, but both region has good growth in all areas. And the good thing with EMEA, what I would like to say is, there was growth within the Media and especially with vitrification. And vitrification is something that I've talked about before, it's the growing segment within the Media field. Also on the EMEA market, it is a situation where the direct markets, where we have our own sales force, have grown more than the distributor business. Within the distributor business, we have some fluctuations between some quarters, if they are, for instance, buying a little bit more at the end of the quarter or not, but that's a normal pattern for having a mix between direct and distributor market. The third market going into that one, and I would like to mention a couple of things to -- with regarding Asia. And in Asia, in this case, is Asia without Japan. So it is, in our case, China of course, India, Thailand, et cetera. China is our biggest and most important market in that region. And the Time-lapse, as you know, has been approved there for some while, and we are starting to see good sales within Time-lapse, even in that territory. And what we are seeing as a negative thing is that our expectations that we had -- that we should, in Q4, be able to transform a customer back to our product assortment when our supply problem was solved, has not been so successful as we expected. The positive thing, and the discussions with customer, is that we will and are able, from the end of Q4, but actually now Q1, depending upon the inventory level, to be able to sell our global assortment. So the situation where we are having a special sourcing and also inventory for the China Media markets is out of the picture. And some of the delay regarding the customer switching back to Vitrolife has come from that situation. The customer knew that we were having regulatory approvals, and that we were going to introduce them during Q1 of this year. And therefore, they don't want to switch back for a month or a couple of weeks, and then switch back to something that they were waiting for. In Thailand, Vietnam, India, it is slow growth, and we can see that the upgrading of the clinics there, and the growth that is there, are regarding -- providing more and more quality treatments within IVF, and that fits quite well with our strategy and our work getting those customers. The growth plan, as you can see, was 1% in that region. And it was good growth with Time-lapse, it was then a decline in Media that is also -- we'll see it when we're looking upon the different kind of product groups. And then Japan Pacific. I will start then with the Pacific. The Pacific region, Australia, New Zealand, is following, more or less, the growth within the market. And the underlying growth within those regions is unfortunately just around 0 or maybe a little growth. And we are seeing the same kind of situation here. The outstanding performance then -- for that region, we have a little over 50%. I would like to mention a couple of things. One has been mentioned before, and that is that our Media is growing due to our new products that has been introduced, the antioxidants in Japan. Together with that the clinics has accepted and has presented, for quite a while, Time-lapse. And with the introduction of especially EmbryoScope Flex, where in Japan, they are doing more low stimulation, the time that's correct -- EmbryoScope Flex has very -- has been very well accepted within larger clinics. And also that they're buying our traditional already introduced products due to the efficiency and clinical advantages of it. If we then look on the reporting per segment, it is Japan and Americas, of course, due to their increase -- that has increased the market contribution then. It is the sales effect that we are getting. And as discussed before, the Genomics has some negative impact on the gross margin, especially also within the EMEA since we have built up our structure, and support structure for the Genomics is mainly based in Europe. Buybacks. Please change to Page #4, and we will look on the business units. And I will go from the top and down on that picture. Starting with Genomics, I don't think it is anything special to mention during that quarter. The Genomics sales was SEK 34 million. It is compared to the quarter 3, is SEK 37 million. So we can see that we have been able to transform the business to Vitrolife, and we are keeping up that kind of pace then. As mentioned then, we are continuing with building the support within the field. And during the year, we have the full support. And also, we are continuing with the development of our own products for the PdtA. So stable situation. We've been able to transform the customers, and we are working with productive plant. ART Equipment is a negative growth of 14%. It is our smallest business unit. The sales are SEK 13 million. What we can see is the same trend, and we've been working with it. And it is a situation where we are focusing on our own products, and we are -- we have during the year more or less stopped with most of the distributor products. There are some distributor products left, but otherwise most of the sales is coming from our own products, NaviLase and Log & Guard. We are continuing with our work to get market approvals for U.S. and China, and we are not seeing any differences within those processes. But we do believe -- and it's always difficult to judge, but we do believe that it's going to be an approval in the U.S. 2020, this year. And unfortunately not this year in China. Time-lapse. As mentioned before, when I talked about the regions, it is a magnificent quarter. It is 41% in growth. It is SEK 143 million in sales. I'd like to mention that there is good growth in every region, and by saying that, I should not mention anything specifically, but I would like to repeat that this U.S., China, Japan that is really continuing to bake the good trend. And those are the biggest market too in billing cycles and also in revenue for the clinics. So that's good that they are getting acceptance for this product line there. Our product offering has also been strengthened during the year and also during the quarter. And after closing day, we have introduced even a new product for a different segment, where we are doing differentiation on what kind of hormone treatment? What kind of performance they do inside the clinic? And that's mainly based upon size of the clinic lab. So EmbryoScope 8 is the one that is suited for most mid-sized clinics. By that, go down to Disposable Devices. It is minus 5 during the quarter and it's plus 2 during the year. We see that there is some fluctuations also there between the quarters, depending upon the delivery of especially containers to some of the distributors. We are right now out of all backorder situation. So during the coming year 2020, this year, we can concentrate more about sales. Okay. Let's go down to Media. As mentioned before, the only challenge we had on Media is the growth in China. The total growth of Media is plus 1%. Sales is SEK 164 million. The limited sales growth of 1% is only due to the negative situation in China, with our transformation back to Vitrolife with some customers. What is good is that our global product assortment is more or less the same right now. And that's positive for our culture media and transfer media that we have working with our customers. What I would like to mention when we are on the Media and the same situation on China, since China is an important business for our Media, and of course, for Time-lapse. I would like to mention that within the report of today, we are saying that we can't foresee what's going to happen with the Chinese market short-term regarding to the corona. What we can say is that the patient inflow is usually -- was closed before the New Year. And still the same kind of pattern where larger clinics and labs were kept working during the New Year to handle the culturing and the transfer that already was started. But with the corona virus and what our thoughts it has done in China, the expected recovery of inflow of patients that was expected from February 3, is now delayed to the 10th of February. And that will mean that we are, at least, seeing a slow start after the New Year, and that's why we are saying that we believe that Q1 in cycles being done in China will push our goal down. Information from this morning have been updated just a few minutes before this meeting. According to the IVF lab group, where they have more than 500 members of embryologists and doctors this morning, they are saying there's very, very few patients coming in this week, as expected, due to the authorities' warnings regarding, that you well know, that they are not supposed to travel. Major clinics are saying that they expect to open up next week. But we don't know what's going to happen. No one knows that. For our product line, the Time-lapse, the hardware equipment, we are not seeing any changes except the delay in installations. Regarding the consumers' media, that will pick up when the cycles will pick up. Thank you very much. And by that, I will ask Mikael to go through the financial and other things on Page #5.

Thank you. So when it comes to the fourth quarter financials, the gross margin was 62% compared to 67% in the same quarter last year. And the negative variation is primarily related to the product mix, as we have seen earlier this year, with the Genomics business unit having a lower gross margin than the average for the group. The other key variance is related to scrapping, amongst others, related to Media as a consequence of difficulties in planning the right production volume for China. Looking at the EBITDA margin, it's down from 42% to -- last year to 39%. And the fact the gross margin variances that I mentioned above. Also the IFRS 16 had an effect here, a positive variation of about 1 percentage point. And we are also seeing in the EBITDA result a positive effect of currency of about SEK 7 million. After the end of the period, the Board proposed a dividend to the shareholders of SEK 114 million compared to SEK 92 million last year. So that equals SEK 1.05 per share compared to SEK 0.85 last year, and that's equivalent to a 24% increase. Then we move to Page #6 on the outlook. So we continue to see a long-term market growth of 5% to 10% in monetary terms as before. And we expect it to be driven by less parents to be continue to wait longer to have children, and there's a higher average income in the society, enabling paying for IVF and there also is increased social acceptance of IVF. Vitrolife, we will, as before, continue to expand sales. And then to support this, we have, during the year, invested in, for example, a broadened product portfolio. And we have also invested in a stronger sales and support organization. We will continue to broaden their product offerings, and we are working with product development projects in all our business units. And we are also exploring M&A opportunities as they arise. And finally, as Thomas mentioned, we expect the first quarter sales to be negatively impacted by the China virus outbreak. With that, operator, we are ready for questions.

[Operator Instructions] We have questions coming in. We're just waiting for their name to be taken, sir. Your question comes from the line of Bjorn Olander.

Start with the typical CFO question. On the gross margin, you mentioned there is a one-off impact on the gross margin due to the Media situation in China. Could you quantify that?

Yes. Normally, we have scrapping costs in our running business as a consequence of short shelf life on the Media. So this quarter, the -- like abnormal scrapping costs constituted about 2 percentage points negative variation on the cost margin.

Okay. That's very helpful. Moving on to Time-lapse. I mean, it has still had an extraordinary development over the last couple of quarters or perhaps years, growing 41% in the quarter. Obviously, the acceptance of the technology is getting more sort of established. What proportion of procedures are performed with Time-lapse in the different regions? I suppose the U.S. is the leading one. And how is the situation in other markets?

Bjorn, Thomas. We're not going to go through the regions exactly, that would take forever. But I'm trying to answer your question. I do think that what you're asking is, where is it accepted? And where will the growth be, more or less? It is well accepted in the U.K., it's well accepted in Scandinavia area, it is well accepted in the Pacific, well accepted in Japan. And some other few markets within this direct market. And those have been from the beginning, and we had a constant growth in those markets. The markets that then are starting to pick up are China, due to regulations that we have products approved. And also due to their own, let's say, research, where they are finding clinical advantages from it and also efficiency on how to run the clinics. In the U.S., where we have had, honestly, a lot of resistance regarding Time-lapse for many, many years, I would like to say that, that has slowly changed, and that's why we see a change there. But it's coming from a low level on how many sites it is being done with Time-lapse. It's also there in the midsized to larger clinics that sees advantages, and that is regarding efficiency. And also from a good clinical situation, where they can perform the Genomics, if they would like to do the Genomics differently. They are then only doing Genomics on the embryos that has more followed the good development. So that's -- hopefully, I can give you -- that's what I can guide you with. And as said before, we were expecting that around 15% of the market are using Time-lapse. So we are looking into this, and it is higher currently with growth. But we can see that with the disposables that they're using, that there are growth within the field for sure.

Yes, I suppose most of the sales is equipment. How much is disposables for the Time-lapse segment?

Yes. We calculate with about -- over a 5-year period. The recurring revenue for disposables and service contracts, that constitutes about 1/3 of the total revenue for Time-lapse. So the consumables and service constitute together about 1/3 and equipment 2/3.

Yes, exactly. But since you're growing so fast, I suppose, the installed base is growing. So most of the -- I mean, a very large proportion of the current sales is related to equipment sales rather than disposables, right?

Yes, you're right, as we are in a growth phase. Of course, the equipment will constitute a little bit higher share in relation to that.

Yes. Final question. I'm not sure if we get better answers from that. But the situation in China. Right now, it seems like we have sort of, around less than a week of sort of lost performance in China year-to-date. What is your expectation? I mean eventually, this will fade out. Would it be fair to assume that yes, it will affect Q1, but those couples who are sort of interested in the treatment will come back later on. So on a sort of full year basis, there will not be that large impact from this? Or what is your -- talk about that.

What we believe, and it is from discussing with the customers, because we -- since people can't be out walking, we have discussions on chat sites and also by calling and having different kind of team meetings during Media. We can see that -- I mean, we can follow one thing, and that is that all clinics, and some of them are already closed, is saying that the treatment cycle is always starting with the hormone treatment. And information that we have got is that the hormone treatment that is being started has drastically been reduced the last 1.5 weeks. And that will, of course, impact the oversight, the pickup, and the culturing and the treatment. And all IVF clinics, I mean they want to resume their operations as soon as possible. And they have goals to reach. And when the situation is sold, or when other information will come, they, for sure, believe that we're going to be a pick up on -- and back to the normal situation. We can't judge that. I don't think that anyone can judge it. But of course, it's going to be a situation where the consumer products will go down for a couple of weeks. And that will impact Q1.

Your next question comes from the line of Patrik Ling.

Sorry if some of these questions have already been answered, but I missed parts of the call. When it comes to Time-lapse, Thomas and Mikael, could you elaborate a little bit if you have any larger single orders like you've had before, in that number that we saw this quarter?

Yes, in Time-lapse, it is hardware. And as said before, there are some clinics that is buying hardware, and that could be looked upon as a single larger order. But in the last 5 quarters, with a pickup of Time-lapse, there is different clinics that are buying. And since the value is quite high on each order, we are depending upon sales of hardware. In Japan, it has been the EmbryoScope Flex, in the U.S., for instance, the clinics are not as big there. So there is more clinics. In China, it is the same, it is more clinics. So overall, sales in this quarter is not based on just a few larger order, it is based on many orders.

Okay, great, good to hear. Could I also follow up on Media sales, where you said that you had a challenging time in China and overall growth is just 1%. If you break out China, how much did the Media sales in China fall in this quarter?

We don't report the Media growth per region, Patrik. But the growth rate in -- excluding China, was at a satisfactory level.

And just remind me what do you think is satisfactory for Media, since that's a relatively mature product? Is it [ 8 ]%?

So the market growth rate is 5% to 10%. So in that level there we are talking about.

Great. Good. And could I also ask, when it comes to China, I know that it's difficult to answer this, but in the scenario where a couple have started hormone treatment and for some reason now, they are unable to go to the clinic and continue. What happened? Can they just continue hormone treatment for another month and then just wait? Or do you have to restart the process all over? So the impact on your consumable part might be something that lingers on a little bit longer. While, for example, you mentioned that for hardware and Time-lapse, that it will just be delays in installation, but that might recover quicker. Could you elaborate on how we should see this?

Yes. Quickly, it has been the New Year. And during the New Year, they are planning for -- normally for less hormone cycles and also less treatment. If we are looking from the former treatment, it takes some time when they started up. The ones that they were doing hormone treatment with and they had started to plan for a pickup, those have been done if there's been a possibility for the patient to come to the hospital. I mean Wuhan region has been impossible then. So the few ones that have already started, they have done it. Where they have started the culturing and they've not been able to do transfer, they have done cryo on those embryos, which means then that they have vitrified them or they have done slow freezing on them. The situation is they are not starting up any new treatments.