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

Ladies and gentlemen, thank you for standing by, and welcome to the Report on Operations 2020 Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today on Wednesday, the 10th of February 2021. I'd now like to turn the conference over to your first speaker today, Thomas Axelsson. Please go ahead, sir.

Thank you very much, and welcome to Vitrolife Report on Operations 2020. The speakers of today will be Mikael Engblom, the CFO of Vitrolife; and myself, Thomas Axelsson, that is the CEO. Please, then let's go into the presentation then and Page #2. As you are well aware, it's been a turbulent year for Vitrolife, but we ended very strong. So let's go through first the Q4. It was sales of SEK 382 million, and that's a decline of 7% in Swedish currency. Sales were unchanged in local currency. Our EBITDA was SEK 164 million, corresponding to a margin of 43%. If we are then looking into the complete year 2020, the sales was SEK 1.246 billion, and that is equal to minus 16% in Swedish currency. Sales decreased by 13% in local currency. EBITDA was corresponding to a margin of 36%. More about the financial numbers will Mikael Engblom go through at the end of this presentation. After the end of the period, the Board proposes a dividend of SEK 87 million. It is corresponding to SEK 0.80 per share. I would also like to say that after closing day, Vitrolife has received information that a civil lawsuit has been filed against Vitrolife in Germany by Ares Trading, a Swiss company, regarding claimed infringements of 3 patents in the Time-lapse area. Vitrolife will dispute the law suit. Also for your information that Vitrolife has not included any provision for the lawsuit in the annual accounts as in the assessment that we have done, there has been no infringement of any patent. By that, please go to Page #3. What I will try to do right now is to explain and see what situation we have inside the company within our customer market, the IVF clinics, and I will then also, when I go through this on Page #3, make some comments on the COVID situation. And the COVID situation and the short-term outlook is on Page #4. So I will then, during Page #3, do some comments that are then comments on Page #4. So sales and growth per market region. Let's start with the region Japan-Pacific. Total sales in that region was SEK 64 million. It was a decline of minus 3% in local currencies. That market has been going quite well. What I mean with that is that it is almost normal numbers in the Pacific area and in Japan. What we can see is that with a decline of minus 3%, we have had good sales in our consumable business. So by looking at the consumable business and in contact with our end users, the clinics, we are having a good feeling about what kind of pent-up demand that's happening on some markets and also in comparison to 2019 what the clinics are doing. So it looks like both of those markets are back, and they are -- they've also dealt with the pent-up demand that -- by partly closing the clinics in Q2 last year then. Then the next market, and that is the China-Asia, and China is our biggest market. And there, we have a slightly different situation where China, more or less, is back to normal cycles. We can see that Southeast Asia, unfortunately, are not back. We can -- and we also know that India is -- currently the number of cycles are increasing, but they are not in any way back to 2019 numbers. Why, for instance, we see some decline in Thailand, that is a good IVF market, is that everywhere where you have IVF tourists, they are still not back to normal numbers. And the reason is, as you know, difficulty to travel and all of those kind of obstacles that are currently around us within the IVF market. I'm very pleased to say that our growth compared to last year in local currency was 0, which is quite good under those circumstances. The growth, same here, we can see, is coming from China, and it is all our consumable business, and especially well has the Media gone during the quarter. Sales in that region was SEK 82 million. Then going to the EMEA region, where we have quite a big differences between some countries and some, let's say, geographical areas. We had a good growth of 6%. And taking into consideration that, globally but going into the EMEA market, I would -- our best guess is that if we are comparing to corresponding -- if we are comparing to last year, we do believe that the clinics are not doing more than around 90% of the earlier cycles. So having a growth of 6% in that territory, we are quite pleased with that. Regarding sales also, I would like to mention that in a situation where we have 0% growth in local currencies, this quarter was our second best ever. Some extra sales, we do believe, have come from, for instance, U.K. due to that, there are a couple of times that they have prepared for Brexit, and some inventory buildup has happened in U.K. Still behind normal numbers are where IVF tourists do exist, and that is, for instance, Spain and Turkey within the EMEA region. Russia is not really back to normal numbers. I will also like to mention that what we see right now also is that it's difficult to project where Q1 this year will go. But due to the restrictions and especially travel restrictions, we can see that the IVF treatment will not come back in Q1, not in Europe and probably not even in Asia. That has an impact on how we can travel and do in-services. And in-services is especially something we need to do for the technology side, and that's the Time-lapse. We can more or less address it. That's the Time-lapse. If we then are leaving EMEA and we go to Americas, there is a huge difference between U.S., Canada and South America. Still, there is -- they're quite far behind in Brazil, Chile, Peru, and we see that as a rebound, but it takes time. U.S. goes very well. Our best guess is that the pent-up demand has been dealt with during Q3 and Q4 in U.S. And totally, if we're looking on that region compared to last year, it was minus 10%. Even in that region and in comparison to the consumables, we can see a good growth in those product areas. In all of those market regions, we had a good market contribution and I would like to mention that the sales -- and I mean, the complete organization has been under a lot of stress during this COVID time. But with savings and also working with customers differently, I do think that we can see a large potential in how we can work together with the customer and keep up the service level and all support. By that, I am directly into Page #4, regarding the current situation and short-term outlook for the COVID. As mentioned, we do believe that if fourth quarter, corresponding to earlier year, around 90% of cycles globally is being done. As mentioned also, it's a large, large, large difference in the recovery between some regions. Also, private clinics in Europe, we can see that. And also in some other places where you have a mix between private and somehow public, it is the private clinics that has had really good growth, and some of them has been in the pent-up demand come up to levels about 20% more than comparison number 2019. As mentioned, we do believe that we are going to be affected even in Q1 -- in Q1 this year, I mean, the current quarter. And that it is especially within the technology. Due to what I said, training and installations of China equipment is difficult when we can't travel. For instance, out from Denmark with some of our team and all of the restrictions. Okay. By saying that, let's go into Page #5 and a short summary on our sales per division. Consumable sales, plus 7%. Under these conditions, where we believe that it is 90% IVF cycles, and we are growing there with 7%. It is taking market share. It is some inventory buildup. And we are also knowing that from customers that the situation and how we dealt with Q2 and Q3, especially for having a clear goal to always support our customers with products. As you know back then, we took some scrap. And we can see that the customers are very satisfied with that kind of service level. On technology, declined with minus 10%. It has partly recovered, and it will recover, but it's going to be 1 or 2 quarters behind the consumables business. Genomics, plus 2%. It is more or less in line with what we see that laboratories are doing and what the clinics are sending to those laboratories. By that, please go to Page #6, and Mikael will take over.

Yes. I will take you through some of the key financials during the fourth quarter. So first, we had a fluctuation in exchange rates that negatively impacted the EBITDA of SEK 21 million in the quarter. That corresponds to about 1 percentage point of negative effect on the EBITDA margin. Besides the currency effect, we were positively impacted by the combination of high sales, as Thomas mentioned. We also had a favorable product mix with selling more consumables than we did with equipment in the quarter. And we also had low expenses. For example, lower selling expenses, traveling and lower personnel costs. The cash in the end of the period amounted to SEK 974 million. And as before, we don't have any financial loans. Looking at the gross margin, improved from 62% in the fourth quarter 2019 to 66% in the fourth quarter 2020. And out of this improvement, about 2 percentage points comes from reduced amortization of acquisition-related intangible assets, due to that these assets have been finally depreciated. We also had about 1 percentage points of positive mix effect, as I mentioned before. On the EBITDA margin, besides the variances on the gross margin, we have had then reduced operating expenses in relation to sales due to the same reasons, as I mentioned before, for traveling exhibitions and lower personnel costs. The net debt in relation to EBITDA at the end of the period was minus 2.1. And as before, we plan to use the cash for value-adding acquisitions. Please change to Page #7 for the long-term outlook. We expect the market growth to be 5% to 10% long term in monetary terms. And as before, we believe this will be driven by the growing middle class, increased social acceptance for IVF, and the trend for parents to be -- with waiting longer before they have children. We are planning to expand sales and broaden the product offering. And to that, we're investing in the marketing and sales organization. And we are also doing development projects. This year, we are planning to launch an AI-based software that we call iDAScore, and we are also planning to launch a new test for genetic testing. With that, operator, we are ready to take questions.

[Operator Instructions] Our first question comes from the line of Ulrik Trattner.

Congratulations on a strong quarter. I have a few questions. Could we please start off with the market share gains in China and where you believe to be the main explanation for this, is there any part of this that is a rebound of the lost market shares last year due to the delivery issues? Or was that fully resolved in Q3? As well as EMEA, obviously, a very strong development and with the clinics back to approximately 9%, it seems like you're gaining market share here as well. And if you could please shed some light on that. That is my first question.

Okay. Ulrik, thank you for those questions. Let's start with China. I would like to say it is 3 things. Yes, you are right that when we had some production problems 2019 during the summer then, then some of the customers that had to go to a competitor, most of them has changed back. So that is, of course, something. There is also another thing when we see that we are not only getting our old customers back, we are also getting partly new customers. And that is due to that China right now is going through a situation where we have been quite successful, and that is within the regulatory approval side. And we can see that other companies are having some challenges with getting their all regulations updated and approved. So there can be a slightly change there that customers are then -- since they are today asked to only buy regulatory-approved products. So some is regulatory considered. And thirdly, that our expansion also and that China is starting to use more and more Time-lapse. Our interaction with the customers through that kind of communication, Time-lapse, how you could do morphology, the importancy of having a good Media system. All those combined are helping us in getting customer satisfaction, which is the same as growth. Then EMEA. There -- since it's a huge territory, there are also huge differences. There are -- what we for sure can say that the IVF tourism do not exist, more or less. And that is impacting Spain, as I said, is impacting Turkey. We also see some decline in Russia. And in Q4, it was a difficult situation in Middle East in some places. So we have been able to take market shares in our, let's say, strong markets that are Western Europe, U.K. And we have done it through, I would like to say, 2 things. First is that we have, during this period, focused a lot on service level. And due to the situation that customers that were not before buying from Vitrolife has in some circumstances come to us and ask for products, since another supplier were not able to do it. So our ambition to have high service level and, unfortunately, we then back in Q1 and Q2 last year had some scrap, that has paid off. So I think that in EMEA region, it is customer service level that has helped us.

Great. And that sort of leaves me to my second question. And if you're looking at EMEA or just -- we can start off with EMEA and on the service. Do you believe that this market share that has been gained is sustainable or are we to expect a gradual shift back to normalized levels? And the second question is, I note that you mentioned that there has been more virtual interactions with your customers, which then translated into quite some significant cost savings. And you also mentioned the Time-lapse will require more hands-on time. But how much would you consider to be sustainable out of this technology or virtual customer interaction works that you have done that could actually translate into savings for comparable periods?

Yes. That's a very good question. We have had good outcome of our digitalization and the way of working together with customers. But we have only started that journey. What I see is that, going forward, and the acceptance to do training and to do support and have interactions through what we are calling Vitrolife Academy and also by individual meetings, that will be a long-term saving. We will continue to invest because what we see also is that we can even gain more from web-based shopping, for instance. And that are -- and currently, we have a good part of our business, but it can be a lot larger. So there are a trend that we need to invest. We will continue to invest. We can see an acceptance rate, and that will, of course, be savings in all levels, even at the end user side, even at our customers' side. What was the other question?

The other question was on the sustainability of the gained market share in the EMEA region.

Our market share gain is coming from Media, of course, but it's also coming from labware and our needles. So within our consumables, it is pipette, Media, labware and the Media. When customers are changing from not Vitrolife labware and going into Vitrolife labware, it is a big change for them. I mean, they are going from labware products that are a lot cheaper than the Vitrolife. But when they buy into this situation with quality controlled plastic products and they change, it is by buying into that and see a difference, they will not go back and buy the traditional labware. And with regulations also changing where in some markets, I'm just mentioning one of them, for instance, the U.K., it is a demand that they will only use regulatory-approved product, IVF-approved products. So there, it is a matter of when competition will come into this area. So I mean, that's something that you don't change so easy. And the same with the needle side with the improvements that we have done in the last couple of years and introduced and/or upgraded our needles, we've been able to take customer after customers. So those are the main reasons for it. And I do think that's going to be a sustainable business there.

Great. And one last question before I get back to the queue and let someone else ask the question as well. You're talking about this AI-based technology you are going to launch as well as a new test for genomics. Could you shed some more light on when you're expecting to launch those? And on the genomic side, is that invasive or noninvasive tests?

We will launch it during this year. I can't really give you exactly what quarter it will be, but it's going to be launched during this year. The iDAScore, the AI system is going to be launched before, most likely, the genetic testing in selling to end users. And the test that we will come out with is going to be an invasive one.

But correct me if I'm wrong, but this should enable you to sell this genetic test on a wider geography than previous collaboration with Illumina, right?

Correct. Correct. Correct.

Our next question comes from the line of Björn Olander.

Yes. So I'll start with that end question, regarding the new test and so on. Is that the one that's going to be in China and sort of the expansion of the Illumina agreement?

For the genomics, the agreement is that we, Bjorn, then will get access to Asia Pacific.

Yes. Did you have a date on that or when's your...

No. We are going to introduce the Vitrolife PdtA test during this year.

Yes. Okay. Then going on to the technology part, and it seems like you indicated that the recovery is probably going to be slower for the technology compared to consumables and so on. What is the reason for that? Is it financial constraints at the clinics or is it just that -- I mean, you mentioned that Time-lapse installations and training and so on could sort of be limited during this difficult period of time with less traveling and so on. So is this just a way of an accounting? I mean, for you to book sales, you have to complete installations and training? Or is the interest in those types of technologies lower right now at the customer level?

I would like to mention 2 main reasons. One is that the clinics themselves, in Q2 and Q3, they came into a situation, more or less a shock, that the customers just went away. So some of them has delayed. Those clinics then that has a good growth and good pent-up demand, they -- we are in contact with them, and some are with purpose and in negotiation with us, delaying the installment due to that when you install, you often close part of the laboratory for some time when you're doing a new piping in those. And if you have, let's say, a demand situation and you're trying to cover up what you lost and you also have the regulations where you can't work the normal way. So for some clinics to do, let's say, normally 100%, they need to work differently and that's taking more time and then closing down some parts of the laboratory is something that they want to delay 1 or 2 quarters. So they feel that they can deal with a pent-up demand. It's more about those things. Then there is a situation where the public -- on the public side in Western Europe, we have good clinics. And a lot of those public IVF clinics are under a tough situation where, for instance, in Benelux, in Belgium, they are more or less closing them and they're prioritizing other activities. The same in U.K. So there is a situation also that the publics are delaying or stopping their purchase of Time-lapse. But they are still under the traditional bid process.

Okay. Then a quick one. The loss related to Time-lapse. I suppose you don't -- you're not prepared to give any -- very much details on those. But do you have a time line for that? When you expect more news from that? And also expenses, I suppose there are patent lawyers and so on going to be involved? And if so, are they material expenses expected for that?

Yes. I can answer that, Bjorn. I mean the process will continue, and it has several steps, and we'll just have to follow that. So it's difficult to predict the time line for when this will be closed. We will have costs for lawyers in representing us in this case. They will be accounted for as running cost throughout the year as the cost incur.

Yes. Okay. And then when I have you on the line, I had also a question regarding the bad debt losses that you mentioned that affected, that reduced bad -- I mean, reduced provision for bad debt losses. Was that only the SEK 3 million from North and South America or something else?