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

Good morning, and welcome to Vitrolife fourth quarter and full year report. Today is the 2nd of February 2023. The speakers of today will be my colleague, CFO, Patrik Tolf; and myself, Thomas Axelsson. And by that, let's go into the presentation and next page, Page #2. The headline for this presentation is strong profitable growth for the quarter. What we will do is that we will quickly go through the numbers, and then we'll go into more details by Patrick and myself. So a quick one regarding the quarter is that we had an increase of 66% in Swedish currency, and the sales was SEK 855 million. It was a growth of 11% in local currency. Later on, we will go more into those kind of details. The adjusted gross margin was 56.5%. EBITDA, we made SEK 273 million, and the margin was 31.9%. EBITDA per share SEK 2.02, and operating cash flow of SEK 166 million. Since it is also the full year report, I will like to also reflect a little bit about the full year report. And that is the sales was SEK 3.234 billion, and that was a growth of 92% in local currency and organic growth 10%. And EBITDA margin is 32.5%, and generating a good operating cash flow of SEK 636 million. Okay. That was some number crunching. Let's go into more about the details regarding what we have done in the last quarter and also during the year. So please go to next page, #3. I will start with the sales and growth and margin by regions and then go into the different business areas. Let's start then from the right side and go to the left. So from the East to the West on the geographical side. We increased, as I said earlier on, with 66% in Swedish currency. In local currency it was 48% and an organic growth of 11%. So that means that the acquired growth in the quarter was 37%. Japan and Pacific organic growth 29%. We are very pleased with that growth. It is coming from mostly the old Vitrolife, what I would like to -- what is then the business areas, Consumables and Technologies. We are performing quite well. I would like to say that with an organic growth of 29%, and it is due to more acceptance of our time-lapse equipment. So it's getting more and more in that territory to become a standard in some countries. Reimbursement system and a well positioning position we have in Japan has helped us in that region. Let's go into Asia. Asia is a mixed picture. You probably know if you have been listening into this in the last couple of years that we have had a very strong position in China, and we are continuing having a strong position in China. However, China, last quarter, it started well in October and then it went down due to COVID. And I don't want to go into those things because you all know about the COVID and the situation has been in China. So for us, to have a situation where we have an organic growth in that region, which is then China, and if we go into the Southeast Asia of 21% is remarkable, I would like to say that. And that is also taking into consideration that we have divested some of the business, and that is within the Genetic side, where everything right now regarding different markets and products and everything has been to -- come into where we have the strongest positioning and where we can have a profitable growth. So that was the situation of Asia then. Then going to EMEA. There, we had an organic growth of 2% and the pro forma, which is maybe good to also look into, was 6%. That region, a little bit up, a little bit down depending upon the different countries. We are getting questions regarding the geopolitical situation and that is impacting, it's difficult to say. But yes, in some countries, we can see a decline of IVF cycles, and that is from the information that we are getting from the customers. But otherwise, it is a stable market. And let's go into the Americas, organic growth of 8% in local currencies then within the region then. If we see this chart, you could easily say that if we go from the East to West, the more West we are coming, the stronger position we had in market share on Genetic Services. If you go from West to East, it is the positioning of the company and what we are selling, which is more the, let's say, the situation of Consumables and Technologies. Overall, regarding sales and what's happening with the customers is the consolidation is ongoing. And it is also that due to that, it is more a focus on having cross sales and building up the structure between the regions. And that's important for going forward with that. Okay. Let's then go into how it looks like on Page #4 and the Consumables business area. Sales of SEK 349 million. As mentioned before, very good growth in Japan, Pacific and Asia. Not so good growth, it's still a growth in EMEA and a little bit decline in Americas. Looking into the product area, it is a stable situation for our media growth. There are some up and downs on the Genomics, which means those kits that we are selling for the clinics or laboratories, they want to do their genetic testing themselves. And a steady underlying growth of Disposable Devices then. If we leave that one and go into the Technologies business area on Page #5. Good growth of 36%, 27% in local currencies. But I want to address the thing that it is [indiscernible] between the quarters. So we have a good quarter, then we can have a quarter that is not so good. But overall, it is an extremely good growth and the trend is looking good for these products. And it's no change. It is the situation of workflow where we can see more and more acceptance on workflow on the, let's say, Americas and it's already accepted in EMEA for those things. Technologies, pleased to say that with the strategy and ambition that we have had for years, and it takes time to do it, is to get a more balanced revenue projection by selling hardware, software, disposables and maintenance. And just the situation of having more stable revenue from software and disposables are helping the areas with the projections of future sales. Going to Page #6, Genetic Services. Genetic Services is not Igenomix. It is part of the Igenomix, but we have built a new company during the year. So we are Vitrolife and the Vitrolife Group then. And within that field, the service side that we have are dealing with genetic testing for customers is the business area Genetic Services. During the year and during the quarter, we have done changes to focus on profitable growth. It is a clear path going forward, it is the focus on fertility IVF then. And the situation then is that we are -- and it's been a good, good outstanding work from our colleagues within Genetic Services and for the rest of the team to adjust the businesses to each other then so we can have one way of entering into the customers, and one way means that we -- one way is to listen in to what the customer wants. And if they want products, services or a mix, that will be decided by the customers. So it is a growth of 14% and then it is minus 2% in local currencies. Overall, the U.S. market stands for more than 50% of the total sales in Genomic Services then. And the situation is that we have grown in number of testings being performed, but we have not grown in sales in U.S. due to the price pressure, you can say that the reduced pricing situations on long-term agreements that was done earlier. And that is being changed. I mean, we want to deal with customers and we would like to have a good relationship with customers where we, together, can see that we are adding value to each other then. So by that, let's go into more of the side where Patrick will guide us through. So please go to #7 and the financial highlights. Please, Patrick.

Thank you. So we will then start with looking on the net sales. As you recall then from Thomas here, the net sales is for the fourth quarter then SEK 855 million. Recall also then when you come to the comparison for the last year that we had 1 month during the first -- during the fourth quarter 2021 with Genetic Services. So that's also why when you talk on the pro forma basis will also then show that performance development. So 37% acquired growth during the fourth quarter, 66% in total growth, and the currency impact of 18% during the fourth quarter. So if we then look on the impact then on growth in local currencies, that was 11% on the total sales. But as we also know that during last year, there was a not so large but anyhow a sales of COVID-19 tests. So that means that when we look on the pro forma, we exclude then the COVID-19 tests and also now we have divested then the businesses in China. So if we exclude that, we also then have a pro forma growth of 9%. The sales of COVID tests during the fourth quarter 2022 was very low in comparison with 2021. If we look on the gross income, that is improved then to SEK 463 million, and that gives us then a margin of 54.2%. And also then if we add back then the adjusted and for the acquisition-related tangible assets, that gives us an adjusted margin of 56.5%. Moving on to EBITDA. That ended up with SEK 273 million, giving us then a margin of 31.9% for the quarter. The pro forma was 27.8%. And also on the impact then when it comes to the EBITDA, we had a positive impact on EBITDA with SEK 32 million on that side. If we then look on to EBITDA per share, that continued to increase, 196% increase to an EBITDA per share to SEK 2.02. Moving on to the next slide where we look more into operational expenses. That in comparison with the pro forma of SEK 281 million, increased with 5% to SEK 295 million. So we have a couple of impacts that has increased the expenses and a couple of things that has decreased the expenses, and let me talk through that one. The sales and marketing activities has increased. So we are more active on the joint marketing activities. We have been visiting various kind of fairs like ASRM that supports into which. We are working on implementation a CRM system and more joint activities for the combined now global sales and marketing team that we have. We have also then a couple of group-related products that is also then related to integration like IT-related projects but also focus on leadership programs that we have been doing during the full year. Generally also, we have increased a bit on the staff and personnel costs during the fourth quarter that is seen. And also given that the presence are globally when it comes to sales marketing team and also when it comes to the group function, we can see a negative impact then on the increase on the expenses side there as well. On the decreased expenses, you see that the R&D cost goes down and the majority of that is related to the agreement that we now have with our former Chief Scientific Officer for Genetics Services, Carlos Simon, who will then basically have set up the foundation. And we can then focus the scientific research through an agreement with that foundation. And the residual part then of the R&D within Genetic Services and Vitrolife Group are then focusing on applied product development. So that is a very good setup that we have going forward, and that has impacted then the R&D focus on our side, which is now continuously then focused on applied net product development. So if we then move on to the next slide where we will summarize the key financials. Keep in mind, as I said initially that Q4 2021 contained 1 month of sales for Genetic Services and also then that the pro forma numbers still included COVID impact for 2021. But again, we have then an improvement then when it comes to sales. Gross margins are approximately on the same level on the quarterly basis. EBITDA margin, 32%, significantly up when compared to the pro forma on that side. And also, as Thomas mentioned here, initially on the net debt to EBITDA, that is now down from above 3% that it was a year ago, down to 1.5%. That gives us, of course, additional flexibility going forward given that we have continued to generate positive cash flow. Also worth mentioning when it comes to the impact in the net income is that we have had a relatively high tax cost during the fourth quarter. And we have basically then managed a couple of adjustments then related to the acquisitions, have taken a conservative approach through the things that was related to the acquisition. So that was an extraordinary high tax rate during the fourth quarter on that side. So moving on to the next slide, Slide #10, the management comments. To a bit summarize what we have done during the last year and during the fourth quarter, we have then, as Thomas initially started with here, we have done significant changes. We have created Vitrolife Group. We have now, as we have that from the 1st of October, we have 1 global sales and marketing team. We have focused on fertility. We have then divested activities that are not related to fertility, and we have now a strong focus on things like operational excellence, commercial excellence. So we have done a lot of activities to continue to strengthen Vitrolife Group. Also important to mention is things like values. And we have been working very closely with the legacy Vitrolife, legacy Igenomix team to combine the vast set of values that we have. And we have now our combined set of values for the Vitrolife Group, which is working very, very well on that side as well. Time-lapse, also important to mention becoming more and more standard of care in several markets. And we will then continue to explore then the possibilities, not only then of using time-lapse as an embryo selection tool, but also how to improve the workflow within several clinics, and we have a lot of ongoing discussions on that one in various markets in the world. We continue then to have a strong profitable growth. We have then managed to improve particularly the margins in Genetic Services. It was a relatively tough start during 2022, and we have now moved up and are above those targets that we have initially talked about giving an EBITDA margin of 25%. So we are well above that during the fourth quarter. And also now as the Vitrolife Group, we are then a much better balanced company between both regions and business areas, on that side, with 1/3 in Americas, approximately 1/3 then in EMEA and then Asia with 1/3. So we are much better balanced, and we will continue then to build on the strength that we have because Genetic Services have a stronger position when it comes to Americas, and legacy Vitrolife Consumables and Technologies have a stronger position in some of the markets in Asia. So we will continue to build on our strength and work then on the commercial excellence with combined customers going forward. So, Thomas, you do the next slide.

Okay. We are on Page #11 then. And it is great pleasure that we were all informed yesterday that the Board has appointed Bronwyn Brophy as the new CEO. She will join the company at the latest of 1st of August. We are all looking forward and thank the Board for a good new CEO. Up until that time, the Chairman of the Board -- current Chairman of the Board, Jón Sigurdsson, will go in as an interim CEO from 1st of April. When that happens, current Board member, Henrik Blomquist, he will step up and be Chairman of the Board from the 1st of April up until the Annual General Meeting that is on the 27th of April. And I, Thomas Axelsson, then will leave my position at 31st of March. Thank you very much, and then I will hand over to the operator for a Q&A session.

[Operator Instructions] The first question comes from the line of Suzanna Queckbörner calling from SHB.

Suzanna Queckbörner here from Handelsbanken. I have 4, but maybe I can take them one by one. So first question, the pent-up demand in China, can you provide a magnitude to this? And also, what's your overall capacity and access to components? Can you match the demand?

No one knows the pent-up demand. I mean, we are -- we are having discussions with the customers and the customers, they predict the pent-up demand because they have not been able to have -- customers traveling through some of the provinces, and that's part of the situation in China where customers -- their customers are going to mainly, if they can, travel through the provinces. So there is a pent-up demand. And then also that during the Q4, and you know well what happened at the end of Q4 and also in the beginning of this year, has been a situation where it's been more or less locked down and there has been clinics that has been shutting down totally, others has been working under a lot of constraints. So yes, we believe a pent-up demand. However, how much will be, I don't want to do any projections, but we are planning for it. And we will continue our ambition that we have had in China, and that is to have a high service level. And then what is critical when you are dealing with the pent-up demand, it is for the clinics to have access to from our side, for instance, the culture media, all of the media business that is necessary for them to do a cycle or actually to do a transfer then of those. So yes, we are planning for it. It can be a risk that if we are too optimistic, it can be scrapped. But I think we have a quite good control over that, yes.

Great. Okay. And then on the Genetic Services in the U.S.A. Yes, you're feeling the price pressure on the PGT-A tests. Perhaps you could expand on the measures that you're taking to counteract this, and specifically, in the report you mentioned, selective approach towards customer contracts.

Yes, yes. There are a couple of things that we have started. First thing is to work with what Patrick talked about, operational excellence. When we are working with Genetic Services, the things that the team has done during the year to increase the profitability from Genetic Services has been extremely good. In that situation, we are then working with changes on the laboratory structure, how we work inside the laboratory structures and also the customer side. What customer and where do we have want to have -- what are the balance between growth and profitability. So there has been a clear growth focus from the earlier owners. Our focus is to have a profitable growth business. So some of the tenders were the PGT-A, I'm only talking about PGT-A, where the pricing are not what we see sustainable then, we are going in and having a discussion with the customers. We will stay in this field. We will have better, let's say, less COGS, better profitability. So we will be able to change this business to a more profitable business. We are then experiencing that the same things is being done by the competition. There are companies that has come out with public information like in Q4 that they will leave this field because they see that the prices have dropped too much and that it is not their focus business. So that's where we are in the little bit PGT-A. So it's only related to the PGT-A larger clinics in U.S.

Okay. And then as a follow-up on that. Given the geopolitical situation, which I suppose you're seeing effect, primarily EMEA, but also maybe to some extent also in the Americas. Can you give us a share of the private and public clinics that you're supplying globally?

Globally, 85-15, [ 85, public 15 ]. We -- I want to add one thing into that. Public is how we do definition within a well-defined reimbursement system by the state. There are reimbursement system that is not traditionally reimbursement system, but we have a growth of insurance-supported IVF. And that's being done in U.S. through insurance companies, through the companies themselves that is adding that on to as employee benefit. So let's say, the third-party payments are increasing. So if we're increasing that trend in some markets, I would like to say that we have probably come to a situation 80-20, where 20 then is paid through that one.

And then on top of that, you've spoken in the report about favorable reimbursement. Can you mention where you're seeing large changes sort of beyond Japan?

I -- that's only qualified guesses. And I don't think it's going to be any changes within Europe as it looks like right now. What I think that might some changes will come are in the territories where they are -- where the public side will come in. There has been a discussion regarding China. They started to do the tests regarding some reimbursement systems when we were in Beijing. Unfortunately, that happened at the same time as the COVID came, so they have not been able to do any conclusions if it works or not. They will continue that, let's call it trial, a trial. And if that works out well, a professional guess is that China needs to support their demographic problem.

The next question comes from the line of Ulrik Trattner calling from Carnegie.

I have a ton of questions. So let's start off with Consumables, and 2 questions there regarding both the product mix, given that you have media, your Illumina distribution test kits and your disposable products. You talked briefly about this during the presentation, but has there been sort of a more tilted towards the Illumina test kits that have affected sort of the margin profile? In addition to that, if you can just talk a little bit about the investment in production during the quarter, what that entails and when that will be fully operational. That would be my first question, please.

Okay, Ulrik. Let's start with your last question regarding investments. And I do my own guesses what you're basing your questions from. And it is from the gross margin situation. Then that expense is impacting the gross margin. That is on the balance sheet. So what we have done this quarter, and we started to do this actually at the end of quarter 1 last year when we saw an increase in demand and we needed to do some investments, and investment have been done from that time up until Q3 on machinery and those things. From Q3 forward, it has been to recruit people and train them and get them into production. So the scale up on the extra resources due to manpower and those activities is not yet seen in sales. It's only extra cost on that side. Another side on that is that we have during the COVID been forced, and I'm glad that we have been forced to do it, is to challenge our supply chain, and in the supply chain, whom we are we going to be supplied with is to change part of the supply chain. And when you do that, you are also adding on expenses for people doing overtime, people working with regulatory extra, people doing everything with [ QA ] to get those new suppliers into the system and in changing part of the operational procedure inside the manufacturing plant. That is not anything we take on the balance sheet. That has been put into the P&L then. So the gross margin drop this quarter is rare in such a way that it's coming from the Consumables side. Product mix then, to affect that, is that with more disposable devices in some territories, disposable devices has less margin than what the media has. To give some reflections on it, the very good growth of Consumables that we have in Asia, for instance, are not coming only from media because media is a product where you need it fresh. So the earlier question that came from Handelsbanken regarding the pent-up demand or not pent-up demand is that more disposable devices being there. And that is due to that they, today, have confidence in the market. We're talking about China. We're talking about all of those market into the China, that they're starting to perform more and more cycles, it's getting back to a normal situation. So both the end users, clinics themselves and also the distributors are filling up their stock level. The vice versa has happened in some of our distributor markets in EMEA, where they are shore up on their supply on the disposable devices, and then they don't need to continue to build up a security -- extra security stock level within themself.

And just a follow-up question on that then. I know you don't really want to talk about China and pent-up demand. But I'm guessing it will be quite messy to decipher here in the quarter whether you have taken market share from the production issues regarding Cook. Or if you're expecting to see further sort of positive effects from that going into Q1, given that it is in this month that they are closing down production?

I don't have any more information than what you have. You know that they are closing down into production somehow, that the customers that has been using their products, they are then questioning themselves then whom they should buy from. With a producer less out of the market, of course, it gives an opportunity for hopefully taking some more accounts. But let's see how it will work out.

Okay. Great. And just on China. Do you have a feeling for the current right now how are the IVF clinics reopening where obviously been high number of COVID cases? What's your impression right now on how China is developing?

We had a meeting yesterday because we assumed that, that should be a question from you and your colleagues. They try to be updated with the latest information. And just one statement, it's difficult to transform this into a number or sizing, but there has been large clinics, and we talk about large clinics that are performing more than many, many countries are doing in total in Europe. They have had a situation where they have been running at a staff level at the worst week with about 20%. So 80% was called in sick. And currently, it is vice versa, that 80% are back and 20% is called out sick. And they believe that, that's going to be every one week there quite soon because they had COVID. I don't know if that is a general situation for the market, but that is what my colleagues are getting from the close contacts with the clinics. And you know then also the new year is over. So there is many things that are -- that sounds like there will be a trend upwards, if I put it that way.

Okay. So year of the rabbit potentially a good year then. if I were to move on to the Technologies segment. And what I'm hearing is rather positive signals from the U.S. market. And you mentioned this on workflow efficiency. And this seems like quite a new sales approach from you guys moving this from then embryo selection tool to a work for efficiency tool. Is this trend -- when did you start to do this type of sales promotion? And if it's the first 5 we're seeing about improved adoption of time lapse in the U.S? And the second question on technology and time lapse is that how much your revenues are software, disposables and services?

Okay. Workflow is not a new thing. We have been working with that for many years. And let's say, the first acceptance on those things has come from clinic change that want to have a standardized situation, and that they are not only favoring genetic testing. And it's been a mix between Canadian, U.K. and Australian side, and we have pushed that for some time and getting more confidence regarding it. And the situation right now is that we can provide the situation if the customers like genetic testing or they would like to have a morphology for the selection or they would like to have a better workflow and then decide what kind of selection tool that they will have. So the trend in U.S. is -- well we have jumped on that one, let's put it that way. It's coming from the changes under COVID we started before. But the customers realize that the changes over COVID has caused a difficulty for them to get skilled staff. And with different tools, they can reduce the number of [ gynecologists ] and that's part of the workflow. So that's more about the business case for strictly on how to manage the laboratory, not so much about the selection.

Great. A few more questions from my end, I know I'm torturing you guys. So Genetic Services, and I think there is a balance here between growth and margin. And you mentioned that a few players have left the market. We have seen Progenesis leave the market. And my impression is that these are low-margin contracts. Are these something that you're going after? Or is that purely a focus on profitable growth? And in addition to that, if you can give us some pieces on the current margin trend for Genetic Services in regards to your long-term target for that business area. That would be very helpful.

Okay. The last question that is easy to -- because we communicated this over this year when we had started to do a lot of actions within the team to improve the situation by closing oncology, getting out of [ BPX ] business that is not here and doing all of those things is that we have said that we should increase the EBITDA level for the business up to plus 25%, and we are higher than that, I can tell you that. And then we said that within next year, I mean, this is the year, this year 2023, that we should reach a number at least of 30% as the target, and we are well on that track. We are well on that track. Going into the situation about profitable growth, you are getting profitable growth if you can add something, because if you don't add something, why should a customer pay something extra? And it is a competitive market. And as you say, there's been situations where this is only been about price. And if that's the situation, then we could deal with those, but then they will not get the same kind of service because the situation about doing a test itself and the COGS for the chemicals are quite equal between all the players. The question is what are you adding on that the customer can get? And what are they willing to pay for it? If they want to have support for genetic counseling, we will charge for it. If they don't want to have it, then we can do a test but they will then don't -- they can't come and ask for anything more without having an extra charge for that. If it is what it is in all other business, you will pay what you're expecting to get. And that's the biggest change within the Genetic Services, that we differentiate our offering with the correct pricing.

And since you're talking about differentiating yourself and adding additional value, could you give us some more information on the Embrace product?

The Embrace product, it is in the phase right now where we are doing user studies. It is approved, so I mean, everything. But we are doing user studies, but we have not yet done an efficient launch.