Revenio Group Oyj

OMXH:REG1V

Earnings Call Transcript 2022-Q1

[Jouni Toijala, executive]

Welcome to Revenio Group Q1 Earnings Call. My name is Jouni Toijala, and with me, we also have here Robin Pulkkinen, our CFO.

We are going to go through today the business highlights of the quarter. So I'm going to cover that one. Then Robin is going to go through the financials plus the shareholder development. And then Robin is going to finish for the financial guidance, and then we go for the Q&A at the end.

So if I start summarizing the Q1. So we saw growth in all regions, especially in the Europe and in the U.S.A. APAC region was growing as well but not as fast as the Europe and the U.S.A. In Europe, we had a couple of highlights from the country-wise. So Italy grew really very strongly, same for United Kingdom then Sweden, Netherlands as well. So in a nutshell, really good start for the '22 for us.

Then we have certain uncertainties in the air as well. So of course, the Russian and the Ukrainian war, which is ongoing. So the Russian and Belarus business and the Ukraine business in total for us, that's roughly less than 2%. So we have stopped all the business with Russian and Belarus.

Then of course, we have had challenges related to the components. They haven't been impacted the business as such, but we are still constantly having daily paddles to get the components into the production with reasonable price.

Then of course, the COVID-19 situation in -- especially in China. So that is going to cause, according to our thinking, also a bit more difficulties related to the component availability in the long run.

But in a nutshell, component -- from the component availability point of view, we didn't have any challenges. The only challenge was actually related to COVID-19-related sicknesses in our supply chain. So we were not able to deliver all the products where we have the orders, so roughly a bit more than EUR 0.5 million.

So if you go actual numbers. So net sales totaled EUR 20.2 million. So that's increase of 20.5%. And if we take the U.S. dollar impact. So the currency adjusted growth in net sales during the Q1 was 17.1%. So the U.S. dollar actually plans the plate for us during Q1.

Operating profit, EUR 5.6 million, 27.5% out from net sales. Growth was 20.6%. So Robin is going to cover in a bit more detail the adjusted EBIT number because we had in the last year Q1, we had the roughly EUR 600,000 related acquisition costs from Oculo transaction. But then on the other hand, now we also have a full-on resource costs in this -- or the last quarter so the Q1.

EBITDA grew 21%, so up to EUR 6.4 million. And then Robin is going to go through the details on the cash side was -- and that was slightly weaker than the previous year.

Earnings per share up from EUR 0.141 to EUR 0.176. So good performance in the Q1.

Then we have been communicating during the -- our yearly release. So when we last time had the conference call, so we said that we are moving forward, and we are working on the solution side. So just to recap, the logic here why we decided to launch the new screening solution software. So really, the reason is that there's going to be increasing amount of the patients who are having eye diseases. And that's because the people are aging. That's because of the lifestyle diseases. And exactly the same trend is going to happen also on the eye care side, which is already happening in normal health care side. So there's a normal health care side, there's not enough nurses, there's not enough doctors to treat the sick people. So it's going to be exactly same thing on the eye care side. So there won't be enough eye care specialists to take care of the increasing amount of the patients if we don't start be able to use more efficiently digital solutions and services also on the eye care side.

So from the solution portfolio point of view, we have 3 different buckets where we are currently working. So one is the capabilities to remotely monitor and see the patient. So there, a good example is our eye care home solution for monitoring and also the Ocular platform gives us telehealth capabilities.

Then the second bucket is that how we guarantee in a more better way that we don't break the patient care pathways and how actually the patient is referred to another eye care specialist through the digital channel. So that's where the Ocular clinical referral system is showing the benefits.

And then the third bucket is actually how we are able to assist with the digital solutions and the software solutions, how we are able to assist that the eye care specialists are able to do a better clinical decisions. And this is where the iCare ILLUME actually benefits.

So what we launched. So we launched a new features and functionality into a DRSplus on the embedded software side. We're just pressing a single button. The image is transferred to the iCare ILLUME cloud service, where the picture then is forwarded to the Tirana AI algorithm and then we get the report back, which is then shown on the iCare brand, an iCare-owned software asset. And you can see from the image, so that's real working UI, which actually I was using about 1 hour ago to screen my eyes related to diabetic retinopathy.

So this is, in a nutshell, what we launched after the review period. And we can cover -- I'm sure there's going to be questions related to this as well, but we cover those at the end. But I think it's time for Robin to go through the financials in a bit more detail. So over to you, Robin.

[Robin Pulkkinen, executive]

Okay. Thanks, Jouni. So here's a bit more detailed listing of some of the key numbers. Like Jouni said, EUR 20.2 million in sales, and we actually were not able to deliver everything we had in the order book. So a bit more than EUR 0.5 million pushed out. So if those were to go out, our growth would have been -- growth would have been closer to 25% and the EBIT, probably closer to 29%, even a little bit above that if we were able to deliver all that out.

Like Jouni mentioned, the cost side, we had the EUR 600,000 Oculo M&A costs in the comparable numbers for Q1 2021. So we have to operate at the adjusted line here. Basically, the reported Q1 '22 is the same. So there are no adjustments for this year, but the last year number is adjusted for the M&A costs. So our operating profit went up 6% year-over-year when you kind of add back those costs to the comparable numbers.

Just important to keep in mind whether it's better, more or less comparable because last year Q1, we didn't have any of the Oculo team in the house, and there are no operating costs. So the cost for this year actually is more than what we are adjusting out for the M&A costs from last year.

Our gross margin was really good. We had a good product mix we sold. Exchange rates played really nicely for us, like you can see from the FX-adjusted sales growth. So those are kind of the biggest 2 drivers for the gross margin.

Also in the U.S., we had some nice sales from some of the national accounts where we don't pay any commission for. So they're kind of ran by our own people, not the sales representatives in the U.S. So obviously, when we don't pay commission, that plays nicely into the gross margin.

Do you want to jump to the next one? Some more quarterly view. You can kind of see a trend, some seasonality in our numbers when you go and look into the couple of years back quarterly outlook. So kind of -- we normally start off with the lower sales in Q1 and end up with the strongest quarter at the end of the year. Our business model is really scalable. So you can see on the right-hand side, the profitability tends to follow the top line. And that same actually goes through also the cash flow.

But looking at the Q1 performed 20.5% growth. But if you look at last year, our growth last year was more than 40% for the first quarter. If you look at our Q1 in 2020, we are up basically 70%. So it's been a really good couple of years for us as a company.

On the right-hand side, you can also see that the EBIT, the kind of the EBIT and the EBIT percentage. So here also, when the top line goes up, the profit goes up, also the profitability goes up. So the business model is really scalable. You can see that our manufacturing is fully outsourced. So it scales up and down with -- the cost scale up and down with the business. So our kind of fixed cost is purely very fixed like it's supposed to be. So when the top line grows, our profitability grows nicely.

And then the next one. Here, you can see also the same quarterly view for the cash flow. So it tends to follow the similar kind of seasonality. We tend to finish quite strong for the second half. Q1 always not the best because we have -- we annually pay out our STIs or the short-term incentives for the whole group as well as the long-term incentives are paid out in the Q1. So Q1 for operating cash flow tends to be not the best at least. Well, last couple of years has been the worst quarter from the operating cash flow.

Equity ratio, the balance sheet is still really strong. You can see it's quite stable for the equity ratio. If we look at the net gearing graph, the yellow line going up and down, If you wonder why it's kind of -- there's a kind of good explanation for why it goes each direction. So in 2020, we paid our dividend in Q2 resulted in net gearing going up, then we build up the cash for the next couple of quarters. It goes down to minus EUR 2.4 million.

Last year, we paid our dividend in Q1. We paid for Oculo from the cash in Q2. Then we build up the cash again, Q3, Q4 and then this year, our dividend didn't make the Q1 numbers yet, but it is well paid in April. Just a couple -- it was last week, I think yes.

Some of the shareholders, there's been a bigger -- not big change but a change anyway. So William Demant has increased their ownership again during the first quarter of this year. So they're just under 15%. So we haven't flagged it in April. So they haven't gone above 15%.

Foreign ownership is now more than 51% of the total company. So the Finland ownership, 48.6%, United States is #2. Denmark has grown now with the demand increasing their ownership and then followed by Sweden below 6% -- 7% and then France below 3%.

The next. In the guidance, we did not change our guidance. So the exchange rate adjusted net sales are estimated to grow strongly from the previous year. And profitability, excluding nonrecurring items is treated to remain at a good level. So here on the right-hand side, you can see some of the historical kind of sales growth and also the profitability. So we've historically always been able to provide and show profitable growth, and that's what we plan to do in the future as well.

[Jouni Toijala, executive]

Thank you, Robin. I think we are ready to have questions. So if you have any questions, so we are really happy to answer.

[Operator]

[Operator Instructions] So we have the first question from Pia Rosqvist from Carnegie.

[Pia Rosqvist-Heinsalmi, analyst]

Yes. It's Pia Rosqvist from Carnegie. First of all, sorry, I missed Robin's discussion on the gross margin. So I heard you mentioned you have fund support from national accounts in the U.S. but there were other explaining factors as well. Could you please repeat those?

[Robin Pulkkinen, executive]

Yes. It was basically the national accounts and then the FX. So our sales in the U.S., almost half of our sales are in U.S. dollar, but all the manufacturing costs for our devices are in euro. So that plays into the gross margin quite nicely. And then we did have a nice product mix also for the quarter. So those 3 things kind of play into the equation.

[Pia Rosqvist-Heinsalmi, analyst]

Okay. And taking into account the strong margin in Q1. Is this a sustainable level now going forward? I'm thinking about your guidance in the light of a very strong gross margin performance.

[Robin Pulkkinen, executive]

I think the dollar has continued to strengthen a lot even after Q1. I'm not sure. Is it 1.05 or something now? So obviously, it's doing good to our numbers. But the plan is not to change the guidance, the guidance what we currently have.

[Pia Rosqvist-Heinsalmi, analyst]

Okay. Good. Then I had some, of course, questions now on the news you shared yesterday on the AI solution for the European market. So is there anything you can share at this point in terms of revenue or the pricing model of this product? And also when do you expect to see a substantial contribution or even a small contribution from this cooperation, I mean, in terms of revenues and profits?

[Jouni Toijala, executive]

Yes. So I can try to answer to that one, Pia. So we have done the decision that -- so first, perhaps to clarify that where we start is the Europe. So we are now ready to go in the Europe. So we have a working solution available. And I just run the test for myself about an hour ago, as I said before I walked in. And we have done a couple of decisions. So we are going to sell the devices, DRSplus as we have been selling today. So they go through the distributors. So we are not going to at first package the device with the monthly recurring fees. So the device business goes as it has been going.

And then we also have capabilities to update the software to the new one remotely so that all the devices which we have on the field are then going to be able to actually support this screening feature.

Then we have 2 options then. So we are going to have a monthly fee per device, which then covers the AI plus the overall platform fee. So that keeps it simple. And then for larger clients, we have a pay by report option. And I don't now -- I don't go -- of course, we have a euro sorted out, but for the confidential reasons, I'm not going to go through the euros yet at least.

And then the second thing, I think, Pia, you had a second question related to when we are estimating to see the revenues coming in. So our plan is to start having the pilots during the Q2. Then hopefully, depending, of course, the sales cycles on the system sales, it's not always -- they are not always really short. So -- but we hope that when we go towards the Q4, we start to have paying customers as well, so.

But then the question is that is it going to move the needle this year? Answer is no. Is it going to move the needle in Q1, Q2 next year? I think that no, and the reason is that we have -- when we closed last year, so we closed at EUR 78.8 million. And -- so that -- and then if we are able to provide a nice growth from the device business as such. So I think that how much it moves the needle in the next 3 to 4 quarters. So device business is definitely and the growth on the device business side is going to move the needle much more than the recurring revenues from software. But this is a long-term play for us. So in 3 to 5 years' time, we are going to see that to be successful.

[Pia Rosqvist-Heinsalmi, analyst]

Okay. And just to clarify, I'm sorry if I missed this, but in terms of kind of a revenue-sharing agreement. So will you kind of -- will you receive something for enabling your partner's AI to be used on your device? So will you have an income from selling the artificial intelligence as well.

[Jouni Toijala, executive]

Yes. So we have there a joint package also related to AI. And we are aligned basically so that when we get the money, so then of course, we have to pay for the AI player, but we -- but that's a pretty normal and standard settlement.

[Pia Rosqvist-Heinsalmi, analyst]

Okay. Good. And then still my maybe final question on DRSplus. What kind of an installed base do you have now in Europe?

[Jouni Toijala, executive]

That's a difficult question to be answered. I have to be come back to that one. Robin, kind of -- I have a hunch, but because it's not the fact it's my hunch. So I'll come back to you, Pia, on that one.

[Operator]

So we have another question from Daniel Lepistö from Danske Bank.

[Daniel Lepistö, analyst]

It's Daniel Lepistö from Danske Bank. Some of my questions were already asked, but if you could still elaborate a bit more on the gross margin and the product mix. So to me, it sounds like that the current mix is still sort of tilting towards these imaging devices. So as the average gross margin on the imaging device side improved closer to the tonometer level or what are the sort of positives here in the sales mix that you currently have described?

[Robin Pulkkinen, executive]

I think the -- some of the new products we've launched like the ultrawide-field lens is extremely high gross margin. Closer or better than some of the tonometer business. Also, the DRSplus manufacturing cost actually has come down a little bit. So instead of it seems like many manufacturers and products despite the business where they're in seem to be going up. We have actually been quite good with the -- maintaining and controlling the cost of the manufacturing for DRSplus as well. Then we do have license revenues. And of course, the U.S. dollar last year was totally at a different level. So that helps because our kind of ASP goes up 10% in the U.S. and the cost basically doesn't. So, those kind of play...

[Daniel Lepistö, analyst]

Yes. That's helpful. I think my second and final question is about the HOME2 product. What sort of momentum have you gained with sort of a launch in the U.S.? And what sort of feedback have you got there? So any commentary on that one?

[Jouni Toijala, executive]

Yes. That's a very good question, actually, because we went to see the launch with Robin, the division experts in the U.S.A. about 3, 4 weeks ago. So it was really nice to be present when launching the device and really good feedback. So a couple of things, what the patients and the doctors were kind of citing as a positive thing.

So the first one, of course, was the Bluetooth capability and the new patient that. So meaning getting rid of the cables. So that was a really good thing.

Then the third one was that you are actually able to measure the IOP when you are lying down, so in the supine position. So that's what is -- what we have also available in the IC200. So that was actually getting a really good feedback.

And then the fourth one was actually usability related items. So we have now a plastic extra small feature, which you can plug in when you are inserting the probe. So it goes smoothly in and you don't kind of have to feed it in. And that was -- it's a really tiny just the add-on which you put on the device before you put the probe in and then when the probe is in, you take it away. But for the older people who have glaucoma. So that was extremely well received.

So good spin, good momentum on that one. And now actually, we have sold now all the products, which we shipped to the U.S. So they are now slightly on the backorder. So we are on the way to provide more. And then we also had a big event in Washington last week. So KOLs were promoting the home device there as well. So it has met the expectations for us. But still, I think we have to remember that it's going to follow the same pattern on the normal tonometer. So it's going to take time. But at least now all the features are okay. And now we are working with the -- testing the different type of the business models as well.

Sorry, long answer, but that was actually the -- actually all the feedback that we got.

[Daniel Lepistö, analyst]

Yes. Yes, that's super helpful. I think I actually would have liked to get a little insight on the business model side still. So have you started this kind of question with the business model, how you can address these consumer customers in Europe and U.S.? Or is this still a work in progress?

[Jouni Toijala, executive]

So we did a strategic decision that we don't go to the model where we go directly to consumers by ourselves. And that's -- I think it requires different kind of skill set and different kind of capabilities in the organization. So at least as for now, we are going to stay business-to-business model, and not to start mixing business-to-business and business-to-consumer straight. So that's a clear strategic decision. But that doesn't mean that we are now able to find and test different models with our distribution partners. Also the new ones which have the capabilities to go directly to consumer.

And there, the key question for us in the long run is that are we able to find out a model where you actually have a monthly fee, you might charge certain amount from the hardware at first, and then you have a rolling monthly fee then, for example, for a couple of years and so forth. So these are now the models which we are testing. Hopefully, we are wiser towards the -- when we go to the end of Q3 or Q4. And this, especially testing these in the U.S.A.

[Operator]

So we have another question from Nikko Ruokangas from SEB.

[Nikko Ruokangas, analyst]

Congrats on your results. So can you comment a bit more on how are you handling the equation between cost inflation and price hikes going forward. So what kind of price hikes are you planning? And how large inflation are you seeing in the short-term future?

[Jouni Toijala, executive]

I can take that one. So we raised the prices 3% starting from November. We are going to raise prices 4% starting from May. And we have had the capability to actually increase the prices and at least still for now also the clients are -- have been continue buying because it's easy to increase the prices. But then if they stop buying, so that's not the optimal situation, but I think we have that part in control.

Then the second thing, if we are looking at the overall inflation rate, so that's a slightly different ball game because what's visible then on our cost side is, of course, the cost related to the salaries and the people, but also cost related to the components. And that varies quite a lot. So we have faced certain cases that for a chip, which is normally 5 USD asking prices have been between EUR 350, EUR 360, even up to EUR 700. So there's definitely a pressure on the component side. We have been able to tackle those prices and just kind of for clarity, so we haven't paid USD 700 for USD 5 chip, but it just shows that how high a certain component as prices can be.

So then another thing is that how to cope the cost inflation is that what kind of actions we actually do on the factory floor. And then we are also working at how to make more devices with the same amount of the resources on the factory floor. So how to optimizing and leaning the actual process and the whole supply chain and the manufacturing process. So there's many aspects. We are working and the operations team is daily basis working, struggling to get the components in good price. This is going to continue. But so far, the only challenges what we have had is -- a serious one is actually during the Q1, the sickness in during -- due to COVID in the overall supply chain. So we were not actually able to get as many devices that we would have needed. So it's slightly complex. There's many levers what to pull and what to use so far pretty well in order, but it's a daily pedal and hopefully, no new yellow, red flags popping up during the Q2.

[Nikko Ruokangas, analyst]

Okay. So is it so that you make a decision that possible component problems was first affect your sales and not like heavily gross margin?

[Jouni Toijala, executive]

That's a difficult -- I think that's a difficult question. So then, of course, depending on the component. So we have possibilities to shift the emphasis which products out from the portfolio, we actually sell. So it's complicated, but we try to balance so that we sell as much as we can with the reasonable gross margin level. So sorry, it's a bit hard to answer the question, but it's a constantly -- it's a constant balancing act what to prioritize and what to not.

[Operator]

So we have no further questions. [Operator Instructions]

So we have another question from Pia Rosqvist from Carnegie.

[Pia Rosqvist-Heinsalmi, analyst]

Yes. It's Pia here, again. You mentioned some costs or the costs related to Oculo. Could you, Robin, please still specify what kind of cost burden Oculo had in the first quarter in your numbers?

[Robin Pulkkinen, executive]

So basically, yes, I said the EUR 600,000 that we adjusted out from the comparable number the operating cost for the reporting period was more than that. So that was the statement.

[Operator]

So we have no further questions, gentlemen.

[Jouni Toijala, executive]

So no questions.

[Operator]

No more.

[Jouni Toijala, executive]

Excellent. Thank you very much for your interest. Have an excellent spring. It's very cold here in Helsinki. Hopefully, it's going to get better. And next time we are going to see and hear each other beginning of August.

So thank you very much for your time. Bye.

[Robin Pulkkinen, executive]

Thank you. Bye.