Biotage AB

STO:BIOT

Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, welcome to the Biotage Audiocast Teleconference Third Quarter 2022. [Operator Instructions]

Today, I'm pleased to present CEO, Tomas Blomquist; and CFO, Maja Nilsson. Please begin.

[Tomas Blomquist, executive]

Thanks, Lydia. Good afternoon, everyone, and thanks for joining us on the call. With Biotage today are: myself, Tomas Blomquist, President and CEO; and Maja Nilsson, our CFO. I and Maja will provide some opening comments. And following our quarter 3 and year-to-date comments, we will then take your questions. So let's jump right into Slide 5 and our executive summary.

We've had another extraordinary quarter performance, where again, many [ stars ] were in line for the Biotage Group. Our positive momentum continued in the third quarter with 31.2% net sales growth and solid earnings and cash flow performance. We managed to deliver our eighth consecutive quarter with double-digit organic growth, of 12.12%, which is in line with our new long-term financial targets.

The organic growth for the entire period from January to September was 16%. Biotage was breaking sales record again, and now for the sixth consecutive quarter in a row. We reached a significant milestone with the first quarter ever to exceed SEK 400 million in net sales. We continue to outgrow the market, thanks to a great performance throughout the entire group and the tailwind of currency effects.

An important success factor behind the net sales growth is that we're now running our business with a customer-centric and proactive approach. This gives us the conditions to meet the rapid changes that our customers and we, ourselves, must constantly deal with today. Our new customer-focused specialist organization also means that we're even more agile in dealing with customers. In our new product development process, for instance, we incorporate customer input to identify the best workflow solutions from their perspective. This ensures that our innovation meets the real needs of our customers.

Broken down by geographical markets, we're pleased to report that all 3 business regions, Americas, EMEA and APAC, recorded double-digit growth, with the Americas region continuing its fantastic development with a new sales record quarter growth of 40%. China also had a very strong quarter with 34% growth, and we performed double-digit growth in both EMEA and South Korea. All 3 of our customer focus areas was minimum growing double the market.

Red Tech was a key contributor with a growth of 128%, driven by our clinical testing and for [ MT ] customers in the Americas and our EMEA region, by our newly launched TurboVap 96 Dual and Extrahera high and low volume instruments, plus our new oligonucleotide diagnostic business.

Our highest product area growth was coming from Biologics & Advanced Therapeutics, where our automated plasmid purification system, PhyPrep sales, continues to grow and contributed to a growth of 70.7% . Recently, we invested in a new facility in our Biologics & Advanced Therapeutics area, by expanding our operation in San Jose, California.

We're now continuing to focus on further strengthening our position in this attractive niche with the future in mind. Some growth was also noted for Analytical Testing with 49.3% growth and Water Environmental Testing with a growth of 32.2%. Now, these exceptional top line results were driven by our team's outstanding execution and ability to deliver products through a challenging operating environment. We believe that our ability to deliver HumanKind Unlimited innovation to reliably serve our customers, and our daily strive for continuous improvements, has contributed to market share gains in many of our businesses.

Despite the turbulent environment and supply chain restraints, we delivered again positive cash flow from operating activities, and a healthy balance sheet development, which gives us good fuel for future growth. Biotage delivered improved profitability with an adjusted operating margin of 27.3%, despite the challenging market conditions, including the energy situation and inflation pressure, through a record sales quarter volume, solid cost control throughout the entire business, and currency tailwind.

To better serve the ASEAN region, Biotage has now established a new sales office in Singapore to further extend our geographical reach, supporting our distributors as well as our end customers in line with our direct sales strategy. This follows our philosophy of being as close to our customers as possible, both to provide them with better service and support, but also to gain local insights that will help us to develop our products and solutions according to ASEAN customer workload needs and to solving their pain points.

With that, I will now turn the call to Maja. Maja?

[Maja Nilsson, executive]

Thank you, Tomas. So let's go to Slide 7 to take a look at our sales per customer focus areas. So as Tomas mentioned, all our 3 customer focus areas are showing strong growth, and they are all outgrowing the market. The highest growth is coming from our Red Tech area with 128% growth in this quarter, supported by currency, of course, but also nice growth with our clinical testing customers and forensic customers in America, in combination with contribution from our acquired Oligo business.

In White Tech, the growth is evenly spread out with strong performance in all regions. In Blue & Green Tech, the growth is mainly coming from Americas with the environmental customers and the food agriculture customers leading the way.

Let's go to Slide 8 and have a look at our sales for product area. As you can see, we've had a strong quarter in all of our product areas as well, except for scale up. In this quarter, we can see the slowdown of the vaccine-related business in our product area scale up, whereas in all the other product areas, we're seeing strong growth. Biologics & Advanced Therapeutics is the main driver, with the continued success of our Biotage PhyPrep [ system ] in America. Analytical Testing is also a great contributor with high system sales growth in both Americas and EMEA.

Let's go to Slide 9 to take a look at our aftermarket sales.The acquired Oligo business is driving the growth of our service business, but we also see nice growth of the service business in China. The Analytical Testing business is driving the increase of consumable sales, but the main growth is coming from system sales in this quarter, with Analytical Testing and Biologics & Advanced Therapeutics growing in Americas as well as Analytical Testing in EMEA, and Small Molecules & Synthetic Therapeutics in EMEA.

Let's go to Slide 10 to take a look at the regional sale. We're very happy to see that our global sales force is doing well, with double-digit growth in all region. The biggest growth comes from Americas with the growth of the Biologics & Advanced Therapeutics business, in combination with continued strong growth in Analytical Testing. And in APAC, the growth engine in China, where the growth is mainly coming from Small Molecules & Synthetic Therapeutics. The weekend vaccine-related business in scale-up is mainly impacting the EMEA sales.

But still, we can see a very strong growth also in EMEA in this quarter, which is a great achievement. That's coming from a nice growth in Small Molecules & Synthetic Therapeutics and a strong growth in Analytical Testing.

Let's go to Slide 11 to see our profitability performancehere, illustrated by the development of our adjusted EBITDA margin. In the third quarter of this year, we are seeing impacts from the challenging global environment of the [ war in Ukraine ] . The war in Ukraine, the global post-pandemic supply challenges, the energy crisis and the overall inflation pressure, are all putting strengths on our ambition to serve our customers well, and to show continuous profitable growth. I am so proud of our team at Biotage on how we continue to deliver, planning ways to mitigate the issues and getting our solutions and products out to our customers.

And as Tomas had already alluded to, we can see the results of those efforts in the strong net sales growth. There is, of course, a cost associated to these [ leases ], and we can see that impact on our gross profit margin. However, in the third quarter, this was offset by the high net sales volume and a very favorable currency tailwind.

Our underlying OpEx, non-acquisition-related, are kept at a healthy level. We do see negative impact on OpEx on the currency rate effect from a continued weak Swedish krona, but we have been stringent in keeping our investments for future growth at a reasonable level, hence, creating a profitability leverage on the strong sales development. Our adjusted EBITDA margin, when adjusting for the impacts on acquisitions included in our OpEx, meaning the amortization of excess values and the deferred earnouts from the ATDBio acquisition, continues to show strong development against that.

The high sales volume has maintained gross profit margin in combination with the strong currency tailwinds, are the key drivers to this positive growth. We are, of course, following the development of the global business environment closely, but the uncertainty related to the inflation pressure, the political instability and the early speculations of a global recession, would naturally impact Biotage as well, but still too early to tell where this [ will be ].

We can go to Slide 12 showing our financial overview.I know that this is a busy slide, and much of these numbers have already been commented, but I would like to briefly comment on our cash flow development in this quarter as well. The third quarter this year shows a positive development of cash flow from operating equity versus last year. This is really nice to see, and excluding Biotage, in a great position to take on the global uncertainties and the challenges I have.

The improved profit in the quarter is a key driver, whereas working capital is a limited detractor. The mentioned global supply chain issues have been driving the inventory buildup during this year, and we see that in working capital in the third quarter as well. Back to you, Tom.

[Tomas Blomquist, executive]

Thanks, Maja. With that, we will now open up for questions.

[Operator]

[Operator Instructions] The first question comes from Karl Norén from SEB.

[Karl Norén, analyst]

Couple of questions from my side. Maybe we can take them one by one and start by scale up sales, which were quite a bit below previous quarters in terms of volumes. I'm just wondering if there were -- if you think there were any COVID-19 sales recognized in the quarter, and if we should see this level as a new kind of baseline for sales going forward here?

[Maja Nilsson, executive]

Well, I can start, and we agree. We had a very successful quarter. When it comes to the scale up business and the COVID-related business as part of that, it's still there in this quarter. It hasn't disappeared, but it's becoming less relevant in the quarter.

[Tomas Blomquist, executive]

And then also, yes, to add to that Like we have always -- the scale-up business is volatile as there are long sale cycles. We should also know that our scale up business is not only covering the COVID-19-related vaccine parts. What we also can say is that we also see somewhat of a change also in customer behavior, which most likely is linked to more of a normalization when it comes to supply chain and lead time efforts. All that taken into consideration, you will also see that we're impacted also this month.

[Karl Norén, analyst]

But then if you look on next -- I know you don't guide, but is it -- do you think it's fair to assume that maybe we shouldn't expect growth in the scale up business for 2023?

[Tomas Blomquist, executive]

I think what you should look into is that we have a very tough comparison quarters, yes, now and looking forward, which should be taken into consideration.

[Karl Norén, analyst]

And then just a general question on the, let's say, customer demand. I mean, we've seen some companies who are coming out with some lower -- they have lowered their guidance, et cetera. I'm just wondering if you're seeing any slower development from your customers, let's say, within the drug discovery and research, or are you seeing any slowdown in demand at all, if we exclude, let's say, COVID-19-related demand?

[Maja Nilsson, executive]

Yes. Well, first of all, of course, we don't provide guidance for the future. So I will be very careful here. But yes, we can see, some customers are facing uncertainties and are a bit more hesitant. But so far, we haven't seen that impact in Biotage. And as we have been discussing previously, we have a very well-diversified customer portfolio, so we are not that [indiscernible].

[Karl Norén, analyst]

Okay. And then on the gross margin side and price increases, maybe if we can divide it to -- first, if you can say anything about price increases and how much that impacted? Because I guess, previously, you've seen quite little impact from price increases, is my understanding and your organic growth has been mostly volume driven. Is that still the case?

And then maybe second on the gross margin side. I mean, you're still above 60%, but it's still below -- I mean, if you look at 2019 levels, and I guess that is to some extent driven by supply chain issues and cost inflation, et cetera. But can you maybe just give a brief explanation of why the gross margin is, let's say, 200 basis points below 2019 level?

[Maja Nilsson, executive]

Yes. So I can start with that. Well, basically, we have seen some nice development. We have been working with automation on our side so we get some productivity improvement. We have been working also on these price increases. That is a slow tool. So the full impact of that is not yet visible, I would say. But then on the other hand, the detractor of course, is the supply chain issues that we have been seeing this year, and that is putting a strain on gross profit levels.

And we have taken some conscious decisions to make sure to be able to provide our solutions to our customers, and that is really getting some impact due to the gross profit. But I think, and I can say that now with this result of Q3 as well that, that has been a very profitable bet for our [ side ] .

[Karl Norén, analyst]

And then just the last one for me on the PhyPrep launch. What can you say in regards to the launch? I mean, you're still growing very nicely here. Is demand still as good as you would have expected? And are you happy with the development?

[Tomas Blomquist, executive]

Yes, we are. And again, it's the Americas that is the main driver behind the strong results, but we're also happy that we're starting seeing progress also elsewhere in other geographies.

[Operator]

The next question comes from Odysseas Manesiotis from Berenberg.

[Odysseas Manesiotis, analyst]

First one on the top line. I mean, it's impressive growth in analytical, chemistry in particular. Can you take us through the key moving parts here? I mean I understand the [indiscernible] [ rate ] relaunch was well anticipated by your client base, but have you been seeing any trends of accelerating adoption for mass spectrometry that is helping your franchise here?

[Tomas Blomquist, executive]

No. But indeed, successful launches is a key driver. But apart from that, we have, yes, a steady ship with Americas driving Analytical Testing. But what is even more pleasant for us is that we see an amazing performance also from the EMEAs region. So those coming together and combined with the launches, it's really driving the 49% growth rate. So very pleased with that.

[Odysseas Manesiotis, analyst]

And one on profitability, it's follow-up from the previous question. I mean, your EBITA margin is staying quite resilient here despite the inflationary and supply chain pressures you mentioned. Could you take us through what the FX benefit was, and whether you had any, let's say, one-off product mix benefits this quarter? As in, should we look at this 27% EBITA margin as something as a [ time ] sustainably stay there for the next few quarters?

[Tomas Blomquist, executive]

I mean, again, I understand your question on this, [indiscernible] but of course, I cannot provide that guidance for the coming quarter. But yes, I can say that so far in this year, we have had a lot of support of the currencies, and also that's true for the third quarter.

And you can see we publicly share that – the top line contribution, which was 15.2% in this quarter. But also, of course, we have an impact elsewhere in the P&L. So you have that impact also on operating – other operating income, which is regarding revaluation of liabilities. So if that's to stay for the future, well, that's a very speculative thing that I will not comment on.

[Odysseas Manesiotis, analyst]

Last one on net financials, they've been above expectations. Could you take us through the moving parts here and what sort of sustainable level for this line be in the next few -- for as much detail has been provided, of course.

[Maja Nilsson, executive]

Sorry, which line did you refer to?

[Odysseas Manesiotis, analyst]

Net financials below EBIT.

[Maja Nilsson, executive]

I mean that is also very much driven by the FX effect and the currency. So also, I can say that, that's the truth of the year-to-date impact, and what will happen in the future, I can't speculate.

[Operator]

The next question comes from Mattias Haggblom from Handelsbanken.

[Mattias Häggblom, analyst]

I have 2 follow-up sort of related to previous topics, but I'll see if we can learn something more still. So on the supply chain challenges, it sounds like you've managed to meet customer demand, but at the higher-than-normal cost. I was just wondering if it was possible, if at all, to quantify the negative impact that you had to take?

[Maja Nilsson, executive]

No, we haven't disclosed that, Mattias I'm sorry. But if you look at the numbers and you see the strong top line volume and the currency tailwind and you think about that leverage, you can almost backtrack what kind of impact has been on the cost side.

[Mattias Häggblom, analyst]

And then again, on this net finances of SEK 12 million, which followed the second quarter where I think it was SEK 18 million. So I'm trying to understand if -- assuming FX volatility continues, is this a line that may continue to be surprising us on the outside going forward? Or is there any of the internal processes where you're trying to say, control this, that can lead to a more, call it, normal level going forward? Or is it all down to FX?

[Maja Nilsson, executive]

Well, it's mainly FX impact here. I can say that there are some intercompany related items in that, which is impacting, and we are looking into those as well. But as it is right now, yes, FX will have a major impact on that.

[Operator]

Thank you. The next question comes from Josefine Persson from Nordea Equity Research.

[Josefine Persson, analyst]

I think we have taken most of the questions already, but just to add something, it's great to see that you're progressing well in biomolecules and advanced therapies with your PhyPrep rollout. And you mentioned that you also expanded your capacity in San Jose to meet the growing demand. And can you elaborate a bit on today's product mix in this product area? So would you say that it's driven mostly by the instruments now? Or is it the Phy itself, the consumables that is driving sales?

And a follow-up question on that is how much of the consumable sales now would you say is due to the -- let's call it, the old [ citings ] that are not related to the PhyPrep?

[Maja Nilsson, executive]

I'm starting with the last question. Yes, when it comes to the consumable sales in that product area, I would say it's more the legacy that's driving it today. So we haven't yet captured that potential, or will follow with the launch of the PhyPrep system. In this quarter, the growth is more leaning towards the system sales.

[Josefine Persson, analyst]

Even with the legacy [ citings ]?

[Maja Nilsson, executive]

Yes.

[Josefine Persson, analyst]

Yes, that was actually the only question I had because the others already covered my other questions.

[Operator]

[Operator Instructions] The next question comes from Karl Noren from SEB.

[Karl Norén, analyst]

There are some follow-ups from me. One question, if you could comment maybe how much of your customer base that you would expect to be loss-making? Currently, I think that is quite a big question out there now with the current financing problems for a lot of small start-ups. So if you can comment on that, I think it would be really, really helpful.

[Maja Nilsson, executive]

Yes. I don't -- I'm not able to share that with you or disclose that. We don't disclose that level of detail, unfortunately, Karl, or is there a high-level question, maybe I could answer?

[Karl Norén, analyst]

Yes, I think it's more of a high level. I mean, I know you have a lot of big pharma customers that are, of course, profitable. But I think it's a question that we get a lot from investors. So some kind of answer would be helpful.

[Maja Nilsson, executive]

So the question is, how are we acting with the customers or looking into our customer's profitability. Was that the question?

[Karl Norén, analyst]

Yes. Or if you have, like, understanding of how much of your net sales are going to customers that are months -- cash flow positive basically?

[Tomas Blomquist, executive]

Yes. Well, yes, we don't disclose that, to Maja's comment. But what we can say also to earlier statements, we have a very diverse customer base. So -- and we have a long legacy turning 25 years old. So a majority that we are working with is the major pharma and biopharma companies and CRO companies. So that's all we're here to say.

[Karl Norén, analyst]

And then a follow-up on another topic here on China, actually. I think you have been managing this situation quite good, even despite the lockdowns, et cetera. And I think you entered the year also with quite a good backlog in China. Are you seeing any, let's say, signs of weakness or anything to comment on in China? Or should that continue to develop stronger?

[Maja Nilsson, executive]

I mean, that comes back again to the guidance for the future. I mean, we can – what we can state is that, so far in this year, we have had a very successful year with China. So that tendency hasn't occurred yet.

[Operator]

Ladies and gentlemen, there are no further questions. I will now give back the floor to Mr. Tomas Blomquist. Thank you.

[Tomas Blomquist, executive]

Okay. Thank you. So to wrap up, we are very pleased with our third quarter financial results and yet another record sales quarter, on our daily mission to support our customers to make the world healthier, greener, and cleaner. Putting it all together, the strength of our platform solutions and balance sheet, combined with our talented global team and the broad workflow solution offerings, provides an outstanding foundation for delivering sustainable long-term results.

We've had an outstanding journey so far this year despite a turbulent environment. And I'm very proud of our aligned global team and our customer-focused efforts that is led by far to be successful quarter and setting us up for further strategic investments with recurring revenue in attractive [ misses ].

With that, I'm coming to a close, and we're looking forward to our next touch point in February 2023. Thanks, everyone, for your interest and support in Biotage and take care.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.