Vitrolife AB

STO:VITR

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Vitrolife Interim Report, January to March 2018. [Operator Instructions] I must advise you the conference is being recorded today, Tuesday, the 24th of April 2018.I would now like to hand over to your speaker today to Thomas Axelsson. Please go ahead, sir.

[Thomas Axelsson, Chief Executive Officer]

Thank you very much, and good morning and welcome to Vitrolife Interim Report, January to March 2018. Speakers today is going to be Mikael Engblom, the CFO; and myself, Thomas Axelsson.Please change to Page #2, and we can start the presentation. The summary of Q1. Q1 was a quarter with high profitability and also good growth in Time-lapse. The sales was SEK 264 million, and it was a growth of 8%, and it was also 8% in local currency. The quarter, if you look into the business units and our sales, it was good sales for Time-lapse and a little weaker for Media sales. I will come back and explain more about that later.EBITDA, best ever, 40% margin. Also, during the quarter, as we have presented before or informed about, is that we have done an acquisition of an embryo transfer that we are currently in early production on and also early development; and also that we got the market approval for EmbryoScope in China. And both of those things is for strength of our portfolio.So please go to Page #3, and I will start with the business units. And if you look on Page #3, I will start from the right side and go business unit after business unit. So the ART, ART Equipment. ART, I just think, had a good quarter with growing mid-6%. And since we are still dealing with the transformation of the product portfolio, where we are reducing or it's actually quitting all of the distributors' products so we can focus on our own products, lasers and also quality control systems, like Log & Guard, the growth was 6%. I want to say when we look on this kind of equipment that it can vary with the quarter since it is hardware and capital goods.Time-lapse, yes, we are continuing the good growth that we have seen for quite a while right now, a growth of 31%. And it is the same kind of momentum that we have seen before, that it is more customers that is acquiring the Time-lapse equipment and also that it is some larger chains that are working and changing the workflow with the help of Time-lapse. During this quarter, we have not seen any bigger effects of the approval of EmbryoScope in China.So if we go into then the Disposable Devices, increase of 8%. And that increase is partly coming from that we have increased our capacity, so we can start to take the orders and also being able to ship to customers that has been waiting on our new needles.We are, however, going to continue in investing in new equipment, so we can get larger growth on this side. And that is for doing more of an automatic and robotized production, which will give us quite a lot higher output and at the same time, a lower cost within that business unit. And we are also going to launch -- and we have done it in mid-Q1, product after some regulatory approval for the needles.Media, I do think that's something that I will get some questions on, so I'll try to explain both the market situation and also regarding the business unit. The situation for Media this quarter was a negative growth of 1 percentage. That's something that we are -- that we haven't seen for the last 10 years. Our sales in the last 3 quarters has been showing -- in the last 4 quarters, as you can see, has been showing some growth. And this quarter the sales of Media was SEK 131 million.So how can we look on the Media business? Last year, it was a growth of 9%; and Q4, it was 6%; and this quarter, it was minus 1%. We still continue and we still believe that it's going to be a continuous growth within the Media. However, during this quarter, there has been a couple of things that I would like to explain more on -- from the market side.So by that, change to next page, where we have sales and growth per market region. And same here, let's go from the right side towards the left side. So what we've done this quarter to be able to report and add information to the financial market and also how we are viewing the business inside the company, we have divided up Asia, Japan, Pacific into 2 territories: One territory is Asia, and when we talk about Asia, we are talking about the distributor market. So in Asia, all markets there is distributor markets. And when we talk about Japan, Pacific, it is a direct market, where we have our own organization and also meeting the end user with our own sales force.Japan, Pacific then. It's good growth. We had a tremendous growth last year in Japan, Pacific, and we are still growing well with 15%. Growth in that area are continuing to come from a good mix, but the main growth business unit is Time-lapse and then it is EmbryoScope+.Then it is China, Asia. And China is our biggest market depending upon the quarter, but it's a little more than 15% of our total sales. It's less than 20%. So with China being the biggest market for Vitrolife, and since China also is the biggest market if we look on IVF cycles, it is important for us to trace that market if we see any changes. And I want to say that we don't see that we have lost any market shares or any customers.So what is it that we have found out? Why we see some negative trend in Media? After discussions with customers and with key opinion leaders, we have found out that there has been less IVF cycles in the first quarter. It's difficult to define why. There are some customers that has closed the clinic for an extra week in February. Some customers is also talking about that it is more of a balance between demand and output from the IVF clinics. But still, all customers are saying that they are positive about the future, and some of them are also investing or planning for growth, which is quite positive. So once again, we aren't losing any market shares as we can see on the Media business in China.In EMEA, our biggest market, 44% then. It's good, good balanced growth between all mature markets and also between the business units. So with a growth rate of 11%, we are satisfied with that in the EMEA market.Americas is something that I personally am not satisfied with. It is a decline of 2%. And the reason behind that is that we have not sold any Time-lapse during this quarter. But it's also a situation where we see that there are some concerns regarding our prices, and we have lost customers in South America. And all of that has been due to pricing issues.What we can't do in United States that we can do in other market is to use our products that we have developed the last couple of years. For instance, the vitrification, it is still not approved in U.S. And we have also less acceptance for Time-lapse in U.S. And EmbryoScope+ is not yet approved there. So in Americas overall, I -- we do think that we have lost some market shares.So overall, it is good growth. It is China that has been some concern. But I'm also concerned regarding the future, if our information is correct.And by that, I would like to hand over to Mikael.

[Mikael Engblom, Chief Financial Officer]

Yes. I will take you through with the key financials on Page #5. So in the quarter, we had a SEK 3 million positive currency effect on EBITDA. We also concluded the acquisition of the ETC technology, that Thomas mentioned before from CrossBay, and we paid $5 million in the first quarter. And on top of this, there can be additional purchase price since there are royalties to be paid later in relation to sales performance.Looking at the first quarter income, we can see the gross margin was stable at 65%. We do see a negative effect of less Media sales, so less proportion of Media sales, as Media is our business unit with our highest gross margin. On the other hand, we see economies of scale of increased sales. So these effects net out each other. That's why we have a 65% gross margin, or 69% if we exclude the amortization of acquisition-related intangible assets.The EBITDA margin was 40%, so 1 percentage points better than the same quarter last year. And it's a stable product mix, and it's a good cost control and operating expenses that explains this situation. We continue to have a strong financial position, and we have a net debt in relation to EBITDA, which is minus 1.Please change to Page #6, on the outlook. So we continue to see long-term market growth of 5% to 10%, as we have done before. And it's, as before, driven by the growing middle class and parents waiting to have children later in life and also increased social acceptance for doing IVF around the world.We continue to expand our sales. We're investing in marketing and sales. For example, marketing approvals, as Thomas mentioned before, we are trying to get our products approved in different markets. We also target clinic chains with our products to increase our share of wallet amongst the growing clinic chains around the world.Furthermore, we're broadening the product offering. We've got development projects in all our business units, and we also add on acquisitions as, for example, the ETC projects that I just mentioned.With that, operator, we are ready to take questions.

[Operator]

[Operator Instructions] And your first question comes from the line of Patrik Ling.

[Patrik Ling, Senior Analyst Healthcare]

A few questions. If we circle back to Media, what type of visibility do you have and do your customers have, I mean, when they say that nothing has really changed? I mean, we saw a slight drop in Media sales also in the fourth quarter. Now it's actually, for the first time in a decade, negative. What type of visibility do you have here? And what type of visibility do your customers have?

[Thomas Axelsson, Chief Executive Officer]

What do you mean with visibility? Do you mean how we can raise the usage inside a clinic, Patrik, or what?

[Patrik Ling, Senior Analyst Healthcare]

No, no, I mean that when you talk to clients and they say that they are still positive, how much do they actually know? What type of backlog of patients do they have? What type of usage? How precise can they be in saying that, yes, demand will come back and, yes, the demand is still there and the number of cycles will come back? I mean, that type of visibility.

[Thomas Axelsson, Chief Executive Officer]

If you're looking on China then, because that's the only place where we have, let's say, dig in a little bit deeper on the market situation. This is a private market also there, where it is private payers. And they have it on from different customers. What they can look on is the queue, for instance, to a clinic. They can also look upon patients that they're doing exams on. So there isn't any longer, say, visibility, if I'm going to use your words, than about a quarter. Because it is within a quarter that a patient is coming in, they do the exam. And they are, in case of -- if they will continue, they are putting the lady on a hormone treatment. So that's one of the things. Another visibility is also in China regarding how the government is guiding regarding this kind of treatment. And the guiding is that the regions and also the, let's say, the industry, and when I talk about the domestic industry, will build up more opportunities for the Chinese people to do IVF. What is visibility then that is negative, that is hard to do any, let's say, projections on is that one customer said that they are starting to see a trend in China that may be similar to what has been in Japan and some Western countries. Where the couples, even if they now are allowed to have more than one child, that they don't want to have more than one child, because it is too costly with school and also with some kind of day care for children. So there is not any clear indications right now that there will be more cycles just due to the situation that you can have more than one child. However, the sign also in China is that you are getting married later on in life, and that's one of the, let's say, the biggest reasons why you are starting to do an IVF cycle.

[Patrik Ling, Senior Analyst Healthcare]

And the fact that the Chinese market, I mean, if we just talk about China, has grown so much over the last 3, 4, 5, 6 years. And the sales in China is now, as you said, somewhere between 15% and 20% of your total. That also means that the number of cycles have grown, and it might also be a treatment that attracts maybe the less wealthy population. Do you think that there is a sort of price issue here also that they are looking for cheaper alternatives? I mean, when you talk about U.S. or South America, it's in the case that there might be a little bit higher price pressure. You, as a high-quality, high-priced provider, do you think that you might be suffering a little bit from that? That this is not -- you're not just looking at the top of the market anymore, that this becoming a broader type of treatment and it maybe goes down a little bit into the income layers. And therefore, the demand may be cheaper input goods into that treatment.

[Thomas Axelsson, Chief Executive Officer]

I don't foresee that in a quarter. I mean, that's a reaction that goes too quickly. But if I want to do proper projections strategically, yes, there is going to be probably some kind of down -- a market in China where it's going to be, let's say, more cost-conscious people that will start to do IVF. And those needs to be cheaper. However, the clinics that they have started in cities -- and then they define those cities as smaller cities with a population between 500,000 to 1 million. Those clinics, they have a challenge in growing, because the market in China, the bigger clinics, they are so big so they have an industry. And so they are able to do an IVF treatment then very costly and efficiency due to that -- I mean, if they do 10,000 or 15,000 cycles, the efficiency is, of course, bringing down the cost. So one of the concerns that many of the new clinics, let's say, clinics that has been started in the last 3 years, is that they have a problem in competing with those bigger centers. What I -- if I also look into the long-term perspective on China, there is going to be more domestic competition for sure. We don't see that yet on Media. It has come up on disposable products. And I do foresee that's also going to be on capital goods, an increased competition from domestic player. But that is not within this quarter or next quarter.

[Patrik Ling, Senior Analyst Healthcare]

Oh, okay. I mean, if I remember correctly, you had once, a few years back, when we had the Chinese New Year, some impact from switching from 1 year to -- one animal year to the other animal year. There are no such a thing in this sales figure.

[Thomas Axelsson, Chief Executive Officer]

No, no. I mean, we have asked the same kind of question because we were supposed -- at least, I was surprised the last time. But there is no indications on that. No, it is not.

[Patrik Ling, Senior Analyst Healthcare]

Okay, great. Then I actually had another question -- or 2 other question. And that is for ART Equipment, where you saw growth of 6%. But that was including products that you are trying to phase out. Could you give us a feeling for how the underlying growth for the products that you're actually keeping is developing in that area?

[Mikael Engblom, Chief Financial Officer]

Well, we are seeing good growth of our own products, and at the same time, we're declining sales of the products from other manufacturers. We have not disclosed any specific numbers for the different specific products in that. But that is the trend, and we foresee that to continue during the whole 2018.

[Patrik Ling, Senior Analyst Healthcare]

Okay. But it's fair to assume that your proprietary products is growing slightly faster than the overall growth.

[Mikael Engblom, Chief Financial Officer]

Yes. I think, I mean, what we have said before is that we expect not any big changes in growth rate in ART Equipment this year as a consequence of one part of the product groups growing and one part of the product groups declining. So we expect not any big changes in sales in 2018 versus 2017.

[Patrik Ling, Senior Analyst Healthcare]

Okay. And then lastly, there is quite a large jump year-over-year from this other operating expenses and income. Is that where you see the FX impact coming? Or is the FX hitting you somewhere else?

[Mikael Engblom, Chief Financial Officer]

No, that's right. I mean, the FX coming from the revaluation of accounts receivable and accounts payable is being captured in the other operating income. So that is the reason for that amount.

[Patrik Ling, Senior Analyst Healthcare]

Okay. And how should we look upon FX going forward? That is -- I mean, in the last quarters, you have guided a little bit cautiously maybe on margins, saying that we shouldn't really expect any large margin expansions from the level where you are. I mean, now you're reaching 40% EBITDA margin, and maybe then to some extent, due to positive FX impact. But in general, I mean, the level where you are right now compared to where you will be, is this a sustainable level, 40%? Or should we see it reverse a little bit?

[Mikael Engblom, Chief Financial Officer]

Yes. I mean, we -- as we said before, I mean, we are very happy with this profitability level. I mean, it is above our financial target. And we have also guided that we anticipate that we will increase our R&D spendings as a relation to sales. So without giving any firm forecast, I think what we're seeing is that we are currently reporting at a very high profitability level, and we expect our R&D spendings in relation to sales to increase somewhat going forward.

[Operator]

And at the moment, gentlemen, there were no further questions coming through.

[Thomas Axelsson, Chief Executive Officer]

Okay. If that's the case, I want to thank everyone for listening in. And bye from us.

[Operator]

Thank you very much indeed. So with many thanks to our speakers today, that does conclude the conference. Thank you all for participating, and you may now disconnect. Speakers, please stay online for me.