Vitrolife AB

STO:VITR

Earnings Call Transcript 2023-Q1

[Operator]

Hello, and welcome to the interim report quarter 1 2023. My name is Caroline, and I'll be your coordinator for today's event. Please note this call is being recorded. [Operator Instructions]I will now hand over the call to your host, Mr. Jon Sigurdsson, to begin today's conference. Thank you.

[Jon Sigurdsson, executive]

Yes. Thanks for that. Good morning, and welcome to the conference call for the interim report for the first quarter of 2023 for Vitrolife Group. My name is Jon Sigurdsson, and I'm normally the Chairman of the Board of Directors, but now until August 1st, I will be the interim CEO, until the new CEO, Bronwyn Brophy, will join the company. I'm here together with our CFO, Patrik Tolf, and we will talk you through the investor presentation which you will find on our website, vitrolife.com. After the presentation we will open up for questions as usual.Move to Page #2, please. This is a good quarter and a good start of the year, which is reflected on the text in the slide, actually. In the first quarter, we increased our sales with 14% to SEK 854 million. With the best reflection of the real top line development is the organic constant currency growth, net of discontinued business, meaning like-for-like, and this growth is 9%. We grow in all market regions and particularly in APAC with impressive 23%. All our business areas continue to grow and the growth in the business area, Consumables, was especially strong during the quarter.Moving on to performance. We increased our gross margin with 1 percentage point to 59.2%, mainly driven by growth, product mix and lower cost base for Genetic Services. EBITDA increased to SEK 282 million, resulting in a margin of 23%, net of non-recurring cost of SEK 20 million.The earnings this year, including the non-recurring cost increased with 23% to SEK 0.74. The operating cash flow for the quarter is, as usual, quite strong, SEK 160 million for the quarter. This puts us in the comfortable net debt-to-EBITDA ratio of 1.3% compared to 2.9% last year.Now -- having said that, now, over to you, Patrik.

[Patrik Tolf, executive]

Thank you for that, Jon. And let's move to Slide #3, where we will look then a bit more into the sales performance per market region. And I will focus also then on the like-for-like business, which is then the 9%, which -- where we then exclude the discontinued business from COVID-19 testing and also then the part of the GPDx that is not longer within our portfolio.Starting then with Americas. We grew with 6% and that is driven then -- primarily then from a solid growth in Genetic Services, that grew 10% actually during the quarter, particularly then in U.S., but also strong growth in South America, although from a lower base on that side. We continue then to grow also the Consumables portfolio in U.S., but had a slight decline in Technologies installations that you know will shift over the quarters.EMEA was a bit shy, just 1% growth, but also quite a bit differences within the region on that side. Continuously solid growth on Consumables, products across the line in the whole region. Genetic Services grew strongly then in Middle East, but offset a bit then by a decline in South Europe. Technologies gained a couple of major accounts during the quarter, but that was actually offset then by large installations during the first quarter of last year. So all in all for EMEA then plus 1%.APAC, 23%. And in APAC, we grew within all business areas. All markets were growing, except for China. And in China, we have seen then a significant increase at the end of the quarter after they have abandoned the zero COVID policy. This will positively impact in the coming quarters. We have seen less of that impact during the first quarter. So more to come on that side once the Chinese market continue to grow going forward.But during the quarter, we also had strong delivery spend on installations of the EmbryoScope to customers in APAC primarily and the rest of Pacific. And you see also that the share of the total sales continued to be balanced within the group.So moving to Slide #4, where we look more into business area, Consumables, which is then growth in all areas. We grow organically then with 12% in local currencies, and we grow in all product areas, media, disposable devices, and also genomics on that side. We have -- as we have talked about in the third and fourth quarter, we have focused on our scalability and investments, and we have increased our production capacity primarily then for disposable devices. And that is going in the right way, and we have been able to increase our production during the first quarter.And we have also taken actions for scalability during the first quarter then to be able to deliver, particularly then for our media portfolio with -- for the additional demand as expected when the Chinese market going up. So all in all, strong growth in Consumables within all product areas and all regions.Moving on then to Technologies. And as you know, the -- there are continuously [Technical Difficulty] over the quarter when it comes to the installations, which you see to the left here as well, but continuously strong growth all in all, so plus 7% for the quarter. Continuously then focused on the time-lapse technology and the EmbryoScope supported then with our AI capabilities.As you know, about -- iDAScore now is becoming more and more standard of care in several markets in APAC and EMEA. Generally, we also then increased our sales of software during the quarter here as well, and the business mix will change a bit going forward with more recurring revenues.We did major installations in APAC with a growth of 55%. In EMEA, we did a couple of key new installations then to existing and new customers, in part of EMEA. Once we did large installations during last year that we did not do this year on that side. In Americas, from a relatively small volume, we declined with 35%. But that is also related to that we did installations last year that we did not do this year.Moving on to Page #6 on Genetic Services. We see continuously then growth in Genetic Services business, who then like-for-like -- which is then excluding the COVID and the GPDx that we have discontinued, grew with 7% in local currencies, with growth in all market regions. And this is also good due to that we have seasonality impact that makes the first quarter of genetics [ thermally ] normally the weakest one.We grew in Americas, which is the largest market for Genetic Services, driven by U.S., but also then, as I mentioned initially, good growth percentage-wise in South America. Volume growth is strong. ASP is slightly lower, but we are working then as we have talked about previously, with updating our customer offer to our customers and focus on continuous profitable growth and scalability on that side.EMEA, yes, we grew strongly within Middle East. On that side, that is then the driver behind that one, but then a small decline then in other parts of the market on that side, and continuous growth in APAC.So moving on -- then to a bit more on some of the financial highlights. So move to Page #7. We have then increased the sales to SEK 854 million, which is then a 14% increase in SEK. Like-for-like, the equivalent number was 16% then SEK, but more importantly then the 9% excluding then the discontinued business, that is the most important thing to focus on.We increased and improved our profitability. Gross margin then increased with about 2% unit to just out of 57% or then 59%, if you then also look on the running base where we then take out the amortization for acquisition-related intangible assets. The improvement of profitability is driven by higher volume, product mix and also that we have a lower recurring cost base for our Genetic Services business from the actions that we have initiated during the last year. EBITDA like-for-like where we then adjust for those non-recurring cost of SEK 20 million, ends up then on SEK 282 million, giving us then an EBITDA margin of 33%.Moving to the next slide, Slide #8, where we focus a bit on the operational expenses. Also there, like-for-like, excluding non-recurring cost on that side of [ SEK 70 million ], we increased the OpEx with 8%. This was driven then by higher sales and marketing activities, the non-recurring costs, but also negative currency impact as we have the majority of the operations and staff located outside of Sweden.R&D. The lower R&D is then related to the activities that we did at the end of the second quarter last year, where we now have an agreement with Carlos Simon Foundation that we did on that side, which means that we focus more on the -- within our operations, and they are within the agreement with Carlos Simon on that side. So that have then resulted in that, net of R&D is lower, but the output is expected to be higher when we focus on the exploratory research.Moving to the next slide, where you then see the summary of the financials. We -- again, just to repeat those, we continue to increase the sales, SEK 854 million improvement in gross margin and in the adjusted gross margin, 56%, 59%, increased also then the adjusted EBITDA to 33% on that side. And then as Jon mentioned initially here, we continue to improve the operating cash flow to SEK 160 million, which puts us in a bit more favorable position than in the net debt-to-EBITDA.So with those words, I leave it over to you again, Jon, to conclude.

[Jon Sigurdsson, executive]

Thank you, Patrik. We've now gone through the quarter. But now I would like to reflect on our standing in the broader market and our -- in my view, our ability to leverage on it. We started by expressing our view that this was a good quarter and a good start of the year. Last year, we have been basic consolidating and putting in place structure that will leverage on our comprehensive and impressive product portfolio and [ stand in ] our position as a leader in technology and service to our demanding customers.Going forward, we believe we will have a great opportunity to continue to grow by focusing on excellence in our offer to our customers and to use our capabilities for economic of scale and consolidation. We are now a group with a broad product line which includes medical device, including software, Consumables, and now Genetic Services. This is becoming increasingly important in the future where we see even bigger and more sophisticated IVF chains in manning fewer and more advanced suppliers.We believe that the new combined sales and marketing organization is a big step in this direction, and will enable us to generate value-creating offers to our customers. We will also continue to look for opportunities to add new products and services to our portfolio through internal development and well-placed acquisitions.Scalability is not only in the sales and marketing and service to our customer [ stores ]. We have approval for record of increasing profitability of acquisition by utilizing economic of scale and by getting out of sub-performing units that do not fit in our long-term strategy. I believe we have enviable franchise in a market with solid underlying growth, and we have both the ability and ambitions to get us there. In other words, the force is [indiscernible] and so is the future.Now, thank you, and now we can open up for questions.

[Operator]

[Operator Instructions] We will take the first question from line, Ulrik Trattner from...

[Ulrik Trattner, analyst]

A few questions on my end. Starting off with Consumables, 7% in Americas, 10% in EMEA and 15% in APAC. It sounds like quite solid underlying markets. Is this something we should read into as the underlying growth? Or is there something else into these numbers? Obviously, APAC and China is something different, and we can take perhaps a second question on that. But overall, is this where the underlying market is today?

[Patrik Tolf, executive]

I think it's a good proxy on that side. I mean, of course, it varies -- can, of course, vary from quarter-to-quarter on that side and -- But there is a strong underlying demand in the market on that side. And we have seen then also a couple of markets -- well, China is an exclusive story on that side. That has relatively good growth on that side. So this is a good proxy on that side.

[Ulrik Trattner, analyst]

And a follow-up question on China. So I know that you don't report China as a separate segment, but your approximation on how much China has grown in the quarter, and you sound quite optimistic towards the end of the quarter regarding the momentum of that business. As well -- if you can give us some color on the Cook medical situation in China, and if you take in market share?

[Patrik Tolf, executive]

I mean, if we start on the Chinese market, I mean, what we hear from our customers is that the activity in China has definitely picked up and have done so quite intensively at the end of the quarter on that side. So definitely an increased activity within the quarter on that side. So -- but if you look upon it then from the impact on the first quarter sales, that has been relatively shy on the first quarter itself. So -- and then, of course, the pent-up demand that we have seen also, I mean, if you compare the Chinese market with the recovery from COVID from other markets, there will, of course, be an increase in the Chinese market. We don't know how big that will be, but it's certainly something that will change going forward.What is -- on Cooper, Cook, I mean we do not specifically comment on that side on market and market share. What we do know is that Cook has decided then to not produce media in China, and that has, of course, led to opportunities for us.

[Ulrik Trattner, analyst]

Going at hereby segment by segment, Technology, obviously, is very lumpy. I think sort of one bigger picture question is, when will iDAScore be available for the U.S. market?

[Patrik Tolf, executive]

I wish I could have a very straight answer for that one, but I cannot do that. At this moment, we are, of course, working with that process. But I don't have any straight answer for that on timing yet, because we are not fully in control of that one by ourselves. But we're working on it.

[Ulrik Trattner, analyst]

2 more questions on my end. Genetic Services, obviously, you have some comparisons with GPDx and COVID-19. But overall, are you seeing the same type of price pressure on the PGT tests as you did throughout 2022? Or has that situation changed or accelerated?

[Patrik Tolf, executive]

I mean we look -- if you look on the volume growth per se on the number of tests, that has continued to increase. There is continuously then a price pressure then on the more commoditized products like PGT, as you mentioned on that side. Maybe it's a bit too early to say that it has flattened out, but we are, of course, working with different initiatives on getting our pricing offer shorter and making sure that we can offer the right kind of products to the customers. What they do need is a genetic counseling or not on that side as well. So we are working more when it comes to the pricing level on that side as well. But maybe it's a bit too early to say they have stabilized on that side.

[Jon Sigurdsson, executive]

On my -- From my point of view that, the good thing about Genetic Services in general, apart from some [ part ] [indiscernible] is that it is on the rise. And the [ commonization ] of it is a result of wider usage and more volume growth. And we are quite optimistic that, that will continue. To answer that there are some [ breaches ] in Europe that do not use it. And -- but then we have a perfect solution for those -- the different Technologies.

[Ulrik Trattner, analyst]

And are you seeing any markets in EMEA starting to ease regulation on genetic testing that could be positive for '23?

[Patrik Tolf, executive]

No major significant changes to my knowledge at this stage on that side. So no major changes on that side to my knowledge.

[Ulrik Trattner, analyst]

Last question on my end. Gross margin, at least in my book, was a bit on the light side. Is there anything we should read into this? And we talk about expanded production of Consumables and the facility down in Gothenburg. Is that something that plays into the gross margin? And is that fully operational here by end of Q1?

[Patrik Tolf, executive]

It is -- as you say, I mean, we have improved then the production capabilities of medical devices for [indiscernible]. In Gothenburg that has improved definitely. So we are getting more output out of that and the previous ramp-up effects on the negative side has improved to more positive on that side. So that is one thing that impacts gross margin positively on that side.What you also see then for the quarter is that you see then the product mix, which is also then positively impacting the gross margin. But also then when it comes to the cost level of Genetic Services, we have improved that one, and the cost base is lower. As you know, I mean, the first quarter is normally the weakest one from a seasonality perspective for Genetic Services. So we don't see that full impact on the margin yet.

[Operator]

We will take the next question from [indiscernible] from SEB.

[Unknown Analyst]

A couple of questions from my end. First of all, on Genetic Services. Could you maybe say something about what products are driving the growth here?

[Patrik Tolf, executive]

Yes. Currently, if the primary growth of the product is then on the PGS, PdtA, Pdtm on that side, so that's primarily where it is growing on that side. So volume growth on that side. But again, as you know, we have a relatively broad portfolio, but those still represent the majority of the portfolio.

[Unknown Analyst]

And then, I mean, it seems like the Genetic Services growth overall has been held back on the headline number from the -- or discontinued business and a bit of COVID also in the comparable quarter. But just looking at the sort of like-for-like, it's still slower than Consumables. And I'm wondering a bit just on your outlook for Genetic Services growth here from this current revenue base in Q1?

[Patrik Tolf, executive]

I mean, as you know, we don't give any specific guideline on the specific business areas on that side. So -- But I mean, what we can say, of course, is that we continuously expect the business to continue to grow on that side. And if anything, I mean, the Genetic Services in the longer run could have a potential to grow a bit higher going forward. So that we see going forward for Genetic Services business on that side.

[Unknown Analyst]

And then on the margins, can you say anything about how you're tracking on the Genetic Services EBITDA margin versus your internal plan you have communicated about a bit more?

[Patrik Tolf, executive]

I mean, for the end of the quarter, we said -- last year, then we said for the Q4 that we were tracking them to 25%, which was the objective on the EBITDA for Genetic Services, and we said that we were a bit stronger than that. And that we are moving into a direction of aiming at 30% for EBITDA margin for Genetic Services. And we don't disclose EBITDA then per business area, as you are aware of, on that side, but it's going in the right direction on that side. The operational excellence programs are working according to plan here as well. So we have no reason to change those statements that we did during the fourth quarter.

[Unknown Analyst]

And then on the more medical device side. I'm wondering if you can say anything about how much is price growth here in the quarter?

[Patrik Tolf, executive]

We have increased the prices throughout the quarter, and we have then, as we did also during 2022, increased prices on that side. The full year effect will probably somewhere around 3%, 3.5% for the full year on that side. And part of that has, of course, come in to the effect of the first quarter as well.

[Unknown Analyst]

And then just a final question on time-lapse. I would be interested to hear sort of some feedback or the progress you're seeing in markets where time-lapse isn't as penetrated yet?

[Patrik Tolf, executive]

I mean we continue then to -- I mean -- as you know, I mean, we have strong progress then in several markets on that side, where it's standard of care, and that is then big part then of Asia Pacific, also then big parts of Europe on that side. I think we have now also -- with Genetic Services in the group, we have learned also how to tell time-lapse into markets where you use Genetic Services as your embryo selection preference on that side. So it's basically also then focused more on workflow on that side. So that we are continuously working on. You haven't seen, call it, any major breakthroughs in U.S. when it comes to time-lapse at this stage, but we are working on that side going forward, absolutely.

[Operator]

We will take the last question from line, Johan Unnerus from Redeye.

[Johan Unnerus, analyst]

I just have follow-up on the gross margin to begin with. It seems like it could be improved with the support from China and the efficacies you're making. What should we expect from the [ COGS ] going forward during '23 and the gross margin?

[Patrik Tolf, executive]

Sorry. Could I ask you to repeat the question? I didn't hear you perfectly on that side.

[Johan Unnerus, analyst]

Yes. What about the gross margin? It's relatively strong, and it seems like there are reasons to expect that it could be improving further if you get more support from China, and you've done some efficacy measures. What should we expect here during '23?

[Patrik Tolf, executive]

We don't make any specific guidelines when it comes to gross margins or EBITDA on that side as well. We are continuously to focus on profitable growth. On that side, we have a lot of activities on the sales side, and we are focusing then when it comes to the cost side on that side as well. But we don't give any specific guidance on the gross margin.

[Johan Unnerus, analyst]

And the cash...

[Jon Sigurdsson, executive]

Yes, I think we have a medium to long-term scalability in the business. That's because of -- we have a quite big acquisition to digest and we believe we have underlying availability going forward, but that's more medium and long term.

[Johan Unnerus, analyst]

And on the OpEx side, there was some pressure partly related to the FX effect, but you're also scaling up this support, especially on the sales side. What to -- should we expect the increased resources on the sales and marketing side?

[Patrik Tolf, executive]

I think what you should -- this is one area, of course, going forward as we expect to work on synergies on that side. We are now working as 1 global sales and marketing team, and we are really then making progress when it comes to certain areas, certain markets. We have mentioned also then during the quarter that we taken advantage of using our global presence then with Genetic Services to go direct into certain markets in South America with Consumables, Technologies products. So those are activities that we will do going forward as well. So -- but when it comes to the cost level, of course, we will continue to work on the efficiency in that area, but also in other areas going forward.

[Johan Unnerus, analyst]

And the -- as you earlier mentioned, it's a bit early to say if it's sort of stabilizing price pressure in the Pdta segment. What measures can you do to cope with the situation if the price pressure could sort of continue?

[Patrik Tolf, executive]

For us, of course, I mean, it's 2 things or maybe more. But I mean it's -- first of all, it's to continue to get a good customer offer so that we can make sure that we can deliver what the customers want and get that pricing structure working in a good way for both ends so that we can value -- create value on that side. But then it's, of course, also to work on the cost side, which we do then on the operational excellence side. So that is important for us going forward.

[Johan Unnerus, analyst]

And finally, the cash flow was strong in Q1. And obviously, there is some moving parts. Should we expect significant quarterly fluctuations also going forward? Or was it unusually a big change?

[Patrik Tolf, executive]

I mean if you compare the cash flow with the first quarter, it's, call it, more similar than to the third and fourth quarter last year as well. So as long as we then continue to deliver in accordance what we do here, that's a relatively good proxy on that side.

[Operator]

We will take the next question from line Suzanna Queckborner from Handelsbanken.

[Suzanna Queckbörner, analyst]

I also have a few questions. I wanted to follow up on the time-lapse. So there has been a recent publication in the launch in RTC showing that time-lapse and AI in embryo evaluation has no benefit in terms of pregnancy and by birth. Now I know this is a competitor trial, but you also have a trial ongoing on clinicaltrials.gov. And I was wondering how you're expecting to sort of communicate those results which are expected to be available at the end of the year? Will there be a publication?

[Patrik Tolf, executive]

No. I mean, first of all, if we go back to the first article that you mentioned here as well, I mean, it's obviously hard for us to comment anything on something that is done on a competitor's platform using old software in a specific market on that side as well, so that we do not comment on. But you're right, we are doing a lot of things on our end as well. And let us get back to how we communicate that one going forward. But we have, of course, a lot of activities on that side that you're aware of.

[Jon Sigurdsson, executive]

As we see a greater off take, any time-lapse technology basically [ louver ]. There are -- of course, it's underutilized in U.S. as you are aware. But any other place, and specifically Asia, it has a great uptick there and a huge acceptance.

[Suzanna Queckbörner, analyst]

Well, then I look forward to the announcement of those results. Then the other question is in terms of the competitive market dynamics in Asia, which are developing in your favor with Vitrolife taking more market share. Help me understand how easy is it for clinics to change their IVF protocol in the lab changing say from Cooper to Vitrolife?

[Patrik Tolf, executive]

It is, of course, depending a bit on what I understand on that side as well and what kind of portfolio that they would like to have on that side, if it's a Consumables product, if it's the full range of Technologies and also Genetic Services on that side. But we, of course, work very closely together with the clinics on that side when it comes to implementation and testing and support it as well. So that we have an ongoing program for as well, we also maybe make it [Technical Difficulty] -- [ so ], you can say also that we are working quite intensively then, what we call then the Vitrolife Academy and also Igenomix Academy, that are also supporting then our global sales and marketing team here with those kind of things as well.

[Suzanna Queckbörner, analyst]

And then my final question is on Genetic Services again. You mentioned in 2022 that you've lost your largest European client. And as this was a global chain, I wanted to know what the impact will be of this in other regions where this client is also prolific? Have you seen reductions in the Genetic Services in the U.S. and India, for example?

[Patrik Tolf, executive]

I mean, of course, it will be so that some customers are choosing to in-source part of their, call it, commoditized business, primarily then the PdtA on that side as well. So that will, of course, happen from time to time then, some customers choose to go that route. But there are, of course, a lot of other things that we have in our portfolio that we offer to the customers on that side. So that we are continuously then to have a relationship with the customers on other products ranged within Genetic Services. Also, the duty now is that we have done a full range of portfolio. So to some customers that choose to go to in-house, then we can, of course, sell Genomics products that now is within business area of Consumables. So we have 2 sides of the [ common ] side.

[Jon Sigurdsson, executive]

And also this commoditization is indication of wider acceptance. Those chains were to use Genomics in their process. And that's a huge advantage for us because we have -- as Patrik mentioned, we have a broad portfolio of all kind of services around -- that we can offer our customers.

[Operator]

Thank you. It appears no further questions at this time.

[Jon Sigurdsson, executive]

Okay. Then on the -- from the Vitrolife side, we'd like to thank you for your participation. Thank you very much.

[Patrik Tolf, executive]

Thank you.