Vitrolife AB

STO:VITR

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you all for standing by, and welcome to today's Vitrolife interim report January to September 2020. [Operator Instructions] And without any further delay, I would like to hand the conference over to the first speaker for the day, Thomas Axelsson. Sir, please go ahead.

[Thomas Axelsson, Chief Executive Officer]

Thank you very much, and welcome to Vitrolife interim report January-September 2020. The speakers of today will be the CFO, Mikael Engblom; and myself, Thomas Axelsson, the CEO of the company. This -- change page and get into the presentation on Page #2. The overall theme for this report is good profitability and continued recovery. Especially, about the recovery is something we will come back to and explain what's current has happened within Q3 and some also small, small projections regarding what goes on right now.So look on then Q3, first. The sales was SEK 320 million, and it is equal to minus 15% then. In local currency, it was a decrease of 11%. Our EBITDA was SEK 134 million, corresponding to a margin of 42%.So let's then change page and go to Page #3. And what we have right now, during this presentation is on Page #3, it is sales and growth per market region. On Page #4, it is current situation and short-term outlook. What I will try to do then together with Mikael. But what I will try to do right now is to explain quarter 3. And when I do some of the comments regarding quarter 3, you know that we started quarter 3 by saying, at the end of quarter 2 and the beginning of quarter 3, we saw the IVF cycles at around 2/3. And what we see currently; at the end of Q3, beginning of Q4; is that it is around 90% globally, the IVF cycles.So what I will do then is to start on Page #3, going from the right side, going from our geographical area, Japan Pacific. It -- this quarter 3, a decrease of 27%. If I go into this then, when we started the period, it was still some restriction in Japan, which was holding back the clinics. And we thought that it was around 90% at the beginning of this period. In Japan -- in Australia and in New Zealand, you know that it's been restrictions, but the IVF clinics has been open, and they have been running quite well.What we see also in this is that the consumer -- our, let's say, disposable business, our consumer business is doing very well also in this territory. What can be explained, why it is such a decline with 27% is, of course, due to that, the clinic has not been able to operate normally, together with the situation that the hardware business, our technology business has been slow in both Japan and Australia. The comparison number, also for last year, is a little bit tough since it was last year that we had the good orders to clinics [ change ], both in Japan and in the Pacific area.Then let's go into the area that is; what we are calling it, China and Asia; really Asia. There's a mix picture. What I will start with then is China. China is picking up good. Our best guess is that the cycles in China today is plus 90%, something like 90%, 95%. And what we can see is that every clinic, more or less is opening and running quite well. The sales in China, on the consumer business, is very good. And that is, let's say, making the numbers still so good within the territory. We're having minus 14% then. If China goes well, the consumer business goes well, we have got back our media position that we were, let's say, losing market shares from Q2 last year, due to some regulatory and supply things. We are right now back, and it looks very, very good.However, the territory includes, as you know, Thailand, Cambodia and India. And in South East Asia, the Thailand and Cambodia business, Vietnam and all of them are in a situation, where the clinics is running with very low clinic -- with very low cycles, and also some has not yet reopened. In India, we feel that the cycles are coming back. Our best guess is that currently, the clinics are running around plus 50%. So good growth coming back within the region. China is back, consumer business is very, very good.Then we are coming into EMEA region then. There, we have a mixed picture between some regions and also between public and private clinics. Overall, wherever we are, if we are in the EMEA region or we are in U.S., it is the private clinics that are performing very well. We had good, good situation in Western Europe. U.K., the private clinics are doing very well, and they are also doing more cycles -- this in some clinics than what we have seen before. Private clinics in Spain, however, since they have quite a few of their cycles is depending upon what's called IVF tourism. They are a little bit low compared to last year. Territories, where cycles has not yet recovered, is for sure, Middle East and part of Turkey and some other countries like Czechia and other places.So private goes very well. They are picking up. And as I said, they're doing more cycles than probably ever in some countries. However, the public clinics, in some places, they have not really reopened. And what we can see, for instance, is that, unfortunately, they're talking about the second wave or what we should call it, is that it is not a pattern globally, but I'm just going to update you that we can see a decrease in [ oversight ] pickups in, for instance, Belgium and France, right now.Why I'm mentioning that, is that we don't see a decline or any reaction on the private clinics, we don't see any reaction in Australia, Japan or in China on, let's say, the risk of a second wave. The only places we see some decline can be and are in public hospitals, clinics in just a few countries. But that is just the current situation today. So the decline in EMEA region was minus 4%.Then go over to the Americas. That region is a really interesting region in Q3, where we had, in South America, and you know that -- well, that they have COVID problems down there. They are picking up, but still, they are not back into a normal rate. It's hard to define exactly what we believe is in that territory because it's a difference between Chile, Brazil, Peru. But I would like to say that it is probably around 50%, 60% of last year.U.S. then, USA, numbers high. It's picking up. What we are hearing from the clinics and what we also see from our side is that the consumer business is doing very well. Cycles are still high. It was growing in Q3. And the discussion with the clinics and how we can assume what's going to happen in U.S. right now is that they will continue to do cycles as last year, maybe a little bit higher in some clinics. And they are unfortunately waiting and that we can also see that on our technology business, that they are waiting with doing orders of our time-lapse.So overall, the market is picking up. Overall, Q3 has come from a situation, where it was difficult to plan the demand up to a situation, where the demand is more similar to the, let's say, the traditional planning situation then.So talking about planning, talking about demand. Let's go over to Page #4 then and see the short-term outlook. I'm just repeating that, that we see that globally, we see that it is about plus 90%, approximately, the number of cycles being done. As mentioned, huge difference between the high cycle rates in the U.S. compared with the very low cycle rates in Southeast Asia.Private clinics back quicker than public, of course, then. And also, what Mikael and I are addressing is that we don't know if it is going to be any impact on the second wave, or the kind of restrictions that we are slowly seeing coming in, especially Western Europe. There is no changes. When we are seeing the quick pent-up demand in U.S. and some other countries, where they're coming back, we do believe it's going to be the pattern for most regions.Okay. Go then into Page #5. So demand products and how does it look like for our divisions, the consumable business in Q3, it was plus 7% in local provinces. And that reflects the increase of numbers. It also reflects what we believe that in some clinics, they have been careful and they are building up a small inventory. So they could come into Q4 and being more secure about their demand that they also have from the end-user, their patients. So good, good consumer business growth with 7%.Technology is not -- it's fun to talk about. But the situation there is that we believe and we can also see that some customers are waiting in doing the final order confirmation, and they are waiting up until -- when they believe that the operations has been normalized. As said before, first, are the consumer business coming, and then we believe that 1 to 2 quarter after when the consumer business are back, the technology will be back to normal situation then.Genomics, minus 13% that are reflected by our customers and where they are in EMEA and in the Americas, then. So that was a short review of the sales per division and also per territory.So Mikael, could you please continue on Page #6.

[Mikael Engblom, CFO & Investor Relations]

Yes. I will take you through some of the key financials for the third quarter. Gross margin in the third quarter was 62%, so down 2 percentage points compared to the same quarter last year. And the reason for the decline was negative economies of scale. Due to that, we have lower sales in this quarter compared to the same quarter last year. We also had a negative currency effect in the third quarter, but that was offset against a positive product mix due to that we sold more consumables, which has a higher margin. On the EBITDA margin, we increased 1 percentage point versus last year from 41% to 42%. And the decline in gross margin that I just mentioned, was offset by lower operating expenses, in relation to sales. What we saw here was reduced, various activity costs, such as travel and exhibitions, as well as, reduced provision for bad debt of about SEK 5 million, due to that -- the market is recovering. We also had a good cost control in general during the quarter.On the cash position side, we have a net debt, in relation to EBITDA, of minus 1.9. So a net cash position as before. And we are planning to use the cash to make value-generating acquisitions as before.Well please change to Page #7 for the long-term outlook. So after the COVID situation, we expect the market to return to its long-term growth rate of about 5% to 10% in monetary terms. As before, we believe it will be driven by demographics, such as parents to be, wait longer time to have children and are in more need of treatment. We also believe the social acceptance for IVF will increase and the increased global income that supports this treatment.Vitrolife, we will, as before, focus on sales expansion and broadening our product offering, and this will be done both organically and through acquisitions.With that, operator, we are ready to take questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Ulrik Trattner.

[Ulrik Trattner, Research Analyst]

I have a few questions. Can you just start off with the general market recovery? And first, if you can, please help us remind, what the split between your exposure to private versus public clinics is in the EMEA given the different dynamics of rebound in these clinics.

[Thomas Axelsson, Chief Executive Officer]

Okay. It's Thomas here. Hi, Ulrik. What I -- in the public, as you know, is mainly in Western Europe. And what we are having is our -- if you compare our sales that normally in Western Europe, it is maybe 60:40. If you go into the global numbers, it is, for sure, more and more private sales then. So that's about a situation then where 60% is then private in Western Europe in our sales roughly, roughly. That was -- you asked 2 questions. That was regarding…

[Ulrik Trattner, Research Analyst]

And you mentioned in the report that you expect negative effects in Q4 as well. Should we interpret this as a flat market rebound going into Q1?

[Thomas Axelsson, Chief Executive Officer]

Yes. Our -- the way of running this company, as you know, has been always for growing, growing, growing. And we are comparing with Q4 and going into Q1. It is difficult right now, to project, and especially in Western Europe. Now -- as I try to say is that U.S. is going very well. And we were talking to the clinics even yesterday, trying to find out if there were any kind of changes there. But it seems like rebound and even a higher demand in U.S. than normally. Look, we got to respond from 1 customer that said, the clinic then that, we see a higher inflow from patients than ever. And there were 2 reasons behind it. One was that their patients now are working from home. So they had time to go into it and start the procedure. And also that there were some customers, who were afraid of more regulations in case of Biden would win, they were afraid that it could be more regulation. So therefore, they want to go into the clinic as soon as possible. So let's say, U.S., and I do think it's going to be a normal business. Japan Pacific, I do think it's going to be a normal business. In China, quickly soon too, a normal business. Southeast Asia, they have a lot of tourists. There is not going to be any IVF tourists within the next quarter, as we believe. And then there are all the restrictions that goes down in China, in India that will keep back the rebound.In the EMEA business, you started to say about the public and private. Public, I'm afraid that they will not rebound to normal business. And seeing a slightly decrease and also a pick up rate in Belgium and France, I think that can set a pattern. In case of the restrictions will continue to grow for, let's say, IVF inside Europe. There isn't any restrictions ongoing in Europe. So clinics can be open, the private clinic. So that's -- it is difficult. That's why I can't give you a straight answer, but we do not believe overall for the Vitrolife business that we will rebound to normal sales within Q4, no.

[Ulrik Trattner, Research Analyst]

And just 1 last question before I'll get back into the queue. You highlight, as well, sort of, a buildup in inventory positive for your consumer business during the third quarter, taking back market share in China. But could you, first of all, please, sort of, quantify or at least shed some more light on how much of the growth in consumables you believe to be in inventory buildup? And secondly, on regained market share, do you believe that you have regained the majority of the positions lost last year due to the production issues?

[Thomas Axelsson, Chief Executive Officer]

Yes. We can start with the second one. Yes, we believe so. So that's the quick answer. On the rebound or, let's say, the building up on inventory, that's difficult for us to judge. We are still in some discussions that customers were quite concerned, in late of June, starting of July when they were getting back to the IVF clinics opening up that they were out of products, and we were able to supply. And so were also some of the competitors, but we know that there was some competitors that has a -- that had a little bit of a supply problem. So I think that overall, many clinics has been on the safe side, they're building up a little bit more of inventory. However, the sensitive part for the products that we have is the culture media with the risk of scrapping, the risk of scrapping for the customers and with a shelf life that are different. But in some cases, it is 12, 16 weeks. So I don't think it is any huge amount. But best guess, maybe I shouldn't do this. Mikael is the CFO then. But I think that maybe a couple of percentage, 2%, 3%, 4% maybe.

[Ulrik Trattner, Research Analyst]

That was my, sort of, my follow-up question. My point exactly, given the short shelf life of perhaps the most important, largest portion of consumer, both being media and obviously, dependent on when the inventory was built up. But as you mentioned, June, July, this shouldn't be interpreted into hampered demand going into Q4, right?

[Thomas Axelsson, Chief Executive Officer]

Not in any major impact.

[Operator]

Next question comes from the line of [ Gilliam ].

[Unknown Analyst]

My question was kind of similar than the -- than Ulrik's one. I wanted to have a bit more color about the restocking impact in Asia. How do you see this? Because there is a point with the life cycle of the media products? And then the point with the restocking, so how could you quantify the pent-up of the demand, I would say?

[Thomas Axelsson, Chief Executive Officer]

I think that the question regarding the stock up is very similar to what I have said. It's probably going to be just a few percentage regarding the consumable business then. And then your question was regarding the Asia and South Asia business. I wasn't really able to find out really, what you are aiming at with your questions. Could you please be more specific, and I can try to be more specific in my answer.

[Unknown Analyst]

My question is, the result in Asia and especially in China, have been very, very good. But I would like to know, what could you attribute to the stock build up? And what the [indiscernible] could attribute to the real demand?

[Thomas Axelsson, Chief Executive Officer]

And -- in China, the business, as you know, was down very, very quickly in the end of Q1, and then it started to move up first in Q2. So if we see about the inventory level and also the rebound of the business and then the running business, the China business has had an opening of the clinics that has been going on for, yes, 6 months or something like that. So I feel that it is the easiest market right now to predict because they have been opening up. It is controlled by, let's say, the regions and provinces when they can open up. So in a situation, currently, where the business in China runs 90%, 95% is that, that is the kind of demand that we are planning for. And when we see that our consumer business is growing as good as it is overall, but that is -- it is partly reflecting a constant planned purchase pattern from our Chinese customers. So I don't see any bigger, bigger build up on inventory in China right now.Mikael, what's your view on that?

[Mikael Engblom, CFO & Investor Relations]

I agree.

[Operator]

[Operator Instructions] No further question at this time, please continue.

[Thomas Axelsson, Chief Executive Officer]

Okay. So if isn't any further questions, then I would thank you all that are calling in. And I hope that you are all doing fine, and that we will get the COVID out of the picture as soon as possible. Thank you very much for today. Bye.

[Operator]

Thank you. That does conclude our conference. With the speakers, please stand by. Participants, you may all disconnect. Thank you all for joining us. Stay safe, everyone.